The Economic Challenge of Prescription–Diagnostic Combinations

In-vitro diagnostic (IVD) tests are complementing targeted therapeutics to reduce side effects, improve efficacy, and help control healthcare costs. Analysts are projecting billion-dollar revenues for some new drugs linked to companion diagnostics.

As the pharmaceutical industry develops more targeted therapeutics, and their interdependence with companion diagnostics grows, companies are considering ways to access diagnostics technology to complement their evolving product portfolios. The main strategy has been to seek companion diagnostic solutions by forming partnerships with diagnostic companies. Yet, the allocation of the overall financial value of the drug-diagnostic combination has made deal-making a challenge.

SURGE IN DRUG-DIAGNOSTIC PARTNERSHIPS

Companion diagnostics partnerships in the industry more than tripled in 2010 compared with 2008, and the pace of deal activity has continued during the first half of 2011. The rising number of partnerships reflects the increasing seriousness with which bio/pharmaceutical companies view biomarker and diagnostic programs designed to accompany their drug-development efforts. They are making more systematic use of companion diagnostic programs to increase drug response rates and reduce side effects. Diagnostic companies, particularly those with strong molecular and tissue diagnostic capabilities, have been active in developing tools to respond to industry's specific needs.

Driving the momentum in companion diagnostics partnership activity is the increasing role of diagnostics in the regulatory approval, reimbursement, and performance optimization of new drugs. Increasingly, regulatory agencies insist on validated diagnostics prior to considering marketing clearance. In addition, the growing use of tests that identify patients who would not benefit from certain therapies has raised the bar for obtaining reimbursement for new drugs. Increasingly, payers see companion diagnostics as useful tools to allocate healthcare funds more effectively and to control costs. Many healthcare professionals insist on specialist testing before prescribing and reimbursing treatment regimens that are expensive and not efficacious in certain patient subpopulations.

In the US, some pharmacy benefit managers are adapting their business models by forming partnerships with, or acquiring, specialist clinical laboratories. Payers' preference for drugs that come with a companion test, particularly when these drugs are expensive and may lead to severe side effects, will likely increase over time with the rising pressure on healthcare budgets and greater availability of appropriate diagnostic tools.

THE PARTNERS: THE RX-DX COMBINATION

Bio/pharmaceutical companies have achieved some success in seeking improvements in drug-response profiles through better patient targeting. For example, drug-response rates of up to 80% have been reported for targeted subpopulations for cancers that generally have a 20% response rate.

The prospect of repeating such technological wins is encouraging industry to accept changes that appear increasingly inevitable, including the decline of the mass-market blockbuster drug model, the emergence of smaller targeted markets, and the need for high-performance diagnostic tools to dominate well-defined smaller market segments.

On the supply side, the technological feasibility of companion diagnostic programs is increasing. Companies continue to develop relevant expertise in molecular and tissue diagnostics, which will enable the development of better tools to guide treatment decisions.

ECONOMIC CHALLENGES

The diagnostics industry is providing new tools that could improve product offerings to physicians and patients and create value for shareholders. Unfortunately, many diagnostics industry players believe the economics of innovation are undermined by low pricing and reimbursement of tests, and the diagnostics partner's low share of prescription–diagnostic (Rx–Dx) partnership values. In this context, it is important that the government and its agencies support required changes. According to research by PwC, diagnostics companies are seeking action in three main areas, as outlined below.

Pricing

Pricing should reflect the value of the test rather than its cost. The price should reflect a reasonable proportion of the test benefits or the cost savings. In the US, the concept of value-based pricing is making gradual progress. Europe, however, has yet to see value-based pricing applied to a personalized medicine test. The diagnostics industry fears, according to PwC research, that unless pricing is adapted to value creation, it will fail to achieve sufficient economic return to stimulate continued investment and innovation.

Reimbursement

The process to gain reimbursement for diagnostics should be accelerated and harmonized across countries. In many countries, reimbursement for a new test can take four to seven years following marketing clearance. Industry participants believe that health technology assessment (HTA) models need to be adapted to allow for faster reimbursement decisions. One practical solution to address reimbursement delays has been companion test subsidies from the bio/pharmaceutical partner. This is not ideal; but in cases where the test determines drug eligibility; the alternative would be that severe limitations would be placed on drug availability. This arrangement may not be acceptable to industry.

Diversity of health technology assessment procedures across countries is another issue in multi-country product launches. This problem has been recognized by the European Commission, which has sponsored the European network for Health Technology Assessment to work on greater cooperation. The US is also represented in this initiative through the Center for Medical Technology Policy.

Value

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 bio/pharmaceutical partners, and that they suffer from historically low recognition of the value of diagnostics. Traditionally, diagnostics represent less than 2% of healthcare spend despite influencing more than 60% of crucial healthcare decisions. Diagnostics partners are focused on trying to rebalance their share of the financial value in Rx–Dx combinations.

One avenue that diagnostics companies are pursuing is to obtain a royalty on sales of the companion product. Companies have resisted such a move because they believe the Dx partner has not shared the risk or investment associated with drug development. Diagnostics players insist that this move should happen, arguing that where Rx–Dx combinations are relevant, the companion drug would not be able to make it through clinical trials or be reimbursed and commercialized without the companion diagnostic. Thus, the value of the drug is critically dependent on the contribution of the companion diagnostic.

In the near-term, these challenges are not expected to undermine the pace of Rx–Dx deal activity. However, they may affect long-term diagnostics innovation if they are not addressed. At best, not addressing these economic issues could result in an undervaluing of diagnostic innovation by pharma. At worst, these issues could eventually discourage continued investment into diagnostics ventures and delay patient access to important new health technology.

By Gerry McDougall, a principal at Pricewaterhouse Coopers (PwC), and Loïc Kubitza, a director in PwC's Pharmaceutical & Life Sciences Advisory Services group, gerald.j.mcdougall@us.pwc.com.loic.x.kubitza@lu.pwc.com.