Devices & Diagnostics

Domain VC: Why we’re investing more in molecular diagnostics

When Domain Associates led Xagenic Inc.’s recent $20 million Series B, it marked the eighth diagnostics investment the firm had made with its $500 million eighth fund. The partners say they’ve invested nearly a quarter of their current fund in molecular diagnostics companies because they think genomic analysis technology has reached a tipping point. “One […]

When Domain Associates led Xagenic Inc.’s recent $20 million Series B, it marked the eighth diagnostics investment the firm had made with its $500 million eighth fund.

The partners say they’ve invested nearly a quarter of their current fund in molecular diagnostics companies because they think genomic analysis technology has reached a tipping point.

“One of the reasons we’re so excited about diagnostics space is because we think this is one way we can really remove costs from the healthcare system,” partner Kim Kamdar explained. “Sequencing costs have come down so much that now you really can understand a lot from comparisons of various genomes.”

Some firms have pulled back on investing in molecular diagnostics, and Silicon Valley Bank life science described in an M&A report last year how the sector didn’t see as many big exits as expected between 2009 and 2011 (PDF).

Kamdar said she suspects the negative outlook on diagnostics stems from investments made when the Human Genome Project was just completed and there was a lot of hype about the impact it would have. Although the science was there, acceptance on the part of key opinion leaders and physicians wasn’t necessarily. “You ended up with companies with high spend that weren’t getting revenue traction,” she said. “The perception then was that investments in diagnostics had a lot of regulatory risk and the cost aspect was really challenging.”

To be clear, diagnostics has always been a part of Domain’s investment thesis. But Kamdar traces the push on diagnostics to 2009, when the firm held what it calls Domain Day. It gathered key opinion leaders and spent the day brainstorming around diagnostics, and determined that exciting advances were on the horizon.

For one, the declining costs of sequencing could make developing and testing new treatments much cheaper than before. For example, an oncology company interested in a particular gene set signature might need to look at sequencing data for 100 patients with cancer and 100 patients without cancer. A decade ago, the cost of getting all of that data might have been prohibitive.

It’s also helping create more actionable tests for patients in the move toward personalized medicine, Kamdar said. “It’s no longer about just being able to identify or run a diagnostic for the purpose of identifying something in a patient, but it’s about something that can change treatment paradigms.”

Domain portfolio company Veracyte, for example, which had a $58 million IPO earlier this fall, looks at gene expression patterns to help doctors know when suspicious thyroid lumps are malignant, which could in turn prevent unnecessary thyroid removal surgeries.

“That type of actionable test becomes really compelling from a physician standpoint and the payer side,” she said, noting that UnitedHealthcare has already said it will reimburse for the test.

Although she admits there will always be regulatory challenges with diagnostics, Kamdar said she’s been encouraged by the FDA’s work on establishing a breakthrough therapy designation for companion diagnostics to work alongside its breakthrough therapy designation for drugs.

“The bottom line is that if one is developing tests that are actionable, and there’s an appropriate data set behind that, the FDA will be very reasonable about what’s actually needed to approve it,” she said.

[Image credits: BigStock Photos, Domain Associates]