In a sudden and severe blow to New Zealand-based cancer diagnostics firm Pacific Edge [ASX:PEB], shares took a nosedive following the announcement that the Food and Drug Administration (FDA) intends to regulate its flagship Cxbladder cancer test under new rules.
The change in rules coincides painfully with an earlier verdict by Novitas Solutions, one of Medicare’s regional administrative contractors, who deemed its Cxbladder cancer testing ‘not medically reasonable and necessary’ to warrant Medicare use.
The company’s shares have fallen by 16% today, trading at 10.5 cents per share after the news. Most of its revenue is derived from the US market, where Medicare is a critical player in the healthcare landscape.
What do the regulations mean for the company moving forward?
Source: TradingView
Pacific Edge battles for validation
Pacific Edge, creators of Cxbladder test, faced critical evaluation by the FDA and its Medicare regional contractor today, with its test no longer receiving Medicare support and subject to new rounds of testing to prove its efficacy.
Cxbladder is a non-invasive urine test designed for detecting bladder cancer.
Under the new FDA regulatory rules, laboratory-developed tests such as Cxbladder will face new regulations and tests to prove they are safe and effective.
The rules will be phased in over a four-year period, but the proposed changes have sent shockwaves through the medical diagnostic sector.
The company had already seen a massive share wipeout this year after the FDA drafts first came to light. PEB fell approximately -75% in the 10 days after the draft FDA changes were first announced in the company’s late May update.
The FDA also made changes to its local coverage determinations (LCD) rules, which determine reimbursement to companies under Medicare for local healthcare providers. This, in turn, moved its Medicare regional contractor Novitas Solutions to withdraw its Medicare support.
Pacific Edge had previously received payments for its product from Medicare through this scheme, equating to approximately $15.3 million in revenue — or 77.3% of FY23’s total operating revenue.
Now all of that revenue is under threat.
Chief Executive Dr Peter Meintjes commented on the proposed FDA changes and the review by Novitas in July, saying:
‘Pacific Edge supports Novitas’ efforts to ensure that Medicare only pays for analytically valid, clinically valid and clinically useful tests. Our Pacific Edge Diagnostics USA Team and our US-based Key Opinion Leaders (KOLs) are well prepared for the Novitas Open Meeting where we will focus on the clinical value of Cxbladder…’
After an in-depth review of clinical evidence, Novitas Solutions deemed their test ‘not medically reasonable and necessary’ to warrant Medicare support.
Pacific Edge heavily criticised the regulatory changes and critical evaluation by Novitas, which then occurred, saying:
‘…the company is surprised and disappointed with the finalised LCD…the local coverage determination appears to materially misunderstand the important role that biomarkers can play in “first line” diagnostics…
‘While Novitas appears to have reviewed all available evidence for Cxbladder, we believe that Novitas’ analysis has sought to predominantly emphasize negative comments in Cxbladder publications.’
Outlook for Pacific Edge
The company has said it intends to work with other providers of lab-developed tests to develop a coordinated response to the FDA, including legal challenges and lobbying.
However, the size of this coalition and the length of time that this deliberation has taken to occur signal that the train has likely left the station for Pacific Edge.
The FDA has long signalled its intention to extend its regulation of this space so it’s very unlikely to budge on its position.
The importance of these changes on Pacific Edge’s future cannot be understated.
The Cxbladder tests under Medicare were previously approximately 60% of US commercial tests. Without this, the company could see a huge drop in revenue.
While the company could attempt to diversify away from the US market, it seems that in the immediate term, its efforts should be focused on retaining some market share.
The major hope for Pacific Edge moving forward is to radically adopt the standardised ‘Good Clinical Practices’ guidelines and move its clinical development program into systems that comply and conform to FDA standards.
For now, it’s going to be a tough time for shareholders.
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