CEO SUMMARY: After making billions during the COVID-19 pandemic, in vitro diagnostics (IVD) manufacturers must now adjust their strategies and relationships with clinical laboratory customers. Because many contracts for automated instruments are coming due, some IVD companies have the opportunity to grab additional market share at the expense of their competitors. IVD firms are also dealing with supply chain shortages and inadequate staffing because of the “Great Resignation.”
IF THE SARS-CoV-2 PANDEMIC WAS “KIND” TO ANY ONE SECTOR OF HEALTHCARE, that would be the in vitro diagnostics industry. Demand for COVID-19 test kits, analyzers, and automation skyrocketed and most of the world’s largest IVD manufacturers reported record sales and earnings during the first 24 months of the pandemic.
However, that’s not the case today. As the coronavirus morphs into what some epidemiologists predict will be an endemic disease, IVD manufacturers and their clinical laboratory customers are learning to live with an ongoing number of new SARS-CoV-2 infections.
To assess the current state of the IVD industry and identify the challenges facing these companies, a special panel of experts was convened at the Executive War College Conference on Laboratory and Pathology Management that took place last April in New Orleans. The panel included:
Chair: Debra Harrsch, President and Chief Executive, Brandwidth Solutions LLC, Lansdale, Pa.
- Bruce Carlson, Senior Vice President, Kalorama Information, Part of Science and Medicine Group, Arlington, Va.
- Bob McGonnagle, Publisher, CAP TODAY, Northfield, Ill.
- Larry Worden, Principal, IVD Logix LLC, Dallas
In this session—aptly titled “Current State of the IVD Industry and How Lab Vendors are Responding to the Pandemic, the Supply Shortage, and Great Resignation”—the four experts agreed that IVD firms are facing the pressing need to replace fleeting COVID-19 revenue while also kickstarting stalled innovation.
As panel chair, Harrsch launched the discussion by inviting the panelists to identify the specific ways that the pandemic has altered or reshaped the IVD industry.
Carlson responded immediately by observing that “COVID-19 ‘giveth’ and ‘taketh’ away. IVD revenue came at a price for staffing and expansion of manufacturing facilities.”
Kalorama, Carlson’s company, has published estimates that IVD companies—from large manufacturers to small start-ups— together made $33 billion in revenue during 2021 from COVID-19-related instruments and molecular and antigen tests. Kalorama pegs the current size of the global IVD industry overall as $120 billion per year.
The Arlington, Va.-based publisher covers medical research in the biotechnology, diagnostics, medical devices, and pharmaceuticals industries.
Carlson continued, noting that the IVD industry transitioned, “from an industry that—pre-pandemic—needed to convince its marketplace that a diagnostic test is needed, to an industry with a ‘war mentality mindset’ that emphasized increasing production of COVID-19 tests as fast as possible.”
That approach produced benefits during the pandemic, but now consequences are being felt that make it imperative for IVD companies to take stock of their businesses.
As the pandemic exploded across the world, “some of the big IVD companies had no molecular platform and got caught short,” explained Worden. “Those companies are now incurring costs as they re-evaluate who they are.”
Automation Pacts Coming Due
The panelists agreed that one challenge about to confront IVD firms—as they estimate sources of non-COVID-19 revenue during 2022 and beyond—is the need to renew a substantial number of lab automation agreements. Many manufacturers’ contracts for automation in medical laboratories will expire in 2023 and 2024, so IVD companies will be pressed to keep their instrument brands in clinical laboratories.
This is true at Roche Diagnostics, for example. Carlson pointed out that “Roche indicated over 60% of contracts will soon expire, and it will make a major effort to nail down contracts for its instruments and automated systems in clinical labs.”
The surge of lab automation contracts that expire in the next 24 months could be an important opportunity for savvy lab administrators and pathologists. The panelists were in agreement that IVD manufacturers were likely to offer attractive terms to their lab customers, either to renew existing agreements or to win the business of a new lab buyer.
In particular, they recommended it would be timely for lab managers to review their existing automated instrument contracts now with the goal of developing useful negotiating points. Then, as these contracts mature, the labs can enter negotiations as knowledgeable buyers.
New Products Push
In discussing the ways that the COVID-19 pandemic has changed IVD companies, Worden said this varied by manufacturer size, location, and market segment.
“Much of the work we do involves infectious disease and molecular technologies,” he said. “From the start of the pandemic, my IVD clients’ resources were dedicated to gearing up and creating SARS-CoV-2 tests.
“This came with a cost to these companies because development of other types of analyzers and products stopped,” Worden explained. “Even if their diagnostic products were ready for regulatory review, IVD companies couldn’t get a meeting with the U.S. Food and Drug Administration (FDA) because the agency was on hold. IVD companies could not implement the clinical trials that were planned and ready to commence because patients were not available.”
For medical device manufacturers, product innovation has stalled, too, he added. “At this point, most companies have not started new product development. It is stagnant, and things are still very much focused on COVID-19 and on roles for diagnostic testing systems that are in place,” Worden said.
The panelists next addressed the situation with smaller IVD companies that successfully rode the COVID-19 testing wave. “Small IVDs companies need to watch out if they are primarily reliant on their sales of COVID-19 tests,” Carlson warned. “It will be hard for smaller companies to develop products and assays to replace those COVID-19 tests amid intense competition.”
Sustained Supply Chain Woes
Two other important topics were addressed by the panelists. One involved the supply chain. The second involved staff recruitment challenges. The experts agreed that recruitment challenges may further slow instrument and product development and launches.
“IVD manufacturers learned during the pandemic that they were not the masters of their own fate,” explained Bob McGonnagle, Publisher of CAP Today and a panelist. CAP Today is a publication of the College of American Pathologists.
“From the onset of the pandemic, some of the IVD companies’ biggest laboratory customers were calling them, having long conversations, and questioning, ‘Why can’t we get our normal allocation of test kits?’” he noted.
Lab administrators, understandably, have preferred not to take on costs associated with carrying inventory, McGonnagle commented. But the trade-off was that during the pandemic, clinical labs became dependent on a lot of imported goods.
“It is also important to realize that IVD companies have the same issue as labs when it comes to an aging workforce—especially in service and installation staff,” he added. “Those are big factors in terms of what IVD firms are able to do going forward.”
From that perspective, U.S. IVD firms and clinical laboratories should be watching their IVD counterparts in the Asia- Pacific region that were able to develop SARS-CoV-2 tests at a low cost and position their brands on an international stage, according to IVD Logix research. (See below sidebar for further details.)
The panel also took up the topic of what IVD firms might do with the profits generated from sales of COVID-19 tests and instruments. Some leading IVD companies are flush with cash. This is prompting speculation by Wall Street investors about future mergers and acquisitions that might alter the IVD marketplace.
“There is investor pressure for the larger IVD manufacturers to come up with a strategic plan for investment for that cash,” Worden stated. “Many are actively looking at start-up companies and investing in co-development or acquisition.”
Panelists recognized one such IVD acquisition as an example of this trend. Harrsch mentioned that QuidelOrtho in San Diego is the new name of an IVD company that formed following Quidel’s $6 billion acquisition of Ortho Clinical Diagnostics in December. Combined revenues of the two companies totaled more than $3.5 billion during 2021. (See TDR, “Ortho Clinical Diagnostics to be Acquired by Quidel,” Jan. 10, 2022.)
Over the next two to five years, Carlson sees more consolidations coming. “Consolidation within the IVD industry will be accelerated by inflation,” he asserted. “There will be at least one big acquisition about the size of Quidel’s and lots of smaller ones.”
History may be clinical laboratory leaders’ best teacher about what to expect in the next 24 to 48 months, McGonnagle suggested. “We have had various clinical events with big inflection points for the lab industry,” he stated. “Organ transplantation was one of them. At first, these procedures could only performed in a handful of sites. Then, it became possible to do them widely and labs got involved.
“Another example is AIDS,” he continued. “AIDS made an incredible difference to the public’s consciousness of infectious disease and the role of diagnostic testing. I have a feeling that COVID-19 will have the same impact, particularly as many consumers became comfortable with buying their own COVID-19 test, collecting their own specimen, and performing the test in their own home. ”
It will take a while for the global giants in IVD solutions to reboot. “The companies are trying to figure out who they are,” Worden said. “Only now are IVD companies beginning to refocus on other development areas and restart clinical trials.”
In response to Harrsch’s question about what will change in the IVD industry in the next three to five years, the consensus was that there would be more IVD consolidation; that the labor shortage would continue to move faster than improvements in automation; and that inflation would increase the cost of products and salaries, both for IVD companies and their clinical laboratory customers.
Contact Bruce Carlson at bruce.carlson@ kalormainformation.com; Bob McGonnagle at firstname.lastname@example.org; Larry Worden at email@example.com; Debra Harrsch at firstname.lastname@example.org.
Emerging New Asia-Pacific IVD Companies Stretched Out Internationally During Pandemic
OUTSIDE THE UNITED STATES, ONSET OF THE COVID-19 PANDEMIC spurred an emerging class of in vitro diagnostic (IVD) companies in the Asia-Pacific region to develop and bring SARS-CoV-2 tests to their local markets. Many of these tests were accurate, fast to administer, and low cost. This well-positioned these brands for a new, international audience, according to IVD Logix.
Two South Korean companies—Seegene and SD Biosensor—reacted to the pandemic early, making significant incremental revenue gains in 2020, according to Larry Worden, Principal at IVD Logix, a Dallas-based consulting and market research firm.
Seegene developed one of the first SARS-CoV-2 tests two weeks after China released the genetic profile for the virus. Seegene was responsible for nearly all COVID-19 clinical laboratory testing in Europe during the initial months of the pandemic, Worden added.
Meanwhile, SD Biosensor partnered with Roche to distribute point-of-care COVID-19 assays worldwide, he noted. That global teamwork helped SD Biosensor to attribute nearly all its 2020 revenue to COVID-19 sales. IVD Logix shared these two examples of market expansion by Asian IVD firms, presented below.
Investors Direct More Scrutiny to IVD
IN VITRO DIAGNOSTICS (IVD) PIQUED INVESTOR INTEREST over the last couple years, but that attraction may be wearing off.
“We have said that the IVD industry is an under-looked industry for investors. IVD, in general, is favored by venture capitalists,” said Bruce Carlson, Senior Vice President at medical publishing company Kalorama Information in Arlington, Va. “But there has been a plateau in investor interest in the IVD industry segment.”
That cool-off may be due to COVID- 19 test revenue falling in 2022 for some IVD firms. However, other business lines are regaining steam. (See TDR, “IVD Firms Grow During 2022, But COVID-19 Revenue Dropped,” May 16, 2022.)
“My feeling is IVD companies are taking a deep breath after two long years,” Carlson said. “Part of that reflection will be to compare performance numbers and determine how they will explain to investors why they are off on revenue.
“Often, during conference calls, IVD executives are warning investors up front that today’s COVID-19 revenue won’t be tomorrow’s,” he added.
Reimbursement for COVID-19 Testing Totaled Tens of Billions of Dollars to Labs, IVD Firms
BOTH CLINICAL LABORATORIES AND THEIR IN VITRO DIAGNOSTIC (IVD) SUPPLIERS rose to the single biggest public health challenge of the last 100 years after the outbreak of SARS-CoV-2. In the United States, both sectors were adequately reimbursed for their efforts to deliver hundreds of millions of COVID-19 test results.
But “adequate reimbursement” understates the true cost in human effort and use of resources required daily during the pandemic by companies that supplied the tests, analyzers, transport media, primers, personal protective equipment and other supplies needed to perform unprecedented numbers of COVID-19 tests.
The website of the Centers for Disease Control and Prevention (CDC) has useful data. Here are some basic numbers that the CDC is reporting for the “daily number of COVID-19 Nucleic Acid Amplification Tests (NAATs)” performed since the onset of the pandemic. The data start on March 1, 2020, and were complete through July 11, 2022.
Total number of NAATs:
- 921,423,930 tests
Highest daily total of NAATs:
- 3,134,008 tests on Jan. 5, 2022
Current seven day average of NAATs:
- 293,878 tests as of July 11, 2022
It should be noted that these statistics are only for COVID-19 NAAT results reported to the CDC. From the onset of the pandemic, the results of some NAATs performed were not reported to the CDC.
Further, these numbers do not include antibody tests for COVID-19. There were significant numbers of point-of-care antibody tests for COVID-19 used by healthcare entities and employers. COVID-19 antibody tests were also sold directly to consumers so they could test themselves.
The Dark Reportdid some back-of-the-envelope calculations to estimate how much reimbursement flowed to the nation’s clinical laboratories for COVID- 19 testing throughout the course of the pandemic, starting in March 2020 and continuing through July 11, 2022.
Estimating Test Payments
Assume reimbursement at the Medicare price of $100 for a COVID-19 NAAT. Here are some estimates of payments to labs in the United States.
- 921,423,930 tests times $100 equals $92.1 billion
Highest daily total of NAATs:
- 3,134,008 tests on Jan. 5, 2022, times $100 equals $313.4 million
Current seven day average of NAATs:
- 293,878 tests as of July 11, 2022, times $100 equals $29.4 million per day
These estimates show that the nation’s labs were paid close to $100 billion for COVID-19 NAATs. That’s about what the nation normally spends for one year of medical laboratory testing. Moreover, at the height of the outbreak last fall and early this winter, labs in the United States were collectively being reimbursed at close to $200 million to $300 million per day for COVID-19 testing.
Assume that IVD companies were paid an average of about $40 per NAAT kit. Using the numbers above, in the United States, that would produce an estimate of $38.9 billion in COVID-19 test kit revenue to IVD companies during the course of the pandemic.
The estimates help clinical lab managers and pathologists better understand one dimension of the financial impact the pandemic had on the nation’s clinical labs and IVD companies.