Molecular Diagnostics Finance & Investment Club Healthcare Sector Senior Analyst: Justin Chiu Junior Analysts: Benjamin Mason Fall 2015

Molecular Diagnostics Industry Definition: This industry includes manufacturers of equipment and reagents for research and medical diagnostic application using tests that detect specific molecules such as DNA, antibodies, and proteins. This molecular technique is very new and was developed in the 1990s Most companies in this industry are subsidiaries of large pharmaceutical companies, or large, stand-alone diagnostic companies that are focused on developing tests. There are also small companies with niche markets such as specific biomarkers. Due to the modernism of this industry, data is very limited. However, due to multiple factors, analysts predict industry growth of 8-10% CAGR Industry: This industry includes manufacturers of electromedical and electrotherapeutic apparatuses, such as magnetic resonance imaging equipment, medical ultrasound equipment, pacemakers, hearing aids, electrocardiographs and electromedical endoscopic equipment. The industry also manufactures irradiation apparatuses and tubes for applications such as medical diagnostic, medical therapeutic, industrial, research, scientific evaluation and more.

Molecular Diagnostics Industry Breakdown: Industry Breakdown by Revenue (US) A) Genomics Healthcare $2595B 100.0% Medical Devices $360B 13.87% In-Vitro Diagnostics $55B 15.27% Molecular Diagnostics $5B 9.09% Genetic testing for inherited disorders Cancer testing Transplants B) Blood Donor Screening Screens for HIV, HBV, HCV and other diseases C) Clinical Infection Diseases In-Vitro Diagnostics: Tests performed on a sample taken from the body and its organs, e.g. blood, tissue, urine etc. Tests in Virology and Bacteriology, e.g. HIV, HPV, HPV, & Tuberculosis IBIS World, S&P Capital, Investext

Molecular Diagnostics (MDx) Technique: The Science Behind Molecular Diagnostics Molecular Diagnostics & Pharmacogenomics explode Molecular Diagnostics (MDx) Technique: Polymerase Chain Reaction (PCR): Tester locates a short gene sequence where known critical mutations/variances occur that lead to a specific disease The sequence is rapidly amplified with a machine until there are thousands of copies Segment is tested for a specific gene sequence with an assay Example - Cystic Fibrosis (CF): CF is seen in patients with two altered CFTR genes, one from each parent (Carriers only have 1) CF MDx test is used to test for carriers, as well possibly affected newborns http://advameddx.org/download/files/AdvaMedDx_DxInsights_FINAL(2).pdf The reduced cost of whole-genome sequencing should not overshadow continuous and important advances in identification of genetic biomarkers and development of more focused molecular diagnostics. Molecular assays play an ever-greater role in screening, diagnosis and treatment of a long list of diseases based on identification of associated genetic variants. Molecular assays will increasingly assume the role of primary screening in HPV and other indications, drive the development of treatments for orphan diseases and improve detection and classification of infectious disease. In 2015, growth and diversification in molecular diagnostics will include the emergence of miRNA diagnostics as an important subcategory. Development for indications such as gastric adenocarcinoma, hematological malignancies and cutaneous T-cell lymphoma is underway. The biopharma industry is actively developing miRNA antagonists and mimics that will be dependent on availability of miRNA assays. DNA sequencing will open the way for an explosion of development in therapeutics that target specific mutations. From a larger perspective, the development of targeted therapeutics is increasing success rates for many projects. On the other hand, payer resistance to pricing of targeted products will continue, especially for products that prolong survival modestly. Wherever possible, developers must seek new and more efficient approaches to development of oncology therapeutics and related diagnostics. 2. 3D printing will bear The U.S. diagnostics market was about $15.5 billion in 2012, with a forecasted growth rate of 5.8% over the next five years.

Business Model: Molecular Diagnostics Research Marketing & Manufacturing End Users 3-Step Process Discovery of Assay Hospitals & Treatment Centers (80%) Creation of Test Kit or Commercial Diagnostic Method 510k or PMA Creation Process Distribution Process Laboratories (10%) + FDA Approval http://www.hpm.com/pdf/CH3_GIBBS.PDF Format taken from Matt Sgrignari’s presentation http://decibio.com/clinical-diagnostics.php Consumers; OTC, Self-tests (10%) Completion IBIS World, S&P Capital

Trends & Drivers of Growth 1) Adoption of MDx tests and New Uses 2) Increased Donor Transplant Growth and Regulation 3) Next Generation Sequencing

Trend 1: Adoption of New Molecular Diagnostic Tests and New Uses MDx has organic growth drivers in HAIs and Virology, as well as continued uses beyond adoption in CDx Health Acquired Infections (HAIs): 1 in 25 inpatients acquire an infection while receiving treatment for another condition Costs $Billions/year and 10,000s of lives To avoid fees, hospitals have adopted rapid MDx tests to avoid HAIs HAI Market will rapidly grow at a 15% CAGR (conservative estimate, down from previous years) New uses: Companion Diagnostics (CDx): are used to determine whether or not the patient is a candidate for the particular therapy Very common in oncology, where expensive therapies are at stake Only 24 FDA approved CDx today Over 50+ announced collaborations b/w Pharma and Diagnostic companies Virology: Organic Growth: The overall Virology Segment of HIV, HCV, & HBV retains all of their patients due to periodic monitoring, and adds newly diagnosed patients each year. This will drive virology growth at a CAGR of 4-6%

Trends & Drivers of Growth 1) Adoption of MDx tests and New Uses 2) Increased Donor Transplant Growth and Regulation 3) Next Generation Sequencing

Trend 2: Increased Donor Transplant Growth and Regulation UNOS policy and MDx adoption will drive the HLA Market to grow at a 10-12% CAGR Human Leukocyte Antigen (HLA) Testing Used to test tissue compatibility for organ and bone marrow transplants New policies from United Network for Sharing (UNOS) are requiring molecular method testing for deceased donors for all 5 major HLA antigen classes Weighted average predicted CAGR of 2.3% to 2018 MDx tests for HLA testing are slowly replacing traditional antibody tests In 2014, MDx represented just under 50% of total HLA Market… 50% is still underpenetrated! Increase of MDx tests due to UNOS policy will drive the HLA Market Transplant procedures are also increasing worldwide  HLA Market will grow at 10-12% CAGR

Trends & Drivers of Growth 1) Adoption of MDx tests and New Uses 2) Increased Donor Transplant Growth and Regulation 3) Next Generation Sequencing

First Generation Sequencing: Trend 3: Next Generation Sequencing The rapidly decreasing costs of NGS will eventually make it a worldwide standard utility tool Genome Sequencing in 2014 1 machine can sequence over 45 human genomes in a day, for approximately $1000 each Researchers are discovering critical genes that cause cancer, autism, heart disease, etc First Generation Sequencing: DNA Sequencing is the process of determining the exact order of nucleotides (CATG) present in a given DNA/RNA Molecule Human Genome Project took 13 years & $3 billion Completed in 2003 Exome Sequencing: The protein-coding regions of the genome, ~1% Quick and cost-effective Next Generation Sequencing (NGS): The Genome Analyzer emerged in 2005 and massively decreased costs and timeframe Launched the “Next Generation” in genomic science http://www.illumina.com/content/dam/illumina-marketing/documents/products/illumina_sequencing_introduction.pdf Decreasing costs and increasing data storage are faster than Moore’s law

Effects of NGS on Molecular Diagnostics: Trend 3: Next Generation Sequencing, continued The possible applications of NGS will provide organic growth after MDx is standardized worldwide Effects of NGS on Molecular Diagnostics: A shift from conventional polymerase chain reaction to NGS methods NGS can examine a tumor sample for all possible mutations rather than running individual PCR assays for each suspected mutation Quick Adoption of NGS Instruments: NGS has gone from technology used for research to being used in application NGS are in use in more than 200+ clinical facilities Researchers are discovering critical genes that cause cancer, autism, heart disease, etc B) Genomics Genetic testing for inherited disorders Cancer testing Organ & Tissue Transplants Trend Drivers & Predictions: NGS instruments will soon become the diagnostic standard as costs decrease further Companies are vying for FDA approvals for the NGS devices NGS will drive the Genomics segment to grow at a CAGR of 8-10% Genomic Segment Market will reach almost $2B by 2020. http://www.illumina.com/content/dam/illumina-marketing/documents/products/illumina_sequencing_introduction.pdf

Thank you Create an index of comparable companies and this is the average of top 5 players etc Find a company you like and use that as a benchmark – use that on an industry level