Today, the detection of cancer is time consuming and expensive. Tissue samples from molecular diagnostic tests must be mailed to a lab and sequenced or otherwise analyzed. In the United States, the process can take between seven and fourteen days, and costs $4,000 to $8,000. Test results from Foundation Medicine [FMI], Myriad Genetics [MYGN], and Genomic Health [GHDX] allow information on specific genetic mutations to direct oncologists toward treatments that will increase a patient’s survival odds. Because of the costs and significant turn-around time, both outsourced lab and on-site molecular tests are ripe for disruption . . . $168 billion worth of disruption. Leading the movement away from centralized labs, Cepheid [CPHD] is a leader in the hospital based clinical diagnostics space. Its distributed model offers a significant number of tests for serious infectious diseases and, soon, cancer. Test kits are sold in chemical cartridges that require Cepheid’s GeneXpert system.
Cepheid is collapsing the time to detect cancer, potentially providing test results within 90 minutes, instead of the days or weeks. The result is less anxiety for patients and quicker treatment decisions for doctors. GeneXpert systems are designed to allow future diagnostics to be added seamlessly. Because of their flexible modular structure, hospitals have embraced GeneXpert systems, now in 23% of American hospitals (as shown below ).
Though Cepheid is well known for its MRSA (staph infections), HIV, and tuberculosis tests, it intends to release a GeneXpert test for bladder cancer by the end of 2015. As is always the case, the new test will be compatible with existing systems, enabling easy adoption.
The upside to Cepheid’s economic model will become clear as it adds tests for cancer. If it were to offer its bladder cancer test for $200, as does Abbott [ABT] for its Urovysion test, Cepheid could generate $3.5 million in annual revenue from the roughly 74,000  Americans diagnosed with bladder cancer each year, even if GeneXpert penetration were to stall at 23% of hospitals. Oncologists in hospitals that already have a GeneXpert system will be able to adopt it easily.
Its bladder cancer test could generate high margins for Cepheid at a $200 price point, or it could destroy the pricing structure of the molecular diagnostic space. Its current average cartridge price is roughly $20, with a 60% gross margin. Even at ten times the average price of its other tests, Cepheid’s bladder cancer test would be competitive with Abbott on price, but significantly margin accretive. If Cepheid were to price its bladder cancer test in line with its current cartridges, however, it would cause significant disruption in the molecular diagnostic space.