Some time ago, when I was working on an annual report for a point-of-care diagnostics start-up, the CEO of the company lamented to me that clinical diagnostics was just not getting a fair share of the healthcare dollar, and the relatively low standing of clinical diagnostics, compared to pharmaceuticals and therapeutic devices, was reflected in company valuation. The year was 1993, and healthcare reform was all the rage. This CEO (and a very successful serial entrepreneur, I might add) explained that the percentage of healthcare expenditures spent on clinical diagnostics was dropping rapidly, from 11 percent to 9 percent to 7 percent at the time.
That comment was one of those eye openers that stayed with me. Over the years, I’ve spoken to many executives in the diagnostics industry and asked them about this rather disconcerting trend. Everyone agrees that the value of diagnostics is not properly recognized; everyone agrees that some awareness building among all healthcare stakeholders would be beneficial; but companies and industry groups alike have taken relatively little action. A quick search uncovered a well-stated summary on Roche Diagnostics’ website at http://www.roche.com/health_economics_e.pdf. The industry group Advanced Medical Technology Association (Avamed) offers a number of position papers and case studies documenting the value of diagnostics in healthcare at http://www.advamed.org/MemberPortal/About/Resources. Abbott Diagnostics is sponsoring a global program (”Labs are vital”) to celebrate the role of laboratory professionals. But that was about it. While many diagnostic product stories are told around how the test can improve health outcomes, and, notably, molecular diagnostics companies are building their stories around targeted therapy, personalized medicine and the like, the diagnostics industry has yet to realize the value of its products and claim its place in healthcare delivery. Not surprisingly, only 4 percent of healthcare dollars are spent on diagnostic services today, and laboratory diagnostics accounts for only 1 percent.
The pharma vs. diagnostics contrast is especially ironic in personalized medicine. Arguably, personalized medicine represents a convergence of diagnostics and therapeutics, and perhaps a major opportunity for redefining the value of diagnostics. Yet, none of the top revenue-generating targeted therapies today (e.g., Herceptin®, Erbitux® and Gleevec®) is associated with a single, exclusive, branded diagnostic test. Are diagnostics companies so eager to maximize revenue from clinical trials that they are missing the opportunity to negotiate a more equitable partnership or exclusivity? Are diagnostics companies shortchanging themselves by selling test kits for clinical trial use rather than taking an equity stake? Should a diagnostics company be a vendor to the pharma company, or should it insist on a partnership role? Of course, with partnership comes risk sharing, and the hefty investment in clinical trials can be a deterrent. And so the value of diagnostics continues to be defined by pharma and payers who continue to find “bargains” in laboratory testing.