With Foreign Deals and Offshore CLIA Certifications, the U.S. Lab Sector Globalizes

For the better part of a century, laboratories had been among the most local of health care providers. They were mom-and-pop operations, often located hard by the local hospital or medical offices.

But in recent decades, that dynamic has taken a 180-degree turn. Quest Diagnostics and LabCorp have taken a lot of hospital and physician office testing business as they have grown nationally. And as the global economy has taken off, labs have not escaped its impact.

In the United States, that means two things: Large multinational corporations that own laboratories in other nations are buying American companies and acquiring either their labs or opening new domestic facilities. Alternatively, those multinational labs are melding their overseas and U.S. operations in unique ways.

If there is any facet of health care delivery in the U.S. that could be globalized in this manner, the laboratory sector is the likeliest candidate. Hospitals and individual physicians can't easily operate overseas; medical tourism is the most likely example of globalization to be seen in those forms of care delivery. But tissue samples and specimens can be shipped to virtually any place in the world overnight, while test results can be transmitted almost instantaneously via Internet portals.

Some examples of globalization are straightforward: Sonic Healthcare Laboratories, an affiliate of an Australian firm, has had significant operations in the U.S. for years, although for the most part keeps a very low profile here and it keeps testing within U.S. borders.

Instead, much of the evidence of the next wave of globalization is often buried deep in the quarterly and annual financial reports of the publicly traded labs. In a recent earnings call with analysts, Foundation Medicine Chief Operating Officer Steven Kafka said one of the company's goals in 2016 "is to commence commercialization activities outside of the United States with (pharmaceutical giant) Roche" and that the company's FoundationOne assay would likely be introduced through Roche in the near-term. More and companies are also noting the effect of foreign currency rates of exchange on their bottom lines.

And there have also been some straightforward deals that have given foreign labs a toehold in the U.S. market. In February, India-based MedGenome acquired Life- Code Health, a transaction that included LifeCode's 13,000 square-foot lab in Northern California. "The acquisition of this lab will allow us to grow our customer base even more aggressively in the U.S.," said MedGenome Chief Executive Officer Sam Santhosh in a statement. A MedGenome spokesperson did not respond to a request seeking comment. MedGenome received a $20 million investment from Sequoia Capital last year to help it expand in the U.S. market.

Eurofins Scientific, the Luxembourg-based biotech firm, acquired Boston Heart Diagnostics last year. Its genomics division opened a 65,000 square-foot laboratory in Louisville, Ky. earlier this year.

"There is a lot of global interaction. We have (testing) facilities in Germany, Japan and India and I have a lot of collaboration and communications with them," said James Corne, Eurofins' head of marketing for genomics in the U.S.

Corne noted that having a lab in an overseas market provides a myriad of advantages, because each market has different demands and expectations. Providers in Japan expect each specimen to be hand-couriered to and from the lab. The German market also has very strict system as to how specimens should be handled.

Even the Centers for Medicare & Medicaid Services (CMS) has been getting into the globalization game. Posted in an obscure corner of its website is a document entitled "International Laboratory CLIA Certification Process" that provides a blueprint for labs operating outside of the United States to legally accept and process samples from the U.S.

At least one laboratory so far has taken the agency up on that offer.

Earlier this year, WuXi NextCODE, the Icelandic and Chinese laboratory concern, became one of the first companies to obtain a certification in China from CLIA, the College of American Pathologists and regulators in California for its laboratory in Shanghai. It will be used to perform molecular testing on specimens gathered in California.

"There was a very specific business rationale" behind the CLIA certification in China, said Hannes Smarason, WuXi NextCODE's chief operating officer. WuXi Pharmatech acquired NextCODE, previously known as deCode Genetics, in early 2015.

The biggest driver, according to Smarason, is to accommodate testing for the global pharmaceutical market. Having a CLIA certified lab outside of the U.S. met the quality expectations of pharma customers while making the logistics of performing testing for firms anywhere in the world more straightforward. The company also wanted the ability for the Shanghai lab to perform other clinical work as well. While U.S. regulators might be providing the flexibility for lab work to be performed overseas, Chinese law bars sending specimens abroad for testing, according to Smarason.

"It is all the question of having the maximum flexibility to work with as many clients as we can," he said. "And because of that, we want to be (CLIA) certified in as many places as we can."

WuXi NextCode currently performs some of its U.S. testing in Massachusetts through an agreement with Claritas Genomics, a strategic and operational partner, but it appears having lab operations in China offer some of the same advantages that having manufacturing operations in that country confer: Lower costs.

According to Corne, there is a wave of companies that might have U.S. operations but prefer to perform testing in China. "It gives them a big price advantage," he said. "We're cognizant of it now, and a little worried."

One specific example is the Beijing Genomics Institute, or BGI. The company has struck up a variety of testing deals with Chinese hospitals, but its sequencing platform business may hold the biggest promise for globalization. It developed a high-speed, high-volume sequencer in conjunction with Complete Genomics, its U.S. subsidiary based in California. That platform, known as Revolocity, was released last year and has landed significant customers in both Australia and Europe. It is considered a direct competitor—one of the very few—to Illumina's HiSeq platform, although it is priced about 20 percent higher than the Illumina platform.

Another company with operations both in the U.S. and China—Genscript Biotech— performs high-speed gene sequencing. Corne said the company has a huge lab in China that can provide sequencing tests at a fraction of the cost of similar services in the U.S. Genscript, which also has headquarters in Nanjing, raised more than $67 million through an initial public offering on the Hong Kong Stock Exchange earlier this year.

Globalization and the accompanying loss of jobs has been a big issue in the U.S. presidential campaign. Although the lab sector has not been as robust a creator of jobs as other areas of health care delivery, it remains to be seen if U.S. lab jobs could be vulnerable as the industry changes.

Smarason, the Icelandic lab exec with operational toes in two other countries and more to come, doesn't see it as a problem.

"Maybe at some point in the future. But not yet," he said.

Takeaway: Laboratories are not being left behind as the economy globalizes, creating opportunities for foreign operators both inside and outside the United States.