Dion Madsen

Dion Madsen

There is an old saying in Saskatchewan, where I grew up and it goes like this: “How do you become a millionaire farming? You start with two million.”  Well that kind of describes how the venture community has viewed investing in diagnostics for the last decade and this perspective was well described by Bruce Booth of Atlas Ventures last year.  I used to describe it as a good way to lose a lot of money as most of the diagnostic companies were developing single tests that were quickly commoditized and getting to market was inordinately expensive.  Channel power was all in the hands of the large diagnostics companies (Quest and Labcorp in the US and LifeLabs in Canada) and these companies have prospered as the number of diagnostic tests have increased but pricing pressure from payers have compressed margins for the developers of new commodity tests.  Labcorp and Quest have shown that you can grow a very substantial business with revenue of $5.8B and $7.1B, respectively, albeit with profit margins that are less than other healthcare sectors like pharma and medical devices.

In 2007, my opinion started to change.  The rise of high-value molecular diagnostic tests, as exemplified by the success of Genomic Health with OncotypeDX created a model that other new, molecular diagnostic tests could follow.  Now, it is important to recognize that the conditions that enabled success for GH were unique. As a recap, the breast cancer assay is a personalized medicine diagnostic that predicts the patient’s probability of recurrence and the benefit of chemotherapy for treatment.  If the test is negative for recurrence and benefit, the patient does not have to undergo a costly treatment that also has the side-effect of cumulative and irreversible cardiotoxicity (for anthracycline treatments).  Use of the test promises both better outcomes and lower costs through the avoidance of unnecessary therapy and side effects and this has translated into strong commercial success for GH.  Following that, every company wanted to be the “next Genomic Health”.  My response was, “No you don’t, you will have to raise $100M to get to market and we are looking for more capital efficient models.”  As it turns out, there really isn’t a shortcut, as demonstrated by Crescendo (raised $146M), CardioDx (raised $208M) and CareDx (raised $120M).  In order to drive FDA approval, adoption and reimbursement, you need to build a clinical dossier that demonstrates strong clinical utility and significant cost savings.

Having said that, there are some positive stories emerging.  The recent Myriad Genetics $245 million acquisition of inflammatory disorders focused Crescendo rolled in Vectra DA, the first blood-based test to determine disease activity in rheumatoid arthritis patients, and associated disease-tracking software for patients into the Myriad product line. Myriad first provided debt financing to the company in 2011 and under the deal, Myriad – fueled by a desire to diversify beyond oncology and broaden its technology platforms into protein-based testing – made a $25 million debt investment in the smaller molecular diagnostics company with the option to buy it outright within three years (at a multiple of revenues once those hit an initial threshold and a formula to gauge rate of growth). The arrangement afforded Crescendo the means to operate independently while holding on to a steady stream of cash; Myriad benefited from observing the business without a high level of commitment.

CareDx plans to complete its IPO this week which would value the company at $168M, and CardioDX has filed for its IPO but does not have a listing date set, so the outcomes for both of these companies will be a bellwether for the sector.

Having said all that positive news, there is a general lack of venture funding in the space, with most of the investment attention focused on later stage companies.  Recently, two molecular diagnostics firms drew the interest of corporate backers in Series E rounds: HTG Molecular Diagnostics Inc. (chemistry platforms for RNA analysis) raised $22 million funded in part by Novo Ventures, SR One, and Merck Capital Ventures; while Metabolon Inc. (biochemical profiling tools for biomarker and pathway discovery) brought in $15 million with participation from first-time buyer Sumitomo Corp.

This interest in focusing on later stage companies is completely understandable given the high capital needs and the lower return on capital shown by the “successful” companies in the space.  I didn’t compile a list of the “unsuccessful” companies, but I am guilty of having one in my track record.  The lack of venture participation also creates a very high refinancing risk for an investment so investing at the earliest stages is not for the faint of heart.  In addition to all of the issues above, reimbursement in North America and Europe remains a patchwork of payors meaning that use of the diagnostic doesn’t translate into immediate commercial success, with the company bearing much of the payor risk during the early launch phase.

Given these facts, our strategy for diagnostics investments can be distilled into the following points.

  • Most of the reimbursement risk should have been removed
    • This means that the test is either using an existing reimbursement code or the reimbursement that the company is seeking is so strongly supported by cost saving data that only the most reluctant payor would hesitate to reimburse.
  • The test has already achieved scientific proof of concept
    • Ideally, we would want the final approvable study completed but you can’t remove all the risks. If the company had strong data on proof of concept and the next study was straightforward, we would be comfortable taking the risk.
  • Go to market strategy is well defined and strong user demand exists
    • Launching a new molecular diagnostic test is expensive, requiring a significant salesforce. Exact Sciences recently began its launch of its colorectal diagnostic kit with 80 reps at launch, rented from Quintiles, targeted at primary care.
    • There should be strongly supported demand from end users for the innovation. Sounds simple but many a company has foundered here as they have had to educate the market on the benefit of the test, hampering early adoption as physicians are reluctant to utilize new technology without strong clinical studies supporting utility, secure reimbursement and recommendation from physician colleges providing supporting recommendations for use.
  • Financial benefit should be clear
    • There should be a clear financial benefit to the physician, clear improved outcomes and lower cost for the patient and savings for the payer. While this sounds simple, ensuring that the commercial proposition is structured appropriately in an era where the patients are overwhelmingly adopting high-deductible healthcare plans[1], understanding whether the patient or the payer is picking up the tab is critical.  Good luck selling that $4,000 test to the median American who earns $51,000 per year.
  • The technology is part of a platform
    • There is little remaining appetite for single tests or companies that are seeking to develop a personalized molecular diagnostic to be performed at the company’s CLIA lab. The costs of operating the lab during the early phases of market launch, combined with the generally low test volumes make this a losing financial proposition.
    • There is appetite for test platforms that promise to enable additional tests to be run on the platform over time. Evidence of this is a prior investment that my former Partner Stacy Feld and I made when we were at Physic Ventures, T2 Biosystems.  T2 recently filed to go public on NASDAQ and the company’s technology enables rapid time to result with no sample prep and enables both nucleic acid and immunoassay-based tests on the same instrument[2].
  • The technology enables decentralized testing
    • Like the T2 technology platform, we believe that the future of diagnostic technology is to enable both the delivery of healthcare in distributed environments and to provide the rapid, clear answer that enables that care to be delivered by less highly trained and lower cost medical professionals.

Recently, we joined Domain and CTI LSF in an investment in Xagenic, a company that I have been following for three years.  The platform technology that the company is developing is very impressive.  Xagenic’s AuRA™ technology is based on ultrasensitive microelectrode arrays. Nanostructured sensors, coupled with highly amplified signals that are generated by an electrocatalytic reporter system, allow direct analysis of clinical samples. The technology is highly versatile and has been validated with a variety of targets, cell types, and specimen types. It provides rapid (15-20 minute) sample-to-answer diagnostic test results with nucleic acid amplification test (NAAT)-like performance.

Let’s test the investment against our criteria.

  • Most of the reimbursement risk should be removed
    • We believe that the company will use existing reimbursement codes for lab tests of infectious disease
  • The test has already shown proof of concept
    • The company has already shown performance comparable to standard testing methodologies and meets commercial performance standards
  • Go to market strategy is well defined and strong user demand exists
    • I won’t go into the proprietary strategy but I will discuss strong user demand. In our interviews with medical professionals, market studies and our consultant’s report, we validated the strong need for rapid screening technology for many infectious diseases and this was additionally validated and supported by recommendations from the CDC and other countries.
  • Financial benefit should be clear
    • Again, avoiding disclosing confidential information, we believe that this condition is strongly met.
  • The technology is part of a platform
    • We believe that the company has a strongly protected and innovative platform that enables additional tests to be developed. What was most exciting about the technology is that it puts the diagnostic capability right in the hands of the medical professional that can deliver an answer to an anxious patient while they are in the waiting room.  Additionally, the footprint and accuracy of the test enable its use in distributed care settings like retail health, an increasingly popular care setting in the US.  We believe that this has even stronger value proposition in rural settings where time to receiving a diagnostic answer with traditional technology is measured in days.
  • The technology enables decentralized testing
    • The huge advantage of the Xagenic platform is the ability to deliver care in a distributed setting (doctor office, STD clinic, retail clinic, etc) and to deliver the answer and the prescription while the patient is still in the office. There is a tremendous amount of time, energy and investment dedicated to solving the issue of non-compliance and non-adherence. Asking patients to return for test results and treatment places one more barrier to adherence and compliance.  By offering convenient testing locations and rapid results, Xagenic’s platform enables broader screening, increased detection and immediate treatment reducing the spread of infectious diseases.

What I don’t mention are the standard management and syndicate qualities that are necessary for each of our investments.  We are very pleased to be joining existing investors Domain and CTI LSF and working with a top-flight team.  While I think that the company fits our diagnostic strategy very well, we are always cognizant of the risks inherent in investing in venture stage companies and the need for solid execution by management and solid and sustained strategic leadership by the board and investors.

I would also like to congratulate the company on being the recipient of the 2014 Frost and Sullivan North American Point of Care Diagnostics New Product Innovation Leadership Award.  It is great to get the additional validation and now it is on to the hard work of bringing this technology to market and building a great company!


Dion Madsen




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[1] Consumer-driven health plans—insurance coverage with a high deductible— are set to go mainstream in 2014. According to the 2013 PwC Touchstone Survey of major US companies, 44% of employers are considering offering high-deductible health plans as the only benefit option to their employees in 2014. Already, 17% of employers offer high-deductible plans as their only option in 2013, a 31% increase over 2012

[2] For molecular and immunodiagnostics targets, T2MR utilizes advances in the field of nanotechnology by deploying nanoparticles with magnetic properties that enhance the magnetic resonance signals of specific targets. When nanoparticles coated with target-specific binding agents are added to a sample containing the target, the nanoparticles bind to and cluster around the target. This clustering changes the microscopic environment of water in that sample, which in turn alters the magnetic resonance signal, or the T2 relaxation signal that we measure, indicating the presence of the target. For hemostasis measurements, nanoparticles are not required because T2MR is highly sensitive to changes in viscosity in a blood sample, such as clot formation, stabilization or dissipation, which changes the T2 relaxation signal. This enables the rapid identification of clinically relevant hemostasis changes.


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Dion Madsen

Those that know me well, know that my favorite words are “Super”, “Great” and “Awesome”. The geek part of me is energized solving the complexity of biology and improving the delivery of care.  I learned patience, hard work and entrepreneurship growing up on a farm in Saskatchewan and teamwork in the rinks and ballfields of my hometown.  After working in Europe and then dealing with bare-knuckle politics in Saskatchewan, I migrated west to Alberta where I began to hang out with some crazy guys doing something called “the Internet” which led to me being the CFO of a publicly-traded company.  After selling the company, I crossed over to the VC side and during a meeting with a vaccine company I had the epiphany of “I can make money and help people at the same time? Awesome!” and I have been working for or financing healthcare companies ever since.

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  • Didier Leconte

    July 23, 2014 at 1:41 pm

    Dion, This is a very compelling overview of this promising, while complex on multiple fronts, area of diagnostic. I strongly support last remark about management and investment syndicate. Thanks for sharing and be well!

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    October 30, 2014 at 10:54 pm

    Spot on with this write-up, I absolutely believe that this website needs much more attention. I’ll probably be returning to read more, thanks for
    the info!