Diagnostics & Imaging Week Associate

SAN FRANCISCO On the final day of the JP Morgan Healthcare Conference last Thursday, the once-packed halls of the Westin St. Francis began to thin out with each passing hour.

Those who stuck around still had a bevy of interesting companies to investigate, many of them involved in the diagnostic space, including such notables as Dade Behring Holdings (Deerfield, Illinois) and Qiagen (Venlo, the Netherlands).

Dade Behring is a provider of in vitro diagnostics (IVD) products and services to clinical laboratories. The company manufactures a range of IVD products and services that include medical diagnostic instruments, reagents and consumables and maintenance services.

"We are the largest company in the world that is totally focused on clinical diagnostics," said company CFO John Duffey during his presentation. That is important, he said, "Because we don't have a bioscience or a pharma business that detracts from our focus on the central lab business."

That focus, he noted, has translated into a company with in excess of $1.4 billion in revenue operating in 43 countries, with more than 6,000 employees and an installed base of more than 34,000 diagnostic instruments.

According to Duffey, diagnostics is a $23 billion industry, and central laboratories those in hospitals and reference labs comprise roughly $15 billion to $16 billion.

"We focus on $12 billion segments within that overall central lab market the immunochemistry segment, microbiology and hemostasis."

He said the central lab sector is a "very stable space" to be in, with a recurring long-term revenue stream. The company's large installed diagnostic instrument base purchases reagents and tests from Dade Behring, representing a classic razor-razor blade business model. In fact, Duffey pointed out that more than 80% of the testing systems on the market are closed, meaning that only one company's tests can run on their testing instruments, ensuring a captive audience at least while a customer is under one of the long-term contracts that the company sets up (roughly five years in length).

Roughly 89% of Dade Behring's revenue comes from this "ongoing revenue" source of reagents or the services associated with a customer's long-term contracts.

One of the company's strong suits is its Dimension workstation consolidation franchise.

"We pioneered workstation consolidation with the launch of our Dimension RxL in 1998," Duffey said.

Workstation consolidation allows labs to eliminate the numerous instruments that they would normally have in that setting and consolidate them into one system.

The Dimension RxL systems are geared toward the mid-volume segment of the market, which Duffey said represents about a $4 billion opportunity out of the total $11 billion the immunochemistry market is currently valued at.

The company also has products in the low-volume market, including the Dimension Xpand, launched in 2001 and the Xpand Plus, which was just launched in 4Q04. The low-volume market represents a roughly $2 billion opportunity, Duffey said.

The Dimension franchise has been wildly successful for the company, with an average 20% growth rate since its launch. It also represents a revenue stream worth in excess of $600 million, "which to our knowledge is the second-largest franchise in the history of diagnostics," he said.

Importantly, Duffey noted that only 35% of the U.S. market has converted over to an integrated system, "so there remains a tremendous opportunity for us here in the U.S."

Dade Behring still has not tapped into the $5 billion high-volume segment of the consolidation market, but has plans to launch a system for such labs by the second half of 2006.

Also presenting on Thursday was Qiagen, which describes itself as the world's leading provider of enabling technologies and products for the separation, purification and handling of nucleic acids (DNA and RNA). It currently enjoys an 85% market share worldwide.

The company has developed an extensive portfolio of more than 320 proprietary, consumable products for nucleic acid separation, purification and handling, nucleic acid amplification, as well as automated instrumentation, synthetic nucleic acid products and related services.

Cumulatively, said CEO Peer Schatz, these products enable life science research and gene-based drug discovery in academic and commercial biopharmaceutical end-markets as well as emerging areas such as nucleic acid-based molecular diagnostics.

"We're not a company selling 50,000 or 100,000 products," he said. "Our average sales per product are $1 million. Most other life science supply companies have an average sale price per product of $30,000, so there's something different about Qiagen."

Schatz said that the company has more than 1,000 intellectual property platforms. He said the reason so many platforms are needed is due to the extremely complex nature of the samples it is working with. "There's no one trick pony, samples are extremely different. If you talk about a blood or tissue sample they will behave very, very differently."

Qiagen earlier in the week launched what Schatz called a "substantial new product offering" dubbed the QProteome product line.

The company believes that this new product line represents one of the broadest, most comprehensive and technologically most advanced solution portfolios for the fractionation of proteins and will allow rapid conversion of today's applied methods, which are mainly based on home-brew protocols.

Fractionation and depletion of proteins are among the most widely used methodologies in pre-analytical sample preparation of proteins and allow scientists to create subclasses of proteins required for subsequent analysis. Protein fractionation and depletion protocols are increasingly used in parallel to and in combination with nucleic acid sample preparation and analysis products.

The quality of the fractionation is critical to the sensitivity and reliability of analysis technologies such as PAGE (protein analysis gel electrophoresis) and mass spectrometry, enabling scientists to identify and validate diagnostic markers or drug targets in academics, biopharmaceutical and biomedical fields.

That market is still relatively new, Schatz said, with a value of roughly $35 million. "There's a large unconverted market out there that's still using home-brew," he said.

Importantly, Schatz noted that Qiagen's growth is based on internal development. "We're not a company that is growing based on acquisition; we're a company that is growing based on innovation and organic growth."

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