Look for a big step up in partnerships between pharmaceutical firms and diagnostic companies to develop tests that aim to make certain that drugs are doing their job.
These unions are expected to become more commonplace as pharmaceutical companies are pressured by payers to provide objective evidence that their medications are on target. As a result, the global market for “companion diagnostics” is expected to surpass $280 million by 2017, according to Global Industry Analysts, a leading publisher of off-the-shelf market research.
It would seem to most investors that the need for companion tests would lead to more drugmakers acquiring diagnostic manufacturers. But if that’s the case, why is Abbott separating its prescription pharmaceutical business from the rest of the company, which has a huge diagnostics unit?
Regardless, the days when it was enough for a drug company to simply bring a drug to market are probably long gone. “Regulators and insurers are … prodding the companies to develop tests to pinpoint which patients are most likely to benefit from a drug, thereby sparing other patients from needless side effects and expense,” according to a recent article in the New York Times.
So far, the companion-diagnostics field is taking baby steps. Today, only about 1% of FDA-approved drugs have corresponding diagnostic tests — and these are mostly cancer treatments, according to Pharmalot. Even then, most of the tests aren’t required, and the great majority were developed only after the companion drugs were on the market.
But things are changing, albeit slowly so far. Consulting firm PricewaterhouseCoopers estimates there were 25 companion diagnostics deals in 2010 and 15 in the first half of 2011, up from only seven in 2008, the New York Times reported.
“The tests are becoming almost gatekeepers to the drug,” M. Trevor Page, director of business development at Danish diagnostics company Dako, told the Times.
In July, the FDA provided industry guidance on companion diagnostics. The agency said it would like to have the diagnostic test ready to go at the time the drug is approved. Timing the two to hit the market simultaneously might seem like a difficult task, but in August, the FDA approved a pair of drugs and their companion tests.
One of the drugs is Pfizer’s (NYSE:PFE) Xalkor, which is highly effective in treating the 5% of patients with lung cancer who have a particular chromosomal abnormality; the defect is detected by a test from Abbott Laboratories (NYSE:ABT).
The second drug is Zelboraf, from Roche Holding Ltd. (PINK:RHHBY) and Plexxikon, a unit of the Daiichi Sankyo Group. Roche also makes the diagnostic test that identifies the approximately half of melanoma patients who can benefit from the drug.
The growing requirement for companion diagnostics has drawbacks for drug manufacturers. For one, a test has the potential to limit the market size of a drug since it will be prescribed only to patients in which it’s effective. Pharma companies are reluctant to admit it, but they make more money when physicians use a shotgun approach to treatment rather than a rifle shot.
In addition, the need for a companion diagnostic might also raise drug-development costs. It’s simply more expensive to coordinate development of a drug and diagnostic since the work is usually being done by different companies striving to meet the regulatory requirements of two different FDA divisions.
On the other hand, having an effective diagnostic early in a drug’s development could allow pharma companies to design clinical trials that are smaller and less costly. That’s what happened with both Xalkori and Zelboraf.