Originally Published IVD Technology April 2005
Anniversary Essays
9. Marketplace and business issues
A short hop from one-stop shopping to best of breed,
and a long jump to market differentiation
Shara Rosen
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Shara Rosen has been involved in the biomedical industry since 1971. She owns and operates StratCom (Montreal), a firm that provides market information and consultation services to diagnostics and medical biotechnology companies in Canada, the United States, and Europe. She can be reached at stratcom@pagebleu.com. |
Twenty years of exponential growth in the IVD industry came to a screeching halt in the 1990s. As the decade began, healthcare providers throughout the Organization for Economic Cooperation and Development (OECD)—in North America, Western Europe, and Japan—came under strong pressure to cut costs as part of an effort to contain their total health expenditures. Diagnostics was an obvious target of this cost cutting partly because of the increased use of higher-priced automated techniques and nonisotopic immunoassays that had been developed in the 1970s and 1980s.
Cost-cutting pressures resulted in a consolidation of hospital buying power into buying groups that evolved a new model for the industry. This new model was based on the presumed need of these large purchasing groups for one-stop shopping, and it aimed to provide members with a broad selection of top-of-the-line products while reducing the number of suppliers and, therefore, transaction costs. In theory, this was an extension of the traditional economies-of-scale market model.
The effect on the IVD industry was dramatic, particularly in the United States, the engine of the IVD industry. By the mid-1990s, Premier Inc. (Charlotte, NC) alone controlled the buying power of close to 35% of U.S. hospitals. A similar trend emerged in Europe and Japan, but the power of consolidated buying was perceived to be less pervasive in these markets. It was generally accepted that lab medicine in the United States was managed as a business, while labs in Europe and Japan were steeped in lab science. Nevertheless, pressures to reduce healthcare costs and the looming healthcare demand from aging populations threatened to upset the status quo throughout the OECD.
Industry Consolidation
With slow industry growth and low operating margins, IVD worldwide company revenues hovered around $18 billion, with increases or decreases of 1–2% per year from 1993 to 1998. The response of the top 10 companies to this stagnation was consolidation. Through a number of discerning mergers and acquisitions covering commodity and specialized products, the total revenue of the top 10 increased 17% between 1995 and 2003. During this same period, the industry as a whole grew an average of 6% per year.
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Table I. Top 10 IVD companies by revenue, 1995 and 2003. Source: Kalorama Information (click to enlarge). |
The consolidations of the 1990s completely changed the composition of the IVD top 10 (see Table I). Before 1995, Roche’s (Basel, Switzerland) sales were approximately $400 million, modest in comparison with the big players in the market. Just a few years later, in 1998, the company’s merger with Boehringer Mannheim propelled Roche into the top spot among IVD companies. Similarly, the acquisition of Ciba Corning Diagnostics by Chiron (Emeryville, CA) boosted Chiron from the number-30 spot in the market to the number-9 position in the mid-1990s. However, Chiron’s sale of the Corning line of products and its molecular holdings (except hepatitis C diagnostics) to Bayer Diagnostics (Tarrytown, NY) dropped its total sales to the second tier of companies by the 2000s. Bayer, on the other hand, profited from the acquisition, becoming the third-largest diagnostic company by the end of the 1990s.
The expanded product menu acquired by Coulter Electronics in its merger with Beckman Instruments helped plug the erosion of Coulter’s hematology business by Abbott Diagnostics (Abbott Park, IL), Bayer, and Sysmex (Kobe, Japan), and cemented the position of Beckman Coulter (Fullerton, CA) in the top 10. The acquisition of DuPont and Behring by Dade International (now Dade Behring Inc.; Deerfield, IL) had a similar effect, expanding Dade’s product menu and longevity in the market.
A Broadening Test Palette
In the 1990s, the major companies—primarily Abbott Diagnostics, Beckman Coulter, Bayer Diagnostics, Dade Behring, Ortho Clinical Diagnostics (Raritan, NJ), and Roche Diagnostics—looked to offer biochemistry, immunochemistry, and hematology IVD solutions as a one-product package. The sales model for these companies was good-value products with high-volume sales and low margins. The root of this model resided in a strategy that emphasized economic pricing for commodity products in clinical chemistry, immunoassays, and hematology, and premium pricing for prioritized tests and technologies that proved critical to patient outcome.
Meanwhile, the smaller 50 to 100 IVD companies concentrated on picking up small markets in all the major test segments and offering specialized best-of-breed products. Their operative sales model was superior products, lower volume, and higher margins. These companies often entered into distribution agreements with major companies: the market presence acquired by the smaller companies and the product breadth gained by the larger companies often made this a win-win marketing strategy for both.
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Table II. Selected fast-growing IVD companies with less than $400 million in annual revenue. Source: Kalorama (click to enlarge). |
Nevertheless, many of these arrangements were short-lived or eventually did not meet the market needs of the smaller company. Examples of such disappointments include Abbott Diagnostics’ distribution of Digene’s (Gaithersburg, MD) products in Europe, and OraSure’s point-of-care HIV tests, as well as Bayer’s distribution of Innogenetics’ (Gent, Belgium) molecular tests. When i-STAT (East Windsor, NJ) did not renew its contract with Abbott Diagnostics, Abbott acquired the company. Similarly, Roche’s long-time alliance with Sysmex in hematology has been reorganized. Of course, there was the high-profile battle between Roche and Igen that ended with the former’s acquisition of the latter. Gen-Probe (San Diego) and Bayer have also been involved in protracted disputes since Bayer acquired Chiron’s DNA test business. Other companies braved the market alone and either succeeded, or vanished for lack of human and financial resources (see Tables II and III).
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Table III. Selected failed IVD companies, 1995 –2005. Source: Kalorama Information (click to enlarge). |
In light of the consolidations of the 1990s, it was expected that the market share of the top 10 would grow from 60 to 65% in the 1990s to 85 to 90% in the 2000s. However, according to the IVD market assessment of Kalorama Information (New York City), between 2000 and 2003, the market share of the top 10 IVD companies increased only to 64% (from $17.7 billion to $27.7 billion). Why this discrepancy? The early predictions did not anticipate the bifurcation of the IVD industry into distinct segments: providers of one-stop-shop tests and the best-of-breed products in expanding markets.
The top-performing companies in the 1990s, big and small, invested in the future expansion of the market for molecular assays, diabetes testing, patient-critical point-of-care tests, histology, cytology, and flow cytometry. Table IV illustrates the contribution these test segments have made to IVD market growth over the last decade. The tests and technologies marketed by these stars complement the need for high-technology diagnostic tools for the management of high-prevalence diseases such as cancer, diabetes, and cardiovascular conditions.
Business in the Postgenomic Era
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Table IV. IVD world market revenues, 1990–2005. Source: Kalorama Information (click to enlarge). |
With the 21st century came the prospect of the human genome’s contribution in new molecular and protein tests. These developments cut short the anticipated power of the one-stop shopping trend. A close inspection of the deals made in the last 10 years shows that rarely did the U.S. buying groups make long-term agreements that covered all of their major testing needs. More often than not, they cherry-picked the best chemistry, immunoassay, hematology, and microbiology products using what were reported to be rational cost-benefit analyses.
“Investment in genomic- and proteomic-based assays for the postgenomic era” sums up the strategy of smaller IVD companies, and, more importantly, has sealed the fate of the big-league companies. In the transition from the 1990s to the 2000s, the annual growth of some of the top 10 began to falter. Abbott’s late entry into the diabetes market and limited success in the molecular field, for instance, has kept its annual growth at 1%. Johnson & Johnson’s LifeScan business buoys the company’s spot in the top 10, but it also accounts for more than half of J&J’s IVD revenues. With less-than-spectacular performance for Bayer’s molecular and diabetes product lines, the company has shown almost no growth in the 2000s. Even megalith Roche has seen its annual growth slip from 8 to 10% per year, to less than 5%.
Further, the business press is replete with examples of how the consolidation of buying power has squelched product innovation and effectively locked smaller innovative companies out of the buying process. This is a myth; for the most part, innovators that invested in successful patient-critical tests and acted on market research to better understand the buying patterns and needs of their clientele managed to ride out the 1990s and are prospering in the era of postgenomic medicine.
In this new, postgenomic market, dynamic best of breed has replaced the one-stop shop. This strategic shift has strengthened the fortunes of a number of companies. Dade Behring’s emphasis on “being the best at what we do” has brought the company from near financial ruin to 5% annual growth. Similarly, in the top tier of companies, Sysmex’s continued investment in upgrading its technology, Beckman Coulter’s experience in immunoassays and flow cytometry, and Cytyc’s (Marlborough, MA) commitment to liquid cytology have been rewarded with sustained growth.
Further, as the data demonstrate, small innovators with well-validated products and technologies have been outperforming the major players. In the next 5–10 years, many of these companies could conceivably hold more market power than the top 10 companies, which are obliged to maintain their commitment to commodity products.
And the cycle begins anew. Since 2000, acquisitions of and alliances with smaller, specialized companies, as well as the mergers of several smaller players, have provided the engine that is driving new diversification in the industry (see Table V). Of particular interest is how Inverness Medical (Waltham, MA) has used the capital earned from the sale of its diabetes product line to Johnson & Johnson in 2001. During the last few years, Inverness has made a handful of significant acquisitions, boosting revenues from $47 million in 2001 to $296 million in 2003. In effect, the company is emulating the consolidation strategies previously used by the majors.
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