April 25, 2010

Personalized medicine - a growing market

In March, I wrote about how personalized medicine is becoming an increasingly important concept in the biotechonomy worldwide. This development is now becoming more apparent and actors seem to be moving in this direction. One of the driving actors pushing this development certainly is insurance companies. Against this background, it is interesting to reflect upon how the U.S. health reform that President Obama signed into law last month. This is certainly one of the most comprehensive legislations concerning healthcare provisions in U.S. history. Obviously the health reform will have a tremendous impact on innovation for its many stakeholders, although some may feel more that they will reap more benefits than others will.

Health reform impact on new biotech business

April's edition of Nature Biotech (Vol 28 No 4) reports that "In return for supporting the bill and stumping up $90 billion in fees and discounts on Medicaid and Medicare pricing, the drug industry receives tax breaks, a biosimilars pathway and a massively expanded drug market." A key question for the Biotechnology Industry Organization (BIO) has been the exclusivity term for biosimilars, which in the reform was left intact at 12-years exclusivity. Another advantageous factor for pharmaceutical companies was that the industry managed to avoid suggested restrictions on drug price and drug importation. It is easy to conclude that all these factors will provide economic drivers for private biotech innovation. Much of the health reform, however, targets - a widely discussed subject in the U.S. - which is health insurance.

By enfranchisement of the many U.S. citizens previously uninsured, not only does the health reform provide societal benefits by progressing towards universality of healthcare access - but it simultaneously expands the U.S. healthcare market with more than 30 million people. For biotech and pharmaceutical companies such a market expansion is very good news and The RPM Report industry newsletter estimates that it could result in $115 billion in new business over 10 years.

How the bill drives the demand for life science innovation

Business models of health insurers in the U.S. have - ironically - been the most profitable when these actors successfully have circumvented the difficult and expensive burden of dealing with sick people. But the new bill prevents insurance companies from excluding coverage to children with pre-existing disorders and it forbids insurance to be dropped when a person becomes ill. I don't think it is far-fetched to say that this is somewhat of a game changer for these actors since their business models now will have to bear more of the financial risk and burden of the sick and vulnerable. This - at least to me - is very interesting from a business model building perspective but perhaps more interesting is the new demand that these actors will create for reducing costs associated with life science innovation.

From an insurer's point-of-view, a number of demands are likely to result;

  • Innovations to diagnose patients at an early-stage
  • Innovations to effectively prevent patients falling ill in the first place
  • Innovations to reverse disease
  • Innovations to effectively select patients that are likely to benefit from treatment at all
  • Innovations to effectively select which patients that are the most likely to benefit from which drug

To me, the bullet point list above shortly translates into some of the most common biotech products such as diagnostic tools, screening methods, drugs, and vaccinations. But it is interesting that more or less all of these have a personalized medicine touch to them and it doesn't seem unlikely that this will be of the major effects of the new health reform. Naturally this will stimulate creation of new biotech assets such as biomarkers, drug targets and candidate inhibitors/activator molecules, which in turn will lead to new life science innovation (six of the 26 FDA approved drugs during 2009 are personalized medicines).

New development towards personalized medicine in the U.S.

Against this background, Medco Health Solutions provides an interesting business model to learn from. In February, it acquired the San Francisco-based genomic medicine company DNA Direct to strengthen its commitment to personalized medicine. The acquisition has similarities to the strategic partnership that was signed between CVS Caremark of Woonsocket and Generation Health, at the end of last year. Medco's aim is to help physicians and payors better match individuals to therapeutics and improve clinical outcome while saving money, by becoming a one-stop health service shop. Nature Biotech reports that several trends help draw pharmacy-benefit companies into personalized medicine. Firstly, there has been an explosion in the number of genetic tests. Medco estimates there to be a 1000 genetic tests, which in many cases the full benefits are not extracted due to inappropriate interpretation and lack of knowledge. A second factor - closely connected to the discussion above - is a growing interest from payors. CVS Caremark states that "To our clients, the insurance companies and self-insured employers, being able to provide tests that target drugs to individuals is of great interest". Thirdly, the main driver is cost reduction. The need to cut healthcare costs is most likely behind the surge in personalized medicine. PricewaterhouseCooper estimates that the core market for personalized medicine - diagnostics and therapeutics - is already worth $24 billion and expected to grow 10% annually, reaching $42 billion by 2015.

What will big pharma say?

What I find particularly interesting in all this is the predicament that this new focus on personalized medicine creates for pharmaceutical companies. Personalized medicine will transfer the control position for how and when drugs are used, something that used to be controlled by drug-label indications and physicians (in consultation with big pharma). Will big pharma remain on the sidelines or will they enter the arena?

Tobias Thornblad

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