NEW YORK – The US Food and Drug Administration's plan to regulate laboratory-developed tests is likely to quicken the already brisk pace of consolidation in the lab industry.
While clinical labs have been almost uniformly opposed to the FDA's proposed rule for oversight of LDTs, large national companies like Quest Diagnostics and Laboratory Corporation of America, as well as some smaller firms, could add test volume following the rule's implementation either through acquisitions or increases in send-out testing.
Robert Boorstein, medical director of Brooklyn-based Lenco Diagnostic Laboratory, said that he expects the FDA rule will push test volume to the large national labs given that they are better positioned to take LDTs through the agency.
"If it is necessary to get FDA approval [for a test], it will be much easier for them than for a smaller lab, whether they are academic or commercial," he said. "It is difficult and expensive to deal with the FDA, and [Quest and Labcorp] are just much more suited to do what the FDA requires."
In a note to investors following the FDA's release of the proposed rule, BTIG analyst Mark Massaro said that while large national labs like Quest and Labcorp would likely see increased costs "to secure compliance" for the many LDTs they offer, these companies might also see opportunities "to acquire quality assets at potentially cheap valuations."
The FDA, in the preliminary economic analysis of impacts of the proposed rule, likewise suggested that the rule could lead to further industry consolidation, noting that small labs "are more likely to reduce operations or exit the market" and that "larger laboratories may take over the production of certain IVDs offered as LDTs," which "may have the effect of driving production concentration to a few large laboratories."
Given how central acquisitions and growing requisition volumes have become to large national labs' business strategies, the FDA's proposed rule isn't without its potential positives for these firms.
FDA oversight of LDTs presents "a definite modest upside for Labcorp and Quest," said David Nichols, president and founder of lab services consulting firm Nichols Management Group.
"Labcorp and Quest are like, 'whatever,'" said Jeffrey Jones, managing partner at lab and diagnostics consulting firm The Deerborne Group. "The little guys are the ones screaming."
The American Clinical Laboratory Association (ACLA), which represents Quest and Labcorp as well as other large lab companies, has maintained consistent opposition to the proposed rule.
"ACLA thinks it is not the right approach to regulate LDTs as medical devices because it is not in the best interests of patients and innovation," said ACLA President Susan Van Meter. "You need a framework that is diagnostic-specific, that is flexible, that ensures that science, as it advances, is being reflected in the tests that are available for patients."
"We can do that today with LDTs," she added. "If we are subject to the medical device framework, the agency will restrict what it allows test developers to be able to do. That is a major shortfall and problem for patients."
Quest and Labcorp themselves have been less urgent in their comments on the rule. For instance, during a conference call following release of Quest's Q3 2023 financial results, President and CEO Jim Davis said that while the company will continue to work through ACLA to oppose the rule, the issue "is not a huge deal for us right now." He said that LDTs account for less than 10 percent of Quest's testing business and added that the three labs out of which Quest does most of its LDT testing are ISO-certified, making them well prepared to handle increased FDA oversight.
Labcorp Chairman and CEO Adam Schechter was perhaps even more relaxed on the issue during his firm's Q3 2023 earnings call, noting that, if regulation "is fairly done, meaning that all laboratory-developed tests have to do the same thing across small labs, big labs, and everything else, and as long as [FDA] can get these filings done quickly so that people can have access to new innovations like they do today, we believe that it would be minimal impact to us in terms of the amount of money or spend."
He added that Labcorp thinks "that our science, our innovation, our technology capabilities actually differentiate us, and if you look at the rigor we go through with our laboratory-developed tests, we think we do the vast majority of what [FDA] would be asking for anyway."
In a follow-up statement provided to 360Dx, Schechter clarified that Labcorp is not, however, "supportive of taking the current FDA medical device authority designed for device protocols and applying it to the testing industry."
Nonetheless, the rule, if it does go into effect, will likely provide well-positioned labs the chance to expand their operations.
Robert Cardwell, chief strategy officer at Delray Beach, Florida-based Genetics Institute of America, said his company expects to see acquisition opportunities emerge as the FDA implements its rule on LDTs and smaller laboratories either stop offering certain smaller-volume tests or struggle to continue their operations.
"We are in acquisition mode," he said. "We are actively looking for other laboratories and companies and pathology groups to acquire. It could be that there is somebody who has [a valuable test] and doesn't have the capital to get it through FDA and becomes an acquisition target. There will probably be some consolidations in the market, which could be favorable to us and others like Labcorp and Quest."
On the other side of this equation are labs like Franklin, Tennessee-based allergy testing lab Allermetrix, which, according to Jay Weiss, co-owner and director of R&D, is able to stay in business largely because it exclusively offers LDTs, which it is able to produce for less than it would cost to purchase the equivalent in vitro diagnostic.
Weiss said that at this point, Allermetrix is waiting to see the final shape of the FDA rule, after which "we'll have to really have a hard look at whether it makes sense to continue doing business."
"The other option is to find someone who does have the wherewithal [to navigate the FDA requirements] and would like to bring in this testing and sell [to them]," he said.