The landscape for advanced diagnostics, particularly next-generation sequencing (NGS) clinical testing labs conducting genetic tests, is rapidly changing. Fueled by technological advancements in sequencing, the industry is moving beyond cost reduction as the primary differentiator. Today, the speed and affordability of genetic sequencing necessitate an expansion of service offerings. This includes a growing demand for targeted, multi-omic analysis, and whole genome sequencing to cater to evolving preferences.
These shifts are reshaping the NGS clinical testing lab and life science tools (LST) markets. Leadership teams must strategically plan for diverse future scenarios, grounded in a deep understanding of profit pool evolution. Such insights are crucial for making informed decisions regarding attractive market segments, fostering innovation, targeting mergers and acquisitions, and effectively differentiating product and service portfolios.
The current paradigm demands that companies broaden their service spectrum beyond basic genetic sequencing, embracing advancements to stay competitive.
The Impact of Lower Sequencing Costs and Evolving Genomics Demands
Sequencing the first human genome was a monumental 15-year undertaking. Now, thanks to NGS technologies, the same process is completed in under 24 hours. This speed is paralleled by a dramatic cost reduction. (See Exhibit 1.) The industry is on the cusp of achieving a $100 whole genome sequencing (WGS), a landmark that will further democratize genomic information. Simultaneously, the applications of genomics are expanding, with comprehensive NGS methods like whole exome sequencing (WES) and WGS becoming indispensable for tumor profiling and diagnosing rare diseases.
Achieving a $100 WGS is not a panacea. Challenges persist, including long turnaround times, the need for sample batching, and substantial expenses in upstream and downstream processes. These encompass data interpretation, management, and complex laboratory workflows. Smaller companies, lacking economies of scale, will find these burdens particularly challenging.
Reduced sequencing costs are fundamentally altering the competitive dynamics for NGS clinical testing labs and LST companies, creating both opportunities and challenges.
Lower sequencing costs are driving significant shifts in the competitive landscape for NGS clinical testing labs and LST companies:
- Enhanced Customer Economics: Researchers and clinicians benefit from more affordable WGS, alongside targeted techniques and expansions into fields like epigenetics, improving research and potentially impacting areas such as Bcg Diagnosis related studies by providing deeper insights into disease mechanisms.
- Rise of Multi-Omics Analysis: The integration of data from genomics, proteomics, epigenomics, and transcriptomics is gaining traction. Multi-omics analysis promises a more holistic understanding of molecular phenotypes and the factors governing biological processes and disease development. As this field advances, multi-omics approaches are expected to play an increasingly crucial role in disease diagnosis and treatment strategies.
- Demand for Comprehensive Solutions: Sequencing and service providers are pressured to move beyond basic DNA sequencing. Customers now require advanced technology and analytical tools for diverse clinical and research applications. The ability to simultaneously analyze multiple features (DNA, RNA, proteins, modifications, cell morphology) on a single instrument will usher in a new era of biological understanding that transcends traditional genomics, potentially refining diagnostic approaches.
The Growing Significance of Research Use Only (RUO) Content
Novel research use only (RUO) content is becoming a key engine for market growth and value creation within genomics. RUO content, not intended for clinical diagnosis, faces less stringent regulatory hurdles, providing a crucial pathway for innovation. It serves as a validation and innovation springboard for translational and clinical applications. Therefore, current sequencing advancements necessitate investments in initial RUO content to unlock future value.
A stepwise approach to incorporating RUO innovation is essential for developing technologies that deliver comprehensive insights and expanded clinical applications. Epigenomics exemplifies this, offering significant insights into disease mechanisms in complex and rare conditions. This knowledge is now translating into diagnostics, with commercial tests assessing abnormal methylation patterns indicative of diseases like colorectal cancer, demonstrating the potential for RUO to inform future diagnosis methodologies.
Future RUO advancements promise even more transformative technologies, further revolutionizing clinical practice. Multi-omics methodologies with higher resolution techniques like spatial analyses are on the horizon. (See Exhibit 2.) However, extended regulatory approval and reimbursement timelines may moderate the immediate impact. Consequently, multi-omics approaches are initially generating significant interest as RUO technologies, paving the way for future clinical applications and potentially impacting areas such as advanced diagnosis research.
Two Potential Market Evolution Scenarios
Considering the rapid pace of sequencing innovation—cost reduction, evolving clinical reimbursement, and regulatory dynamics—two primary market evolution scenarios emerge:
- Scenario 1: Cost Erosion and Market Contraction. Continued cost declines and stricter regulations could stifle content innovation. As sequencing becomes increasingly commoditized, differentiation and profitability for NGS clinical testing labs become challenging. Market consolidation and contraction may occur due to slower innovation cycles and a delayed transition to multi-omics, possibly impacting the development of new diagnosis tools.
- Scenario 2: Content Differentiation and Market Expansion. Moderate regulation and differentiation among sequencing players could accelerate content innovation. Companies developing innovative sequencing solutions to differentiate themselves will drive a more realistic path to multi-omics. The NGS clinical testing lab market is projected to expand as players scale and consolidate, leading to advancements in areas like personalized diagnosis.
To analyze these scenarios, a profit pool market analysis was conducted using over 30 data sources and 900+ input factors. (See Exhibit 3.) This analysis forecasts US spending in NGS clinical testing and LST from 2023 to 2032, suggesting the future of sequencing profit pools will likely fall between these two scenarios, influencing the future landscape of clinical diagnosis.
Implications for NGS Clinical Testing Labs
Currently, NGS clinical testing labs face profitability challenges, potentially losing approximately $0.50 for every dollar of revenue. This is driven by intense competition, sub-scale operations, and high costs, especially in R&D and clinical trials. Future innovation may leverage predicate devices—previously approved sequencing-based clinical diagnosis tests. These can serve as benchmarks for validating new diagnostic tools and fostering innovation by enabling comparisons with established technologies. However, the availability of predicate devices is currently limited.
In the cost-pressure scenario, NGS clinical testing labs are projected to remain unprofitable. Success will depend on capitalizing on market consolidation, maintaining stable pricing, and achieving operational efficiency. Strong regulatory expertise will be crucial for informed investment decisions, preventing resource wastage on products unlikely to gain approval. Risk aversion may increase, with labs potentially favoring sequencers with larger market share to mitigate competition and price pressures.
Conversely, in the content differentiation scenario, NGS clinical testing labs could achieve profit margins of 20% or higher, primarily driven by clinical somatic sector volumes. Multi-omics is expected to experience the highest growth in minimal residual disease and early cancer detection, although growth rates will vary across different tests, potentially revolutionizing cancer diagnosis and monitoring. Notably, NGS clinical testing lab R&D costs are projected to decrease from 40% to under 15% of revenue, and selling, general, and administrative costs are expected to fall from 72% to below 35%, assuming increased scale and business unit synergies.
Implications for LST Firms
In contrast to NGS clinical testing labs, LST players are highly profitable, benefiting from their position as suppliers to labs. LST clinical revenue streams include nucleic acid preparation, library preparation, core consumables, automation amortization, sequencing amortization, and informatics. LST players gain roughly $0.05 for every dollar of clinical testing lab revenue.
The LST market is projected to remain consistently profitable in both scenarios, driven by overall market growth. As value chain suppliers, LST providers face less direct risk from factors like reimbursement. However, the LST market’s upside is capped compared to the potential for NGS clinical testing labs, as clinical volume remains the primary revenue driver for LST firms, indirectly influencing advancements in diagnosis technologies.
LST companies must strategically support NGS clinical testing labs across both scenarios. In the content differentiation scenario, technological advancements, particularly in multi-omics and somatic testing, are expected to shift LST revenue towards library preparation, automation, and bioinformatics in the coming years, with compound annual growth rates exceeding 20%. Content differentiation is likely to elevate bioinformatics to a more significant revenue source, potentially leading to more sophisticated diagnosis data analysis tools.
In the cost pressure scenario, LST companies will need to assist NGS clinical testing labs in navigating the regulatory landscape for new sequencing-based tests. This could involve increased investment in regulated instruments and assays to alleviate profitability concerns for NGS clinical testing labs and ensure the continued progress of diagnosis innovation.
The Critical Role of Scenario Planning
For both NGS clinical testing lab and LST players, advancements in genetic sequencing are reshaping competitive dynamics and creating a wider spectrum of potential future scenarios. Market evolution will be heavily influenced by efficiency gains, reimbursement policies, and the regulatory environment. These factors will significantly impact profitability across the industry. Therefore, preparedness is paramount, regardless of future developments. Several key strategies can enhance preparedness:
- Develop Internal Scenario Planning Capabilities: Given the diverse potential outcomes in diagnostics, the ability to identify and evaluate potential scenarios is crucial. Companies must cultivate these organizational skills as a core competency for strategic foresight in the evolving field of diagnosis.
- Implement a Regular Scenario Planning Cadence: Scenario planning should be integrated into the annual strategic planning process, alongside product development analyses, rather than being a one-time exercise, to ensure continuous adaptation to the changing diagnosis landscape.
- Focus on Profit Flow Analysis: Tracking financial flows makes various scenarios tangible for leadership teams by quantifying the bottom-line impact of decisions and highlighting potential tradeoffs between competing options, enabling better strategic choices in the dynamic diagnosis market.
The genomics industry is entering a new era of genetic sequencing. Strategic foresight is essential for companies to effectively adopt new sequencing technologies and develop more advanced genetic diagnostics. Scenario planning ensures preparedness for this evolving environment and enables sustained competitive success, ultimately driving progress in the future of diagnosis.
The authors wish to thank Otto Liska, Kristen Cook, Sandra Andersen, Johannes Thoms, Bob Lavoie, Matt Prisby, Alec Ludin, Joe Bernardo, Max Schmid, and Kerri McWeeney for their contributions.
