Big Pharma gets a bum rap.
Year after year its highly educated staff toil away inventing the medicines that keep us alive. It takes years of effort and a billion dollars to bring a new drug to the market.
But if that drug has an unexpected reaction, something that the extensive testing has not predicted, then all hell breaks loose. The drug company is pilloried by the media, chased to the end of the earth by avaricious lawyers and forced to pay out millions in fines and compensation.
Now though there is reason to hope that such episodes may become a thing of the past. It is due to an advance in one of the world’s major medical industries, diagnostics. A field that presents some of the most exciting penny share opportunities of any industry today.
How a simple test spawned a $45bn industry
70% of medical treatment is determined after some form of diagnosis. We have all had to give a urine sample or a pin prick of blood, so that the doctor can see what might be the matter with us. These are both examples of diagnostic tests.
But today the term ‘diagnostics’ usually refers to immunodiagnostics. Immunodiagnostic tests introduce antibody generators (or “antigens”) into a sample of body tissue or fluid, stimulating an immune response. The concept of using immunology as a diagnostic tool was introduced in 1960 as a test for serum insulin, and is now the basis for a $45bn global industry.
This is a rapidly growing market – powered by the ageing population, the ambition of developing countries to match western healthcare standards and widespread pressure on healthcare budgets. And it is bringing about a radical change in medical treatment.
Why diagnostics are a major money-spinner for Big Pharma
Traditionally diagnostic tests have involved a visit to the surgery, where the doctor takes the sample and then sends it off to a distant laboratory. The results are received days later, after which the patient may need to make a second trip to the surgery. This is an expensive and time-consuming process.
But now health policy makers are doing all they can to keep people away from the surgery and the hospital. And new diagnostic tests offer the chance to assess patients in their own home. Today diagnostic tests are devised for the ‘point-of-care’ market. According to Frost & Sullivan the point-of-care testing market is growing at some 10% per annum in the USA, Europe and Japan.
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Healthcare companies are attracted by this growth but also by the ‘razor blade’ business model. Point-of-care diagnostic tests require a small device that can be sold, rented or leased, but the real money-spinner is the supply of the consumable reagents required for each test.
But while Big Pharma has had great success developing these traditional tests, a new discipline – molecular diagnostics – could dwarf these efforts in the space of a few years.
The new industry that will transform drug development
It was the sequencing of the human genome that made this new discipline possible. By deconstructing the human body cell by cell, scientists believe they will be able uncover the genetic roots of complex diseases such as cancer and diabetes. And that is a hugely exciting prospect for the diagnostics industry.
While traditional diagnostic tests can only measure the response of the body to random antigens, the new molecular tests look directly at the make up of the body. They can help identify the portions of genes responsible for chronic genetic disorders. And they could also be used to determine the optimum dosing of a drug for each specific patient – heralding a new personalized approach to drug development.
Molecular diagnostics is already used in forensics and paternity testing and is also popular in genetic screening, for instance when testing newborn babies for genetic disorders. But it’s this shift towards personalized medicine that is the fastest growing area for molecular diagnostics.
The aim is to achieve the right dosage of the right drug at the right time for each patient, and it promises a major advance on the ‘one-size-fits-all’ approach that has traditionally characterized drug development.
Having initially been wary of a potentially disruptive threat to their traditional business model, pharmaceutical developers are now realizing that molecular diagnostics offers a better way of treating people. But there is another important consequence…
Over the years the industry has discarded hundreds of therapeutic drugs because a handful of people might suffer adverse consequences.
If molecular diagnostics can identify the latter in advance, then a large number of those abandoned drugs could yet be brought to market.
How to tap the most exciting medical breakthrough in decades
This is a high growth industry that has already produced several stock market successes.
Shares in Immunodiagnostic Systems (IDH) have soared from 50p in 2005 to 740p today (13th Aug 2010) – just under a 1,400% return for early investors.
Now the man behind this money-spinner has a new stock market vehicle in the diagnostics industry. You can read all about it in the August issue of Red Hot Penny Shares.
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
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