Veracyte Inc. is adding winds to its sails by entering the growing pulmonology market. The South San Francisco, Calif.-based company has acquired Allegro Diagnostics in a deal valued at $21 million, a rare instance of late when a purchase price is disclosed in the lab sector. The transaction includes $7.8 million in cash and $13.2 million in Veracyte stock. Allegro had been developing a test called Bronchogen, which acts as a complementary assay for bronchoscopic procedures. The test helps clinicians determine whether a patient with lung nodules can be effectively monitored using CT scans rather than through more invasive procedures required for a pathology diagnosis. It closely monitors molecular changes that occur in a patient’s airways as a result of smoking. Bonnie Anderson, Veracyte’s chief executive officer, said the test can be used with surgery to detect lung cancer. Although the test is not yet commercially available, it has been tested in two validation studies involving nearly 1,000 patients. It was deemed to be more than 90 percent effective in diagnosing patients with an intermediate risk for lung cancer. About 8 million Americans are considered high risk for developing the disease based on their history of heavy smoking and might […]
Veracyte Inc. is adding winds to its sails by entering the growing pulmonology market.
The South San Francisco, Calif.-based company has acquired Allegro Diagnostics in a deal valued at $21 million, a rare instance of late when a purchase price is disclosed in the lab sector. The transaction includes $7.8 million in cash and $13.2 million in Veracyte stock.
Allegro had been developing a test called Bronchogen, which acts as a complementary assay for bronchoscopic procedures. The test helps clinicians determine whether a patient with lung nodules can be effectively monitored using CT scans rather than through more invasive procedures required for a pathology diagnosis. It closely monitors molecular changes that occur in a patient’s airways as a result of smoking. Bonnie Anderson, Veracyte’s chief executive officer, said the test can be used with surgery to detect lung cancer.
Although the test is not yet commercially available, it has been tested in two validation studies involving nearly 1,000 patients. It was deemed to be more than 90 percent effective in diagnosing patients with an intermediate risk for lung cancer. About 8 million Americans are considered high risk for developing the disease based on their history of heavy smoking and might need ongoing testing, Anderson said.
The functionality of Bronchogen is similar to that of Afirma, Veracyte’s test for thyroid cancer, which can provide a detailed diagnosis and help avoid unnecessary thyroid biopsies and removals. The company claims Afirma can reduce surgery rates for thyroid cancer victims as much as 50 percent. Anderson said pulmonology has a similar “diagnostic ambiguity” to endocrinology and therefore provided an opportunity for its next business expansion.
“With Allegro and its novel, clinically validated lung cancer test, we plan to accelerate our entry into the pulmonology market, enabling us to improve care for patients with lung nodules while creating long-term growth opportunities,” Anderson said. “Allegro is a natural fit for us, and we believe this move further establishes our leadership in molecular cytology, using genomics to resolve diagnostic ambiguity preoperatively and thus spare patients from unnecessary invasive procedures and reduce associated health care costs.”
The test is expected to become commercially available by the middle of next year and would provide “meaningful revenue” to the company’s top line by 2017, according to Anderson.
Veracyte was already developing a test for idiopathic pulmonary fibrosis, or IPF, but Anderson indicated it would not be available until at least 2016. However, the launch of Bronchogen is expected to enhance the chances for the IPF assay because the focus on sales growth would be on the same pulmonologists.
One Wall Street analyst said the deal only provides upside for Veracyte.
“It’s a great area for the company to be getting into,” said J.P. McKim, an analyst with William Blair & Co. in Chicago. “It kind of goes along with the prevention of overtesting and overtreatment and allows those people to kind of avoid unnecessary surgery, which in essence saves payers money.”
McKim added that the money-saving factor is among the reasons Veracyte has been able to obtain relatively quick coverage approval for Afirma from a large number of insurers. It has coverage for about 135 million lives, up from 125 million in the prior quarter and 100 million a year ago, according to a recent report McKim and fellow analyst Amanda Murphy recently published on Veracyte.
“We believe Veracyte is uniquely poised to commercialize and gain reimbursement for our test, given the rapid success the company has achieved with its Afirma solution,” said Michael D. Webb, Allegro’s chief executive officer.
William Blair has other reasons to be bullish on Veracyte. It recently renegotiated its contract with biotech giant Genzyme to provide marketing and sales support for Afirma. It will pay Genzyme 15 percent of the revenues from test sales, down from 32 percent, until 2027.
“We believe that the amended agreement brings not only forward profitability for the company, but also additional sales reps in house (more feet on the street) to penetrate complex accounts with a more-specialized/-focused rep,” McKim and Murphy wrote, projecting that Veracyte will have a 35 percent market penetration by 2017, compared to its current penetration of about 15 percent. Although the company’s stock price has retreated significantly from its 52-week high of more than $18 a share in the spring and is now trading at around $11 a share, the analysts maintained their “outperform” rating on Veracyte’s stock and expected that more payer contracts will be announced later in the year.
Takeaway: Veracyte’s decision to acquire Allegro Diagnostics will accelerate the company’s entry into pulmonology testing.
