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The second coming of consumer genomics with 3 predictions for 2018

Several fundamentals have changed to accelerate growth in the genomics space, spurring our second look into the sector.

As healthcare venture investors, my colleagues Adam Seabrook, Hailey Hu, and I identify disruptive trends at the intersection of healthcare and technology and back companies that are pursuing those trends. Occasionally, albeit rarely, we come across resurgent trends that reach an inflection point after several years of heavy capital investment but only linear growth.

In the last decade, more than $1 billion has been invested in the human genomics category. The top five most funded companies including 23andMe, Pathway Genomics, Counsyl, Helix and Color have each raised $50 million to $300 million in capital. Understanding why the human genomics space hasn’t yet become mainstream requires reflection upon where it started and how it has matured to date.

A brief history of human genomics

Genomics is defined by the WHO as the study of all parts of an organism’s genes and their functions whereas genetics is the study of heredity or how single genes are passed between generations. The Human Genome Project sequenced the entire human genome for the first time in 1990, at a cost of $3 billion and took thirteen years to complete. In 2007, new technology was introduced that increased DNA sequencing output 70x in one year.

Next Generation Sequencing (NGS) was further advanced by Illumina, a $35 billion public company that provides sequencing technology for life sciences. Over 70,000 individual tests are available today; companies such as 23andMe have become household names. In 2007, 23andMe launched the first direct-to-consumer test at $999 per test, and introduced a $99 “personal genome service” in 2013. In 2015, the company hit its millionth customer sequenced. However, the growth of the industry has not been without ups and downs. In 2013, in the face of non-compliance with several orders, the FDA ordered 23andMe to stop selling their tests to consumers, which resulted in market uncertainty, slowing growth of the sector.

Why now?

Recently, several fundamentals have changed to accelerate growth in the genomics space, spurring our second look into the sector. Specifically, lab costs have continued to decline, consumer awareness is higher than ever, regulation has become more favorable in the U.S. and remains permissive in other parts of the world, and new models of payment and distribution have emerged.

The cost of sequencing an entire genome has fallen from $3 billion to $1,000 in a decade, and direct-to-consumer tests are now widely available in the sub-$400 range. Earlier this year, a UBS report titled Genomics 2.0 predicted a $2B to $7B market size based on average test prices of $100-$200. Awareness of consumer-facing genomics brands is also ramping up, with over half of UBS survey responders being aware of Ancestry, and 1 in 5 having heard of 23andMe. While the market is still in the early stages, 13 percent of survey responders report having taken a genomics test.  And of those who have not, one-quarter plan to do so in the next 12 months. Another recent Mobihealth article provides more statistics on the public awareness.

Crucially, in 2017, the FDA issued a landmark decision to reverse its 2013 ban on 23andMe marketing their disease risk screen directly to consumers, leading to a more progressive regulatory environment in the United States. As a result, new distribution models are emerging. In addition to direct-to-consumer marketing and clinically prescribed tests, insurance carriers are now bundling tests with new policies, and employers are beginning to offer genomics tests as a risk screening tool and a covered employee benefit.

Who will win?

In our view, the direct-to-consumer space is crowded. By our latest count, more than a dozen companies are competing for mindshare, and we expect the number of competitors in this space to continue to grow, driving pricing down further. Invitae is being described as the “Amazon of Medical Genetics” by aggregating a large number of genetic tests into a single platform. Established companies such as 23andMe and Ancestry are consumer brands more than IP-based businesses, and will therefore have an advantage against smaller and less capitalized competition at this stage of the game. For this reason, we’re bearish on backing the next consumer branded test kit.

At the other end of the spectrum, the clinical market is rapidly expanding. This market is IP-based, highly regulated, and follows a similar commercialization pattern to life science and diagnostics. For instance, Counsyl has established a brand in the clinical testing space. The company will exceed 750,000 patients screened this year with their flagship Family Prep product. In another case, Natera has introduced an advanced pre-natal screening test for birth defects which is far less invasive than amniocentesis, targeting the 20 percent of pregnancies that are high risk. And there appears to be even more room for market expansion. At the Cowen FutureHealth conference, Natera’s SVP of product shared that despite projecting 500,000 tests this year, the clinical market is still under penetrated due to lack of reimbursement and the need for greater education with both provider and patient populations.

One promising area of near-term growth for genomics testing is the insurance market. Prenetics has launched co-branded tests in partnership with Manulife, Prudential, and HSBC in Asia. These tests focus on diet, fitness, disease risk, and drug efficacy, and avoids personal traits and ancestry; in other words, their tests gather data that can be used for both new policyholder acquisition and risk stratification. The same Genomics 2.0 UBS report referenced earlier suggests that individuals aged 25-39 with annual incomes over $100,000 are most likely to be early adopters of these genetic tests, a valuable demographic for insurers. The approach of having an insurance company market and pay for non-clinically validated product threads the needle between direct-to-consumer offerings, which require costly consumer marketing, and clinically prescribed tests, which require a provider to be the gateway for distribution.

So what’s next? Here are my three predictions for genomics in 2018:

Genomics will play a bigger role in clinical decision making

Genomics will emerge as a key enabler of personalized medicine. We will observe greater patient awareness, test volume and increasing payer reimbursement for genetic testing throughout the patient lifecycle, from pre-natal to disease prediction and management. At some point in the not too distant future, ordering a specialized genetic test will be as routine as ordering a lab screen.

Competition and test proliferation will flourish, especially in overseas markets

The number of branded genomics tests will double in the coming years. Regulation in the U.S. is evolving and generally becoming more lenient. In addition, regulators in international markets, particularly in Asia, have shown more willingness to allow the use of genomics data for risk stratification and policy underwriting. We expect that China and Southeast Asia will sustain downstream markets of $5 billion and $1.4 billion, respectively, potentially outpacing North America in test demand.

Value will accrue to new data platforms

Technology will bring efficiency, price transparency and efficacy measurement to the genomics world, as it has in other areas of healthcare. As the testing market matures and test volume proliferates, payers and providers will need to measure efficacy and pay for different panels of tests. Companies that help providers and insurers navigate ordering, referral management and billing of rapidly proliferating tests will be well positioned for success.

We look forward to seeking out and backing the next generation of pioneering entrepreneurs and innovative technology companies in this space.

Photo: Getty Images

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