Medical Device Daily

SAN FRANCISCO – A panel at this week's OneMedPlace Finance Forum at the Sir Francis Drake Hotel covered a variety of issues surrounding diagnostics, touching on how to create successful molecular diagnostics, challenges for the diabetes market, and what large companies are looking for in partnerships and acquisitions.

Diagnostic tests drive about 80% of medical decisions made by a doctor sitting with a patient, said panel member Brook Byers, founding partner at Kleiner Perkins Caufield Byers (KPCB; Menlo Park, California). But even with so much use, challenges remain for the sector. "There's not enough economics put on diagnostics, there's not enough innovation going on, and we need a different regulatory and reimbursement network and policy," he said.

Byers let the audience in on KPCB's "secret sauce," the method it uses when developing its companies: The starting point is a doctor and a patient in an examination room, trying to make a decision about therapy. In most cases, data are not good and decisions are made based on age or size of tumor – all told, a fairly random method of decision-making.

"We start with that decision and then start working backwards," said Byers. "What is the biology that would speak to that? What are the tools that would speak to that biology?" Then they ask what samples are needed, where samples can be found, and what product development procedures will be required. Only then do they look at the type of team needed to ensure development, clinical validation, and peer-reviewed publications on the studies. "Then we put the team together, and then we do the funding," he said.

Peter Wyles, vice president and general manager, Bayer HealthCare (Leverkusen, Germany), offered insight into the history and challenges of his company, which has been in the diabetes business for about 30 years.

"What many people don't know is that we actually started the business. It was more of a pet project within the larger diagnostics group, and we started out with a 100% market share." The business didn't receive much money or attention, and slowly its market share plunged to the single digits.

When Bayer sold its diagnostics business to Siemens Medical Solutions (Malvern, Pennsylvania) a few years ago, it retained the diabetes care piece, changed the management team, and restructured the business. Since then, Wyles said, Bayer has had a successful run. It has moved into third position but still is trying to gain back market share.

A large focus for Bayer is glucose monitoring, currently dominated by four major players – Bayer, Roche, Abbott Laboratories and Johnson & Johnson. It's a bit of a "tired old realm," Wyles said. "Everybody's kind of chasing the same customers. We've gotten to the stage now where we just change the colors [of products]." He said that the technology has been taken about as far as it can go: Meters are small and smaller blood samples are needed for testing.

In fact, in terms of direct-to-consumer advertising, the market is at the level of offering companies a Ford, Chevy or Mercedes, he said. "You're just trying to prove that your product's a little bit better and more convenient and simpler to use."

Wyles pointed out that the market is not expanding since battles going on now are for market share rather than market expansion. He mentioned a few areas that could shake up the market: changes in diagnosing, especially to make it more efficient, as well as early stage diabetes treatments that could delay onset.

"We're really at a precipice now around the business as to what is going to be the next technology in this field in order to address this exploding disease, and also bring it more to a population that is underserved or not being served, or even people who don't care about being served, which is about 80% of the diabetes population," he said, referring to the large number of diagnosed diabetes patients who do nothing to manage the disease.

Another key issue in the space is reimbursement, especially in developing nations with increasing diabetes populations that don't have any reimbursement infrastructure in place.

"Who could shake up the market?" he asked later during the panel. "Apple, probably, if they wanted to get into the business." He said anything that can make a product easier, more convenient and more discreet is attractive to customers. "There's more discreetness with an iPhone type of product because people don't know what you're doing; they think you might be doing e-mail. I think that would certainly broaden the use base amongst those that aren't testing today."

Wyles said the wave of the future could be at the pre-diabetes stage, if there was a pill to manage diabetes, similar to the popular cholesterol-lowering drugs.

The panel discussion then changed course, as Byers commented on the role of the federal government thus far and into the future. "For the most part they've been useless. It's all been driven by the medical and private sector."

Although many people are worried about the Democratic lineup, Byers said he is less so, citing a personalized medicine bill written by President-elect Barack Obama and his health advisor, Dora Hughes, MD. "It called for a variety of things that I think are the right things to get done," he said, including a registry of all new molecular tests for personalized medicine and good regulation of all diagnostic tests under formal rulemaking rather than guidance.

Byers recommended that industry leaders get involved with organizations such as the Coalition for 21st Century Medicine (Washington), a group of diagnostic companies working with the FDA to help it understand what would be best for innovation and regulation.

The panel also addressed funding and how to build a successful company.

According to Byers, molecular diagnostics products are "closer to devices on time," but "closer to biotech in some of the capital required." He estimated that it takes about three years and between $20 million and $40 million to develop a good molecular diagnostic test.

He said he sees companies that try to do it quicker and for less money. They make shortcuts on the science and don't run all the trials needed for clinical validation. "The consequence of doing that is you're not going to get respected FDA, you're not going to get peer-reviewed journals to get you adoption, and you're not going to get reimbursement," he said.

Ruedi Stoffel, PhD, vice president, business development, Roche Molecular (Basel, Switzerland), said it's rare to see companies that have biomarkers which have been validated in a consistent manner. Roche sees value in partnering and realizes it can't do everything, but it likes to see technologies that have made through two or three clinical trials, showing that they're getting consistent results. With that in place, he said, Roche is agnostic as to whether its pipeline is developed internally or externally.

Wyles echoed this opinion, saying there is a lot of activity in the med-tech arena, though "what is good stuff and what isn't is another question."

The panelists also offered insight on what they look for in companies they will invest in or acquire.

Byers said KPCG doesn't necessarily need to see a business plan, but prefers to see the team's field notes. "We like to see the raw data of their notes as opposed to a slicked-up PowerPoint presentation on 30 slides."

Bayer's Wyles said his company doesn't have a shopping list for acquisitions and in-licensing, though its products are generally geared to consumers. "We're more into monitoring now; we don't go into big-box diagnostics anymore."

He said Bayer isn't stuck on its business plan as the only model that will work. "We are looking for things that may make us better at what we do, and transformation in the way we approach our business. We are prepared to even change our organization around a new technology if we think that technology will be a game-changer."

Corey Strege, vice president, business development at Olympus (Tokyo), said that in the past, the company had an internally driven culture. After the Gyrus ACMI (Berkshire, UK) acquisition, however, "we're realizing that we can't do it all ourselves and that we must turn externally for potential opportunities to really grow our business to the next level."

Strege said the company spends a lot of time in due diligence. First it looks at whether the move would be a good fit for Olympus, if the technology is safe, efficacious and meets an unmet need. After that, it looks at the financial opportunity.

Wyles said dealmaking is fairly competitive at the moment. "We're seeing this year as a year of great opportunity, so we're prepared to go after things that we may have not gone after before. We're willing to spend. I think we'll see some more activity coming up by all of the players."

The panel was moderated by David Cassak of Windhover Information (Norwalk, Connecticut).