Biologics is a growing market; in 2009-2010 alone it grew 7 percent. With the rise in biologics use and the absence of price pressure values, Congress passed the Patient Protection and Affordable Care Act with a biosimilar pathway, the Biologics Price Competition and Innovation Act (BPCI Act). The BPCI Act tasked the FDA with the job of developing this pathway which defines the key metrics to show biosimilarity; including structure, functional assays, animal data, PK/PD, clinical immunogenicity assessment and clinical trials for safety and efficacy. It also requires post-marketing surveillance of the biosimilar product to identify new adverse events that are not present in the innovator product, and ensure safety and efficacy are in line with the innovator product. Plus it provides label guidance so that a biosimilar may be approved biosimilar and/or interchangeable.

Interchangeability is a subtle, but important, aspect of the guidance which allows the biosimilar to be interchangeable with the innovator product. Products that are deemed to be biosimilar may or may not be interchangeable depending on a yet to-be-defined FDA parameter. This may intersect with various State Laws and various operational considerations at the pharmacy that are not seen with regular small-molecule generics..

After review of the draft guidance, the considerations found within the guidance provide a baseline to begin the necessary studies to adequately compare the biosimilar to the innovator product. These guidance documents are still being formulated and because of the complexity of these molecules, a case-by-case approach has been built in to accommodate this complexity.  The FDA requires a “totality of evidence” supporting the biosimilar during the approval process. This totality of evidence will judge the biosimilar on several different factors as it relates to the original innovator product, which will provide a better barometer to judge the product as an appropriate biosimilar to an innovator product.

Considering everything we know, the path set forth makes it a difficult task for biosimilar companies to enter the US market. The FDA guidance creates an interesting path for new biosimilars to come to market, but the devil will be in the details for follow-through by both the innovator biologic and biosimilar companies. Because of these dynamics and requirements, innovator pharmaceutical companies and the biosimilar companies will likely compete more directly than traditional small molecule generics.

It will be interesting to see the different dynamics, from a clinical, regulatory and commercial perspective.  We will continue to monitor the FDA Guidelines and share updates and insights in future blogs and webinars. If you have any questions, please contact Jonathan Pan.

“By taking their Blu-ray technology commonly associated with consumer electronics and extending it to the medical arena, Sony has created a platform technology for the development of microfluidics, lab-on-a-chip, and other exciting high-value components to life science and medical device companies around the world”, noted Glorikian.

“The evolution of healthcare depends upon novel technologies like Sony has developed to reach the next level in terms of cost, accessibility and discovery.  Healthcare spending is burdening the worldwide economy at an unsustainable rate.  While traditional medical innovations have focused on extending life-expectancy and improving quality of life, future innovations must consider the economic impact.  This focus on economics has the potential to threaten today’s market leaders.  In an environment in which miniaturization, microfluidics, low-cost optical sensors and portability is leading to low-cost Point of Care Testing (POC) and Remote Diagnostics, traditional players are going to have to re-think their strategy to prevent losing markets to new entrants.  Further, the current capital constraints on medical spending, revolution in data analytics and the development of low-cost, small footprint devices by the developing world is going to cause further disruption in the developing economies”, stated Glorikian.

“At Scientia Advisors, we see the first wave of technology (Optics and Labels) being replaced by a second wave of technology (Electronic Detection).  This is going to dramatically reduce the cost of life science products and provide for the decentralization of testing and decision making.  Instead of someone needing to go to a hospital to get tested, they will soon be able to get the same test at a rapid clinic or within their physician’s office.  This will go a long way towards reducing the cost of healthcare delivery and enable the right test, at the right time by the right healthcare participant.  No more waiting in the ER to get a flu test or going to a cardiologist to get an ECG.  Innovations like these are here today and Sony’s capabilities are one more enabler”, noted Glorikian.

If you would like more information on Scientia Advisors and the services we provide, please contact Harry Glorikian or Rick Lifsitz.

The Neuromarketing Opportunity

The neuromarketing industry first sprouted in 1991 when companies like Coca Cola hired academic labs in the US to study the effectiveness of advertisements with their sophisticated neuroscience equipment. Neuromarketers use technologies such as EEG (electroencephalography) and fMRI (functional magnetic resonance imaging), which have been traditionally used by doctors and researchers to study neuropsychological disorders. Other technologies like MEG (magnetoencephalography) and TMS (transcranial magnetic stimulation) may also enter the market in the near future. While EEG and fMRI devices differ greatly in cost, appearance, and mode of operation, they both read brain activity in near-real time. They are said to provide a deeper understanding of consumers’ emotions and preferences than traditional market research modalities—surveys and focus groups.

Over the past two decades the industry has grown to comprise eleven neuromarketing companies, which are competing for a portion of the $4 billion spent worldwide on qualitative market research each year.

The Implications for Device Manufacturers and Suppliers

Responding to the rowing demand of neuromarketing will allow manufacturers of these medical devices to increase the size of the markets for their existing products. The leading manufacturers of these devices are Natus Medical and Nohon Kohden in the EEG market and General Electric and Siemens in the MRI market. However, firms like these may need to adapt their business models to succeed as suppliers of the growing neuromarketing industry. The types of adaptations required depend on the kind of products a manufacturer sells. One can consider two broad groups of product types: 1) First Level products are lower-price, less technically complex, such as EEG, EMG, and eye tracking technologies. 2) Second Level products are more expensive and complex products, such as fMRI and MEG.

Manufacturers of First Level products may need to adapt their business models in two ways for different reasons: 1) Lower-price products are more likely to be purchased directly by neuromarketing companies for use in their studies, which represent a new class of customers. This will require manufacturers to establish new sales channels. 2) The relatively lower complexity of the technology means less capital investment is required to innovate and manufacture new technologies in this category. There also exists a contract manufacturing marketplace to allow new innovators to quickly manufacture new products. This may require manufacturers to innovate in order to raise intellectual property barriers and to produce hypercompetitive products, or to pursue other methods of defending their share of the market.

Manufacturers of Second Level products have the opposite forces at play. These technologies are less affordable for neuromarketers to purchase directly, so they will likely continue to rent this equipment from academic and medical researchers, diagnostic imaging service companies such as RADNET. Thus manufacturers will continue to sell to their existing channels. The higher technical and manufacturing complexity of these products results in higher innovation costs, making significant product changes unlikely with current levels of demand.

Customers Becoming Competitors

As demand increases, neuromarketing companies may increasingly bring the device development and retail in-house. NeuroFocus has already done this with its dry, wireless EEG device, the Mynd^®, which the company uses for its own market research services but is also marketing as a tool to control paralyzed patients’ wheelchairs. Thus a former customer of EEG technology has become a competitor of incumbent EEG manufacturers in the healthcare market.

Other Non-Healthcare Applications

As highlighted earlier, a variety of medical devices are used outside the healthcare industry. Their use is not limited to the market research or other business-to-business markets. A number of companies are selling EEG platforms directly to consumers for applications such as gaming and sleep aid. And consumer products companies are tagging along with complementary products, such as the new cell phone app from Nokia that displays a user’s brain activity. The list of applications of medical technologies outside of medical care continues to grow.

The case of neuromarketing is a good example of how medical device manufacturers can leverage emerging trends in non-healthcare markets. Manufacturers can react as little or as much as they wish to these market shifts. Those who take action by making some or all of the above adaptations will have an opportunity to capture a larger share of the growing non-healthcare market. Those that choose not to act will eventually be outcompeted by manufacturers that target new customers with products and promotion tailored to their needs. Manufacturers should assess their level of exposure to these competitive activities, as well as their abilities to capitalize on the growth of the non-traditional use of their products.

The main insight from the conference is that cells and scaffolds/biomaterials is a key combination, critical to clinical success. In fact, most researchers at TERMIS are finding that certain regenerative solutions require both cellular and environmental signals to develop properly. Heart cells don’t properly grow without the right mechanical forces, flow, and electrical environments, blood vessels don’t grow properly without simulated blood pressure and alignment of cells with the direction of blood flow. This is leading to investment in and investigation of scaffold technologies for use during implant as well as novel bioreactor technologies to generate regenerative materials ex vivo.

Scaffolds & Biomaterials:

Three main classifications of scaffolds and biomaterials are ‘biologic’, ‘synthetic’, and ‘hybrid’. Biologic scaffolds include materials normally found in and manufactured by the body, e.g. collagen. Synthetics are not naturally found in the body but have become accepted as resorbable biomaterials, e.g. PEG, PGLA, etc. Hybrids are found in nature and are biocompatible (like biologics), but are not found in the human body (like synthetics), e.g. alignates, chitosan. Researchers are looking to address medical needs using approaches and technology from all three categories. Below are examples of research coming from all three approaches, in trying to address a specific medical need: heart valve regeneration/restoration.

Biologic Scaffolds & Biomaterials:

One way researchers are trying to redress heart valves is with Extracellular Matrix (ECM). At TERMIS, Lucrezia Morticelli from the University of Leeds shared her work on xenogeneic ECM heart valves. Her early stage study evaluated the biological composition of porcine pericardial tissue after decellularization for suitability as a mitral valve implant. This would replace mechanical/gluteraldehyde fixed heart valves- particularly important for pediatric patients who need their hearts to grow as they do. ECM is an excellent scaffold, not just providing three-dimensional structure, but also actively inducing cellular ingrowth and stem cell recruitment to facilitate new native tissue to form.

Synthetic Scaffolds & Biomaterials:

Another talk in the cardiovascular sessions at TERMIS focused on work out of Rice University, using cell sheets to build mitral valves. The sheets were propagated and then held together with hydrogel—PCL or PEG-GA. The work focused on how to keep these layers of cells together, and the success the group has had so far. While they have made progress, during the Q&A it became clear this work is still in development as in vivo shear forces would likely pull the valve apart.

Hybrid Scaffolds & Biomaterials:

Each hybrid biomaterial is selected for its properties. For example, alginates resist resorption and make good biomaterials for delivering a package of cells that are meant to stay packaged (no disbursement), e.g. packets of islet cells (e.g. Dr. Martin Yarmush’s work). Returning to our theme of examining biomaterials in context of heart valves, Bin Duan’s work out of Cornell University is an example where hybrid materials have been leveraged. He is researching 3-D bioprinting, using an alginate/gelatin hydrogel seeded with aortic valve interstitial cells in an attempt to construct replacement valves. It should be acknowledged that this is very far from the clinic – the technology is not translatable to in vivo models at the moment. However, this represents another option for pediatric patients as this fully resorbable valve would induce native tissue remodeling and would grow with the patient. His work also represents the vast potential for bioprinting in clinical applications.

Production Systems/Vessels:

There are additional ways to achieve the structural benefits other than directly introducing biomaterials into a potential cellular/ regenerative therapy. The alternative is to control an environment ex vivo that will influence cells to generate the proper biologically-relevant therapy. This is illustrated with research being done to build blood vessels, such as work being done at the Worchester Polytechnic Institute by Marsha Rolle & Tracy Gwyther. Using ring shaped cell culture chambers they have seeded the two main types of cells that comprise blood vessels– smooth muscle cells and endothelial cells. The cells grew in the ring shape and demonstrated good strength in mechanical testing. A second study showed how the rings can be fused together to make tubes. This is a second or third generation approach to blood vessel production, and the mix of cells used is more similar to natural blood vessel physiology than early generation tissue engineered grafts. This approach also avoids biodegradable polymers which might not facilitate inter-cell reactions and mimic physiological conditions.

Thoughts and Summary:

Given what we saw at TERMIS this past year, we may be able to estimate where the cellular and regenerative medicine industries are today. Many current clinical trials are focused on delivering cells in an unorganized way, e.g. injecting cells into damaged tissue to provoke regeneration. While there is promise in this approach, it appears second generation solutions will mix in biomaterials, hopefully with greater/better effect. In addition, cell and biomaterial combinations being researched are potentially able to address additional medical indications beyond those of today’s pipeline products, implying an expanded scope of regenerative solutions going forward.

One could look at the cartilage repair market for an example of this progression. The very first therapy in the area Carticel, developed by Genzyme, simply reintroduces cartilage cells to a lesion, and holds them in place with a periosteal flap sewn in place over the injury. Second (and third) generation products, like Genzyme’s MACI (Matrix-Induced Autologous Chondrocyte Implantation), regularly incorporate scaffolds and cells. The additional benefits not only improve the quality of therapy but also the medical procedure itself, as adding matrixed cartilage cells to a lesion is less challenging than sewing a periosteal flap in place to secure the un-matrixed cells.

It is apparent, looking at the technologies in research today, that regenerative medical solutions will likely require new clinical competencies, moving forward. Preparation and delivery of these new regenerative therapies will be unique in some aspects from other medical devices and drugs; this will require uniquely capable clinicians. Lastly, there may be additional implications for medical infrastructure (hospital on-site culture labs for bioproduction), regulations, and reimbursement mechanisms.

If one looks at the cartilage example, and then looks at the research presented at TERMIS, it is clear there is a second & third generation set of regenerative products on the rise. Further, cell/biomaterial combination products appear to offer advanced levels of medical value. However, these products may well require entirely new ways of conducting medicine and doing business.

To prepare for commercial regenerative medicine, companies need to plan accordingly. There are several steps to planning. First, one must identify clear clinical needs, e.g. heart valve failure. Second, one must understand potential regenerative solutions, such as novel valve regeneration/replacement solutions, and how well their company fits with those solutions. Third, one should look at any gaps—technological, competencies, etc. For instance, does one have biomaterial competencies? And of course last, one will need to plan to fill those gaps as they are able (partnering, licensing, etc)

Contribution made by Lisa Carey

• Buyers
• Suppliers
• Substitutes
• Competitors and
• New Entrants

All 5 of these are important and Scientia Advisors can create response strategies to mitigate or leverage certain dynamics for each force imposed on the market. However, there are two major dynamics that I have found are top of mind for our clients: Competitor Activity and New Entrants in the healthcare industry

Competitor activity is defined as the set of strategic and tactical moves within the market, which help the competitor positively influence their position.  New entrants are those companies that do not directly compete with a market incumbent, but may potentially enter the market to capture value through synergies, new technology or other advantage. In the healthcare industry, reductions in monies allocated for healthcare and other capitation vehicles are forcing companies in the sector to become creative to fight for shrinking resources.  This creates a dynamic that forces fierce competition and new entrants to extract value from the market.

Often clients ask me what is happening competitively in the market, but the more important questions that need to be asked are why are these activities happening and what are the long-term strategic wins competitors are trying to create through their activities.  In order to answer these questions, we need to look at the various dynamics within the market and assess the fundamental drivers of competitors and new entrants.  Are they looking to gain initial market share?  Are they looking to serve a small, niche customer?  Are they looking to go beyond their core competencies into new white space?

Based on historical engagement experience, we understand how the dynamics of the market will likely behave based on the buyers, suppliers, and the substitutes within the market place.  The key differentiator is that we can assess the competitors view on the same market and their approach.  This informs us on how we should potentially develop a strategy that is one-step ahead of the competition.

For example, a client of ours was looking to acquire technology to gain entry into a new space.  The rationale was to couple this newly acquired technology with their existing technology to leapfrog the competition.  We found, based on extensive strategic market analysis, the product would be viable.  We then provided a long-range strategic valuation of their product, and we discovered that the competition 1) had products competitive to this in the pipeline and B) the business models the competitors had in place could have easily stifled adoption of our client’s potential concept.  We assisted them to strategize how to mitigate these issues before making the acquisition and integrating product lines.  This provided valuable insight and prepared our client to move forward fully aware of the path ahead, designing response strategies to anticipate likely changes in dynamics.

Based on our experience, the need for competitive strategies is moving from knowing what the external competitor will do to understanding how the internal organization should respond.   The market is becoming complex and the drivers, once easily understood, are now being obfuscated by new entrants and changing competitive dynamics.  Increasingly, companies need to prepare for the uncertainty that arises from the market and be smart about an implementation response plans –they need this not only win in this environment, but to survive.

Please feel free to send your comments or questions to Jonathan Pan at jpan@scientiaadv.com or Jeff Stoll at jstoll@scientiaadv.com.

1. Five of the ten leading drugs face generic entrees in 2012 (Lipitor, Plavix, Zyprexa, Seroquel and Lexapro), accounting for over $50 billion in revenue
2. The collateral impact these generics will have on current competitor block buster drugs (e.g., Crestor, Abilify)
3. After years of over spending on R&D budgets, major players are cutting budgets and looking to spend more effectively (the savvy investor will recognize that phrases like probability of success or PTRS has become an accepted nomenclature during investor presentations as justification for why some programs progress and others stall)
4. The uncertain impact of ACOs
5. The potential impact of healthcare reform and corporate tax reform

But despite this, it is not all doom and gloom in the industry. In fact, there are several strategic opportunities and business models that will enable some pharma players to weather the patent cliff and maintain their industry leadership status.

The Blockbuster: Back from the dead and looking good

Even though many in the industry have written the epitaph of the blockbuster drug, we maintain that the blockbuster era is alive and well. Those who have written the blockbuster model off are clearly not paying attention to several important events.

In oncology alone, there are over 280 small molecule targeted therapies. The successful development of any of these agents has an opportunity to become a blockbuster drug with tremendous margins. One specific example is the emergence of the JAK inhibitor class of drugs. The first JAK inhibitor, Jakafi (ruxolitinib) indicated for primary myelofibrosis, launched in November 2011, co-promoted by Novartis and Incyte (the originator), and most likely Pfizer’s tofacitinib will be initially approved in the third quarter of 2012 for rheumatoid arthritis. There are numerous other JAK inhibitors (each targeting different receptor subsets) targeting indications ranging from AML to psoriasis.

Big pharma will continue to find blockbuster agents, albeit often more specialized and targeted. In fact, there are some high-risk drug candidates, notably CTEP inhibitors, in Phase III that if successful will mark a return to statin-like profitability,

Small Molecule Drugs: What’s old is new again

It can be argued that the era of biologic agents may actually enable competing small molecules to capture exaggerated value-based pricing. One emerging example is tofacitinib, which will likely garner pricing similar to or just below the more expensively produced anti-TNF biologics. The trend will create an industry hungry to find those markets where biologics have led to breakthroughs in healthcare and brought with it high cost therapies. The value of cheaply produced small molecules competing in these markets may allow manufacturers to capture margins never seen before for small molecule therapies.

The threat of biosimilars on originator biologics and branded small molecules is a market specific issue, and it is possible the value of biosimilars in highly regulated markets may never be fully realized before new mechanism of action replace current top selling biologic therapies. The market opportunity today and continuing through2012 for biosimilars is largely in the ROW (or less in regulated markets). Assuming EU regulatory guidelines for biosimilars sustain the current rigid standards, the EU market for biosimilars will slowly evolve to compete with branded biologics with multi-disease indications (e.g., Remicade). The US market is even more restricted. The bottom-line for biosimilars and US regulatory environment is the more complex the biologic protein, the more difficult it will be for any biosimilars manufacture to enter the US.

The biosimilars pathway in 2012 has begun to be codified by the latest guidance from the US FDA stating several factors that will limit the likelihood that a biosimilars will come to market earlier or even at a lower price point that originator biologics. The key issues regarding clinical trial equivalence testing will have two major factors in the market place:

1. Decrease in clinical trial patient populations
2. Tight conformation on the use of these biosimilars products

As products search for clinical trial cohorts, patient populations will begin to dry-out and will slow the maturation cycle for some of these products. We will continue to see decreased clinical trial testing in the US and EU-5 as the standard care slowly increases. In addition to the dearth of clinical participants to take a biosimilars to market, the on- and off-label use will also be called into question. A key question this year will be, if biosimilars are found to be similar to an originator product, can the biosimilar also be used off-label like the originator?

While much of the buzz around the pharmaceutical industry focused on the patent cliff and the possibility of biosimilars, the slow re-emergence of potent small molecule therapies is on the horizon, and 2012 will mark the beginning of this dynamic. The industry may be in a contraction cycle, but 2013 and beyond will begin to see an industry rejuvenated by small molecules, biologics, and stratified medicine. Drug developers who have leveraged their pipeline to be in-line with all three opportunities will weather the patent cliff and industry contraction the best.

Through 2012, we will see some hallmark changes that will become pervasive in the pharmaceutical industry:

1. Resurgence of the biotech model
2. Increase in portfolio company investments beyond core R&D for big Pharma
3. Large capital investments from VCs into the biotech arena to sponsor further R&D in new technology platforms for new NME discovery

These changes will embolden the pharmaceutical industry going forward to survive these tough contractual times, and will re-invigorate the pipeline to reclaim mid-single digit growth by 2016.

But no longer. Consider just two items:

• PepsiCo has frequently asserted that they will grow the revenues of their Global Nutrition Group from $10 Billion (2010) to $30 Billion by 2020
• Nestle recently spent roughly $1 Billion to buy Prometheus Therapeutics and Diagnostics, a company that specializes in treatments and tests for Irritable Bowel Syndrome, Chron’s disease and cancer

What’s going on?
Think about what’s happening with older consumers. Most of us have long applauded the various measures that have lengthened our lives. But if we graph Quality of Life vs. Length of Life, we’re starting to worry that it will look like Figure 1:

Figure 1: A dreary old age – increasing life span but not health span

Most of us would rather enjoy our life in good health and then abruptly drop dead. (Figure 2)

Figure 2: Increasing health span to match life span

In coming to grips with that, many of us are realizing a simple but powerful fact:

What we eat affects our health

Although there is powerful research in nutrigenomics and nutrigenetics regarding how different diets affect the ways in which a given gene expresses, that research hasn’t affected the consumer marketplace yet.

What is hitting the marketplace is the realization that chronic disorders – conditions that once gotten, we will have forever (diabetes, arthritis, etc.) – REALLY interfere with our ability to function well and enjoy our life. And yes, they are very expensive to the health care system. And we are realizing that if we modulate our dietary habits, it can have an impact on our health.

These realizations are now manifesting themselves in the marketplace:

• Sales of Health & Wellness products are growing more than twice as fast as traditional food products: 7% per year vs. 3% per year (2008 – 2012)
• Many of the products in those “unappealing niche markets” are enjoying higher margins and higher purchase rates per customer than traditional foods

So those markets that were once viewed as “unappealing niches” are now looking increasingly attractive. There are 17 million people in the US alone that have been diagnosed with diabetes. There’s another 9 million people that have diabetes and don’t yet know it, and a staggering 79 million people in the US who have pre-diabetes. If diabetes is a niche market, I’ll take it.

What does “food as medicine” mean?
We used to use a lot of phrases to describe this movement: “functional foods,” “engineered foods,” “medical foods,” and the like. And while those phrases resonated with the scientists among us, they were bad news for the consumers. Consumers just don’t want to hear about technology in their foods.

So when I say “food as medicine,” I’m not suggesting that the growth will be in muffins that cure, treat or prevent diseases. I’m suggesting that the growth will be in those foods that encourage wellness and continued good health. This will be a combination of “Food Minus” (foods with less trans-fats, sugar, etc.) and “Food Plus” (foods augmented with nutrients that provide a benefit beyond basic nutrition).

It’s noteworthy that the American College of Sports Medicine is currently using the phrase, “Exercise is Medicine.” This is in the same spirit: extending our “health span” to match our “life span.”

Where is the innovation coming from?
Let’s face it: most large companies in every industry have selected away from the ability to do genuine innovation. (Many of my friends in R&D privately joke that what they actually do is D.) Consequently, many large food companies are investing capital in venture funds. Their primary motivation is to get a first-hand look at what innovators are working on, and be in the leadership position to bring that innovation in-house if it fits the company’s strategy.

One of the leading funds in the nutrition world is Nutrition Capital Network. The list of investors posted on their website reads like a Who’s Who of the food industry: Coca-Cola, PepsiCo, Danone, Unilever, Cargil, Corn Products, Nestle, and many more.

And my point?
The business of food as medicine is still a small part of the overall food industry, but it’s growing. In our view at Scientia Advisors, the growth in this sector will continue to outstrip that of the traditional food industry. Many big companies are already in the field, because it’s just good business to do so. And they are increasingly out-sourcing their innovation in order to build products that promote Nutrition and Wellness.

From an investor perspective, diagnostics is only just becoming exciting. Last year was notable in that there were several acquisitions of IVD companies by non-traditional companies, including Nestlé’s purchase of Prometheus and GE’s of Clarient (the latter completing at the end of 2010). That this pattern might continue in 2012 doesn’t seem too far-fetched. So what’s going on here? Let’s examine the logic of each of these acquisitions first.

Acquisitions in 2011
Nestlé’s ~$0.6 to $1.2 billion (est.) acquisition of Prometheus, a provider of proprietary diagnostic testing services for gastrointestinal disorders, appears to be the most surprising. Why would Nestlé, the largest food company in the world, get into medical diagnostics? Firstly, Nestlé leads the industry in R&D spending, and manufactures medical nutrition products (baby formula, nutrition supplements). The Prometheus acquisition, however, gets them into diagnostics, which seems unrelated to the business of selling food. Or is it? The use of genetic and biochemical information to inform individuals’ selection of medicines – Personalized Medicine – is catching on in Pharmaceutical companies, but its use in tailoring individual nutrition has been on the far horizon for years. This horizon appears now to have come much closer.

GE’s acquisition of Clarient, a provider of pathology laboratory services for community doctors and hospitals, was another big ($580 M) event in 2011. GE is already a healthcare company – GE Healthcare is a leading maker of medical imaging devices and pharmaceuticals – so this is not an entirely new industry for GE. One can also argue that pathology and radiology have common technologies, such as image digitization, storage and interpretation. GE’s Omnyx joint venture with the University of Pittsburgh Medical Center to develop digital pathology solutions indicates that GE has entered the game already. And information from pathology and radiology come together in diseases like cancer to inform diagnostic and treatment. GE is making a bigger bet than this, however: GE announced that it is investing $1 B over five years to develop cancer diagnostics and molecular imaging capabilities. As clinical decision-making increasingly involves integration of multiple diagnostic modalities, with multiple clinical stakeholders, often using sophisticated algorithms, it makes sense for GE to play across all these critical modalities – including molecular diagnostics.

What’s ahead?
A consumer electronics company creating point-of-care devices, a food company offering gut-health diagnostics, and a medical imaging company combining multiple diagnostic modalities – these are indications that IVD has become a critical entry point for companies entering into or expanding their healthcare business. Already on January 25th Roche made a $5.7 B hostile offer to acquire Illumina, which would strengthen Roche’s already strong position in the Life Sciences and Diagnostics Market. We should expect more M&A activity this year, but from non-traditional IVD companies. What might these be? An Apple or Samsung acquiring a diagnostic device company? Or a consumer products company like P&G, Colgate-Palmolive, SC Johnson, Mead-Johnson or Unilever making a big move into IVD? This no longer seems completely ridiculous. But whatever happens, one trend is clear – for the IVD industry the hunting season is open. If you don’t have an IVD strategy, you may be left behind.

With the massive subsidies being provided by the Federal Government for Electronic Health Records (EHRs), the healthcare system has become more data intensive than ever. While many physicians are just getting used to the basic features of these EHRs, companies/organizations large and small are developing analytics that utilize this information to do “comparative effectiveness” on therapeutics and diagnostics to understand the best practices and treatment paradigms. For instance, does a 30 year old Asian female with high triglycerides do better on Lipitor or Crestor?

Some are using analytics to find “appropriate” patients for clinical trials – something that has been hard to do in a paper-based world. A clinician can now query their panel of patients to determine whether he has any patients with non-Hodgkin lymphoma for a study being done by a colleague.

Others are determined to provide transparency of healthcare pricing – something that is very attractive to self-insured corporations and their employees. Studies have found within a one block area of Chicago, the cost of a CT scan can vary by three fold. Wouldn’t it be nice to have the option to go to the lowest-cost provider – particularly if you had a high-deductible plan?

While fee-for-service models will reside in parallel with global payment systems into the near future, those organizations choosing global payment systems see “Big Data” and analytics as competitive differentiators in their fight to increase quality and profitability. Improved care coordination takes better analytics and more comprehensive financial systems to balance quality with the most cost-effective approach to treatment. Knowing your total cost for a patient is not enough – rather, understanding the cost of care and quality for each “hand-off” in the care continuum, enable providers to understand where there are efficiencies to be gained and how to properly compensate the team members in the provision of care. Cost and quality matter today, but will be even more important going forward as payment models evolve.

Of course “Big Data” is also paying off for therapeutic companies who want to better segment patients. As many of the “blockbuster” drugs go off patent in the next year or two, understanding the sub-populations that may have not responded well to these drugs is leading to developments in therapeutics that are more tailored to these individuals. Personalized Medicine is becoming a reality for many.

“Big Data” is here. Turning the “data” into actionable information – particularly at the Point of Care (POC) is becoming a competitive advantage for providers, payors, therapeutic/diagnostic providers and consumers. Whether you choose a “build” or “buy” approach to obtain these capabilities, 2012 will be an important year to make the investment to maintain or build a strategic advantage in the healthcare marketplace.

Please feel free to send your comments or questions to Rick Lifsitz, Principal, Scientia Advisors at rlifsitz@scientiaadv.com.

Back in 2002 I can recall interesting development. Among the industry standard bearers who presented to the packed audience of bankers, investors and executives, a strange new group of presenter emerged: Hospitals, both large and small attempted to “sell” their wares to the highest bidders.

These “wares” were indeed unusual, consisting of patient sample collections, or trying to turn pathology samples and medical records into cash during what was then the period of post genome hype. At that time those hospitals were acting on the premise of “whoever owns the patient wins”. In fact, all institutions that owned patient samples made their bet on this belief. The reality turned out to be different (except for a lucky few), in that no one was willing to pay for access to those patient collections. Genomic Health, which I worked for at the time, found another way to capitalize on archival patient collections.

Turn to this year. JPM 2012. Again, a new and very interesting group has emerged at the conference seeking to gain investor attention: Payors, managed care groups, and closed payer/provider networks. These include players like Aetna, Cigna, Geisinger, Humana, Intermountain Health, Kaiser Healthcare, and WellPoint.

Here, again, it seems that the strategy deployed is “whoever owns the patients, wins. Their new business models of command and control, limited access to their delivery system, health care accountability, buyer groups, and self interested arbiters of what migrates into the care paradigm. I can see how the generation of economic “rewards” that these groups promise get some real traction from investors and companies seeking to an edge in the age of cost containment, stringent resource controls, limited channel access, and of course brokered in deals.

Leaving this year’s conference. I contemplate whether Health Care Reform has inadvertently unleashed a new profit driven enterprise in the managed care industry? 
Maybe next year we will have a better sense of how successful these companies are in architecting a healthcare system that is both more profitable for them and beneficial to patients. Can these two goals co-exist? Or will their efforts reach the same conclusion the sample providers reached in 2002?

This question looms large, and is one that we look forward to helping this group of companies find the right answer to.