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Monday
Sep052011

The Summer of Companion Diagnostics

This has been an exciting summer for the biotech community as two highly anticipated approvals for targeted therapeutics, along with their respective companion diagnostics, were given the green light by the FDA.  The approvals of Zelboraf (Roche/Plexxikon) and Xalkori (Pfizer) was a great highlight for the pharma industry this summer, and could result in the accelerated development of other personalized medicines.  

Zelboraf and Xalkori are both orally administered therapies that address a specific patient subpopulation that is identified via a companion diagnostic.  While these two drugs address modestly sized markets (see chart below), their ability to effectively treat a specific patient population enables them to garner premium pricing.  Some industry insiders are now referring to similar drugs that address niche markets and command pricing power as “nichebusters”.  

There are pros and cons to the nichebuster model as it relates to companion diagnostics, and I thought it might be helpful to lay out some of the facts regarding the recent approvals of Zelboraf and Xalkori.  Though quite a bit older (approved in 1998) than the other two therapies, Herceptin provides a good comp:  

These three oncology products have markedly different approaches to pricing - but why?

  • Therapeutic Cost: Herceptin helped set the price range for targeted cancer therapeutics at $50,000-$100,000.  Because doctors are able to identify likely Herceptin responders with a companion diagnostic and only treat those patients, the drug is able to command a premium price.  The more powerful the diagnostic is at predicting likely response, the better chance the drug developer will be able to command premium pricing.
  • Diagnostic Costs: While the Zelboraf companion diagnostic is a pretty straight forward PCR test, Herceptin is a little more complex - involving immunohistochemistry (IHC) and sometimes fluorescence in situ hybridization (FISH).  Despite the variance in technical difficulty and time associated with the lab test, the companion diagnostics for Herceptin and Zelboraf are both about $100.  In the face of those precedents, Abbott intends to charge $1,500 for its own FISH-based test to identify Xalkori responders.  At $100 and $150, doctors can be fairly price insensitive when prescribing a diagnostic test for Herceptin or Zelboraf.  But, doctors may not be so price insensitive when it comes to a $1,500 test.  Even if doctors do prescribe the Abbott test, it is unclear if CMS will reimburse the product at $1,500, let alone $1,000. One last thought to chew on: what happens to pricey companion diagnostics when the cost to sequence a person’s genome breaks the $1,000 price threshold or even the $500 threshold?  
  • Dx Hit Rate & Market:  At what utility level (what I refer to as “Hit Rate”) and price point does it become a no-brainer to use a companion diagnostic?  In the case of Herceptin and Zelboraf, both have companion diagnostics that are relatively cheap ($100-150) and those diagnostics identify mutations that are relevant in a large percentage (25-50%, depending on the test) of the patients who will be tested.  Xalkori, on the other hand, is quite different as it has a high price tag and is not relevant for 24 out of 25 patients that are tested.  To look at it another way, it takes $37,500 (25 tests x $1,500 cost) to identify a patient that is likely to respond to Xalkori - making the real cost of Xalkori more like $117,500 ($80,000 Tx + $37,500 Dx).  Despite the fact that Xalkori is quite efficacious for those patients harboring ALK mutations, prescribers may balk at the all-in price tag of $117,500.  What I cannot speak to is how the all in cost of Xalkori relates to the long term economics of treating NSCLC.  There is a chance that the overall economic benefit of identifying and treating ALK positive patients might outweigh the all in cost of $117,500.
  • Bundling:  Roche is one of the few pharmas that has in-house expertise in both therapeutics and diagnostics.  That dual capability enables Roche to subsidize the cost of its diagnostic and transfer the cost of that subsidy into the price of the therapeutic.  By bundling low cost diagnostics with high cost therapeutics, Roche is able to drive adoption of its high margin therapeutic by basically giving away its diagnostic.  It is unlikely that Xalkori will have a bundled Tx/Dx because both components are made by different companies.  If Pfizer were to subsidize the cost of the diagnostic by paying Abbott a portion of the diagnostic’s cost, then it would have to charge quite a bit more (new cost = $80,000 + 25*subsidy) for an already expensive drug.  Charging more for the therapeutic could have a negative impact on adoption. 
  • Reimbursement:  The price range for simple analyte-based test like PCR has been firmly set by CMS at $50-400. With regards to complex tests (also referred to as “esoteric tests”), the agency has not formally set pricing guidelines.  That being said, CMS has indicated that it is likely to become more price sensitive for diagnostics that are priced above $1,000.  In the case of Xalkori, it is still unclear whether its FISH-based test will be considered an esoteric test and warrant a high price tag.  
  • Regulatory:  As therapeutics and diagnostics are regulated by two different groups at the FDA, coordination between those two groups is a must for any company trying to develop a companion diagnostic.  For many early stage therapeutics companies, it is cost prohibitive to develop in house expertise in both therapeutics and diagnostics.  Therefore, most start-ups shift diagnostic development to third party groups.  Providing the required oversight to ensure that third party development of the diagnostic is of high quality can be a challenge for a start-up that has a core competency in therapeutics.  

Future

Diagnostics offer pharma companies the ability to create new therapeutic sales channels and strengthen already existing ones.  Regulatory changes have decreased doctor access for sales reps, which then limits the ability of reps to drive the adoption of high margin therapeutics.  Diagnostics, and even devices, provide another avenue for sales reps to garner more face time with doctors.  By creating in house diagnostic divisions (ex: Novartis purchasing Genoptix) or partnering with existing diagnostic players (Roche, Abbott, LabCorp), pharma companies can leverage those diagnostic sales channels to better position and sell their therapeutics.  As pharma companies increasingly ramp up their diagnostic efforts, expect nichebusters to become a greater portion of pharma companies’ pipelines.

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