Axial - Color
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Color is democratizing access to genetic testing. Founded in 2013 due to a personal experience of the CEO and enabled by a new law, Color is building a unique business model in diagnostics by owning the relationship with the customer and commoditizing genetic testing to increase the value of its software.
Color was founded by 4 individuals - Elad Gil, Nish Bhat, Taylor Sittler, and Othman Laraki. Before Color, Othman (CEO) and Elad (Chairman) had sold a geotagging company, Mixer Labs, to Twitter and stayed there for a bit. Taylor was a pathology resident at UCSF and took up the role of CSO. Nish was a security engineer at Lookout. They were a group of four fearsome founders:
Elad Gil, Nish Bhat, Taylor Sittler, and Othman Laraki (top), Lamar Lundy, Rosey Grier, Merlin Oslen, and Deacon Jones (bottom)
The driving force behind the company was Othman’s diagnosis that he was a BRCA2 mutation carrier. His grandmother unfortunately passed away from breast cancer and his mother survived two bouts of breast cancer. Due to family history, Othman originally thought he probably was a BRCA carrier. He tried to get tested at Stanford, which ended with him going to the clinic several times and cost ~$6K. From these set of personal experiences, the goal of Color was to bring down the cost of a BRCA test by at least 10x. Combined with the other 3 co-founders, this combination of mission and rigor led to Color focusing on scaling up BRCA testing while always publishing its results to papers and clinical conferences.
In the early-stages of the company, the founders made a key decision to focus on BRCA. At the time genomics was very fashionable and the idea that a business had to make a broad land grab to win was trendy. Partly due to Othman’s personal connection to BRCA and the founder’s previous experience, Color took the existing model of BRCA-carrier screening and did it at scale, a place where software shines. This focus had another major benefit for Color’s patients - by focusing on one test, Color was able to perfect its processing and analytical pipelines deliver accurate results to patients. Moving too fast in life sciences can lead to bad places.
Color’s first product was a LDT test for breast and ovarian cancer for $250. The test screened for mutations in 19 genes including BRCA1 and BRCA2 that imply a lifetime risk of ~80% to develop breast cancer and ~50% to develop ovarian cancer. By bringing the price down, Color allowed customers to minimize their need to get insurance involved or comply with pre-existing testing guidelines. At the time, insurors required that a person requesting a BRCA test have a close family relative with cancer or the mutation. However, a little more than half of all women with a BRCA mutation actually don’t have a direct relative that had breast/ovarian cancer. So how did Color bring down the cost of the test so quickly? It’s not like their first product was $4K then $3K the following year until it got to $250 per test. They immediately sold it for over 10x less than competitors. Were they losing money on each test or was there something with the underlying market structure that allowed Color to emerge with a new model so quickly?
In 2013 (the early-days of Color), the US Supreme Court ruled that natural genes cannot be patented. This new law broke the monopoly Myriad Genetics had over BRCA testing where they were charging ~$4K per test. New laws often enable new business models. This decision from the Supreme Court destroyed an old monopoly and allowed Color to first enter the BRCA space. Myriad was overcharging quite a bit for its test - before 2013, the company’s gross margin was close to 90% and now it's steady at 75%, and tests cost across the board went down ~50% within 1-2 years. That’s the first place Color can find some cost savings. The second place is around the delivery of the results to the patient. A big part of the cost structure for BRCA screening is the downstream analysis and genetic counseling (in high school, I found it bizarre that one of my buddies wanted to be a genetic counselor, like a guidance counselor? I just wanted to be a geneticist). Color made the analysis of the test data a core competency, something a lot of diagnostics companies don’t do, and used software to scale genetic counseling. By being vertically integrated, Color was able to bundle the interpretation with the test allowing them to integrate with physicians and set themselves up to do a lot more in the future like develop population-level products.
Key findings
Others saw the opportunity? Why has Colored pulled away? Marketing, product, culture, more? There were, and still are, companies like Invitae and Quest in the same sandbox, but Color’s focus on vertical integration from day 1 has allowed the company to control the cost structure of old and new tests and own the customer experience the whole way. The founders played a big role in this decision.
What’s going to be really exciting is how Color will price its population-genomic products. These products are going to be margin expanding because customers already pay Color to do a test and the company is using that data, and anonymizing it, to package it into products for hundred billion dollar markets from therapeutics to healthcare.
The founders had a plan to make genetic testing cheap to increase the value of its analysis and data. To successfully commoditize your complement in life sciences - https://axial.substack.com/p/substitutes-and-complements-in-life - you can’t just commoditize first then figure out the substitute later; you end up becoming the commodity. Like Color, a business needs to know most of their substitutes at the beginning of the journey.
Technology
When Color was getting started up, sequencing costs had significantly dropped something 10,000x over the previous 5 years. This was an important enabler of the company’s product. Where most BRCA tests on the market were PCR based, which is still pretty effective, Color took an advantage to help bring sequencing to BRCA screening that provided better coverage of more variants as well as setup the product to expand to a larger panel.
Source: NIH
Color’s product is actually the pipeline from sample to results. The kit is a component of the pipeline. Color chose to be vertically integrated so they can control costs of the test. Their test is a laboratory-developed test (LDT) in their own CLIA labs. So where does the pipeline start?:
An individual who wants a test goes to Color’s website and orders one
That person pays the $250 or puts in their insurance information
Before Color sends off the sample collection kit, a doctor on Color’s side or the person’s own doctor reviews the order
If the order is approved, the person gets a kit (image below) to spit in and they send the kit back to Color
Color preps the sample to extraction the person’s DNA and spins up its Illumina machines (in parallel with other samples) to sequence it
Color analyzes the sequencing data screening for genes involved in hereditary cancers, initially 19 and now 30 genes, like BRCA (i.e. calling) and generates a report for a doctor to inspect and approve for accuracy. Turnaround times are 2-4 weeks; impressively, this has remained steady in the face of pretty acute growth.
Color sends an email to the individual with their results and the ability to receive genetic counseling, which is already baked into the cost of the product; pretty nice deal especially compared to the product Myriad was offering. Color now also offers a similar product for hereditary heart disease (30 genes) and medication response (14 genes).
Two key metrics for this pipeline is: did it require human intervention? Did the costs per sample go down?
Source: Color Genomics
Others saw the opportunity? Why has Colored pulled away? Marketing, product, culture, more? There were, and still are, companies like Invitae and Quest in the same sandbox, but Color’s focus on vertical integration from day 1 has allowed the company to control the cost structure of old and new tests and own the customer experience the whole way. The founders played a big role in this decision.
The pipeline is the core engine for Color’s ability to build a moat around the business and increase access to genetic testing. Initially focusing on helping customers with hereditary cancer screening then onto heart disease and now with this engine, Color is creating population genomic products. Population genomics has been a field for some time, but Color is the first one to actually translate the ideas of the field into a commercial product. Most molecular diagnostic companies are set up to just test a fraction of the population, a company pursuing population genomics needs the pipeline to test everyone. Color has been able to build this infrastructure and get people to pay them while they bolster it. Now, the company has worked with over 100 organizations from research institutions to healthcare systems to offer tests across large swaths of a population:
Source: Color Genomics
Point their pipeline to population-scale problems, Color can provide their customers unique longitudinal data useful for healthcare delivery and drug development. Color can also get involved in the management of patient care to help healthcare networks; doing things like guiding a patient to a specialist, risk stratification, and resource allocation. This has led to a series of exciting projects that are only getting better:
Sequencing 100K people to generate polygenic risk scores for disease - https://www.prnewswire.com/news-releases/color-to-move-whole-genome-sequencing-into-clinical-care-through-100-000-person-initiative-focused-on-polygenic-risk-300773709.html
Working with the NIH, along with others, on the All of Us research initiative to sequence 1 million people along with collecting other health information - https://allofus.nih.gov/news-events-and-media/announcements/nih-funded-genome-centers-accelerate-precision-medicine-discoveries
With the University of Washington, releasing a database with variants across 27 genes involved in breast cancer from 10K women who were over 70 years old and never had breast cancer - https://www.genomeweb.com/sequencing/ashg-uwash-color-genomics-launch-free-database-breast-cancer-gene-candidate-variants
The long-term potential of Color is to bring all genetic tests to patients around the world. This sets up the business to get a piece of drug development, clinical trial recruitment or even enabling distributed trials, healthcare management, and a lot more. Their pipeline will get better adding exome sequencing then whole-genome. They could also point their engine to other sample types and push forward a revolution in measuring clonality to guide therapeutic use. Overtime, the FDA has become more open to allowing direct-to-consumer diagnostic tests to do more, helping expand the opportunities Color can pursue.
Source: Color Genomics
Market
The founders of Color initially started with a validated market - hereditary screening for breast and ovarian cancer. The thesis was to take little market risk and use their model to scale up testing. By 2014, around a million people in the US had been screened for BRCA1/2 mutations - https://www.ncbi.nlm.nih.gov/pubmed/24304220 Many of them received negative results, but technology has progressed to a point for rare, pathogenic mutations in BRCA1/2 and other genes (i.e. PTEN, ATM) can catch some of the false negatives. A million people could be the lower limit for the market, and at the cost structure Color uses, breast/ovarian cancer screening is worth around $250M to them. On the upper end, it’s in the billions if lowering costs of the test, increases demand for it; which has played out so far. The market is large, and the potential impact to get in front of cancer and disease earliest is very meaningful and has already saved lives. The market sizing here is pretty simple: how many people might get cancer times the price of the test.
Then Color expands like the Roman Empire in all directions. The hereditary heart disease test is equally large as well as the medication response product. What’s going to be really exciting is how Color will price its population-genomic products. These products are going to be margin expanding because customers already pay Color to do a test and the company is using that data, and anonymizing it, to package it into products for hundred billion dollar markets from therapeutics to healthcare.
Business model
Color’s business model relies on owning the customer relationship. Being vertically integrated is an easy way to do that. But how did Color get those customers? A lot of SEO and press releases. But Color’s main value proposition was lower costs. Pretty easy to get. Individuals who wanted to figure out if they were a BRCA carrier could use Color instead of paying Myriad 4 thousand bucks. Color was not like many of the millennial DTC brands that actually charge higher prices for the same “branded” product. Color provided a better product at a much lower price. Pretty awesome. This was partly enabled by a new law and improving technologies (i.e. sequencing and software), but the founder’s vision that they would make up for it later with new population-scale products played a pivotal role. The founders had a plan to make genetic testing cheap to increase the value of its analysis and data. To successfully commoditize your complement in life sciences - https://axial.substack.com/p/substitutes-and-complements-in-life - you can’t just commoditize first then figure out the substitute later; you end up becoming the commodity. Like Color, a business needs to know most of their substitutes at the beginning of the journey. It’s like trying to find the exit while in a mosh pit. You should know where the exit is before you jump in.
By starting with the customer, Color has been able to aggregate demand and use that force to get into a larger set of customers:
Color for Employers - enterprise customers can pay a recurring fee per employee for testing and monthly updates; this has helped smooth out Color’s revenue over time. Moreover, large corporations see products like Color as a competitive advantage to add to benefit packages to improve retention and hiring.
Source: Color Genomics
Almost like how Dropbox, Slack, and other enterprise software companies used a consumer product to close larger deals, Color is doing the same for genomics. Maybe those companies had an influence on Color given Elad’s and Othman’s previous background in tech. The company used their beachhead with the direct customer relationship to invade other parts of the supply chain. Then it’s all about outworking the company next to you. This case study is relatively short because Color is a pretty simple business that is going to be hard to replicate.