Medical Device Daily Washington Editor
WASHINGTON — The outlook for therapeutic devices might look a little shaky in the eyes of many in the venture capital industry, but according to one speaker on the final day of AdvaMed 2009, hosted by the Advanced Medical Technology Association (AdvaMed; Washington), venture capital (VC) managers are bullish on diagnostics.
Roopom Banerjee, director of investment banking at Leerink Swann (Boston), said that diagnostics historically have been "a mature, slow-growth industry, a place that only large players really played." He noted that "on the small cap side, there weren't a lot of notable companies" involved in times gone by. The lay of the investor land has largely been driven by the fact that diagnostics have traditionally served as "a secondary supporting cast to therapeutics," he said, but change is in the wind because research into genomics is feeding diagnostics at least as much as it is therapeutics.
Hence, the expansion of "the right-drug-right-patient" paradigm "has certainly led to the opportunity for significant expansion" in investment in diagnostics, which Banerjee said is "expected to go up by four or five times over the next eight to 10 years."
Banerjee said investors should expect "a quite robust" merger/acquisition season in the months ahead, especially compared to the level of activity in the last half of 2008 and the first half of 2009, which he described as "the lost year." He said the discussion now is more hopeful "because we've turned the corner from one of the worst train wrecks" in recent economic history.
Despite the overall optimism, Banerjee warned, "we're also seeing a bias toward later-stage assets," with potential buyers seeking developers with a revenue stream of about $30 million, whereas half that sum might have sufficed in times gone by.
Diagnostics are doing well because investors see "a large commercial opportunity," in part because the concept of the biomarker has acquired a lot of heft in the eyes of physicians, Banerjee observed. Investors are of the view that small firms can do well in diagnostics because in some instances, the "potential is as large as a blockbuster therapeutic," he said.
All the same, Banerjee noted that the diagnostics arena is "a very fragmented market," and doctors have to be persuaded as to the value of a new product, but it's not just doctors. Formularies are arising that screen out some diagnostics, so hospital administrators have to be sold on them as well.
Banerjee said that while there were relatively few initial public offerings from diagnostic makers toward the beginning of the decade, there has been more activity of late. Inverness Medical (Waltham, Massachusetts) "has been on quite the acquisition spree in the last couple of years," he said, but Inverness is not alone. Quest Diagnostics (Madison, New Jersey) and Perkin Elmer (Boston) have both been busy in this sector as well.
Banerjee said the good bets have a few characteristics. A product that is best in its class or meets an unmet need is a good prospect, but so is anything that qualifies as a "disruptive" technology. However, a firm should not neglect to "establish a reimbursement pathway," as well as a strong economic justification to get payers on board, he said.
Commercial adoption hinges on having a product that offers important benefits to hospitals as well as to doctors. Banerjee said that developers and investors consequently have to ask three questions. "Why is it better, why is it cheaper, why should hospitals use it?"
Venture capitalists are getting pickier, he said. "A lot of realism has set in" about valuation and the amount of time needed to derive that value, Banerjee said. He also stated that while financial markets generally are bouncing back, VC is lagging where healthcare is concerned.
The silver lining is that VCs "like revenues" and diagnostics offer revenues. "The A-list companies are getting funded," Banerjee said. As for whether the days of the one-hit wonder are gone, Banerjee said, "I think the answer is probably no," because investors see a strong initial product as key to a company's long-term viability.
Donald St. Pierre, deputy director for pre-market evaluation at the Office of In-Vitro Diagnostics (OIVD) at FDA's Center for Devices and Radiological Health, gave attendees a brief on impending changes at OIVD. "I think the best thing FDA can do in this changing environment is to be predictable."
St. Pierre said the guidance for in-vitro diagnostic multivariate assays (IVDMIAs) is still in development. "We have briefed the commissioner's office ... and it is kind of working its way through," he said. However, he declined to offer a due date. "I don't predict [the timing of] guidance documents anymore," he said, but added it is impending. "There's general agreement" at FDA "that this is a reasonable document," he reassured the audience.
St. Pierre also tackled the issue of analyte-specific reagents (ASRs) and research-use only (RUO) diagnostics. He told industry, "You did a clever thing. You changed ASR to RUO," which he said is "probably not the right thing to do." This, he said, is the subject of another guidance that may come out soon to distinguish between the two.
"If it's research, it's research and you shouldn't be using it in a clinical setting," St. Pierre asserted. "It's not that RUOs are horrible products," he said, but there are no QSR requirements for them and FDA is "a big believer in the quality systems requirements," he said. For FDA, this is "a real big thing."
St. Pierre urged industry to think proactively. "If you have an RUO product ... you should probably start conversations with us" about the product.
Mark McCarty, 703-268-5690