With Drug-Diagnostic Co-Development, Firms Must Ensure Priorities, Goals Align

As knowledge around biomarkers grows, more drugs are coming onto the market with FDA-approved labels indicating their use with a particular diagnostic test. With most manufacturers nowadays choosing not to develop their own companion diagnostics but rather to partner with an outside firm, pharma companies need to be able to incorporate a diagnostic strategy into their drug development approach so they are able to identify the appropriate patient population at launch and get their drug to as many people as possible.

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With Drug-Diagnostic Co-Development, Firms Must Ensure Priorities, Goals Align
by Angela Maas
Courtesy of AIS Health

As knowledge around biomarkers grows, more drugs are coming onto the market with FDA-approved labels indicating their use with a particular diagnostic test. With most manufacturers nowadays choosing not to develop their own companion diagnostics but rather to partner with an outside firm, pharma companies need to be able to incorporate a diagnostic strategy into their drug development approach so they are able to identify the appropriate patient population at launch and get their drug to as many people as possible.

Last year, 34% of the 46 new molecular entities that the FDA approved were personalized therapies (see chart, p. 10), the most of any year ever. That’s up from just 5% in 2005, according to the Personalized Medicine Coalition (PMC). Since 2014, the percentage has topped 20% each year. In addition, in 2017, the FDA expanded the labels of 15 already-launched personalized drugs, according to PMC’s Personalized Medicine at FDA: 2017 Progress Report.

Previously some companies would develop both the drug and the diagnostic, but the number that now do so has declined. Pulling double duty “used to be a little bit more common, but it’s relatively rare right now,” says Amit Agarwal, managing director, life sciences at Deloitte Consulting LLP. “If you asked the question [of whether drug companies developed their own diagnostics] five years ago, there’d be a lot.” Roche, which has both a pharmaceutical division and a diagnostic unit under one roof, is one of the remaining examples. Some companies have reorganized and spun off diagnostics divisions, while others have sold them.

Agarwal tells AIS Health that “diagnostics is a very different margin and business model than the pharmaceutical industry. In fact, it’s lower than pharmaceuticals.…The economics of it differ pretty dramatically, so a lot of these decisions weren’t made because they don’t believe in the value of companion diagnostics — it’s just that they saw these divisions as being less profitable than their core business of developing drugs.”

Diagnostics Have Different Economics

In this era of personalized medicine, a drug may be effective for only 15% or 20% of a patient population base, he notes. So diagnostic companies have a limited number of people who will undergo testing once, “and that’ll be the end of [their] revenue” from a test, he says. “A drug company, when they develop a drug, it might be a treatment that goes on for years, and they might make literally billions of dollars off that drug, whereas a diagnostic company is making $20, $30 million off of all the testing they’ve done. So there’s a very different set of economics that are associated with it, and that’s why most drug companies have chosen to partner with a diagnostic company in terms of them developing the diagnostic, and the pharma company sticking to developing the drug.”

In addition, there are scientific and technical reasons that drugmakers don’t develop their own companion diagnostics, Agarwal says. A challenge here is “that a lot of drug companies, today especially, utilize biomarkers as the basis for their drug development process. They discover some kind of biological phenomenon that highlights to them that either this is an indication, or this particular area is something that you can create a drug for or treat in some way.”

The issue here is that “sometimes you can have a really, really good biomarker for treating a disease that’s a very poor biomarker for developing a diagnostic. Because diagnostic biomarkers have a different set of criteria needed in order for them to become useful.”

According to Mark Ginestro, principal at KPMG Strategy, “Developing diagnostics and developing drugs are different types of businesses that have different operating models, skill required, regulatory pathways and cost structures,” as well as “very different pricing and sales orientation.”

“Historically, drugmakers have identified the need for a diagnostic test during the drug development process to predict response to the drug without necessarily knowing what the regulatory impacts may be,” says Karen Richards, senior vice president of in vitro diagnostics and quality at Precision for Medicine. “Lab tests used for patient screening may result in some form of a laboratory assay at approval; however, with proper planning and the right regulatory strategy early, the type of test, companion diagnostic, complementary diagnostic test or a CLIA [i.e., Clinical Laboratory Improvement Amendments] laboratory test can all be properly defined. Today, drugmakers may develop their own test, but the complex regulatory and market access hurdles are such that most turn to outside experts to develop clinical trial assays with a focused lens to the downstream impacts.”

That’s not the only reason for pharma companies to outsource the development of these tests. When they develop both the drug and the diagnostic, “in many instances it sets up legal and pricing challenges,” says Ginestro. “For example, if a pharma company subsidizes the price of a [companion diagnostic] such that it gets used on more patients (you would think this is good!), but if the companion diagnostic indicates a ‘rule-in’ for a drug that the same pharma company sells, then the pharma company may be seen as inducing a part of the health care system to make monies from another. If one of the payers is a government agency, this gets even more restrictive and potentially hazardous. For companies like Roche that have diagnostic divisions, they maintain a healthy arm’s length relationship between the [pharmaceutical and diagnostic] divisions to ensure that independence can be shown when/if investigated.”

It is most beneficial, maintains Richards, for pharma companies “to partner with a company skilled in developing research assays and companion diagnostic tests. The drugmaker will often contribute the biomarker/analyte to be detected, in the form of a drug target molecule or known antibodies/antigens to a drug itself. However, the process to develop, validate, market and distribute a companion diagnostic is distinctly different from that for drugs.”

When two different companies are co-developing a drug, Ginestro says, “knowledge of the molecular biology can be shared; the assay can be tweaked to reflect learnings from the clinical study; clinical samples for observational studies can be sourced/shared; prospective clinical studies can have small marginal costs when companion diagnostic are overlaid; health economics and pricing can be analyzed in one true ‘cost to system’ picture; and, most importantly, the regulatory approval agencies such as the FDA can look at the companion diagnostic and the compound’s data and provide a combined approval.”

FDA Encourages Co-Development

In fact, the FDA encourages co-development of a drug and diagnostic. In the August 2014 guidance titled In Vitro Companion Diagnostic Devices, the agency states, “Ideally, a therapeutic product and its corresponding IVD companion diagnostic device should be developed contemporaneously, with the clinical performance and clinical significance of the IVD companion diagnostic device established using data from the clinical development program of the corresponding therapeutic product.” The agency acknowledges, though, that this may not always be possible.

“If you’re putting a drug out there that you believe only works in a subpopulation, the FDA increasingly is demanding that you develop a companion diagnostic contemporaneously with the drug,” elaborates Agarwal. “They’re taking a dim view of ‘launch it and hope that it works in enough of a population that you power your trials to a high enough level that you’ll show some kind of efficacy or response.’ If you believe that there is some kind of genetic or some other biomarker that indicates whether a patient will respond or not, they want you to go ahead and put that in place.”

So at what point in the drug development process should a manufacturer partner with a diagnostic company? According to Richards, “This is a critical question and one that should be considered as early in the development life cycle as possible. Given the complexity of the diagnostic ecosystem, it is less about when to partner with a diagnostic company and more about when to engage the proper experts to holistically assess the clinical trial and longer-term diagnostic needs. Diagnostic products that will be reviewed by a regulatory authority are subject to very specific requirements under a quality management system. This is true whether the diagnostic is intended for use as a lab-developed-test (LDT) in a CLIA-certified lab or review and approval by the FDA or other regulatory bodies. Because it is a multistep process with specific requirements to be met along the way, it is important to engage experts as soon as possible — preferably as soon as the drugmaker has identified the need for a clinical trial assay, which may be as early as the initiation of Phase I studies.”

Diagnostic Must Be Ready by Phase III

In a situation where a company wants to simultaneously launch the drug and diagnostic because the diagnostic’s availability “identifies the patients that are going to be treated,” then based on the standard drug development process, “you have to have the diagnostic developed and ready to go by the time you go into Phase III of your trial because the diagnostic is going to be used as a way to segment and actually identify patients that will be used in your Phase III trials,” says Agarwal.

When drugmakers are selecting a company to partner with, there are various considerations that go into the decision. “The strength of the technology they have or are developing is most important,” asserts Ginestro. “Beyond that, partnerships need to consider strengths beyond technology, such as marketing, manufacturing, informatics, finances, relevant product development history and overall ability/willingness to make a deal.”

Richards tells AIS Health that a third company may need to get involved in a situation where “the development and manufacture of the companion diagnostic may require specific expertise from a company that does not market or distribute such products. In this case, the drugmaker may engage two different diagnostic companies, one to act as a contract manufacturer, the other for marketing and distribution of the test. The goal of the drugmaker is to have the companion diagnostic readily available for commercial clinical use in all drug markets on the first day of drug launch, and the ability to achieve that goal is the standard against which potential partners should be measured.”

Because drug and diagnostic companies have different models and priorities, they need to make sure these are aligned within a co-development partnership. “Making sure the strategy rationale for the partnership is clear is of the utmost importance,” Ginestro tells AIS Health. In addition, “it’s important to be clear on expectations for performance on both sides, how performance will be measured and what happens if performance criteria are not met for whatever reason.”

An outside expert can help “ensure alignment scientifically and economically,” say Richards and David Parker, senior vice president, diagnostics solutions for Precision for Medicine. “The diagnostic and drug development processes have different timelines and technical hurdles, so to avoid potential delays in drug development, it is critical that these disparate processes be overlaid and rationalized from the start.”

With different development timelines, pharma companies need to make sure they keep their diagnostic partners “apprised of the time and investment needed by the drugmaker to move products through various trial phases,” since that “can lead to disconnects” between the development pipelines for the products.

In addition, “For a diagnostic company to invest the time and resources into a companion diagnostic program with an uncertain probability of success for drug approval puts the diagnostic companies in a high-risk situation for which they need to be compensated either up front (i.e., the pharma company defraying the cost of development) or later based on the drug’s success,” say Richards and Parker.

This risky situation, notes Agarwal, “can be very challenging for a diagnostic company because it does not have access to the same deep levels of capital that a pharma company does.”

Drugmakers may not have an understanding of diagnostic access internationally, he adds. “For example, in Spain, they don’t cover the cost of doing the testing of a companion diagnostic for a drug. So that makes it very hard for a diagnostic company. The cost of the diagnostic has to be put into the cost of the drug, which means that either the pharma company has to reimburse the diagnostic company, or, what the diagnostic company would really like — but I’ve seen very few examples of this — is the diagnostic company would like to get some degree of royalties on the sale of the drug. From their perspective, that’s how they’d square the circle. But most pharma companies work on a milestone-driven approach.”

 “It is imperative that drugmakers consider these dynamics when engaging with diagnostic companies and invest in the success of the diagnostic development program to ensure enthusiastic cooperation in bringing the companion diagnostic to market,” say Richards and Parker.

“There are invariably different expectations about timelines, responsiveness, technology complexity and other similar characteristics” when companies are co-developing a drug and have different priorities, says Ginestro.

For example, says Parker, “There is a common misunderstanding of the differences between a research assay, clinical trial assay and companion diagnostic assay. Each has value but represents very different stages of test development that require different levels of performance testing. This is why it is important early on in the drugmaker’s development process to identify whether there will be a requirement for a marketed companion diagnostic vs. just a research or clinical trial assay, for example.”

To address such factors, many companies “have a steering committee with members from both sides overseeing the partnership” Ginestro says. “Co-development partnerships have ebbs and flows of success and momentum, so it is important to have a solid base of trust and strong relationships. Alignment among the partners can be fostered through development milestones being built into an agreement.”

Ultimately, says Ginestro, “Being proactive and monitoring the partnership is key to addressing challenges before they become issues.”

Clear lines of communication between the companies are also critical, Richards and Parker say: “It is essential that communication between the development and commercialization teams of the drugmaker and diagnostic company must be clear, frequent and free-flowing to ensure that the linked products reach the market as planned.”

Post-Launch Interests Must Be Aligned

Once the products are commercially available, the companies need to make sure their business interests remain aligned. With the shift from co-developing to co-marketing, “there are typically different parameters and success criteria governing the partnership,” Ginestro notes. “There are also different stakeholders involved from both sides.”

“For a pharma company, the key is that they want to get the diagnostic out to as many people as efficiently as possible and get the test done because that expands the market for their drug,” notes Agarwal. “That ability to go out and actually get a diagnostic and market it and sell it is something that often has been overlooked by drug companies when they work with companion diagnostic companies.…To put it in a very simple way, what a [drug] company needs to do is they have to make sure that both of them can make money doing this.”

Tests May Have Many Competitors

This also can be challenging because pharma companies may not have an exclusive relationship with a single diagnostic firm but rather wish to “get this diagnostic testing out there as widely dispersed as possible,” Agarwal says. “And since diagnostics don’t have the same level of IP [i.e., intellectual property] protection that pharma products do,…the more the merrier as far as they’re concerned. They want as many people to use the diagnostic as possible. So you often see in many cases that there are then multiple companies that are producing companion diagnostics for that [drug], which is good for the pharma companies but not so good for the diagnostic companies because their individual assays and the diagnostics they produce don’t earn as much money.”

Competitor tests may have distinguishing qualities such as lower costs, wider availability and faster turnaround times, points out Parker. So even though a drug may have hit the market with a specific companion diagnostic on its label, in situations where competitors may have such qualities, “the drugmaker perceives the alternative test as a better option for drug access, and in practice the payer may not care which test is used to stratify patients for treatment.”

On the flip side, a diagnostic company “may pursue a go-to-market strategy that it sees as optimal for revenue and profit from the companion diagnostic, but which is not favorable for access to the drug,” he says. “This might involve choices in test format, distribution channel or even CPT coding for billing purposes. It is to the drugmaker’s benefit to ensure that its business relationship with the diagnostic company affords it some control over these factors.”

But focusing solely on the two companies within the partnership would be a mistake, says Agarwal. “It’s increasingly important…what providers and payers are thinking about this whole thing because they’re the ones that, at the end of the day, give the diagnostic test and then give the therapy and then pay for the therapy.”

And these stakeholders’ priorities can differ as well. For example, there are numerous tumor necrosis factor (TNF) inhibitors available that have different prices, with some working better in certain patients than in others. In this situation, he says, what providers and payers would like to see “is a panel diagnostic that would compare…‘if this patient comes in and I do a diagnostic test, and it tells me whether they have a particular genetic mutation,…which of those anti-TNFs would work best for my patient?’ Now that’s a very different kind of diagnostic that a provider or payer would like to see. A drug company only wants to have a diagnostic out there that tells you whether their drug is going to work. They’re not interested in expanding the market for their competitors.”

Agarwal tells AIS Health that there also is growing tension around drugs with companion diagnostics over whether “the selection of a drug for a patient is going to be driven by the unique biological situation with the patient,…or is it going to be driven by commercial contracting concerns? [Payers are saying,] ‘I have a certain drug that I have on formulary, and I got a better price for it,’ and that’s been sort of the challenge that we’ve been starting to see with providers and payers: They’re starting to have a more significant role to play in these kinds of decisions that are going on.”

Contact Agarwal through Ellen Conti at elconti@deloitte.com, Ginestro through Bill Borden at wborden@kpmg.com and Richards and Parker through Tess Rollano at trollano@coynepr.com.

Precision Medicine Group is an integrated team of experts in fields from advanced lab sciences to translational informatics and regulatory affairs, payer insights to marketing communications. Together, we help our pharmaceutical and life-sciences clients conquer product development and commercialization challenges in a rapidly evolving environment.