If genomics is ushering in an era of personalized medicine,where diagnostic tests predict diseases and determine the best drugs for patients,then you might say a 100-acre campus of futuristic buildings near the Cleveland National Forest is the testing ground. Literally.
Quest Diagnostics Inc.’s Nichols Institute near San Juan Capistrano is sometimes called the “laboratory’s laboratory.” The medical lab’s highly specialized, complex genetic tests give doctors in-depth clues about certain cancers, hepatitis C and the HIV virus, among other things.
“The industry is evolving with the genome. That’s where Nichols Institute comes into play,” said Bob Parente, an analyst with Leerink Swann & Co., a Boston investment bank.
Nichols is positioned to capitalize on the trend toward “much earlier diagnostic tools that provide more information,” Parente said. “That’s the whole point behind Nichols.”
As such, Nichols is growing in importance for Quest, one of the pillars of the medical testing industry.
“Genomics is our fastest-growing business,” said Quest spokesman Gary Samuels.
Gene-related testing accounted for $225 million of Quest’s $3.4 billion in revenue last year and is growing at a 25% annual clip, Samuels said.
Nichols Institute employs around 1,400 people in Orange County,1,200 on its Ortega Highway campus and another 200 down the road at its Nichols Institute Diagnostics, which makes test kits and reagents.
Parent Quest is based in Teterboro, N.J., and once belonged to Corning Inc., the Corning, N.Y.-based maker of fiber-optic networking products.
Like other medical companies, Quest’s shares are a relative standout in a tough market. As of last week, they were about even for the year at around 70, but nearly double where they were in March.
Quest, which has 30 full-service regional laboratories around the U.S., counted a market value of more than $6 billion as of late last week.
Part of Quest’s challenge is convincing stingy insurers and healthcare providers of the benefits of advanced testing. Analysts estimate that gene-based diagnostics can fetch hundreds of dollars per test, while a routine blood test or Pap smear might cost only $10 to $40.
But analyst Parente contends that diagnostic testing performed by laboratories such as Nichols is growing and attitudes among health insurers are shifting.
Some insurers are finding that diagnostic tests actually may save them money by catching cancer and other diseases early on, he said.
“Hospital care is very expensive, operations are very expensive,” Parente said.
Quest is one of two biggies left in the medical laboratory industry, which has consolidated in recent years. Laboratory Corporation of America Holdings, based in Burlington, N.C., is considered Quest’s largest rival. A local rival is Irvine-based US Labs, which also does cancer and genetic testing.
The move toward gene-based testing should benefit Quest and LabCorp, said David Lewis, an analyst with Thomas Weisel Partners LLC in San Francisco. In a report, Lewis said the $1 billion annual gene testing market is growing at a 30% to 50% annual clip.
By contrast, Lewis estimates the more traditional fluid and tissue testing markets, valued at $32 billion annually, only are growing at 2% to 10% a year.
“As manufacturers produce more tests and as clinical laboratories incorporate them, both are positioned to benefit from molecular diagnostics,” Lewis said.
The human genetic code, which has 30,000 genes and the blueprint for 100,000 proteins, could lead to commercialization of some 6,500 gene- and protein-based testing assays, Lewis said. The result could be new sources of profits for labs, he said.
Nichols’ customers include hospitals, women’s doctors, endocrinologists and infectious disease physicians, said Patricia Swartwood, Quest’s director of marketing for core products.
“You’re more likely to see esoteric testing with specialists,” she said. “Primary-care physicians (order) routine tests.”
Nichols also does complex testing for other Quest regional laboratories and even some competitors, according to Raj Pandian, Nichols’ senior laboratory director. The site also is the launch pad for Quest’s research and development efforts, he said.
To spur innovation, Nichols turns to its academic associate program, which brings scientists into research and development efforts, according to Dr. Delbert Fisher, Quest’s vice president of scientific innovation.
The program includes representatives from, among other places, University of California, Los Angeles, Cedars-Sinai Medical Center and Stanford University.
“Our goal, to the extent that it’s possible, is to be the first to introduce new, useful assays,” Fisher said.
While Nichols is playing a key role for Quest, the going hasn’t always been smooth. The medical lab business dealt with a run of testing errors in the 1980s and big legal settlements in the 1990s.
The industry faced charges of defrauding federal healthcare programs by billing for unneeded or unperformed tests and of paying kickbacks to doctors. Collectively, medical labs paid about $1 billion in refunds and penalties to settle such claims.
Quest wasn’t untouched. It agreed in January to pay nearly $13.1 million to settle U.S. Justice Department allegations that Nichols Institute defrauded federal healthcare programs with inflated billings. At the time, the company contested the charges but said it settled to put the matter behind it.
A visit to Nichols’ sprawling campus is like entering a clinical beehive, where robotic arms handle testing samples while other fluids are stored in huge refrigerators. Automated testing platforms, including some made by Fullerton-based Beckman Coulter Inc., are used for some blood and serum tests. Last year, Quest signed a $30 million contract with Beckman for hematology instruments and supplies.
Nichols also makes some testing gear and supplies of its own. The company’s diagnostics unit produces Nichols Advantage, an automated testing system capable of producing 170 test results an hour.
The diagnostic test kit unit accounted for around $40 million in revenue for Quest last year, according to William Kinser, vice president of diagnostics.
“Half of our sales are outside of the U.S.,” Kinser said, adding that Japan has been a growth market for the company.
Nichols’ workforce is diverse, including many workers who hold advanced degrees and special certification in lab practices. They perform various laboratory tests by hand.
“We only perform specialized testing here, no routine,” lab director Pandian said.
Some 22,000 samples are tested a year at the facility, Pandian said.
The site’s two buildings house 24 laboratories conducting tests in six major areas, from molecular testing to oncology and toxicology.
Nichols Institute’s roots date back to 1971, when Dr. Albert Nichols, a former medical laboratory director for Kaiser Permanente, had a vision for a high-end testing company with an academic orientation. Nichols Institute started with testing, adding its diagnostics unit in the late-1970s.
Albert Nichols eventually grew the lab to $175 million in yearly sales through acquisitions and regional expansion. But in the early 1990s, increased competition led to losses.
Albert Nichols, who is no longer active in Nichols Institute, eventually stepped aside as chief executive in 1993 to make way for George Bragg, a former vice chairman of Lake Forest-based Western Digital Corp. who had a reputation as a turnaround artist.
Now living in Aspen, Colo., Albert Nichols still visits OC, where he has ties to the University of California, Irvine and philanthropic activities.
In 1994, Quest, then part of Corning, bought Nichols for $325 million and dubbed it Corning Nichols Institute. Corning spun off Quest in 1996. n
