An Executive Interview with
Robert Bauer, President of CaseBauer
Diagnostic Insight, Winter 2002, Vol.29, No.1, pp.2
Robert Bauer grew up in shadow of DuPont's corporate headquarters where his father, a chemical engineer, made his career commercializing new technologies. Bauer earned his degree in biology from Villanova University and his MBA from the Wharton School of Business at the University of Pennsylvania. He cut his teeth in IVD with two start-ups in the late 70's and moved on to R&D and marketing positions with Becton Dickinson International and Abbott Laboratories in the 80's, followed by a stint at Boston BioMedical Consultants in the early 90's. "A lot can be said for being in the right place at the right time. I lived through the boom days of IVD and had more than my share of choice assignments. I was fortunate to have an opportunity to work for and with some very talented individuals."
Bauer was President of the Biomedical Marketing Association in 1990, served as a board member and advisor until the end of 1997, and is a recipient of the BMA distinguished service award and the BMA Jerry Goldsmith Award. Mr. Bauer is also a founder and principal in SunWest Homes, a real estate development company based in Dallas. In his spare time, he relaxes on his sailboat, skis the Rockies, and is an avid runner and cyclist.
When CaseBauer was founded in 1991, Bauer says he was determined to create consulting tools to fill a gap he experienced during his corporate days. The firm specializes in diagnostics, laboratories, imaging, and point of care and operates in 14 countries. Services include multinational political and macroeconomic analysis, business-foundation packages, strategic benchmarking studies, market research, proprietary market modeling, business and technology valuations, investment due diligence, and new product fatal-flaw analysis. CaseBauer pioneered market simulation models for the IVD industry, based on multivariate statistical methods. A typical analysis using 8,000 to 50,000 simulations can predict potential market share capture, price sensitivity, and the net present value of product features.
After 10 years of successful multinational engagements with a cross section of the largest and smallest IVD companies, he has developed a unique perspective on an industry that has undergone a substantial transformation during his professional career. In the following interview, Bauer talks about the industry and where its headed.
Worldwide IVD Market Growth Almost Matched That of the Pharmaceutical Industry Last Year
DIAGNOSTIC INSIGHT: What would you say is the general state of the IVD industry as we come to the end of 2001?
ROBERT BAUER: Clearly the market is showing recovery from the difficulties of the mid to late 90's. After hitting a valley in 1998, we now have growing revenue and profitability. In fact, worldwide IVD growth almost matched that of the Pharmaceutical industry last year. The industry which had been turning in single digit pretax margins, is now seeing an average of 10% to 11% for the major players.
We expect this trend to continue, but don't expect to see double digit sales growth in the near term. An overall market growth rate of 6-8% from now through 2005 seems more reasonable.
Its also good to see that we are finally reaching some level of price stabilization. The consolidation of providers and the increased influence of group purchasing organizations, coupled with competitive price slashing in the late 1990s resulted in some pretty significant price erosion in an already shopped down market. Providers, physician groups and the manufacturers have all had a taste of it now and price discounting has tempered somewhat. The IVD industry has adjusted to the new environment and has become more adept at understanding the value of profitability vs share.
DIAGNOSTIC INSIGHT: To what do you attribute this recovery?
What we saw was a correction. But, for the most part, the fundamental drivers of market growth have remained intact. I don't believe anyone would dispute that their had been poor management of test ordering and, in some cases, even abuse. With little pressure, testing volumes corrected, possibly even over-corrected in some areas. I think this correction has run its course. Recovery is being driven by growth in the number of healthcare procedures, both as a function of an aging population base in the G7 countries and improved access to healthcare services in developing nations. While there has been some rationalization of services, mostly through systematic reductions in the number of hospital beds and a reduction in the average length of stay, the affect on diagnostics has been relatively minor.
It also helps that the use of new, higher value products and technologies is increasing in areas such as critical care, viral disease management, and diabetes management and at the same time newer, more labor efficient automated workcells are coming on line in many laboratories.
We are also seeing growth related to better utilization of some of the existing tests. This is the flipside benefit of the trend to achieve greater standardization of medical practice and procedures. A good example is in diabetes care where a significant portion of the diabetic population is not being tested at the recommended frequency. There has been a continued increased in the utilization of diabetes tests because of new ADA testing guidelines and benchmarking efforts, such as those being conducted by HEDIS in the United States.
We can't lose sight of the fact, though, that there has been a philosophical shift here in the US, as well as in Europe and Japan, from growth driven by "pride of technology", to a more fiscally responsible approach to "technical medicine" such as pharmaceuticals and laboratory testing. It wasn't that long ago that European governments and healthcare providers took great pride in their healthcare technology and reach. This has changed. Now the focus is on harmonizing and strengthening the economy of Europe and healthcare costs play a major role in this. This factor will temper the recovery somewhat, so I expect European growth to lag that in the US and I don't expect to see a near-term return to the worldwide growth rates of the 80's.
To Be Successful New In Vitro Diagnostic Products Must Materially Affect the Clinical Decision Process
DIAGNOSTIC INSIGHT: You mentioned growth generated by new technologies and products. Which types of technologies and products do you see as being the most successful in this new IVD environment?
ROBERT BAUER: To be successful, new products must materially affect the clinical decision process or, as in the pharmaceutical industry, catch on in the public eye. Troponin is an a good example of a product that has had a substantial effect on clinical decision making. Cholesterol and PSA are good examples of products that have caught the public eye. Her-2-neu breast cancer tests are a good example of both. Breast cancer is a very high profile disease with strong patient advocacy groups that have influenced the adoption of this new technology. The one thing we have noticed, however, is that the standard for "affecting the clinical decision process" is not just technical, it is also practical. Even if the test result supports theoretically better medicine, it must be provided in an environment where other factors such as liability and public opinion do not limit its utility. This is not always an easy concept to get across to an inventor. If a test, for example, identifies patients who are not appropriate candidates to receive a specific treatment, but there is a potential political or legal liability in denying that procedure to them, then the test may not be all widely adopted.
To answer your question more specifically, some of the most interesting growth areas today are in critical care, molecular diagnostics, diabetes care, and cellular diagnostics.
Looking farther out, the whole area of genomics is exciting, especially in the area of drug therapy and cancer. However, as we have seen with the development of nucleic acid diagnostics, this won't happen overnight.
Inpatient Diagnostic Tests Face Fewer Reimbursement Problems
DIAGNOSTIC INSIGHT: And do you think that reimbursement will follow as the clinical need is established? What about the failures?
ROBERT BAUER: IVD has faced a comparatively tame reimbursement and regulatory environment for most of the products currently on the market. For truly new clinical tests, reimbursement has always been a battleground. Regulatory approval has also been a challenge. A lot of companies dealt with this whole area by simply avoiding certain parts of the market.
The real question is how many products have the earning potential to substantiate the investment and delays imparted by the regulatory process?
The problem really varies depending on the test application.
Tests for the outpatient market face the greatest challenge because reimbursement is on a per test basis in many markets and the value is formally determined and set at the beginning of the product life cycle. These products also need full regulatory approval to be on the market. This poses a dilemma for some potentially high value tests. For example, we recently evaluated a new serology test that will likely be launched on the basis of substantial equivalency to other serology markers, and reimbursed as such. The true value of this test, however, could be as a unique predictive marker that will substantially reduce the morbidity and mortality associated with a highly complex medical procedure. It will take several years of clinical experience and data to support this claim, however, and even if it is established and regulatory approval for this claim is eventually granted, reimbursement will already be set at the lower level. It would seem best to fund the required clinical studies to substantiate the higher value claim before entering the market, but not many start-up firms can afford this luxury, and in the case of this marker, while it is a substantial opportunity, it is not one that would likely attract investment at this level from one of the top five IVD companies.
Inpatient tests are easier than outpatient tests. Most are covered by more global budgets where there is little formality and value is established at the physician or laboratory level.
Highly specialized tests, run in high prestige institutions, face the lowest level of difficulty. Research use only labeling is not a particular limitation in this setting.
Unfortunately, a lot of the biggest opportunities are for outpatient conditions. And without a doubt, the environment is not very conducive right now in the US, and with the CE mark coming on line in Europe in 2003, it could get worse before it gets better.
A big part of the equation is the price of the manufacturer can extract in the market. Here, I think we also sell our technology short. IVD has had a "process" orientation that has heightened in recent years. The "clinical sell" is only present in a few areas today. The recent cardiac marker experience is a good example. One manufacturer entered with a well priced marker, but the price eroded as the test was leveraged to place instruments. The orthopedic device industry has $150.00 screws. We have $10.00 nucleic acid diagnostic tests.
Overall though, I think the regulators and the manufacturers will learn from the failures and in the long run the situation will improve.
The Drive for IVD Manufacturer Consolidation Has Cooled
DIAGNOSTIC INSIGHT: If you contrast company consolidation with the consolidation that has happened in the reference lab industry, where there was a consolidation that eliminated overcapacity, would you predict this will happen in diagnostics as well?
ROBERT BAUER: We have to look at it in near term and long term. In the near term I think the kind of consolidation we are going to see will be mostly fill-in acquisitions, like the recent acquisition of Vysis by Abbott, where you are adding a potentially high value technical capability.
Overall, I think the drive to consolidation is cooling. There are a few reasons for this. All of the major players have made a significant acquisitions and in many cases are still assimilating their acquisitions; good and bad. And with a market recovery in progress, even at its current level, most companies are not feeling as desperate right now. Of course this is not universal.
Also in the near term there are some regulatory issues to be concerned about. Look at what happened with the Roche's COBAS Mira product line in the Boehringer Mannheim acquisition and with Syva's drugs of abuse line when Roche acquired Syntex . US and European regulatory agencies forced the divestiture of these businesses as a condition of the acquisition. On a larger scale, look at what happened to the recently proposed General Electric / Honeywell merger. Future mega mergers may not be approved, at least in Europe.
Further consolidation will likely be a function of how well the growth of current technologies dovetails into the emergence of next generation products such as genomics. If there is a prolonged disconnect, I think we will see more consolidation at the top. It could, however, be very different consolidation than we have seen in the past. A lot depends on how the market evolves in some of the IVD growth sectors, such as molecular diagnostics, diabetes monitoring, advanced cellular diagnostics and hospital point of care. If these segments continue to grow they will account for as much as half of the market in the foreseeable future. Growth in these segments could force further consolidation in some of the mature, lower margin businesses such as routine chemistry and hematology. It is not necessarily companies themselves that will consolidate. We may see product line consolidation with a resulting reduction in industry overcapacity.
DIAGNOSTIC INSIGHT: It is generally thought that small companies need the infrastructure of larger companies to successfully market their products. Is this necessarily so?
ROBERT BAUER: For me, this brings up the issue of cooperation of IVD companies, in general, regardless of size. Our industry has yet to optimize cooperative relationships between companies. When a small company is targeting a decentralized market, it may need the infrastructure of a larger company for distribution power. You can even make the argument that even if they are targeting a centralized market, particularly if it is a more mature market, they may need the larger company. For instance, they may not be able to build the instrumentation or guarantee the delivery required by a blood bank.
We have yet to see the kind of partnerships seen in Pharma where co-marketing among the major players is now common practice. As we move down the road and companies seek to grow their businesses, the current barriers to cooperation will likely erode and we will begin to see more cooperative relationships. Now, several large companies compete head to head in all product lines and do not want to cooperate even on secondary product lines. As newer technologies start to evolve, we will start to see companies experience varying levels of success in different areas and I think that it is likely the top companies will look less like mirror images of each other. As this happens, their willingness to cooperate will increase.
DIAGNOSTIC INSIGHT: Are you seeing more active discussions between pharma and diagnostic companies?
ROBERT BAUER: Actually no. I think this is because most diagnostic companies are a near term oriented and pharmaceutical companies are very far term oriented in their product development. For diagnostic companies there is little motivation to partner with pharma because there is a fair amount of risk and time required to develop a pharmaceutical product. These partnerships may be more interesting to a smaller company because a smaller company because the relationship itself can help raise funds. This approach doesn't necessarily meet the net present value requirements of a larger company.
DIAGNOSTIC INSIGHT: Over the years as you have been consulting with industry, what are some of the surprises you have encountered?
This is a fun question. Let me take a stab at three things I've noticed.
The first one I'd call "the blessing and curse of corporate think". In my first assignments after leaving Abbott, I was surprised at how unique the cultures of the other leading companies are. And how much culture drives the way the market is defined, the way competitive moves are anticipated, how customers are seen, and how the future is projected. What was most interesting is how each company's commitment to its culture has contributed to many of it successes. It is also these company's inability to think outside of their culture that contributed to many failures.
The second is the real value of multi-market analysis. At CaseBauer, 85% of our assignments are multinational. I noticed early on how much more could be learned about a specific business opportunity when multiple countries are analyzed in tandem. There is incredible insight to be gained in understanding how different markets contend with basically the same medical scenarios and products.
The final has been the historic instability of the IVD market leaders. This has probably been the most surprising thing. Over the years, the number one player, first Technicon, then Dupont, and finally Abbott did not leverage its leadership position and pull away from the pack. It will be interesting to see how Roche will fare.