An informed outsourcing strategy can help IVD manufacturers adapt to increasing worldwide pressure on product margins.
By Donna Hochberg, Kate McLaughlin, and Jeremiah O’Connor
In vitro diagnostics (IVD) companies face a growing array of global pressures. Many clinical lab customers currently are challenged to perform a higher volume of tests with flat or declining budgets, leading to difficulties in managing throughput, staff time, and expenses (Figure 1). Austerity measures in the European Union have led to dramatic reductions in overall public health expenditure, late payments, and reimbursement cuts for specific tests such as blood glucose and HbA1c. Together, these measures have resulted in a slowing of growth for the European IVD market, with 2.7% lower revenues for the first three quarters of 2012 compared with 2011; some countries, such as Greece, Poland, and Portugal are experiencing double-digit drops in IVD revenues.
In the United States, across- the-board cuts to Medicare (Figure 2) are creating an environment in which the most efficient labs thrive while smaller labs struggle to stay afloat. This has driven ongoing consolidation between hospital-based labs, as seen by recent large acquisitions among US reference labs and European mergers in response to recent government mandates to meet new performance standards. These trends provide the largest players with greater purchasing power, further driving down diagnostics pricing.
In addition to these pressures on key clinical customers, diagnostics companies are faced with new challenges to demonstrate the cost effectiveness and clinical utility of their products to gain reimbursement. Both the United Kingdom and Germany have established processes to review the clinical merit of diagnostics and incorporate this assessment in a reimbursement decision. Prior to review of companion diagnostics by the UK National Institute for Health and Care Excellence (NICE) starting in 2010, these tests were paid for by the pharmaceutical sponsors rather than the NHS. Following NICE evaluation and determination of clinical merit, tests for Her2, KRAS, and EGFR as companion diagnostics for oncology drugs are now reimbursed by the NHS. In other EU markets, local decisions on coverage and reimbursement rates for diagnostics make it difficult for companies to capture the value of tests even with a significant clinical impact.
Both CMS and private payers in the United States are taking a closer look at the clinical utility and cost of diagnostic tests. West coast Medicare carrier Palmetto has taken the lead on evaluating molecular IVDs, and has established a process to review coverage and determine reimbursement for all molecular diagnostics using evidence-based assessments. CMS and other private payers are also incorporating clinical data in the coverage process. Payers in leading diagnostics markets essentially are asking companies to invest more in product development and clinical evidence to support use with smaller potential returns.
To survive in this environment, diagnostics companies are seeking ways to reduce the cost of tests and supplies, develop new products in a more cost-effective manner, and protect margins on existing diagnostic products all while maintaining quality. A number of potential strategies are available to diagnostic OEMs to contain costs and provide high-value tests to customers in the face of these challenges. One often-overlooked option is to focus on optimizing the design and manufacturing approach for disposable platform components. For new products, emphasizing lean manufacturing early in the development process can reduce costs and mitigate downstream risk associated with supply chain management, sustainability, and meeting potentially abrupt changes in demand. For existing products, continued refinement of manufacturing processes can be a useful ongoing cost-reduction approach which is less burdensome than a full-scale redesign.
While diagnostics companies are fully capable of improving the technical performance of their product offerings, an external manufacturing partner can provide a valuable perspective on options to reduce manufacturing costs throughout the life cycle. Outsourced manufacturing enables diagnostics companies to contain costs and mitigate the risk of investing in new technologies, which may not succeed in the evolving global diagnostics market. As a result, contract manufacturing organizations (CMOs) are increasingly utilized and valued for both economic and strategic contributions to product development. Together, diagnostics companies and outcomes-driven CMOs can drive innovation and continually lower costs to achieve higher margins. Through a culture of cost savings and strict quality-oriented process control, and with a track record for innovation and problem solving, an experienced CMO partner can bring a wealth of continuous improvement strategies and skills from previous successful projects to the table.
To systematically reduce production costs for disposable components of diagnostic products, a CMO must have a disciplined culture of cost savings that can only survive with sustained success. The appropriate culture is rooted in a belief system within the organization that delivering cost savings is critical to serving customers and, therefore, key to the survival of the enterprise. This belief system is manifested as a formal, organized system supported by control documents and accounting approvals. Everyone from the assembly line to the C suite is responsible for finding cost savings, and this responsibility must be accounted for during every employee’s annual performance review. The contributions from engaged, motivated, line-level associates are invaluable and cannot be supplanted by top-down processes such as a center of excellence. A cost-saving culture celebrates winning and incentivizes every employee to identify and deliver cost reductions individually and as an organization. Without the achievement of cost savings, this type of program will crumble under its own weight, as employees will lose motivation and drive.
Furthermore, CMOs capable of delivering lower costs throughout the product life cycle should be able to provide diagnostics companies with documentation on cost savings for other customers as a percentage of total purchases. By actively seeking a partner whose culture fosters a drive to reduce costs across all levels and who is able to provide evidence for achieving results, diagnostics companies should be able to differentiate between CMOs that talk about delivering cost savings and those that actually live it.
Cost-savings activities can only begin if a CMO is already making perfect parts that result from quality engineering, launch, process, manufacturing and control disciplines. To determine the extent of a potential partner’s emphasis on quality, diagnostics companies should look to the defect rate reflected by end user complaints, or the external rate of defects per million units (DPM/PPM). If a CMO is chasing problems and reacting to issues, it will not be able to place appropriate emphasis on improving margins for its customers.
Finally, diagnostics companies should be aware of the importance of experience and innovation when selecting a manufacturing partner. Diagnostics companies should look for a core group of engineers with diverse experience across technologies and applications. In this way, a CMO partner can bring a continuous improvement ethos and skills from previous successful projects to the table. As important as these experiences are, they are either muted or amplified by the group’s ability to innovate. Unfortunately, innovation isn’t as easy to identify. Some of the most creative innovations appear obvious . . . after they have been introduced. To assess a CMO’s ability to innovate, diagnostics companies may look at the CMO’s track record of problem solving, once again asking for examples and referrals to ensure these efforts bore fruit.
In sum, the examples above underscore the major ways a CMO can help a diagnostics company improve margins in an increasingly complex marketplace. When searching for a CMO, diagnostics companies should look for the following four attributes:
In reality, the vast majority of CMOs are focused on growth and building revenues. A culture of cost savings requires a firm belief that the approach will deliver long lasting partnerships. The culture demands a discipline throughout the organization and a commitment to invest in this activity. Diagnostics companies looking for CMOs to help them improve margins in the face of new pressures will realize that these relationships are not transactional—they are the essence of successful and lasting partnerships.
Donna Hochberg is a vice president at Health Advances. She can be reached at firstname.lastname@example.org.
Kate McLaughlin is an associate at Health Advances. She can be reached at email@example.com.
Jeremiah O’Connor is director of sales and marketing at Injectronics. He can be reached at joconnor@ injectronics.com.