Corporate challenges in the changing IVD industry

Diagnostic Insight, 1997 Interview

Sanofi is a Paris-based multinational company whose core business is health care, including pharmaceuticals, diagnostics, and animal health. Its powerful research and development organization focuses on major therapeutic areas. Sanofi's mission, since 1973, has been to improve the quality of life.

The Sanofi beauty business comprises well-known brands such as Yves Saint Laurent, Van Cleef & Arpels, Roger & Gallet, Krizia, and Fendi and associate companies Nina Ricci and Yves Rocher.

Sanofi employs 37,500 men and women in more than 100 countries, with a global economic presence amounting to FRF 41.3 billion and products with leading positions in world markets.

In the following interview, Pasteur Sanofi Diagnostics chairman Christian Policard provides insight on his view of the IVD market.

Only infectious disease and cancer are profitable

ROBERT BAUER: With the ACCESS® automated immunoassay system, Sanofi jumped right in the middle of a crowded and competitive immunoassay systems market. What is your assessment of your situation today?

POLICARD: Many companies invested in the automated immunoassay market at the same time. The fact is, there are just many too many immunoassay systems on the market today. Profitability is down. Thyroid, TDM and manual products profits are down. Only infectious disease and cancer are holding.

Will this be a profitable market long term? I really don’t know.

But what I do know is that market cannot support all the immunoassay manufacturers that entered the market and the market will enter a period of consolidation. I envision this to be very similar to what happen in the clinical chemistry market in the 1980s. The net result will be that three, maybe four primary automated immunoassay competitors will dominate the market.

Abbott is the strongest. Abbott has the large position in the market and is effectively protecting share. Abbott is in position to provide many value added services is even setting a pace of services that others are finding hard to match.

If I look at our strengths and weaknesses, I consider Sanofi to be too small to be effective in North America. A company needs to have economies of scale in order to provide the necessary levels of service in a market that is increasingly demanding more service.

For us to deliver our ACCESS ® system with the type of support that we provide in Europe our cost is almost twice as much.

Now the US market is very important us and it's urgent that we become a stronger player. We will take action to see that happens.

In order to deliver competitive high value services, we're going to need an alliance in the U.S. We cannot go it alone. We need to partner. Someone with an established infrastructure... possibly a clinical chemistry product company.

I strongly prescribe to globalized market and localized management. When it comes to investment resources and research development, centralization is important to leverage the capabilities and bring the necessary resources to bear. At the same time, it must be recognized that every market is unique and that a decentralized operating organization can be most effective in adapting to specialized regional demands of marketplace.

The IVD market is depressed - the industry has waned except for a few companies

ROBERT BAUER: Overall, what is your assessment of the IVD opportunity?

POLICARD: The IVD market is depressed. Market growth is flat, at best, and testing volumes are decreasing. At one time, Pharmaceutical companies were intrigued by the IVD market. Compared to the pharmaceutical industry, the size was small, but the consistent 15% plus growth was intriguing. This market is no longer growing at that rate and as such, this interest has waned, except for a few companies such as Sanofi.

When I look at the growth opportunities it's hard to envision much growth in the U.S. market. And the situation in Europe is even worse with some markets declining as much as 2-3% in volume and pricing.

In recent times we have seen declines in the IVD market such as 20% in Italy, 6% in France, and 3% in Japan.

There is little opportunity for growth in the established markets.

ROBERT BAUER: What are the challenges facing IVD companies?

POLICARD: I would characterize this revolution in the IVD market as very similar to the revolution in Microprocessors. I essentially see many companies looking at the market the same way they did ten years ago. This is a sure formula for failure. I expect these companies will be in big trouble if they do not recognize change and alter their strategies.

The IVD market is changing. One key change is a more demanding buyer. This is largely a function of consolidation of healthcare providers. In the US, groups and chains are consolidating the hospital market. In Europe, the commercial laboratories are consolidating.

The result is fewer customers and larger customers. These “new” customers are exerting extreme price pressure on the market. Hospitals want better prices and they want more free services than ever before.

Essentially, they want to transfer their costs, for training and other product services to the IVD manufacturers. Buying decisions are not being made solely on technology and innovation any more. Services are becoming more and more important. Just look at the growing expectation by hospitals that the manufacturers train the operators and provide, in some cases, both the manpower and the supplies for the product evaluation.

This requirement for free services will drive mergers in the market. If the services must be offered as free, this is the only way to provide them and preserve a bottom line. In a flat market you must leverage service. This means supplying many products to your customer. Manufacturers need a broader fare to be profitable in the environment.

If a company has less than $25K to $30k in business, some buyers will not even meet with them. Manufacturers need critical mass to be competitive.

Short product life cycles combined with extended regulatory approval times are a key challenge

Another key challenge is regulation. I anticipate that the regulators, and the regulations facing this market will continue to move along the lines of those regulations facing the pharmaceutical industry. What this means is that it will take longer and longer to bring products to market.

There was a time when IVD products could be brought to the market in a matter of one or two months. But as I project the trends I see today, I anticipate that we are rapidly moving towards IVD approval cycles in excess of a year. And this is very troubling to me.

Diagnostic products have a relatively short product life cycle and need to be renewed every one or two years. When you couple this short life cycle with the extended regulatory approval times the situation could become most difficult.

Another key issue is IVD’s manufactures lack of influence on the process of change. IVD is a small industry and has really no effective lobbying power with the exception of maybe Boehringer Mannheim’s efforts in the field of diabetes. What this means to me is that IVD will not be well represented in political decisions and therefore decisions will likely be made that negatively impact the industry in the absence of a strong defending body.

ROBERT BAUER: Globally, how are these challenges developing?

POLICARD: Northern Europe is similar to the US... a bit behind but moving in the same direction. Germany leads the pack.

I see significant similarities, particularly in the last 5 years between Japan and Germany. These countries function very alike. This of course is not very surprising given the German healthcare system was modeled after the Japanese.

Southern Europe, France, Italy, Spain, are socialized and will to stay focused on preserving its employment. In southern Europe, the change will be much less dramatic than in the US and Northern Europe... it will take much longer.

ROBERT BAUER: Much is being said about privatization in healthcare. What is your outlook for privatization in Europe?

POLICARD: As I look across the industry I expect that in the U.S., Japan, and the U.K., private concerns will prevail and the government will step out as much as it possibly can from healthcare.

In France, it has not changed much in recent years from its 50%/50% split. I envision in the future that potentially 60% of the testing could be done on the private side and 40% in the public sector, but not much more of a shift than that.

In my opinion, Germany will continue to support a large public sector in healthcare.

There will ultimately be two basic IVD markets -Industrial Automation and Disease Management Products

ROBERT BAUER: What will result from the consolidation of testing, or Plateau Technique, as it is referred to here in France?

POLICARD: In my opinion Plateau Technique is good for testing that is not urgent. Plateau Technique is the answer for cost reductions and it's good for classical tests such as clinical chemistry testing.

At the same time Plateau Technique is not good for cardiovascular testing, tests like Myoglobin and Troponin. For these tests, speed is important and here is where point of care and specialization will play a role.

What I envision happening in the market is that we will ultimately have two basic IVD markets. One which I would characterize as that of industrial automation and another that I would characterize as that as high technology, disease related products.

Now when you look at the market and you realize that there's two types, the industrial and the disease related field, I think you must also realize that it would be extremely difficulty for a company to be successful in both. These market segments require very different skills.

To be successful in the industrial automation, you will need automation, communication systems, information technology and above all, a low cost position. Manufactures will not be successful without leading in 2-3 of these areas.

On the disease state side of the business, I envision many niches or that will offer significant growth opportunity. Essentially in these markets the value of the IVD product will be how well it contributes to the global control of the disease state.

I also believe that the advancement of product systems will have an overall limiting effect on competition. What I mean by this is that as you look at the sophistication of systems in this marketplace, more and more is becoming difficult to pioneer and master all the technologies required to be successful. As such, companies will need to work together to bring products to market, with the exception of a few large companies will have the wherewithal to bring systems to market. Ultimately this will have the effect of limiting competition in general.

ROBERT BAUER: What does this mean for Sanofi’s diagnostic businesses?

POLICARD: As you know Sanofi is a joint venture made up of 28% Pasteur and 72% Sanofi.

At Sanofi we have really three business; our business in blood viruses, our bacteriology or conventional microbiology business, and our automated immunoassay system, ACCESS®, which is focused on protein and allergy testing.

I'd say the approach for Sanofi is really a three prong strategy; establishing key collaborations, developing high technology niche markets, and dominating high growth regional markets.

To bring products to market we're not afraid of collaborations. We're collaborating with Johnson and Johnson with our HIV products in the U.S. and we're collaborating with Fujirebio in a joint venture in Japan. In order to deliver high value for our ACCESS® we're going to need an alliance in the U.S.

Clearly we cannot go it alone if you look across our product lines our bacteriology business is not even represented in our U.S. or Japanese markets.

We envision ourselves as a leader in the development of disease state products and niche markets.

Five key business areas: Hepatitis C, cardiovascular disease, aging, diseases of the central nervous system, and cancer

Sanofi's true strengths are in it's technology. We have an excellent technology source with Institute Pasteur and a broad patent portfolio in the HIV and probe testing area. We are a company that's very strong in pharmaceutical research and we can couple our advances and technology developments in diagnostics with drugs and this is what we plan to do, particularly in area of cardiovascular disease, aging, central nervous system disorders, and cancer.

As Sanofi there are five areas that we are most concerned about. That is Hepatitis C, cardiovascular disease, aging, diseases of the central nervous system, and cancer. In these areas we have the ability to couple our drug development with out development of diagnostic tests which can be used together to improve the management of the disease.

In these markets the value of the IVD product will be how well it contributes to the global control of the diseased state.

Patents will be much more important than they were in the 1980’s. Patients will be the basis of licensing as companies strike more cooperative deals. I expect this will be a very significant issue in infectious disease HIV and the probe market.

And finally, we anticipate we will be one of the strongest companies in the developing markets and will get much of our growth from Asia, Eastern Europe, and South America.

Our direct marketing capabilities are the strongest in the emerging markets which now represent more than 25% of our business when they only represent 15% of the market. We are a strong player in markets such as Brazil, China, Eastern Europe and Asia. Here ,Sanofi as a company, has always been a pioneer. Sanofi was the first pharmaceutical company in Europe to go into China.

This is an area where I think, Sanofi has a significant advantage. In my opinion North American corporations know little about these markets. While it's true these markets today only represent 10-15% of the overall worldwide IVD market. I think it's reasonable that in ten years they will represent as much as a third of the worldwide market.

The growth that we have experienced has been in Brazil, Thailand, and Korea where we've seen growth rates of 15%, 13% and 15% respectively.

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