Revisiting Roche's Diagnostics Strategy

A recent long article in the Wall Street Journal took a very hard look at the problems plaguing the pharmaceutical industry (see: Big Pharma Faces Grim Prognosis) and came to the conclusion that the business model used by most of the Big Pharma companies is badly outdated. Buried in the article are a couple of key paragraphs relating to Roche that will be of interest to the readers of this blog. Here's the first of them (boldface emphasis mine):

Diversification is another hope [for Big Pharma to help solve its problems]. Roche Holding AG is pursuing a $3 billion hostile takeover of Ventana Medical Systems Inc., a diagnostics company that makes the test used to determine whether women with breast cancer should receive Herceptin, a targeted biotechnology drug that Roche sells in some markets. The bid is part of a broad push further into diagnostics by the company, which said in July that Severin Schwan, who runs the company's diagnostics unit, will take over next year as CEO.

Here's the second item (boldface emphasis mine0:

The future, many [pharmaceutical companies] believe, lies in biotechnology. Unlike traditional, chemistry-based drug development, biotechnology uses biological tools to create entire proteins, often similar to those that occur in the human body....Biotech drugs are especially appealing because they face no competition from generics: No regulatory pathway yet exists in the U.S. for bringing to market generic biotech drugs. So until Congress creates such a pathway, no generic threat will exist [for biotech drugs]. And biotechnology products tend to target specialized areas of medicine that don't require mass advertising or armies of salespeople.

I have posted a number of previous notes about Roche's business strategy, including special attention to its interest and support for companion diagnostics (see: More Details About Roche's Companion Diagnostics Strategy; Five Alternative IVD + Software Business Models). Here's what I take away from these quotes article regarding Roche's diagnostics strategy:

• Roche is interested in expanding its already very significant position in lab diagnostics as evidenced by its persistent quest for Ventana and its appointment of Severin Schwan who runs the diagnostics unit as its CEO. As I have previously discussed, GE and Siemens, are pursuing a diagnostic-centric model within the healthcare industry by attempting to blend medical imaging with IVD. (see: Ten Reasons Why Pathology and Lab Medicine Should Merge with Radiology). Roche cannot help but derive benefit from this increased emphasis on lab diagnosis as promoted by GE and Siemens. The latter company, of course, is now a major presence in the IVD sector.
  
• As noted above, all of the pharmaceutical companies are attempting to diversify while simultaneously trying to rework their drug development pipeline, which has not been successful for them in recent years. The fact that Roche is already diversified into diagnostics will certainly work in its favor.
• Roche's emphasis on companion diagnostics is inextricably linked to biotech drugs for which these lab tests serve as a pathway to identify suitable recipients. Biotech drugs, as we learn above, are not threatened at the present time by competition from generic drugs. Roche can therefore leverage its expertise in companion diagnostics to help shield its current and future biotech drugs from competing products.