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Market commentary: Medical technology - Gold rush times in diagnostics


December 21, 2015 - London

Bellevue Asset Management /Market commentary: Medical technology - Gold rush times in diagnostics. Processed and transmitted by NASDAQ OMX Corporate Solutions.The issuer is solely responsible for the content of this announcement.

Gene testing is a booming business. The market potential is huge and experts are constantly upping their forecasts. BB Adamant Medtech (Lux) Fund managers met with top executives from more than 30 companies while attending conferences in New York and Boston. Few companies are truly well positioned in the battle for market share and the entire playing field could shift early next year.

Although the limited long-term clinical data and non-reimbursement by insurers have been standing in the way of (even stronger) market growth, strategic market players are staking out their positions and investing billions in the process. Notwithstanding all the euphoria, investors should be cautious. Few companies are truly well positioned in the battle for market share and the entire playing field could shift early next year. The world's largest annual healthcare-focused investor conference, organized by JP Morgan in San Francisco, will take place in January. Market leader Illumina has presented new gene sequencing machines at several of these conferences in the past. But the really big surprise might come from Roche Diagnostics one month later at the important AGBT (Advances in Genome Biology and Technology), a science and technology conference held in Orlando, Florida. Roche is the sole gold sponsor, Roche's exclusive clinical technology partner Pacific Biosciences (PacBio) is silver sponsor and Kapa Biosystems, a company recently taken over by Roche, is bronze sponsor. Any company that has made such elaborate preparations for a conference probably has something important to say. In the same vein, we note that Roche Diagnostics made the final milestone payment of USD 20 mn to its development partner PacBio, which is developing a sequencer for clinical diagnostic purposes exclusively for Roche. Any surprising news could also have an impact on Qiagen's share price, likewise a silver sponsor at the AGBT, where it will present its recently launched GeneReader NGS system. Selectivity is called for. Some stocks have corrected to much lower levels and now offer good entry points.

Several approaches for diagnostic tests

The huge market potential of DNA sequencing and liquid biopsy tests is undisputed. Isaac Ro, for instance, a Goldman Sachs analyst who has earned a reputation for conservative estimates, expects market potential to reach USD 14 bn over the next 10 years. Other analysts' forecasts go as high as USD 20 bn.

There are particularly promising opportunities for diagnostic tests in areas where the current testing methods are inadequate and sample collection procedures pose high risks to patients. This is the case, for example, with early detection of fetal trisomy 21. Standardized test kits for sequence-based non-invasive prenatal testing (NIPT) are likely to come to the market and completely supplant the invasive procedure of amniocentesis, even in the normal risk segment. Significant potential is also seen in tests that detect DNA fragments of dead tumor cells in the bloodstream. Such tests are used to control drug delivery in personalized cancer therapies and lead to significantly better treatment outcomes.

From an investor's standpoint, the question is whether there can be another winner besides Illumina. This US player has captured a more than 80% share of the research market. Moreover, Illumina is the leader in terms of quality and costs, a fact that puts the company firmly in the pole position in the race to develop sequence-based clinical diagnostic applications. Just how important cost leadership is can be demonstrated by looking at NIPT tests, a field where market share is already being gained through pricing tactics. Oncology testing will entail significantly more costly test procedures. Besides the liquid biopsy blood test, healthy and cancerous tissue of patients will have to be sequenced, and this is 10 to 100 times more often than routine sequencing tests. With a research budget of almost USD 400 mn focused exclusively on sequencing, Illumina will also have no problems keeping pace with the sector heavyweights in the diagnostic business.

Roche Diagnostics is world market leader

Illumina's biggest rival is Roche Diagnostics (Roche Dx). The world leader in the diagnostics market is trying to interrupt Illumina's long string of successes. Roche Diagnostics has recognized the market potential and, in the wake of its failed bid to take over Illumina, has been investing most of its annual research budget of some USD 1.1 bn to build up a sequencing-based diagnostics arm.

About USD 2 bn has already been spent on acquisitions, equity interests, and marketing rights, resulting in a portfolio that spans the entire value chain. Particularly noteworthy portfolio assets are Genia's sequencing technology, the exclusive distribution rights to PacBio's sequencing technology products in the field of human in vitro diagnostics, and the majority stake in Foundation Medicine, a leading lab services provider focused on targeted cancer therapies. Roche Group is the global leader in cancer drugs and therefore ideally networked with medical practitioners and patients. This is an advantage on the distribution front and also facilitates the execution of clinical trials. Sequence-based cancer tests will be fully reimbursed only if and when data from long-term clinical trials demonstrate that the tests enable better treatment decisions and improve treatment outcomes. But time is getting short and Roche Diagnostics has had problems in the past adhering to its own R&D schedules. Roche Diagnostics must quickly come up with an integrated sequence-based diagnostics product for oncology treatment. Otherwise Illumina will establish itself here as the gold standard, as it has already done in the research market.

Qiagen could become a takeover candidate

Qiagen qualifies as the third major player in the diagnostics business. Its full-range solution bearing the name GeneReader NGS system was presented atat a conference in November. It is said to be highly automated and user-friendly. No details were given regarding the company's strategy for seeking regulatory approval and, despite the integrated workflow, this system is not a solution for the broad mass market. Then there is the technology risk, the lack of critical mass in gene sequencing and the research budget constraints associated with Qiagen. On the other hand, Qiagen is viewed as a takeover target, which is not surprising considering that Siemens and Abbott Diagnostics appear to have missed the boat for gene sequencing and could use an influx of productive assets in their traditional molecular diagnostics business.

What other players are there in the diagnostics market?

Thermo Fisher Scientific has a portfolio of ion sequencers that is well-suited for clinical diagnostics thanks to their rapid testing times and small sample input requirements, and the company has the necessary critical mass to successfully grow this business. LabCorp, Quest Diagnostics and other high-volume lab services providers offer attractive risk/return profiles. They cover their fixed operating costs with routine diagnostic tests and generate their profits with complex molecular tests. Given the expected boom in sequence-based diagnostics tests, these companies are likely to report a proportionately faster rate of profit growth going forward. At the same time investors can avoid technology-related risks: These companies simply select the best solution with the cheapest price tag.

The future of diagnostics has just begun

Adaptive Biotechnologies, a privately held company, wants to monitor how the immune system responds to attacks by cancerous cells. Its goal is to transform cancer from a terminal condition into a treatable chronic disease.

Efforts are under way to introduce other diagnostic procedures besides personal genomics in the healthy population and continuously measure individual behavioral "fingerprints" as well as environmental factors. The private company Human Longevity, founded by genomics pioneer Craig Venter, is extending the field of gene sequencing technology to include the microorganisms living in and on the body and metabolic mapping. In combination with imaging procedures such as full body MRI scans, portable monitoring devices and health checkups, important supplemental data can be collected to learn more about the causes and agents of disease.

The use of big data applications, i.e. applications involving huge datasets, is increasing. This is something that has also attracted interest from Alphabet, the parent company of Google, which has been investing in genetics research for years. The growing use of gene mapping, the collection of vital data via wearable devices such as fitness bracelets or the iWatch and other developments are working in Alphabet's favor. The company's aim is to draw the right conclusions about the cause of disease by sifting through a sea of data.

BB Adamant Medtech (Lux)

The Fund invests in medical technology companies around the world. Experienced sector specialists focus on mid- and large-cap companies with established product portfolios. ISIN B-EUR: LU0415391431

More information: 

Bellevue Asset Management AG, Seestrasse 16, 8700 Kusnacht, Switzerland, Tel. +41 44 267 67 00 Tanja Chicherio, tch@bellevue.ch 

b-public AG, Pfingstweidstrasse 6, 8005 Zurich, Switzerland, Tel. +41 79 423 22 28 Thomas Egger, teg@b-public.ch

Bellevue Asset Management

Bellevue Asset Management is an independent and highly specialized asset management boutique focused on managing equity funds for selective sector and regional strategies, in particular for African equities, Swiss/European entrepreneurial equities, healthcare equities and multi asset strategies.

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The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: Bellevue Asset Management via Globenewswire

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