Biopharm America, Day 2: Debating the business model for diagnostics

Biomarker ImageThis afternoon, I sat in on a juicy session at the Biopharm America conference titled, “Will the Commercial Opportunity Live Up to the Hype?” Panelists and audience members talked about the difficulty in finding a value proposition for diagnostic technologies that would convince an investor to commit. The main question they were trying to answer was how do you monetize a diagnostic asset?

The business model for diagnostics is rapidly changing, making revenue streams difficult to predict. Also, the price ceiling for a diagnostic test is not as high as it is for a therapeutic. As one investor said, the money required to build the infrastructure of a diagnostic company is equivalent to a therapeutic company, but without the same promise for return.

There was general agreement in the audience that models like Myriad Genetics, where the cost per test is on the order of several thousand dollars, were not likely to apply to future companies given the pressure in the healthcare industry to cut costs.

Surprisingly, a few of the voices in the room, most notably Bryan Dechario, development head of personalized medicine R&D at Medco, suggested the possibility of a radically new model: payors may be the ones providing development capital and possibly even exit strategies for small diagnostic companies with promising technologies.

The thinking is this: with pharma pipelines drying up and blockbuster drugs going off patent, generics will become increasingly the ‘go to’ solution for improving patient outcomes for disease. There are multiple classes of drugs available for many of the chronic conditions that are currently responsible for the majority of healthcare spending. These drugs tend to vary in efficacy depending on the genetic background or pathology of individual patients.

If a diagnostic company can somehow select out subpopulations of patients that will respond better to a particular generic over another, this test could save the healthcare industry considerable sums. Stakeholders such as payors, would likely be willing to invest several million dollars upfront if they can generate long term cost savings in treating patients with chronic diseases. For example, there is a large market opportunity for biomarkers that can indicate which depression medications are the most efficacious in certain patient subtypes.

Medco is currently interested in making these types of investments based on their success with a genetic test that predicts responsiveness to Warfarin. Players like Medco have the ability to negotiate sponsorship of the test with individual payors, which is a way to get reimbursement without having to appeal to CPT code structure.  The rapid to market plan offered by partners like Medco might intrigue investors who were otherwise discouraged by the cumbersome, risk laden path of diagnostic development.

Although there was general agreement in the room that payors may be the new target audience for some diagnostic companies, there is still the problem of lack of precedent. Ed Torres, managing director of Lilly Ventures, mentioned that investors may not be convinced without any example of previous success using this model.

The waters of business models for diagnostics are treacherous. But this is the environment where creative entrepreneurs and investors thrive! Payors as partners was one of several business models brought up during the discussion. It became clear that business models could vary widely depending on the platform used for testing and the clinical utility provided by the test.

I left the session concluding that the best way to determine a market entry strategy is to be wary of the wide range of market barriers that could threaten market entry of any given diagnostic test. Talking to venture capital, regulatory, diagnostic platform companies, pharma, payors, and clinical thought leaders early and often seems to be the only chance of success.