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BioMarket Trends : May 15, 2009 (Vol. 29, No. 10)

Are In Vitro Diagnostics Recession-Proof?

While the Industry as a Whole Is Predicted to Emerge Unscathed, Some Segments Will Suffer
  • Bruce Carlson

Compared to the automotive or housing sectors, there is a general consensus that healthcare and diagnostics (as part of the healthcare industry) are fairly recession-proof. But are they really? According to Kalorama Information’s latest research report, “In Vitro Diagnostics in a Recession,” the answer may be: “Yes, but…”

Diagnostics starts with an advantage, for while there have been decreases in discretionary health spending, not all types of medical care can be put off. Heart disease, cancer, diabetes, autoimmune disease, and many other diseases strike regardless of the economic environment, ensuring a foundational demand for testing. This may seem an obvious conclusion—people get sick and will still need care, in spite of the state of the economy. But the safe-haven status that healthcare enjoys may be only relative to that of other industries. 

In fact there is evidence that some patients are cutting back on care. A study conducted by the Associated Press found that people with diabetes are increasingly cutting back on doctor visits, treatment, and testing. Such a slowdown in doctor visits would impact most areas of the testing industry.

Hospital Woes

While testing now takes place in a variety of settings, most still occurs in hospital labs. Yet hospital funding is in jeopardy. A major source of hospital funding is derived from investment income. Some 80% of hospital asset financing is rooted in equity investments. With the constriction of the stock market, analysts estimate that most hospitals now have at least 50% less money to spend. 

As a result of the cash crunch, weaker hospitals may not survive and will be acquired. This new wave of hospital consolidation is also not necessarily a positive sign for in vitro diagnostics (IVD) companies. There will be fewer purchasers of equipment and reagents. Traditionally, small labs pay more for reagents and supplies than larger labs, and thus there may be a slight reduction in the price point for some routine tests.

The Market in 2009

Overall it is Kalorama’s view that despite the recession the market will be primarily status quo for the IVD industry over the next three to five years. The world market for in vitro diagnostics will approach $47 billion in 2009. The United States and Canada represent roughly 44% of this market. There are a number of reasons why we would hold to our numbers on IVDs.  

  • Less room to drop: In vitro diagnostics were the first products targeted for cutbacks in the major markets—the U.S., Europe, and Japan. Since the late 1980s healthcare payers have systematically frozen reimbursement rates for the existing group of tests and have imposed strict utilization guidelines for the adoption of new tests. The majority of labs located in the largest single market for IVD products, the U.S., acquire their instruments, reagents, and supplies for routine tests at rock bottom and discounted prices.  
  • Government stimulus: Healthcare initiatives proposed by the new U.S. administration further bolster the use of IVDs.
  • Unyielding demand: Demand for healthcare and thus diagnostic tests in all the major markets is driven by aging populations and increased incidence of conditions such as cancer, diabetes, cardiovascular disease, arthritis, and obesity. There is an emerging menu of specialized tests for these diseases, but routine tests are used as the first line of diagnosis.
  • Emerging markets: The “Asian Tiger” has slowed but not stopped. Emerging markets, primarily China, India, and Eastern Europe, will still experience high market growth rates. This is fueled by privatization and health insurance initiatives. 
  • Institutionalized demand: Advancements in minimally invasive surgery and same-day interventions mean that in-patient populations need more acute care. This creates demand for faster test turnaround times and more hospital-based point-of-care type tests and instrumentation.
  • Stable market: The routine test segments—chemistry/immunoassay workstations, hematology, coagulation, and routine microbiology—make up some 50% of the dollar value of the hospital-based IVD market and about 70% of the market test-wise. These tests make up the basic investigation of any disease, and it is not anticipated that there can be much of a cutback on these tests.

More expensive nucleic acid tests, pharmacodiagnostic tests, and immunoassays are widely expected to gain market share over the next five years. Some of these test segments may see some decreased utilization in the short term. But cost-benefit analysis, technological innovation, and investment in new test applications will lead to increasing market share for other segments. Cancer research will spur growth in histology/cytology, flow cytometry, and tumor markers. 

As cost-management pressures continue to increase, private and public payers will make their decision whether to reimburse a new product based on its impact on patient care. No new test or test service can expect to be reimbursed simply because it appears to provide a technological improvement over the status quo.

Managed care, HMO, and fee-for-service plans create reimbursement formularies that dictate which tests can be reimbursed for which patient diagnoses. Payer groups demand medical evidence related to the clinical and economic implications of a test that is not inherent in an FDA market application. They will look more closely at patient selection and at the prevention, diagnosis, and treatment protocols that will be influenced by the incorporation of a new test into their family of covered services.

These developments will have a significant impact on all new tests but especially high-priced multiplexed gene tests for cancer. They are already coming under intense scrutiny, and most have been found to be investigational and so nonreimbursable except on a case-by-case basis. 

Although individual product lines may suffer, Kalorama still sees high growth rates for molecular and pharmacogenomic tests as a category.