Lab Testing to Boom During This Decade

Clinical labs, pathology groups, & diagnostic manufacturers poised for plenty of growth

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CEO SUMMARY: Several recent acquisitions of lab test technology by billion-dollar diagnostics manufacturers reinforce a new reality in the healthcare marketplace: developing new diagnostic tests is faster, cheaper, and more profitable than developing new pharmaceutical products. This simple economic fact is driving an amazing expansion in the number of companies developing new lab test technology.

IT IS WIDELY-RECOGNIZED throughout the lab industry and pathology profession that research into the human genome will trigger a growing number of new diagnostic assays.

But less recognized within the lab industry is the comparative economic advantage that new diagnostic technology is gaining over new pharmaceutical technology. Simply stated, it is becoming cheaper, faster, and easier to develop new diagnostic assays and introduce them into clinical usage than it is to develop and market new prescription drugs.

For hospital laboratory administrators and pathologists, this developing marketplace dynamic warrants attention. The clear and speedy benefits that accrue from developing geneomic and proteomic discoveries into diagnostic
assays is already a fact. A host of new and unknown companies are developing diagnostic assays and planning to introduce them into the clinical marketplace.

The compelling economics in favor of diagnostics over pharmaceuticals is best illustrated by the example offered by Jorge Leon, M.D., Ph.D. at the recent CLMA annual meeting in New Orleans. Dr. Leon is the Chief Genetic Officer at Quest Diagnostics Incorporated. During his presentation titled The Post-Genomics Revolution: What’s In It For The Lab Industry, he noted that, on average, “it now takes between eight to ten years and one-half billion dollars to develop a new drug and bring it to market.”

“In contrast,” continued Dr. Leon, “a new diagnostic assay can be developed in 24 to 36 months for around $30-$40 million. Within a short time after market introduction, this new assay can generate as much as $70-$100 million in annual sales. At that sales level, these new assays are considered blockbuster successes.”

Pharma Versus Diagnostics

THE DARK REPORT observes that this simple economic fact will alter the long-standing relationship that has existed between diagnostics and pharmaceuticals. Through most of the last century, the size, variety, and economic clout of the pharmaceutical industry was second to none in the healthcare marketplace.

But the regulatory and political climate is turning against the pharmaceutical industry. As investors and entrepreneurial scientists recognize that diagnostic lab tests can be developed at much less cost—and generate profits within a couple of years—then growing amounts of money will be shifted away from pharmaceutical research and development and into clinical diagnostics.

The earliest signs of this market evolution are already visible. On the pages of THE DARK REPORT, the relevance of new diagnostic players such as Myriad Diagnostics, Exact Sciences, and Visible Genetics has been presented. But for every company like these three, there are five or ten more with credible diagnostic technology working to get their products through the regulatory approval process and into the clinical marketplace.

Pharma Firms’ Investments

More signs of the increased attention that diagnostics is getting are recent acquisitions of diagnostic technology by Roche Holdings, Inc. and Bayer Corporation. In the case of Roche, it purchased a portfolio of HPV patents from Institute Pasteur. Just 14 days ago, Bayer’s diagnostics division announced its acquisition of Visible Genetics, Inc., manufacturer of the TRUEGENE™ HIV-1 Genotyping Assay. As part of the acquisition, Bayer also gets hepatitis assays which Visible Genetics is developing.

Both Bayer and Roche are important pharmaceutical companies. But the improving economics of diagnostics motivated them to invest in acquiring relevant technology for their diagnostic divisions.

For strategic reasons, lab directors and pathologists should understand that the more attractive economics of diagnostic test development compared to new drug development will tug the laboratory industry into some new directions. As growing numbers of new diagnostic vendors enter the marketplace, the traditional distribution channel for new lab test technology will be altered in fundamental ways.

Pipeline Of New Assays

In the near future, possibly as soon as 24 to 36 months, laboratory professionals will find themselves confronted with a remarkably large number of new assays, assuming that the FDA approval process functions in an orderly manner.

These new vendors and their new diagnostic assays will trigger some interesting changes. THE DARK REPORT can identify at least four significant ways that both clinical laboratories and pathology group practices will be impacted:

  • First, laboratory professionals will need to stay abreast of new diagnostic assays as they gain FDA approval. Home brew assays will also expand in number and clinical application.
  • Second, labs will find themselves dealing with multiple new vendors, since lots of start-up companies are entering the diagnostics field. This will complicate both the buying process and how the lab organizes itself to perform the tests.
  • Third, new assays will probably not come through the traditional distribution pipeline, i.e.: in a kit form that labs can purchase and set up whenever clinical demand or volume warrants. In fact, tests may be referred to either the vendor’s own lab to be tested, or to specific “licensed” labs which hold an exclusive contract with the vendor to perform such testing.
  • Fourth, most of these new diagnostic assays will have a degree of clinical sophistication that requires a greater expertise within the laboratory offering and performing the test. Pathologists will find them- selves taking a greater role in helping clinicians order these tests and evaluate the results, thus creating an opportunity for the lab to add value from clinical pathology professional services.

Other Consequences

As the evolving economics make clinical diagnostics more attractive relative to pharmaceuticals, there will be another interesting consequence. Clinical labs and pathology group practices will be the targets of increased sales and marketing attention from this host of new diagnostic companies.

Laboratory professionals remain the essential link between new diagnostic technology and clinicians. For these companies to launch their products successfully, they will need to gain the attention—and the help—of local laboratories. Thus, some of the same type of marketing largess that has traditionally been showered upon physicians by the pharmaceutical companies will undoubtedly soon be directed toward laboratory administrators and pathologists.

Although it may not lead to multiple vendors offering lucky pathologists courtside seats near Jack Nicholson at the Lakers’ basketball games, it will certainly expose laboratory decision makers to a more intense level of marketing attention than they have received in past years.

Finally, the “Big Ten” diagnostic vendors which have anchored the lab marketplace for decades will not let upstart companies slice into their market share unopposed. Look for lots of new technology and acquisitions by the entrenched diagnostics companies as part of their competitive response.

Bayer Acquires HIV Genotyping Technology

To FURTHER BOOST ITS PORTFOLIO of infectious disease testing products, Bayer Diagnostics will acquire Visible Genetics, Inc., maker of the TRUE-GENE™ HIV-1 Genotyping Assay.

The acquisition was announced on July 23. Visible Genetics offers the only FDA-approved HIV resistance typing assay in the marketplace. (See TDR, April, 2002.) Visible Genetics had earlier disclosed that it was seeking a buyer.

In 2001, Visible Genetics lost $40.7 million on sales of $13.6 million. For second quarter 2002, it reported revenues of $4.7 million, an increase of 18% over the same quarter last year. It also reported that sales of its TRUEGENE test were up 77% from last year.

Bayer Diagnostics will pay $61.4 million to acquire Visible Genetics. This is the second major acquisition Bayer has used to build its infectious disease product portfolio. In 1998 it purchased Chiron Diagnostics.

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