February 2010: Volume 36, Number 2
An Optimistic Outlook for the Diagnostic MarketWhat Will it Take to Succeed in a New Business Environment?
By Bill Malone
In vitro diagnostics (IVD) manufacturers have good reason to feel like they are between a rock and a hard place. With the ‘Great Recession’ affecting every aspect of the U.S. economy and the tortuous path towards healthcare reform spreading uncertainty, IVD manufacturers have had to rethink their strategies as the second decade of the 21st century gets underway. But despite the murky beginnings of an economic recovery and the specter of an unwelcome mix of higher taxes on the industry and lower reimbursement for lab tests coming from Congress, the IVD market continues to grow. In a recent survey of medical device and IVD companies from Emergo Group, a consulting firm, 71% of executives said they expect overall sales to increase in 2010, and 70% said they felt very positive or somewhat positive about the overall business environment.
With their fingers crossed that the early signs of economic recovery will continue, IVD manufacturers are preparing for steady, albeit slower growth while working harder than ever to hold onto decent prices for their products, according to industry observers. All too often for manufacturers, declining prices due to reimbursement hassles and competition mean that growth in testing eventually stops translating into growth in revenue. For this and other reasons, IVD companies are betting on strong returns from molecular diagnostics and advanced lab automation components to be profitable in a competitive and evolving business landscape.
“For 2009, we estimated a growth rate for the worldwide IVD market of approximately 5.3 percent, and for 2010, we’re projecting 6.1 percent growth,” said Gerard Conti, vice president at the healthcare market research firm Enterprise Analysis Corporation (EAC). “It makes sense that 2010 will be better for manufacturers because we see hospital budgets starting to thaw out, the credit crunch has eased up, and many hospitals put off big purchases that they can’t put off any longer.”
Ready to Spend Again?
A huge drop in available credit for hospitals and other organizations, along with lower patient demand and increasing numbers of patients unable to pay for care, made the last 2 years some of the most difficult for IVD manufacturers. “In 2009, it was very difficult to win market share—customers tended to be fairly cautious, often deferring purchase decisions, and the capital expenditure environment was very limited,” explained Alan Harris, vice president for global marketing, chemistry systems, at Beckman Coulter. “Sectors like automation, where there is strong demand, stalled in that people didn’t have large capital budgets to deploy.” However, labs can only forestall purchases of needed equipment or upgrades to a certain point. “One year you can do without it, two becomes a strain, and three becomes a stretch,” Harris quipped. Eventually, labs that have deferred capital expenditures will have to buy; otherwise they could end up spending more on service than it would cost to replace an instrument.
Even with recovery from the recession looking tenuous at best, there are signs that hospitals and other customers are beginning to have more funds to make the big purchases IVD manufacturers depend on, according to Rich Ramko, a medtech partner with Ernst & Young’s global life sciences division. “Lately we’ve seen more confidence from hospitals when it comes to issues like bad debt and capital expenditures,” he said.
Even better, recent declines in the quality of the hospital payer mix seems to have finally flattened out, Ramko said, an important indicator of if and how much hospitals can expect to get paid. Commercial insurance usually pays the best, followed by Medicare and Medicaid. The most worrisome element—patients who pay out of pocket—can only be counted on about 20% of the time. “We’ve seen that percentage of Medicaid and uninsured go up over the last year or so, and lately that’s abated,” said Ramko. “But that payer mix will deteriorate again if unemployment goes up or stays where it is for a long time. People can only put off healthcare for so long, and after they wait, their ability to pay is even less than it was to begin with—their COBRA has run out, the medical situation is worse, and then uncompensated care at hospitals will rise.”
Unemployment isn’t the only lingering concern that’s part of what Harris described as “macroeconomic overhang.” Outside the U.S., emerging markets may still suffer from devalued currencies that makes buying U.S. products more expensive, he explained. “Facing a significant economic downturn, every central bank began to dump liquidity, whether it was money supply, lower interest rates, or however they could better offset the global economic downturn.” With central banks pushing out this much cash, some currencies became greatly devalued and emerging markets—including Korea, South Africa, Turkey, and others—got hit hard.
In other cases, the reverse was true when the dollar was comparatively low, bringing revenue for U.S.-based companies down with it. “While the actual quantity of products and services U.S. manufacturers delivered may have not changed dramatically, or may have even gone up, the amount of revenue that the global manufacturers received for that may have fluctuated significantly in certain countries because of changes in currency exchange rates,” said Harris.
AdvaMed Launches AdvaMed Dx for Diagnostics Companies
After years of debate among in vitro diagnostic (IVD) companies about how best to work together to advocate for the industry, a new association under the auspices of the Advanced Medical Technology Association (AdvaMed) is creating enthusiasm among IVD companies as they look toward coping with changes in healthcare reform in the years ahead.
“This is a particularly sensitive period, where we’ve had healthcare reform running the profile of many aspects of our industry from a government affairs standpoint,” said Scott Garrett, Beckman Coulter’s chairman, president, and CEO, who will serve as chair of the AdvaMed Dx board of directors. “We also have new regulatory issues coming out of China, and a continual emphasis on Japan and Europe. It’s an important time where it will be very helpful to get senior executives throughout diagnostics very involved in the association.”
AdvaMed Dx will work as an association-within-an-association, where the new organization can take advantage of the staff and capabilities of AdvaMed while still focusing exclusively on issues that matter to the IVD industry. With AdvaMed covering such a large spectrum of companies—manufacturers of everything from stents to orthopedics and wound care products—Garrett sees AdvaMed Dx as a way for IVD companies to have a strong voice on issues and perspectives that are unique to their industry. “It’s our expectation that the positions and issues of AdvaMed Dx will rarely be in conflict with the rest of AdvaMed, but they might often be different than the priorities or agenda of AdvaMed,” said Garrett. “Though it would be great to have an independent global diagnostics organization, our industry is relatively small, and the level of infrastructure and staff that we could afford as a completely separate organization is probably not significant enough for us to have a strong voice. So I think this approach is the best of both worlds.”
Issues of particular importance to the new association will include following FDA regulation of diagnostic tests and working to curb any further cuts to the lab fee schedule. With a lot of new people in the FDA office, Garrett expects AdvaMed Dx to help companies establish a closer relationship with the agency. “FDA is under pressure to be tougher—pressure from the public and from Congress,” he said. “So we have an opportunity to improve their understanding of all that goes on in the industry in a way that is more balanced than what they might have picked up so far. But I have a lot of confidence that the new FDA leadership is quite capable and has the right objectives in mind.”
In working with the Center for Medicare and Medicaid Services (CMS), AdvaMed Dx will have a chance to do a lot better for the IVD industry than what has been done before, Garrett said. “We want to make sure that our customers, the labs and the hospitals in the U.S., are reimbursed fairly for the services they provide in the lab,” he said. “I think there will probably be an opportunity over the coming years to take a good hard look at the lab fee schedule and try and get it in line with reality.”
Garrett expects the new organization to get off to a fast start this year, and said he’s been encouraged by the level of enthusiasm from the major diagnostics companies. “We expect AdvaMed Dx to be an important part of our industry in the future,” he said.
Fighting the Price Plunge
No matter how innovative their technology or how in sync their instruments are with the needs of laboratories, IVD manufacturers inevitably have to ask themselves the question: how do I hold onto a fair price? “The recurring theme we hear is, ‘how do you keep pricing from devolving’,” said Mark Hughes, also a vice president and senior consultant at EAC. “Manufacturers want to know how to charge a decent price and get reimbursement for their novel test that represents its true value so it doesn’t become a five dollar test.”
Hughes and his colleagues find that more and more, companies are looking for solid evidence of the value of their tests by performing health economic studies. “More companies are now performing studies to try and prove that what they are bringing to market truly has value and that the test is displacing certain care protocols,” said Susan Farber, vice president of operations at EAC. “We are seeing more price pressure in diagnostics, so they’re trying to show that as part of the whole value stream, their test should be valued a little more highly than other products may have been in the past.”
To get better reimbursement, manufacturers will have to demonstrate that a new test is truly an improvement over what’s on the market already, emphasized Ernst & Young’s Ramko. “If the demand is there, then the reimbursement will work itself out,” he said. “Those that show they can reduce the cost of care and are better than what’s currently available will get reimbursement and will be successful in the market. But if it’s a ‘me too’ product—you won’t see those products coming through to commercialization.”
Molecular Diagnostics Lead the Way
While 4 to 5 years ago testing in the diabetes area helped to propel pre-recession annual market growth in the 8% range, now the diabetes share of the market has flattened out and left molecular testing as the leader in rapid growth. Part of this change has to do with the especially intense pricing pressure on diabetes testing, creating a counter-intuitive scenario with an exploding disease population but frozen revenues for testing.
“We see the incidence and prevalence of diabetes going through the roof, and it’s only going to get larger. Payers have done their best to mitigate the cost, and for a time, those techniques have been very effective,” said Harris. “But eventually quantity will trump price and the market will grow again. In this market you have to distinguish growth in testing versus revenue generated by it.”
Molecular testing is also surpassing other areas of the IVD market by encroaching on territory that traditionally belonged to the microbiology lab, offering speed and turnaround times that traditional culture methods can’t match. “Rapid molecular tests to detect respiratory pathogens in hospitalized patients are new weapons to help control outbreaks of serious bacterial and viral infections, such as methicillin-resistant Staphylococcus aureus (MRSA),” said Keith Chaitoff, divisional vice president, U.S. marketing of Abbott Diagnostics. “Healthcare-acquired infections are a major source of patient complications that increase lengths of stay and prolong recovery time.” Under pressure from payers, patients, and even Congress, hospitals need better solutions for managing healthcare-acquired infections, with more and more facilities testing patients for bacterial and viral infections before admission.
With fast and sensitive molecular tests, physicians get answers back in hours or a day, not in the week to 10 days it can take for traditional microbe identification. This change in patient care will continue to drive the adoption of molecular methods, emphasized Jack Zakowski, director of scientific affairs and professional relations for Beckman Coulter. He offered the example of a respiratory panel. The physician would like to know whether an infection is viral or bacterial, and whether they can rule out the most serious illnesses. With traditional microbiology, the physician sends the sample to the microbiology lab—either hospital or reference lab-based—and waits for 1–3 days for bacterial identification or 5–10 days for myobacterial identification.
“The clinical condition of the patient tends to answer the question much sooner than the laboratory in this situation,” Zakowski said. “We’re dealing with methodologies that are more than 100 years old—agar plates and Petri dishes—and the new molecular-based methods that are either in use today or that will be available in the next few years are going to transform that.” Zakowski thinks the biggest hurdle at this point may be the human one—getting people adapted to and comfortable with using the new technologies. Still, it will be challenges like MRSA that will create more demand. “This is all going to be driven by both an economic and clinical need,” he said. “These tests can make a huge difference in patient care and that will drive adoption of the technology.”
The molecular diagnostic sector also tends to be more profitable than traditional microbiology, which is more of a commodity business and has lower margins, explained EAC’s Hughes. Molecular tests also command a much higher price per test, though in some instances the manufacturer has to pay patent royalties that eat into profits. “There has just been a continuing trend toward molecular testing, and some of that is taking away from traditional microbiology. Having said that, I don’t see traditional microbiology going away any time soon—we’re still going to be doing traditional culture plates for many years to come. But there are specific tests and areas where molecular is encroaching on traditional culture methods because of the speed and turnaround time advantages that it offers. So I think we’ll continue to see that eating away at some of the traditional microbiology.” EAC is projecting the microbiology market to grow at a steady 5% per year, while the molecular segment will see double-digit growth, between 12% and 14% per year. Hughes also predicted that manufacturers will continue to push for more simple instrumentation for their molecular tests, the ‘sample-in, answer-out’ model.
Labs Still Hungry for Automation
IVD manufacturers will also continue to push hard to get laboratorians the automation solutions they need to cope with more complex, consolidated operations as well as lingering staffing shortages. Just taking a look at exhibit halls and conference programs demonstrates both the enthusiasm and challenges laboratorians have with automation. “In coping with cost pressures and personnel shortages, laboratories increasingly are being forced to do more with less,” said Abbott’s Chaitoff. “This is fueling development and market share growth of highly automated analyzers with automated sampling handling features and sophisticated informatics to improve throughput, results reporting, and coordination with the LIS.”
Beckman Coulter’s Zakowski echoed this assessment. “The technology is advancing rapidly, and I think you’ll see automation become better, cheaper, and faster—and that’s true whether we’re talking about the analyzers themselves, the kinds of assays they can perform, the kind of track lines they’re connected to, or the information technology,” he said. “We’re doing things now we didn’t dream of 10 years ago, and I think that will be the case 10 years from now.”
Prices are already coming down, with a handful of companies that are very competitive and willing to cut an amazing deal to place an automation solution, noted EAC’s Farber. Manufacturers know that if they can get their automation solution in, they tend to have a hold on that lab’s business. “I’ve heard of some ridiculously low-priced deals where pieces of automation were practically given away,” said Farber. As a result, she thinks it’s possible that, in terms of dollar investment, the market for automation could start to flatten out eventually; however, with regard to the number of labs that are looking to move toward automation, “that’s still a very strong number,” she indicated. “From what I’ve seen in the last few months, laboratorians are quite serious about automation and about standardization on automation, so I think there is still a very good outlook for this market.”
Advanced analyzers, more molecular testing, and more automation will all lead to dramatic changes in what the clinical lab looks like, emphasized Beckman Coulter’s Harris. “The chem-immuno line will become the chem-immuno-coag-hematology line over time, and likewise, those individual disciplines that have remained relatively separate in specialty labs, like microbiology, flow cytometry, and molecular tests, will all benefit from more automation and more specific and sensitive techniques, so I think that’s a good view of our future.”
Point-of-Care Market Faces Hurdles
Another area of growth in the IVD market is coming from point-of-care testing (POCT), which EAC projects will grow in the range of 7%–8% per year for the next few years. While the firm’s consultants noted a strong desire on the part of providers to move testing out to decentralized locations, POCT still hasn’t met the growth expectations that investors and analysts initially expected.
While certain segments of the POCT market have expanded rapidly, such as rapid testing for the 2009 H1N1 virus, POCT certainly cannot substitute for all core lab tests. “Point-of-care has to balance a lot of things: turnaround, precision and accuracy, and cost-per-test, and I don’t see the technology there yet for point of care to take over as much as people are predicting,” said Beckman Coulter’s Zakowski. “The increased cost of POCT has to be trumped by some workflow advantage within the site of care, or it can’t be successful.” Essentially, the test must help the hospital move the patient forward in a meaningful way, such as blood gas in intensive care units or coagulation tests in emergency departments and operating rooms. These kinds of tests allow clinicians to test and treat more efficiently, and have moved forward at an ambitious rate, Zakowski said.
However, a manufacturer must study the cycle of care attentively if it wants to make the extra dollar or so for a POC test to be worth it. For instance, with blood gas testing, clinicians might actually need blood gas, basic metabolic panel and lactate results before they’re comfortable moving the patient forward, explained Zakowski. So just offering the quick blood gas will, in some situations, do nothing for clinicians because they still have to wait for the other tests from the main lab. It can actually make the workflow more complicated because clinicians have to look for answers from two separate places. “I think POCT is a promising piece of the market, but it has some very particular demands,” he said. “And it’s not really taking from main lab volumes, but mostly complementary, in fact. So it’s an opportunity more than a threat for the main lab.”
POCT is also a hot area for startup companies with many of them developing POCT multiplexing platforms that use disposable cartridges—some in hematology, and even in the molecular area, noted the consultants from EAC. Hughes and Farber indicated that technology has by no means peaked for POCT, considering all the promising innovations at these new companies.
According to Abbott’s Chaitoff, the ability of manufacturers to pull out all the stops in POCT technology is what will make the difference in the marketplace of the future. “Whether we are talking about POCT, molecular, or traditional core lab diagnostics, the key is that advanced technology—microfluidics, nanotechnology, advanced chemistries, biologic breakthroughs, and information sciences—all are going to have to converge more and more to achieve goals around productivity, outcomes, and physician and patient satisfaction,” he said. “And yes, reduced overall healthcare costs.”
Still Betting on Pharmacogenomics
Part of the surprisingly positive outlook for the overall IVD market draws from the consensus among laboratorians and IVD companies that in the final analysis, diagnostics can improve both healthcare quality and cost-effectiveness. Of course, this is in spite of the way payment policy handed down from Congress and the Center for Medicare and Medicaid Services (CMS) rarely seems to recognize this fact. For many, pharmacogenomics symbolizes the way in which advances in diagnostics can have a big impact on the future of medicine. And manufacturers want to be sure they get a piece of the action when the field matures.
“While the 20th Century witnessed an unprecedented growth in the development of medications and therapies, this century will witness a similar explosion in the development of diagnostic tests,” said Abbott’s Chaitoff. “Human blood is overflowing with molecules and proteins that each have a story to tell. Until recently, we had very limited knowledge of what these molecules and proteins did. Advanced diagnostics will lead to a wider recognition of the value of the lab and diagnostics to solve many of our pressing healthcare needs from optimizing patient care to reduce the financial burden on the healthcare system.”
Ironically, the federal government’s drive to eliminate waste and reduce the amount of reimbursement will turn into an advantage for pharmacogenomic tests if manufacturers play their cards right, said Ernst & Young’s Ramko. The challenge will be to prove to payers that advanced tests really do make a difference in care, reduce costs, and therefore deserve reimbursement themselves. “With big pharma developing fewer small-molecule type drugs and moving to more expensive biologics, there will be an emphasis on making sure that a treatment will really work,” he said. “Clearly the push is going to be to reduce costs, to not pay for things that are unnecessary. As the move to reduce cost is more and more acute, suppliers of treatments are going to need pharmacogenomics to prove how a therapy can work for certain targeted individuals instead of offering it to everybody to see what works.”
Pharmaceutical companies will be using pharmacogenomics in the research and development phase of drugs and as a tool to show the government and other payers why they should get reimbursement, Ramko emphasized. And just like more mature sectors of the IVD market, manufacturers will have to put a focused effort into proving the value of a new test for this purpose.
Although widespread use of pharmacogenomic tests has not yet arrived, manufacturers want to make sure that they’re not left out when the time comes, said EAC’s Farber. “People are really starting to come to grips with the reality of companion diagnostics, and we’re now getting very serious inquiries about where the market is going and how a company can position itself to do something about it.”