DIAGNOSIS: PROFIT

The concept of personalized medicine has been viewed by some as a threat to pharmaceutical firms. After all, its promise is to use genetic information to find patients that are pre-disposed to respond well to a drug. This smaller group threatens the “blockbuster” model and will force drug companies to be more precise in their drug development and distribution. It IS progress, but firms will go through some growing pains as they adapt to wring out profits on a smaller scale.

But what if use of diagnostics could actually improve sales?

It is not hard to imagine such a scenario when reading Andy Pollack’s article about recent forays to introduce a pay-for-performance drug model. http://www.nytimes.com/2009/04/23/business/23cigna.html?_r=1&scp=1&sq=%22pay%20for%20performance%22%20drugs&st=cse  Here is the hopeful scenario. Merck will provide Cigna a discount based on positive outcomes for two of its diabetes drugs. Incentivized by discounts, insurers enact patient compliance programs, which leads to higher volume sales as patients adhere to the regimen. The drug stays as part of Cigna’s preferred drug roster.

If Merck finds a diagnostic tool to better stratify patients by likely outcome, it can price drugs with the precision of an actuary to maximize profits and spread risks. It can price its product to insurers the way insurers price insurance. Consider what would would happen if a Merck competitor can provide Cigna a diagnostic test to better predict outcomes and they can not.  How long before they would bump Merck off Cigna’s  list of preferred providers?

In the post- blockbuster era of pharmaceuticals, quality will have to replace quantity. Diagnostic tests will help. Sanofi-Aventis and Proctor & Gamble earlier this month agreed to reimburse insurers for the costs of fractures suffered by patients taking Actonel, an osteoporosis drug. Typical costs run $30,000 for a hip fracture and $6,000 for a wrist fracture. This is the costs of keeping Actonel in the insurer’s lineup, but it is one that that can be reduced or eliminated with use of a diagnostic that could weed out patients whose condition was unlikely to improve.

Pay-for-performance reimbursement drug pricing will become more prevalent the closer the shift to universal health coverage, according to Ernst & Young’s annual report on the biotech industry. Cardiovascular disease is the leading killer in America and thus, a huge opportunity exists for diagnostic tests in this area. In 2007, the cardiovascular biomarker market was over $1.3 billion and accounted for an estimated 23% of all biomarker revenues. Less mature than the oncology biomarker market, it is estimated to grow to $6.6 billion by 2015, with biomarker discovery being the largest component. https://www.espicom.com/prodcat.nsf/Product_ID_Lookup/00002226?OpenDocument

Celera Corp. (Nasdaq:CRA), www.celera.com,  of Alameda, CA offers clinical laboratory testing services that characterize and monitor cardiovascular disease risk as well as personalized treatment and ongoing therapeutic compliance education services. 1Q results yesterday showed net revenues increased to $45.7 million compared to $39.5 million prior year quarter Q1. There was a $0.02 per share, compared to a net loss of $7.4 million, or $0.09 per share, for the prior year quarter. It trades at $7.71. Cambridge Heart, www.cambridgeheart.com, fittingly from Cambridge, MA (CAMH.OB) develops a test that can help determine a patient’s risk of sudden cardiac arrest, a killer of 400,000 Americans annually. The stock was a diagnostic darling not so long ago when it traded as high as $3.90, but largely due to issues involved in the endpoints of its clinical trial, it has sunk and trades at .13. The Company has been busy on the publishing front and hopes to produce clinical data that replicates the promise of the tests profiled in several scientific papers. Those who live by the clinical data die by the clinical data. Cambridge is hanging on for a better day.

Clinical Data, of Newton, MA (Nasdaq:CLDA), www.clda.com,  utilizes its biomarker expertise and intellectual property to develop targeted therapeutics and pharmacogenetic tests that help predict drug safety and efficacy, thereby reducing health care costs. In the area of cardiovascular health, the Company has developed a Therapeutic Diagnostic to help guide physicians in the initial and ongoing dosing of Warfarin, a drug used by over two million Americans to prevent blood clotting after cardiovascular events such as heart attack and stroke, and for prophylaxis of clot formation in the setting of major surgery.

The diagnostics space also has its proverbial “picks and shovels” players – those that supply technologies to improve the basic research process. LA-based Response Genetics (Nasdaq:RGDX) www.responsegenetics.com, has developed a process to lower the price associated with the extraction of genetic information from stored tumor specimens.  The Company generates clinically relevant information regarding the risks of cancer recurrence or chemotherapy response using approximately 30,000 genes available from microarray profiling of stored specimens.  Another platform play is Northbrook, IL-based Nanosphere (Nasdaq:NSPH), www.nanosphere.us. Its technology enables the development of test assays to be performed on a single platform.  Its Verigene® system can enable  localized molecular diagnostic testing and decision-making at the 4,000+ hospital-based laboratories in the United States.

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