Diagnostics & Imaging Week Associate

Richard Clark, the new CEO of Merck (Whitehouse Station, New Jersey), recently told a group of analysts at a private meeting that he was considering expanding the company's operations into medical devices and diagnostics as a way to revive the company's recently sagging fortunes.

JP Morgan (New York) analyst Chris Shibutani, who attended the meeting, said Clark stressed that change needs to come, but "change is not synonymous with cutting costs."

"Longer-term, we heard for the first time of the potential for how Merck could even envision itself as a company with businesses beyond pure pharma [pharmaceuticals], to include [implantable] devices and diagnostics as well," Shibutani wrote in a research note.

A Reuters story on the meeting said that Merck spokes-woman Amy Rose confirmed the gathering took place, adding that the drugmaker is examining its options but that "no decisions have been made."

Rose was careful to note that Clark did not provide any material information at the meeting, and will outline his plans by the end of the year. Any material information would first have to be publicly disclosed since the company's shares are on the open market.

According to Richard Arons, PhD, managing director of the Global Medical Device and Diagnostics Sector for Korn/Ferry International (Los Angeles), Merck's recent interest in the device and diagnostic sectors may be the start of a growing trend for pharmaceutical companies looking to shore up sagging profits due to increasing competition from generic drug companies as well as the staggering costs associated with bringing a new drug to market through either collaborations or acquisitions with companies involved in those markets.

Arons told Diagnostics & Imaging Week that one of the primary motivators behind the sea change in the drug/ device relationship has been the incredible success of the drug-eluting stent (DES), a market now worth more than $2 billion.

"I think that the [DES technology] awakened people to the latent opportunity that they had underestimated."

Prior to the DES phenomenon, the trend over the last decade had been for pharmaceutical companies to jettison their device holdings via a sale or to spin them off into separate organizations.

Pharmaceutical companies, Arons said, had considered device holdings to be a drag on their earnings and a distraction from the much more lucrative creation of blockbuster drugs.

The thought, back in the early 1990s, was not to use the device holdings in a synergistic fashion with their core business.

One particularly good example of this was Guidant, a spin-off of pharma company Eli Lilly (both Indianapolis). And Edwards Lifescience (Irvine, California) was spun off from Baxter International (Deerfield, Illinois), in 2000.

"The Holy Grail was, 'where's our next $2 billion blockbuster drug?' I don't think people appreciated the notion of drugs and devices together," he said.

Now companies like Johnson & Johnson (J&J; New Brunswick, New Jersey) – one of the only big pharma companies to retain its device division through the last decade – are actively talking about "how they can stuff active pharmaceutical compounds into just about everything they make, it's a constant drumbeat."

Of equal importance Arons noted, is the interaction of drugs and diagnostics in such areas as low cost nucleic acid testing and pharmacogenomics. He called the drug/diagnostic combination a potential "sleeping giant."

Part of the reason for the growing success of that market, Arons said, is the fact that personalized medicine is becoming much more socially acceptable. "People are getting used to that," he said.

Arons hopes that the pharma companies get device mergers right this time and are not simply attempting to turn back the clock to the 1990s when having a diversified portfolio made sense, yet the separate divisions hardly ever talked to each other. A more sophisticated approach, he said, would be to find ways to leverage both competencies.

"I'd like to think that the motivation is more about how you leverage the synergies and get more into a J&J-like posture."

J&J is the model that he said would-be players in the market should attempt to emulate. "I think Johnson & Johnson is the best singular example of how the opportunity is teed up and how they're starting to exploit it."

J&J initiated the DES revolution with the approval of its Cypher stent coated with sirolimus in April 2003.

The DES sector, he noted, "is not the only opportunity. There are many other opportunities, say, in open surgery and wound management, and people are starting to get religion around women's health and cancer treatment."

And companies are trying to find new ways to get drugs into different areas of the anatomy – and more specifically targeted – as opposed to using pharmaceuticals that work systemically.

He said growth factors are another interesting area, an example being the ability to grow new blood vessels around the heart.

On the regulatory side, Arons noted that the development of hybrid devices is much more streamlined with the addition of the FDA's Office of Combination Products, created at the end of 2002 as part of the Medical Device User Fee and Modernization Act of 2002.

"I think the FDA has adjusted, he said, "I don't think that [companies] can use regulatory issues as an excuse," not to get into the drug/device business.

On the reimbursement side, he said that "if you have the data and you can demonstrate that you can increase health and reduce cost then you'll get reimbursed. It may take a while, but eventually things will happen."

Generally speaking, Arons said, "there are no more excuses anymore," for drug companies not to take the plunge into the device market.

"I think whoever has the bravery and the resolve to do it and who can assemble the competencies to do it, should have a reasonable probability of success."