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The global market for diagnostics: New technologies, foreign lands

It's more than just a numbers game; what analysts say about emerging technologies can have a profound impact on investment in new IVD products.

Steve Halasey

At the best of times, it isn't easy to keep track of the rapidly moving medical technology marketplace. But manufacturers of IVD products might be forgiven if they have a little bit more than the usual confusion over the size and shape of the market in which they do business. In fact, even expert analysts who track the market on a daily basis can't quite agree on how the IVD sector shapes up.

Manfred Scholz, senior consultant for Boston Biomedical Consultants (BBC; Waltham, MA), voices the credo of all market analysts: "We believe that our firm uses sound analytical tools to get to the bottom of the IVD market. Within a few hundred thousand dollars, we're certain that we can account for all of the IVD products sector's sales."

So, what's the size of the global IVD market? According to Scholz, "the number is $18.7 billion in worldwide IVD revenue.

Updates and revisions are an expected part of market analysis, but those factors don't go very far toward explaining the wide range of variations found in recent market reports on the IVD industry (see Table I). On the conservative side with BBC's Scholz is Medical Data International (MDI; Santa Ana, CA), which estimates the total size of the IVD market in 1998 at $18.0 billion. Recent publications by Clinica Reports and U.S. Bancorp Piper Jaffray are slightly more optimistic, placing the global market at $19.0 billion and $19.1 billion, respectively.

But these estimates pale in comparison with that of Michael Farmer, a project manager at Asiatic Research (San Francisco), who says he is "quite certain that the size of the IVD market is $21 billion."

To a large extent, the differences among the market estimates of various analysts come down to a matter of definition. For instance, John Keefe, a research analyst for clinical diagnostics at Frost & Sullivan (Mountain View, CA), notes that his firm's reports commonly focus on a particular market segment (clinical chemistry, for instance), usually separate the U.S. and worldwide markets, and rarely combine reagent revenues with instrument revenues. As a result, few of the firm's segment-specific estimates can be reliably compared to the broader reports of other companies.

Similar problems of definition make it difficult to compare even estimates that seem to be close. The total market estimates of Clinica Reports and U.S. Bancorp Piper Jaffray are separated by only $1 million, but any similarity between the two reports ends just about there (see Table I). For instance, Clinica sets the size of the clinical chemistry market at $3.12 billion and includes separate categories for blood gas/electrolyte testing ($588 million) and urinalysis testing ($552 million). Piper Jaffray, on the other hand, estimates the market for clinical chemistry devices to be $6.57 billion, does not include estimates for blood gas/electrolyte or urinalysis testing, but does add a category for blood banking ($775 million).

And then there are those pesky gray areas—the revenue-generating pursuits that may or may not be accounted for when analysts tally a company's sales revenues. To its market total of $18.0 billion for clinical diagnostics, for instance, MDI adds separate categories for estimated sales in life sciences research ($2.33 billion), industrial/environmental areas ($1.15 billion), and animal health ($1.12 billion), bringing the total worldwide sales volume for IVD products to $22.6 billion. The larger total might not be relevant to those interested only in clinical diagnostics, but could still be of use in indicating overall company health and wealth. Most analysts say they are careful to separate out such revenues when making their calculations, but it's difficult to be certain in a field where so many products cross over the lines.

Market Drivers

Numbers aside, analysts have an easier time agreeing on the key forces that are helping to shape the IVD market, both in the United States and abroad. Eyeing the current size of the blood glucose monitoring segment (roughly $2.6 billion), for instance, nearly all analysts agree that it has the potential to remain a major factor in market growth for the foreseeable future. "In the next year especially," says Scholz, "increased consumer attention to, and reimbursement for, diabetes monitoring will be the biggest driver of growth in the IVD industry."

Although most analysts foresee high growth for the glucose monitoring segment, the actual size of that growth is, predictably, a disputed issue. MDI predicts growth of only 8 to 10% (through 2003); Clinica Reports looks for a slightly higher rate of 11% (through 2004); Piper Jaffray is modestly more optimistic at 11.8% (through 2001); and BBC tops the list with expectations of 12% growth (through 2003).

Another force shaping the IVD market is the ongoing pressure for cost containment, which for some analysts has a silver lining. "For companies whose products are focused on automating big laboratories, it's good news if cost-containment pressures bring about further lab consolidation," says Farmer.

"Cost containment is both the biggest driver and the biggest restraint on the IVD market," agrees Keefe. "As a driver, it impels healthcare organizations to adopt more-sensitive and preventive testing, which stimulates growth in the IVD industry and has the potential to save billions of dollars while improving the quality of healthcare."

In the immediate future, says Farmer, miniaturization of point-of-care (POC) instrumentation is likely to drive significant growth in that segment of the IVD market. Clinica Reports agrees, forecasting a worldwide compound annual growth rate (CAGR) of 10.8% (through 2004), including a whopping growth rate of 75.4% for POC cardiac marker kits and systems.

Gazing further into the future, however, Farmer sees a number of other trends that are likely to influence the growth of the IVD market, including a coming crisis related to the emergence of antibiotic-resistant strains of bacteria. "At the same time," he notes, "new antiviral and antibiotic drugs will be developed, and many of these will require IVDs for continuous monitoring."

The Limits to Growth

Whatever silver lining analysts may have found among the dark clouds of cost containment, they are also unanimous in considering such pressures as a significant brake on IVD market growth. "The low level of government reimbursement brought about by cost-containment pressures is the greatest force restricting the market," says Scholz.

"In the United States, cost containment is one of the largest restraints on the market," agrees Keefe. "The healthcare system still needs to address the question of whether the price of a better test offers a significant clinical advantage."

Because government and third-party payers are not generally interested in screening and preventive diagnostics, says Keefe, the market for such advanced technologies is being stifled. "Highly sensitive nucleic acid screening assays are available, but in most cases they have not penetrated the qualitative diagnostic assay market. Generally, by the time a patient shows symptoms and goes in for treatment, the pathogen concentration in the patient's blood is high enough to be easily detected by an immunoassay."

According to Farmer, however, not every market has been affected by such pressures. "It's true that government and other third-party payers are demanding lower prices for diagnostic products and services," he says, "but this phenomenon has really had an effect only in the mature markets of the United States, Europe, and Japan." Elsewhere in the world where growth has slowed, he notes, cost-containment pressures have not been the cause.

Competitive forces also have a role to play in slowing the growth of the IVD market. Already reeling from the closure of many physician office laboratories after enactment of the Clinical Laboratory Improvement Amendments of 1988 (CLIA), manufacturers are now also enduring significant consolidation among their clinical laboratory customers. The result, says Scholz, is "too many competitors" chasing too few customers.

The net effect of such competition is to exert further cost-cutting pressure on manufacturers. And with no end in sight for this trend, "further lab consolidation seems destined to result in lower average sales prices," says Farmer.

Hot Sectors

Although analysts have high hopes for some segments of the IVD market, other segments are expected to show little or no growth in the foreseeable future. The segment uniformly predicted to have the least growth is that of clinical chemistry, which Clinica Reports expects will have a CAGR of –3.0% (through 2004), MDI expects it will have a 0–1% CAGR (through 2003), and Piper Jaffray expects it will have a CAGR of 2% (through 2001).

Other segments of the IVD sector are generally expected to perform better, but aside from glucose testing and molecular diagnostics few areas top 5% growth in any of the published reports. Scholz agrees that the published reports are right, but adds another field to watch. "The greatest growth will come in three sectors: diabetes, nucleic acid–based infectious-disease diagnostics, and cell-based cancer diagnostics," he says.

According to Farmer, however, profitable days still lie ahead for innovative companies whose primary business is in the oldest and most traditional segments of the market. "In the near term, the largest growth will go to companies whose products offer the highest throughput for routine chemistry and hematology; to companies that are developing cell counters that can perform 40–60 CBCs per hour with a three-part differential; and to those that develop and sell rapid, foolproof, noninstrumented immunoassays.

"In the longer term, over the next five years or so, the greatest growth will go to all of the above areas plus small-throughput random-access chemistry instruments; the smallest, fastest POC instruments; automated nucleic acid testing systems; and tests for monitoring new antiviral and antibiotic drugs," Farmer adds.

Keefe agrees that monitoring technologies are likely to become a hot area for IVD development over the next few years. "Already, the most significant growth rates being seen in IVDs are coming from the monitoring of such chronic viral infections as HIV and HCV. HIV viral load monitoring is already more than a $100 million market. And now that new therapeutics for HCV are entering the market, the demand for HCV viral load monitoring is expected to show dramatic growth over the next few years."

Key Technologies

Whatever segment of the IVD market is going to see growth, analysts agree that continued innovation from industry will be required to make it occur. In the current healthcare climate, increased marketing of existing products won't make the cut, because users and payers are coming to expect increased performance from the products they purchase.

"A number of key technologies will be involved in stimulating IVD growth," says Scholz. "These will certainly include patient data management systems designed to make decentralized testing possible; the conversion of an increasing number of tests into consumer-type products (following the successful example of home-use glucose testing); tissue-processing technologies for use in cellular diagnostics; and the gradual conversion of infectious disease testing to nucleic acid formats."

Farmer agrees that decentralized testing and molecular diagnostics will play major roles in shaping the IVD market. "Over the next five years, POC tests will continue to be miniaturized, and nucleic acid tests will become automated," he observes.

Before those long-term trends kick in, however, manufacturers still have a long way to go toward fulfilling the promise of current systems. Especially among the largest IVD manufacturers, the development of diagnostic systems intended to automate virtually all laboratory testing remains a major preoccupation.

"The largest change that is currently affecting the IVD market is the development of totally automated systems that can handle everything from sample preparation through analysis," notes Keefe. "Many companies at this year's American Association for Clinical Chemistry (AACC) annual meeting were presenting new automated systems or talking about such products in development."

According to Farmer, automation is likely to remain a major factor for some time to come—but perhaps not in the markets that manufacturers are most accustomed to. "In developing countries there are more than 60,000 manual and semiautomated laboratories, and each year 6 to 7% of them step up to random-access instrumentation."

The Regional View

To achieve their greatest growth in product sales, in fact, IVD manufacturers will unquestionably need to get used to doing business abroad—and that statement applies equally to manufacturers based in Europe and Japan.

"Like the North American market, the European and Japanese markets will achieve a CAGR of only 4% over the next five years," says Scholz. "Meanwhile, the rest-of-world (ROW) countries will gain a combined CAGR of 8%."

Farmer is wholeheartedly in agreement. In fact, he says, underestimating the strength of overseas markets is one of the key reasons that most analysts compile worldwide market figures that are much lower than his own estimate of $21 billion.

"The IVD markets in Europe and Japan are much like the U.S. market," says Farmer. "Nearly all labs have automated instrumentation, and large, government-affiliated payers are exercising their clout to squeeze diagnostic costs. Previously extravagant reimbursement rates are being retrenched. And there is widespread cynicism about the cost-effectiveness of spending more money for faster or more-sensitive assays if they don't affect treatment decisions."

For manufacturers, the result is an overheated marketplace in which competitive forces are driving down prices at an alarming rate. Moreover, the costs of entering the market are going up, as more and more payers are expecting to see the results of cost-effectiveness and outcomes research before they consider adopting a new test.

By contrast, markets in the underdeveloped ROW offer significant opportunities for growth over the next decade. While Clinica Reports predicts overall market growth of only 4.3% in the United States through 2004, it foresees growth of 8.7% in ROW countries during the same period.

According to Farmer, the emerging economies of Latin America offer a prime opportunity for manufacturers to expand sales and market share versus their competitors. "In Latin America, there are a vast number of small but healthy mom-and-pop laboratories. These laboratories are continuing to grow, and are gradually upgrading their instrumentation." Candidates for upselling of automated lab systems include more than 18,000 labs in which testing is still being carried out manually, and nearly 4000 semiautomated labs where growing demand could support greater automation (see Table II).

At the recent AACC annual meeting, the potential for business growth in Latin America was the topic of a special industry seminar entitled "Emerging Markets 2000: Latin America." While agreeing that the prospects for IVD manufacturers are good, several of the panelists cautioned that manufacturers should be aware of some of the special problem areas that apply to doing business in Latin America. One such problem is the large gulf that exists between the public and private healthcare sectors.

"Few of the Latin American nations have produced medical systems like those of Western Europe or Japan, through which basic healthcare is provided for most people," observes Farmer. "Consequently, the private sector has responded with well-funded alternatives catering primarily to the urban affluent classes. The result is that two systems exist side by side, much as in the United States; those with money get the best diagnostic care, while those who have no choice but to rely on the government get something very different."

The public and private systems also do business very differently. Although the public healthcare systems can purchase products in vast quantities, they generally place orders only a few times a year, and often take a long time to pay. Private laboratories are almost exactly the opposite: they prefer to order in small quantities, sometimes monthly, and can pay more quickly.

Panelists at the AACC meeting noted, however, that manufacturers could not afford to ignore either of the two healthcare sectors if they intend to be successful. "To establish a reasonable market share, a manufacturer must address both the public and private sectors," said Carlos Padilla, Latin America area director for Rochem Biocare Group (Santafé de Bogotá, Colombia). "The private sector represents only 20 to 30% of the total market, and although it is stable over the long term, new institutions can be a credit risk. Manufacturers need to balance their private sector activities with sales to the public sector, which is slow to pay and has limited funding, but has the advantage of tremendous volume."

But if sales volume is the goal, the ROW market that IVD manufacturers should continue to keep their eyes on is China. For sheer size, the potential of the Chinese market is second to none, but development of that market is still awaiting social and legal changes.

"In China, nearly all doctors are somewhat like indentured servants employed in the public sector," says Farmer. "Although many doctors moonlight for cash, there is no legal framework for private medicine, so they don't open private labs or hospitals. If the doctors were to be liberated from their government obligations to open private practices, a private IVD market of 125 million people (10 to 12% of the population) would be created virtually overnight."

Whether that private market would also be open to imported diagnostics—or continue to be desirable to outside manufacturers—is another question.

"There's no place that is in any way comparable to China," Farmer notes. "The Chinese pay the highest prices in the world for imported instrumentation, but squeeze so hard on every penny spent for reagents that there is only a very small market for imported reagents. In part, this is because enforcement of quality control practices is negligible, so the demand for cheap, unreliable reagents remains brisk."

Conclusion

For IVD manufacturers, product R&D can be the lifeblood of the organization. In today's competitive climate, there's virtually no way for an IVD firm to maintain company health without a portfolio of intellectual properties and a pipeline filled with forthcoming products.

But the ways that market analysts assess such new technologies can also have an important influence over potential development funding and, inevitably, the stability of the company itself. Companies with core competencies or forthcoming projects in hot segments of the market are likely to be viewed as investment-worthy darlings, while companies that emphasize slow-growth segments languish in ugly duckling—land.

Following the lead of market analysts, however, manufacturers can exert some control over their own destiny by maximizing the value of their holdings and carefully selecting their target markets. Investing in outcomes or cost-effectiveness research, for instance, can provide a market-share boost even to an established product, and offer something of a hedge against encroachments from newer but less-qualified products. And overseas markets can offer a reasonable target for both mature and new products.

But whatever a company's dilemma, the search for a solution begins with more information. However much they may disagree, market research firms and their publications offer a valuable guide to the marketplace that can help manufacturers to turn the right direction at the next fork in the road.

Steve Halasey is editor of IVD Technology.

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