The Business Effects of Regulatory Uncertainty in Genetic Testing

The business of genetic testing has progressed rapidly, if unevenly, over the past several years. Like any business based on new and rapidly developing science, the promise of new products and markets is counter-balanced by the obstacles of developing commercial products from raw science, fostering markets for those products, constructing profitable business models and overcoming novel legal and regulatory hurdles.

The Regulatory Environment Turns Negative. Until May 2010, the regulatory challenges in the genetic testing world seemed relatively benign, with most attention focused on patent and related IP issues (e.g. the Myriad gene patent litigation) and a challenging economic climate which made commercial operations and capital raising difficult for most businesses.

At the time, most genetic tests self-identified as laboratory developed tests (LDTs). LDTs have been an indefinitely defined category of diagnostic tests that were considered distinct from the category of in vitro diagnostic tests that the FDA regulates as medical devices under the Federal Food, Drug & Cosmetics Act (FFDCA). While the agency has long claimed jurisdiction over LDTs, it had adopted a policy of “enforcement discretion” that left such tests substantially unregulated other than that the laboratories had to operate in compliance with the Clinical Laboratory Improvement Amendments of 1988 (CLIA) and applicable state laws.

Not that there were no signs change might be coming. Over the past several years the FDA repeatedly expressed its desire to revive the oft-postponed regulation of certain high-complexity LDTs (the “IVDMIA guidance” which would include coverage of complex genetic tests). And numerous commentators advocated greater regulatory oversight of the emerging field of direct-to-consumer (DTC) genetic tests. Still, as of a few months ago, the regulatory environment for developing and commercializing genetic tests appeared to be relatively stable.

That stability largely disappeared following a high-profile and short-lived partnership between a DTC genetic testing company (Pathway Genomics) and a national drugstore chain (Walgreens) in May of this year. Within hours, the FDA spoke up in the press to characterize Pathway’s product as an “illegally marketed device” and followed up with a letter to the company stating that Pathway’s test “appears to meet the definition of a device as that term is defined in section 201(h) of the [FFDCA].”

In the weeks that followed, the FDA sent two batches of similarly challenging (some would say threatening) letters to genetic testing companies, including to several prominent DTC companies. The agency also announced its intention to regulate all LDTs, including thousands of tests previously unregulated by the FDA. In July of this year, as the FDA took the first step toward regulating LDTs with two days of high-profile public meetings, the GAO issued a negative investigatory report on DTC genetic tests and Congress held hearings on the topic.

In a few short months, the regulation of genetic tests had been transformed from “confusing, incomplete and relatively stable” to “confusing, incomplete and highly uncertain.” Genetic tests and the regulatory agencies responsible for their oversight have been thrust squarely into the spotlight, with all signs indicating that a regulatory overhaul is both necessary and imminent.

What Can Businesses Do Now? Despite the dramatic change in the regulatory outlook, businesses still can operate largely like they did before May 2010. The FDA letters to the DTC companies were not enforcement letters that would have effectively prohibited the sale of those companies’ products. And the larger LDT regulatory process is certain to be contentious and lengthy. So nothing right now prohibits companies from continuing to provide the products and services they offered prior to May.

On the other hand, it would not be prudent for companies to continue to operate without any regard for the events of the past few months. For instance, had Pathway Genomics moved forward with its plan to sell genetic test kits on the shelves of Walgreens, the next letter from the FDA might well be an enforcement letter threatening seizure, fines or worse. Those companies that offer genetic tests to consumers should expect to face increased scrutiny – from both the FDA and possibly other regulatory agencies as well, including the FTC – if they offer major new products, ramp up marketing and promotions or enter into new distribution channels.

While traditional LDT providers (particularly those that provide tests through healthcare professionals) face fewer immediate constraints, they must still operate with an eye toward an eventual overhaul of the regulatory review process for their products. Based in part on information presented by the agency at last month’s public meeting, it appears the FDA is intent on categorizing LDTs as medical devices, and pursuing a risk-based classification regulatory framework. Preliminary comments from the FDA indicate that this new regulatory framework will incorporate or substantially draw upon the current approval and clearance process for medical devices. While it may be some time before the FDA releases a formal regulatory proposal (the FDA recently extended the period for the public to comment on its proposal to regulate LDTs), LDT providers should consider the likely impact of device-style FDA regulation.

The most common category of medical device is a medium-risk or Class II device, for which a 510(k) regulatory clearance is required. In the case of in vitro diagnostic (IVD) devices, for example, a 510(k) requires, among other things, (i) considering whether there is a “predicate device” on which a 510(k) application could be based, (ii) generating both analytical and clinical data to support an FDA application and (iii) preparing to manufacture the devices and operate laboratories under compliance and inspection regimes that are likely to be more demanding than the currently-applicable CLIA compliance requirements.

The FDA is currently in the process of reviewing its 510(k) clearance process to “enhance device safety, foster device innovation, and create a more predictable regulatory environment.” With changes afoot for currently regulated medical devices, and the uncertainty surrounding the FDA’s proposed regulation of LDTs, there is no guarantee what the LDT regulatory regime will look like when it finally appears.

At least for the moment, uncertainty prevails when it comes to the regulation of both LDTs and DTC genetic tests.

What Are the Practical Consequences? This new level of regulatory uncertainty coupled with a reasonable expectation of increased regulatory oversight and costs will have a variety of practical consequences for genetic testing companies. While these effects will vary depending on a company’s specific business model – not only LDT vs. DTC, but the many and important variations within each of those broad categories – and economic circumstances, some of the possible consequences include:

Reduced access to capital. Genetic testing companies may find that investors are more cautious about making new and add-on investments.

Fewer new products. Companies may delay plans to introduce new products both because of lack of funds and concern about the regulatory response to innovative products or business models.

Fewer entrants. Numerous investors, and companies in related industries, have been preparing to enter into the genetic testing field. Many of those plans may be put on hold.

Litigation risks. The well-publicized GAO report and Congressional hearings, which highlighted apparent operational deficiencies of some DTC companies, could lead to tort (e.g., negligence, emotional distress, malpractice), securities or other lawsuits from plaintiffs’ lawyers and litigious customers. Although the GAO report and Congressional investigation focused on DTC genetic tests, the broad and negative public attention focused on genetic testing could spur similar litigation against more traditional genetic testing developers and providers.

Reduced access to technology. Companies dependent on third-party providers for some portion of their own test or business might find their options limited if regulatory uncertainty or changes discourage such collaborations.

Encouraging overseas development. Increased regulation – or even the possibility of increased regulation – may encourage companies and investors to focus on developing new products and businesses overseas in advance or instead of in the United States, with potentially detrimental consequences for patients and consumers in this country.

The Problem of Delay. Perhaps the greatest frustration and difficulty for genetic testing companies is the prospect of an extended period of elevated regulatory uncertainty. Every indication is that a regulatory overhaul is indeed coming; but there is no way to know whether it will be weeks, months or even years until it arrives. If new regulatory requirements could be decided and implemented quickly, then companies could understand the new environment and adapt their products and business models to comply.

If, however, the regulatory process grinds on over an extended period, most companies will be limited in their ability to confidently make significant changes – or to do so without considerable uncertainty and, thus, risk – because there will be little clarity about what will be required under future regulations. This is a particular concern for new companies seeking to develop a commercial and regulatory strategy, as well as for companies for whom a significant regulatory overhaul might require a fundamental change to their product(s) or business model.

On the other hand, regulatory delay and uncertainty could constitute a competitive benefit for companies that are well funded and either already have received 510(k) approval for their IVDs or intend to pursue medical device clearance and approval for their new products. For such companies, the regulatory uncertainty could have the immediate effect of limiting or delaying competitive products.

As the genetic testing industry waits for definitive guidance from the FDA, the only sure thing appears to be that the field will be tested by considerable uncertainty for the foreseeable future. While the consequences of that uncertainty vary company by company, the industry as a whole – and by extension patients and consumers – would benefit from a timely and appropriate regulatory resolution.