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The IVD Market from an Investor's Perspective
Adamant Biomedical Investments AG

Although the use of in-vitro diagnostic (IVD) influences approximately 60% of all patient treatment decisions, the amount spent on IVDs is only about 2% of the total healthcare expenditure. Despite this phenomenon, the global IVD market has grown considerably over the years. It is now estimated to have an annual turnover of about 46 billion USD, and is still expanding at about 5% every year.

The IVD sector is closely linked with other industries, both within and outside of the healthcare field. While it can be easily understood how the IVD business is important to healthcare areas such as pharmaceuticals, life sciences tools and equipment and veterinary medicine, it also plays a key role in areas outside the healthcare area, including the production of industrial goods, food processing and environmental protection. Because of its far-reaching associations, the IVD industry is resilient and appears to be more immune to economic downturns. Even in extremely volatile environments, the IVD industry has been able to achieve positive growth rates. For instance, during the economic turmoil of 2009, the industry still grew a respectable 3%. As such, the IVD business remains a very profitable one for leading companies in the sector.

In the healthcare space, the top firms currently involved in IVDs are broadly diversified. There are companies like Roche, which is primarily a pharmaceutical company, J&J and Abbott, which are large healthcare companies, as well as Danaher and Siemens, which are industrial conglomerates.

The industry has been and is still undergoing consolidation. In 2005, firms outside of the top 10 held about 33% of the total market share. Today, they hold only 24%. For example, Danaher had recently acquired Beckman Coulter and Labindia, while Thermo Fisher acquired Phadia and Brahms. And this year, notable deals included Agilent's acquisition of Dako and Hologix's acquisition of Gen-Probe. There were also failed attempts such as Roche's unsuccessful bid for Illumina in April 2012. Still, many industry players expect this consolidation trend to continue.

The distribution of the IVD market across the different regions looks similar to those of other healthcare sectors. The US market accounts for the lion's share of the total sales worldwide, followed by Europe and Asia. In terms of growth, the Latin America region and the Asia Pacific region (ex-Japan) are growing most rapidly, at double digit rates.

The IVD market is heterogeneous in nature and the various business segments have very different market dynamics. There are 3 areas which are particularly interesting from an investor's perspective:

  • Molecular Diagnostics
  • Point of Care Testing
  • Diagnostics in Personalized Medicine
Molecular diagnostics involves analyzing the genetic information stored in nucleic acids. It is the one area that has dominated the IVD market over the last few years with sustained growth – generating approximately 5 billion USD in sales each year. The segment is currently growing at 9% annually, exceeding that of the overall IVD market. This growth is driven in part by the availability of more effective technologies to detect and accurately diagnose various diseases and conditions over the years. Some examples of recent successes include diagnostics for cervical cancer screening (from Qiagen), for breast cancer prevention (from Myriad Genetics) and for blood donation screening (from Gen-Probe).

Point of care testing is often referred loosely to as “rapid tests”. The key factor which differentiates point of care testing versus ‘regular’ testing is the place where the testing takes place i.e. in the immediate vicinity of the patient. Point of care testing circumvents the need to conduct tests within a laboratory setting. Tests can be carried out on a patient at home, in a doctor's office or in a hospital.

The market for point of care testing has grown considerably over the years. It is currently estimated to be worth around 4 billion USD annually and is growing at about 10% each year. Some examples of point of care testing solutions that have been successfully commercialized include those used for the analysis of blood count (from Sysmex) and those using cardiac markers (from Roche, Biosite/Alere).

It is interesting to note that many of the diagnostic solutions used by doctors and patients to measure blood sugar associated with diabetes are, strictly speaking, point of care testing solutions too. However, this segment is so enormous – with an estimated annual sale of 9 billion USD - that industry players tend to regard it as a category by itself.

Diagnostics used in personalized medicine is a new and emerging segment within the IVD industry. These are diagnostic tests that accompany the use of drugs. The application is based on the discovery that the same drug prescribed for a particular disease can act differently in different patient groups. These diagnostic tests, also called “companion diagnostics”, are used in personalized medicine to help answer some important questions such as:

  • Is this drug is effective on a particular patient group?
  • Which group of patients can metabolize a drug more rapidly?
  • Which group of patients may be harmed by a drug?

The use of companion diagnostics is quite common in certain disease areas such as oncology, where there are already many drugs that are associated with companion diagnostics. Familiar drug examples include Herceptin (from Roche) and Vectibix (from Amgen).

While drug companies that develop “personalized” medicine have built very profitable businesses around their products, the providers of the companion diagnostic have yet to achieve the same level of commercial success. The market size for companion diagnostics has been estimated to be only about 250 million USD in revenues annually. One factor that has contributed to this is the uneven market power between drug companies and diagnostics companies - drug companies dominate and can easily choose their preferred diagnostic provider. Other challenges faced by diagnostic companies include the patentability of their solutions and the lack of comprehensive reimbursement for companion diagnostics.

The remarkable consistency with which the IVD industry has developed throughout the years makes it particularly interesting for investors. Some areas, such as molecular diagnostics and point of care testing, are characterized by a high degree of innovation and attractive growth rates. New business fields such as companion diagnostics, “whole genome sequencing” and pre-natal diagnostics are also in the works but will take time to mature. These are areas in the IVD industry where innovations shine but companies still have to develop commercially successful business models around these fields. The hurdles faced by their developers are similar to those faced by new businesses. Therefore investors should keep a close eye on these promising developments and exercise caution when investing in them. More importantly, these are areas where the next success stories will likely emerge.

About the Author

Adamant Biomedical Investments AG is a Swiss asset manager with exclusive focus on healthcare. It provides services including advisory and portfolio management as well as development of structured investment vehicles. Adamant takes a global research approach, investing in established and emerging healthcare markets worldwide. For more information, please visit www.adamantinvest.com.

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