Foundation Medicine’s Reimbursement Woes May Signal Broader Industry Challenge

Foundation Medicine (Cambridge, Mass.) candidly reported in quarterly financial filings that reimbursement challenges are stymieing the company's growth. The company's lack of Medicare coverage decisions and commercial payer contracts delays reimbursements and has led to a backlog of payments for more than 30,000 completed tests.

The company acknowledged these backlogs are not only delaying revenue, but also leading to slower than anticipated growth in its clinical testing volumes, particularly in the community setting. Industry watchers are taking note and assessing the implications of these reimbursement challenges for other, less well-funded companies.

For the third quarter (ending Sept. 30) Foundation Medicine's revenue reached $25.4 million, 54 percent year-over-year growth for the period. This growth was driven by strong results from the company's pharmaceutical business, which accounted for $11.7 million of the quarterly revenue, an increase of 75 percent. Pharmaceutical testing is negotiated on a set price per test. The third quarter pharmaceutical revenue was tied to 2,676 tests. (The company notes quarterly revenue is based on when reimbursement is actually collected, not when the tests were performed.)

The company's clinical testing revenue for the quarter also grew (40 percent yearover- year) to reach $13.7 million. This revenue reflected payment for 4,300 clinical tests in the quarter, well below the stated quarterly test volume of 8,012 clinical tests (7,000 FoundationOne tests and 1,012 FoundationOne Heme tests).

"Our efforts to obtain payment for individual claims can take a substantial amount of time, there is typically a significant lag between the time the test is reported and the time we actually recognize the revenue from such test," the company writes in a quarterly report filed with the Securities and Exchange Commission (SEC) on Nov. 2.

In the filing, Foundation Medicine said that 17,235 FoundationOne and 15,375 FoundationOne Heme tests have been billed to commercial third-party payers and Medicare, but remain unreimbursed. The company says in the filing that it has not generated "any" revenue from Medicare to date and is in the process of appealing these unpaid claims. In contrast, the company says it has been "reasonably successful" in securing reimbursement from private payers.

Impact of Uncertain Reimbursement
Despite growth in test volumes (25 percent year-over-year growth), the company says quarterly test volume fell short of expectations and blamed the shortfall on slower than anticipated adoption due, in part, to the reimbursement challenges.

"We expect that our current lack of significant coverage decisions and the general uncertainty around reimbursement for our products will continue to negatively impact our revenue and earnings, both because we will not recognize revenue for tests performed ... and because the absence of Medicare or other significant coverage decisions may lead physicians to not order a meaningful number of tests," the company explained in the SEC filing.

In the filing, the company reveals both a mix of confidence in the value of its products, along with a warning that achieving "material" market success is contingent upon securing coverage decisions and favorable reimbursement rates.

"The company believes an information-based approach to making clinical treatment decisions based on comprehensive genomic profiling will become a standard of care for patients with cancer," the SEC filing says. "We believe we have a significant first mover advantage in providing comprehensive genomic profiling and molecular information products on a commercial scale."

The company is encouraged by recent policy decisions by private payers. United Healthcare recently published a medical policy for coverage of highly validated genomic profiling in patients with non-small cell lung cancer. Additionally, Aetna became the first national insurer to publish a coverage policy supporting whole exome sequencing under certain clinical conditions.

Takeaway: Reimbursement challenges are not unique to Foundation Medicine. As molecular testing continues to expand in scope, more companies will feel the impact on revenue and test volumes, if payers do not address the lack of coverage decisions and reimbursement uncertainty.