Attention pharma: where do diagnostics fit in your future strategy?

Loïc Kubitza

PwC Luxembourg

With in vitro diagnostics (IVD)s becoming more important for drug development, pharmaceutical companies can’t ignore the role of diagnostics.

Merger and acquisition activity in the medical diagnostics area is heating up. These promising new technologies are advancing, and thus experiencing bigger deal values, more interest from pharmaceutical companies and an influx of new investors. All of this activity reflects widespread belief in the growth prospects forIVDs, propelled by the advance of personalized medicine and the development of new tests for the earlier detection of disease.

According to PwC’s biennial review of the IVD sector, several trends are causing deal-making activity in the IVD sector to grow strongly. In 2010, for instance, the value of disclosed deals rose 57 percent, to $4.7 billion, up from $3 billion in 2009. Helping drive up values are new entrants to the IVD sector, such as financial investors, life sciences research groups, clinical laboratories, and medical technology players.

Other factors contributed to the increase in valuations in 2010, including a restructuring of business portfolios that led to more divestitures and acquisitions, the growing strategic convergence of medical technology with IVDs, and efforts to add complementary products to existing portfolios. The trend continued in 2011, with a series of multi-billion-dollar deals announced during the first seven months, which is expected to more than triple total M&amp,A deal value from 2010, to more than $15 billion.

“Pharma’s appetite for companion diagnostics is expected to remain strong.”

Companion diagnostics taking center stage

Companion diagnostics, which complement targeted therapeutics, are of increasing interest to pharmaceutical companies for their ability to increase drug response rates, reduce side effects and help control healthcare costs, according to the PwC study.

In fact, the number of companion diagnostics partnerships with pharma more than tripled during 2010, compared with a trough in 2008, and strong deal activity continued during the first half of 2011. The main route used by pharma currently to access companion diagnostics technology is through external partnerships, but in-house development and M&amp,A are emerging scenarios.

Pharma’s appetite for companion diagnostics is expected to remain strong since regulatory pressure for improved drug performance and payer pressure for more effective budget allocation will intensify over the next few years. Furthermore, in July 2011, The Food and Drug Administration released draft guidance on companion diagnostics, a move that could clarify the FDA’s future direction with regard to regulatory approval requirements.

Roadblocks to opportunities

Despite the increasing demand for companion diagnostics, there are roadblocks to their opportunities to improve pharma’s product offering to physicians and patients and create value for pharma’s shareholders. Chiefly, the industry is concerned about the economics of diagnostics innovation, adversely affected by current pricing and reimbursement practices. In addition, many diagnostics partners feel they are not getting a fair share of Rx-Dx partnership values.

Diagnostics industry players would like to gain greater support from government, private payers and the pharmaceutical industry to implement the following actions relating to the pricing, reimbursement and value sharing of diagnostics.

“So far IVD tests have not made significant inroads in replacing current standards for early detection of major cancers.”

1. Pricing should reflect the value of the test rather than its cost. Many in the diagnostics industry feel the price of the test should reflect a reasonable proportion of the benefits the tests generate or costs they help to save. Unless pricing is adapted to the level of value creation, the industry may fail to achieve sufficient economic return to stimulate continued investment and innovation.

2. The process to gain reimbursement for diagnostics should be accelerated and harmonized across countries. In many countries, gaining reimbursement for a new test can take four to seven years following marketing clearance. Industry participants feel that health technology assessment (HTA) models need to be adapted to allow for faster decisions on reimbursement. With regard to multi-country product launches, another issue is the diversity of HTA procedures across countries. Greater cooperation is needed to increase the speed with which diagnostics are approved.

3. The share of value going to the diagnostic in Rx-Dx partnerships should be revisited. Diagnostics companies are concerned about not getting a fair share of the overall value of Rx-Dx combinations when negotiating deal terms with pharmaceutical partners. Traditionally, diagnostics have represented less than 2 percent of healthcare spend but influenced more than 60 percent of critical healthcare decisions. Rebalancing the equation could encourage greater investment in diagnostics, accelerating the development of these tools.

Emerging diagnostics companies are hoping for some action to be taken to help sustain their momentum of innovation and partnerships with the pharmaceutical industry in the long run.

Early detection provides new prospects for improved outcomes

In addition to companion diagnostics, diagnostics for screening (i.e., tests for early detection of disease) are emerging as a potential growth driver for the IVD sector, with several new tests for early detection of cancer reaching the market during the last two years, and several more moving toward commercialization.

“Pharma companies are increasingly likely to consider bringing companion diagnostics capabilities in house or acquiring stakes in niche IVD players.”

In principle, the case for early-detection testing should be clear-cut, considering the clear improvement in survival prospects that follows early detection. Nevertheless, actual detection is one thing, the quality and cost of the testing procedure to achieve early detection is another.

Many of the tests currently used as standards of screening are seen as having sensitivity that is too low, too many false positives because of low specificity, low compliance because of invasiveness and discomfort, risks from exposure to radiation, and high cost. These issues highlight the challenge of developing appropriate new technologies for screening. So far IVD tests have not made significant inroads in replacing current standards for early detection of major cancers.

However, innovative research on screening technology has continued and is beginning to produce results. Consequently, a significant pipeline of new IVD-based tests – at least 23 such tests in development – could offer new hope for improved early detection.

Ultimately, strong market adoption will be driven by the benefits of noninvasiveness, high sensitivity and specificity, together with favorable health economics. If a number of IVD-based early-detection tests achieve strong market adoption by 2015, PwC expects pharma players to take an increasing interest, with many choosing to become commercial partners for such products by 2020.

Outlook

Looking ahead to 2015, M&amp,A activity in the IVD sector will be shaped by the confluence of several factors. With new market entrants continuing to add IVD businesses to attain critical mass, current players have a choice of responding in kind or risking a decline. One new source of M&amp,A activity could be pharma companies that are building drug-diagnostic co-development programs to support targeted therapeutics.

Pharma companies are increasingly likely to consider bringing companion diagnostics capabilities in house or acquiring stakes in niche IVD players to complement their evolving product portfolio. Molecular or tissue diagnostics firms—the most relevant areas for today’s companion diagnostics programs—are the most likely targets.

New entrants and private equity houses also could continue their activity. Another possible scenario: The entry of major diagnostics or pharma companies into the early detection field. This would become more likely if noninvasive IVDs become common for early detection of major cancers.

In Summary

With IVDs offering so much promise, pharmaceutical companies can’t ignore the role of diagnostics in their future strategies, whether they decide to build, buy or partner.

During the past two years, positive growth prospects have resulted in new deals, new investments and new advances in IVD science and technology. However, these advances may not be sustainable without the continued commitment of stakeholders.

Among the areas that need to be addressed are pricing to reflect the value of tests rather than only their cost, accelerated and harmonized reimbursement processes, regulatory pathways that are clarified for each type of diagnostic, including stand-alone and companion, and clarity for the design of clinical trials for drug diagnostic co-development.

Not taking action in these areas could damage the survival prospects of many emerging IVD players, especially those that are taking chances by being among the most innovative. If that occurs, diagnostics innovation could be discouraged, continued investment into diagnostics ventures could be depressed, and most importantly, patient access to important new health technologies could be delayed.

About the author:

Loïc Kubitza is a director in PwC’s pharmaceutical &amp, life sciences advisory services practice, and can be reached via email at loic.x.kubitza@lu.pwc.com.

PwC’s Diagnostics 2011 provides an overview of M&amp,A deal activity during the past two years and the factors driving it, the development of new prospects for early detection testing and a review of significant events for the development of personalized medicine. The report also includes trends in companion diagnostics and business model considerations for pharmaceutical companies. A full copy of the report is available for download at www.pwc.com/diagnostics2011.

This article has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this article, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this article or for any decision based on it.

“PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network.

What are the greatest challenges to developing appropriate new technologies for screening?