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Navigating the Diagnostics Market

An introduction to a growing sector

Each facet of our everyday lives is influenced by the growing presence of technology. From predicting your next song to advertising certain products based on your consumption behavior, technology’s unique ability to identify patterns has become ubiquitous. In the past, the health space has been slow to adopt such levels of customization and efficiency; however, the transition towards personalized medicine has begun, ushering in a new era of diagnostics and therapeutics.

This sort of disruption is already causing established players in the diagnostics sector to rethink their strategies. As technology giants look to utilize their existing capabilities to expand their spheres of influence, diagnostics is becoming an increasingly dynamic environment. No longer is it enough to simply market a single asset or product line. While pharmaceutical companies are consolidating and specializing, diagnostic companies don’t have the luxury of $1B+ potential annual sales from “blockbuster” drugs. In order for such diagnostic manufacturers to achieve scale, there is an increasing need to broaden their portfolios [5].

Diagnostics are composed of a broad array of medical devices and biologics that are treated quite differently by industry. This can often lead to confusion as to what is considered a diagnostic test. The FDA defines in vitro diagnostics (IVDs) as “those reagents, instruments, and systems intended for use in the diagnosis of disease or other conditions, including a determination of the state of health, in order to cure, mitigate, treat, or prevent disease. Such products are intended for use in the collection, preparation, and examination of specimens taken from the human body” [6].

This effectively translates to anything that assesses one’s current health conditions. An important differentiation between IVDs and other medical devices is that the term “in vitro” specifies that the collected biological samples be analyzed outside of the body. Additionally, some IVDs, such as HIV testing or diagnostic allergenic extracts, can be considered biological products and are treated differently than traditional medical device classifications.

To help provide some clarity on the different classifications of IVDs, I’ve divided them into four main categories: Pre-commercial, Lab Developed Tests (LDTs), Companion Diagnostics (CDx), and Patient-facing. I’ve provided a brief discussion on each of these below.

Pre-commercial

Pre-commercial devices include Research Use Only (RUOs) and Investigational Use Only (IUOs) devices. These devices are exempt from much of the traditional regulatory requirements (to be discussed in further detail) because they are restricted from patient care. You can think of these as precursors to definitive diagnostic tests on the market. These devices have limited patient access because they have not yet been approved for clinical diagnostics.

Lab Developed Tests

LDTs are defined as tests developed and conducted by laboratories in-house. LDTs are utilized to detect a broad range of analytes, including proteins, sugars, and DNA. These tests can determine variations in samples to diagnose state of health. Traditionally, LDTs were regulated differently than other types of IVDs because the FDA considered them to be relatively low risk. However, as technologies advanced, the FDA recently decided to standardize regulation of all IVDs [7]. While this potential loophole has been closed, the clement regulatory climate has enabled other IVDs to reach faster approval decisions instead of LDTs simply being slowed down.

Companion Diagnostics

This type of IVD is utilized to provide information regarding safe and efficacious use of a particular therapeutic. Designed to be used in conjunction with treatment, CDx is capable of providing useful information to physicians [8]. Next-generation sequencing (NGS) technology is significantly disrupting this space by providing extensive genomic data about a patient. In April 2018, Illumina announced a partnership with pharmaceuticals conglomerate, Bristol-Myers Squibb, which would commercialize their IVD assay in support of Bristol-Myers Squibb’s oncology portfolio [9]. Cancer research is simply one booming area for CDx applications.

Patient-facing

This is my catchall category for the rest of IVDs that do not fall into the specific subcategories outlined above. These IVDs are treated as medical devices according to their corresponding risk to patients. Subject to pre-market approvals (see Regulatory Environment), patient-facing IVDs include any combination of reagents, techniques, and instruments that provide a diagnosis in a controlled external environment. HIV test kits or glucose monitors are just two examples that would be considered patient-facing because they are being employed directly for diagnosis purposes. We will dive further into the different technologies when analyzing the IVD market by segment, since patient-facing IVDs include most point-of-care tests as well as approved tests in third party laboratory settings.

These four types of diagnostic products contribute to separate IVD market segments that are evolving in unique ways. We must differentiate between these end-applications to understand more specific drivers affecting each one. While one can divide the market in a number of ways, analyzing by technique allows us to draw insights regarding use cases. Through this framework, three of the most important segments include point of care (POC), immunoassays, and molecular diagnostics. While immunoassays and molecular diagnostics are technologies that can apply towards POC testing, here we will address them within the conventional lab-testing context.

As a whole, the IVD market was valued at roughly USD $59.4 billion with a CAGR of 6.6% by a study conducted by Grand View Research [10]. A growing geriatric population is a major demand driver for IVDs and medical devices in general. As the elderly demographic grows beyond 15% of the US population, pricing for diagnostic devices will be increasingly affected by aggregated healthcare consumption through Medicare [11]. The legislative landscape in the US also bodes well for IVDs in 2019 with an excise tax on medical devices being suspended through the end of the year [11]. Additionally, regulations have been significantly favorable for device manufacturers as the FDA continues to make its approval processes more efficient.

On a global scale, we see North America and Europe capturing about 70% market share for IVD markets with high growth areas in Asia, as China and India continue industrializing [10]. Spanning these international markets, global corporations are continuing to partner and merge to maximize their product portfolio performance.

The following outlines specific market factors affecting each of the high-impact segments of the IVD marketplace. To qualify, these three areas are not mutually exclusive, but rather each provides a lens through which we can better understand the IVD market.

Point of Care: Bringing Personalization to Healthcare

For most medical device companies, the primary customers are physicians and the corresponding hospital product approval boards. Because device manufacturers are ultimately paid by insurance companies through procedure reimbursement to healthcare providers, purchasing decisions are frequently separated from medical device pricing [11]. However, point of care (POC) somewhat challenges this orthodox third-party payment scheme as direct-to-consumer (DTC) products become more prevalent. Advances in portability and scaling down of technology have enabled handheld at-home devices and test kits to permeate through the IVD market. POC has enabled quicker turnaround times for care providers to take action on patient test results. While POC is driving much of the IVD growth in recent years, DTC still faces challenges overcoming limitations of the conventional care system. While glucose monitoring and infectious disease detection lead the sector, telemedicine advancement is essential to unlock further growth in the DTC sector [12]. Companies, which can identify ways to interface at-home tests with professionally certified prescriptions, will be poised to thrive in coming years.

Two of our portfolio companies, Delve Labs and Lambert (previously BeerLambert), are looking to take advantage of these high growth areas in DTC. Delve Labs is developing a digital, at-home strep test that automatically mixes reagents and reads test results, effectively eliminating human error in a delicate process. One of the largest challenges for Delve Labs was developing partnerships with telemedicine companies so that their diagnosis can effectively interact with existing patient infrastructure. However, the team’s early partnerships and R&D traction made Delve Labs an attractive investment for the Genesis biotech portfolio. Additionally, Lambert is creating glucose-monitoring software that employs a pre-trained AI algorithm to convert smartphones into a glucose-monitoring device. The ubiquity of smart phone technology eliminates the need to purchase a separate device and reduces the costs to that of the test strips alone. Both companies are employing innovative solutions to disrupt prominent areas of this segment.

Although growth in POC testing remains promising, there are several obstacles that ventures operating in the space will need to overcome. All diagnostics are assessed on the basis of specificity, sensitivity, simplicity, and cost. Due to comparisons made to established diagnostic methods in the developed world, concerns regarding specificity and sensitivity have pushed many to consider molecular assays [5] . While these tests are significantly more costly, they will likely limit volume growth in the segment as a whole. Emerging markets in the developing world could potentially buttress expansion, but the lack of purchasing power and reimbursement platforms offer confounding issues [5].

Immunoassays: Enabling Sensitivity

Immunoassays are diagnostics that take advantage of the specific binding of antibodies to various types of macromolecules in solution. Because antibodies interact with only a single type of antigen, assays can be designed that require minimal amounts of reagent and small concentrations of analyte (in some cases, on the order of picomoles) to produce meaningful results. Because of their amenability to automation, clinical immunoassays have been applied to measure multiple cell types and soluble proteins simultaneously.

Enzyme Linked Immunosorbent Assay (ELISA) is perhaps the most ubiquitous technology within this segment. ELISA is often combined with other techniques, such as in Immuno-PCR, to detect small amounts of target biomarkers. Since the underlying technology has been well-researched (ELISA itself was invented nearly half a century ago), the immunoassay segment has many mature sectors. However, companies continue to innovate on these platforms. Multiplexing, a nascent type of immunoassay that measures multiple analytes, is becoming increasingly prevalent in this field. Additionally, miniaturizing platforms will continue to drive the market further toward POC applications and away from central lab-based applications, which currently make up over 70% of the immunoassay market [14].

Molecular Diagnostics: Streamlined Testing

Similar to immunoassays, molecular diagnostics represent an IVD technology that is increasingly applied to POC testing. Companies are beginning to realize the power of merging platforms and taking advantage of immunoassays in conjunction with molecular diagnostics to generate more powerful insights [15]. In fact, many techniques, such as PCR-ELISA, use antibodies in the detection of biomarkers.

Consolidation is also occurring frequently in this segment as companies seek partners in developing joint technologies. Qiagen’s acquisition of STAT-Dx early last year exemplifies the trend towards integrated platforms. Building out its real-time PCR technologies, the joint R&D teams developed a molecular assay with up to 48 different targets to diagnose various infectious diseases and cancer [18]. Such molecular diagnostic platforms continue to be high-value products in IVD portfolios.

As groundbreaking innovations in sequencing and microbiome research continue to impact the industry across segments, IVD companies look to bolster their product development to stay competitive. While newcomers are likely to make a splash with novel technologies in a specific area, gaining significant market share is often limited to those who can diversify their portfolios [19] . With large R&D budgets and diverse capabilities, holding companies such as Roche and Danaher have an advantage when developing a variety of products. The synergies and available channels of large conglomerates can be hard to overcome for a rising startup. However, the space is largely driven by consolidation, with companies consistently forging collaborative R&D partnerships, making licensing deals, and acquiring promising ventures [11]. In August 2018, Sysmex exemplified this trend by joining forces with JVCKENWOOD Corporation to manufacture biodevices outside of their traditional realm [10]. Another example is Illumina, an industry leader in next generation sequencing, partnering with Siemens, Quest Diagnostics, and others to bolster these companies’ genomics products.

Utilizing annual investor reports, I summarized the high growth geographies for each of the major IVD players and their special expertise areas in Table 1. Although each of these companies has a wide array of offerings, these are areas in which each company particularly excels. Ordering a selected 14 top IVD companies by market capitalization, we see a steep drop-off in valuation. This is due to a mix of holding companies, with businesses outside of purely the diagnostics sector, and ventures with more targeted expertise areas. Many corporations continue to target seven major emerging markets, including China, which has seen rapid growth on the international stage.

In order to get a better idea of how the competitive landscape mapped to each of the segments previously discussed, I also decided to perform a high-level qualitative analysis of product offerings for each of these companies to compare portfolio performance. While some of these offerings, such as glucose DTC tests and urinalysis tests, appear to be rather specific, they are representative of the broader sector. One 2018 study attributed 80% of revenue from the home diagnostics market to glucose monitoring, illustrating that this is a niche, yet integral, technology for DTC [20].

Table 2 compiles data on available product offerings from each of the companies’ public records. Rank 5 represents companies that have demonstrated significant share in a given area through a wide array of solutions. Roche, which by some reports has captured close to 30% of the overall IVD market, came out on top for five of these product categories [5]. Rank 4 represents an extensive product portfolio in the category, while rank 3 shows the company has the technology but is limited in some way. Often this translated to recent acquisitions or partnerships in this functional area, but also depended on relevant financial data. Lastly, Rank 2 and 1 represented early stage and an absence of the pertinent technology development, respectively. From this chart, we can tell that many successful players are well versed across the board in their product portfolios.

Although the Genesis competitive landscape analysis was more targeted to infectious disease at-home kits and glucose monitors when conducting due diligence on Delve Labs and Lambert, respectively, a similar question arose. In a market dominated by large medical device manufacturers and diagnostic companies, is there room for the little guy? Perhaps surprisingly, we determined the answer to be a resounding yes. As one can glean from Table 2, DTC is an area into which orthodox diagnostic companies are just beginning to explore and grow. As these companies look to build out their capabilities through acquisitions, early ventures that can deliver superior product, tailored to a particular customer need, won’t go unnoticed. Through extensive customer needs analysis of over 100 parents, Delve Labs determined that 97% of parents would conduct at-home strep tests for $20–35 instead of visiting the doctor and paying the copay. By offering an automated solution to consumers, Delve is mitigating the confounding human error during test administration. By identifying their particular differentiators, startups and even larger corporations can effectively carve out a niche in this marketplace.

Luckily for IVD companies, the domestic regulatory environment continues to be favorable towards diagnostic and medical device manufacturers. Recognizing that the diagnostics sector is rapidly changing with technology developments, the FDA has proposed amendments to existing processes that may facilitate lower risk diagnostic devices to get to market faster. Through the recent Diagnostic Accuracy and Innovation Act, the FDA will begin regulating all in vitro devices under a single category, in vitro clinical tests (IVCTs) [21]. While this effectively closes a previous loophole that allowed companies to circumvent the need for clinical data by classifying their devices as laboratory-developed tests, FDA Commissioner Gottlieb predicted that the shift to IVCTs will allow for more than 50% of tests to be exempt from premarket review [7].

However, filing a 510(k) FDA clearance is far from a free pass to commercializing IVDs. This process has been increasingly scrutinized as safety standards and device capabilities continue to progress. In a recent press release, the FDA announced that it would be revising the predicate standards in an attempt to modernize the process [22]. By encouraging manufacturers to not use predicate devices older than 10 years, the FDA hopes to promote higher safety standards and a healthier product environment. While this could potentially pose risks for certain products, this will likely not impact developers too much. DTC will be particularly less affected since these devices tend to be lower risk (Class 1 and 2) and reflect technology that has only been significantly advanced in recent years.

[2] Berger, D. 2017. A Path to Personalized Oncology. Genentech.

[3] Das, R. 2018. Top 8 Healthcare Predictions for 2019. Forbes.

[4] Zweig, M and Tran, D. 2019. The AI/ML use cases investors are betting on in healthcare. Rock Health.

[5] Morel C, McClure L, Edwards S, et al., editors. Ensuring innovation in diagnostics for bacterial infection: Implications for policy [Internet]. Copenhagen (Denmark): European Observatory on Health Systems and Policies; 2016. (Observatory Studies Series, No 44.) 3, Overview of the diagnostics market.

[7] US Food and Drug Administration. 2018. Blueprint for Breakthroughs — Charting the Course for Precision Medicine.

[8] Pearl Pathways. 2014. Types of In Vitro Diagnostics: Clearing up the Confusion.

[9] Bristol-Myers Squibb. 2018. Press Release. Bristol-Myers Squibb and Illumina Announce Strategic Collaboration to Develop and Commercialize Companion Diagnostics for Bristol-Myers Squibb’s Oncology Immunotherapies.

[10] Grand View Research. 2018. In Vitro Diagnostics (IVD) Market Size, Share & Trends Analysis Report By Product (Instrument, Reagent, Service), By Technology (Clinical Chemistry, Molecular Diagnostics, Microbiology), And Segment Forecasts, 2018–2025.

[11] Rajbhandary, S. 2018. 5 Trends to Watch in the Medical Device Industry in 2018. Mercer Capital.

[12] Statista. 2018. Size of the U.S. point of care diagnostics and testing market from 2015 to 2022, by product (in billion U.S. dollars).

[13] Thermo Fisher. 2018. Overview of ELISA.

[14] Kalorama Information. 2019. The Immunoassays Market.

[15] Ling, M. et. al. 2007. Multiplexing molecular diagnostics and immunoassays using emerging microarray technologies. Expert Rev Molecular Diagnostics.

[16] Khan R. and Mittelman, D. 2018. Consumer genomics will change your life, whether you get tested or not. Genome Biology.

[18] QIAGEN. 2018. Press Release. QIAGEN enters into agreement to acquire STAT-Dx, plans to launch a next-generation, fully integrated multiplex platform for syndromic disease testing.

[19] Kalorama Information. 2018. The Worldwide Market for In Vitro Diagnostic (IVD) Tests, 11th Edition.

[20] Globe News Wire. 2018. Home Diagnostics Market Triggered by Growing Preference for Self Diagnosis.

[22] US Food and Drug Administration. 2018. Statement from FDA Commissioner Scott Gottlieb, M.D. and Jeff Shuren, M.D., Director of the Center for Devices and Radiological Health, on transformative new steps to modernize FDA’s 510(k) program to advance the review of the safety and effectiveness of medical devices.

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