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Agilent to Strengthen Personalized Rx Foothold with $2.2B Dako Acquisition

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Originally published May 22.

With its planned $2.2 billion purchase of cancer diagnostics firm Dako, Agilent is not only hoping to bolster its molecular diagnostics capabilities, but also stands to benefit from Dako's longstanding relationships with drug developers as a provider of companion diagnostics for personalized treatments.

During a call with market analysts last week, the two companies focused on how the acquisition would strengthen Agilent's presence in the cancer molecular diagnostics market and enable it to provide a wider range of instruments based on immunohistochemistry and in situ hybridization. However, what the deal means for Agilent's entrance into the pharmacogenomics and companion diagnostics market remains to be seen.

So far, Agilent has painted its strategic rationale for acquiring Dako in broad strokes. "Agilent's strategy in acquiring Dako is about strengthening our presence in [the] life sciences," an Agilent spokesperson told PGx Reporter. "Together, we will be able to develop a wider range of products that help in the fight against cancer."

The acquisition is slated to be finalized in the next 60 days. Ahead of closing the deal, Agilent said it could not provide answers to more specific questions about its interest in personalized medicine.

Dako's pharmacodiagnostics business garners revenues from assay-development contracts with pharma as well as from the sale of companion diagnostics.

"If you put the two of them together, it's a fairly sizeable business," Dako CEO Lars Holmkvist said during the analyst call without breaking out exact figures. "The business is doing well," he assured, adding that Dako is really the only company that has been able to partner with pharma to commercialize an IHC-based companion diagnostic.

Dako was an early entrant into the companion diagnostics market. Its HercepTest IHC assay for HER2 overexpression was the first companion diagnostic to accompany Genentech's Herceptin.

Often cited as the poster child for personalized medicine, Herceptin and HercepTest were the first drug/diagnostic combination product to be simultaneously approved by the US Food and Drug Administration in 1998. Since then, the FDA has issued a draft guidance on companion diagnostics that indicates the agency's preference for co-development and simultaneous approval of Rx/Dx personalized treatments.

Since the initial collaboration around Herceptin, Dako and Genentech have expanded their partnership to advance Dako's HercepTest and HER2 fluorescence in situ hybridization pharmDx assay to support the administration of Herceptin in advanced HER2-positive stomach cancer, as well as for other investigational drugs for advanced HER2-positive breast cancer, such as trastuzumab emtansine and pertuzumab.

Given Dako's track record with Genentech, several other drug developers interested in entering the personalized medicine space have also hired Dako to develop companion tests for drugs in their pipelines. Dako has publicly announced deals with Amgen, AstraZeneca, and Bristol-Myers Squibb.

By acquiring Dako, Agilent garners a solid foothold in the companion diagnostics space and is in a strong position to attract new pharma clients by offering them global marketing access – a capability that multinational drug firms highly prize in a diagnostic partner. In fiscal year 2013, Agilent expects to invest an additional $10 million in sales and R&D to support the development and marketing of Dako's products. It is unclear what portion of this funding will be dedicated to growing Dako's companion diagnostics activities.

Agilent's acquisition of Dako "permits a clear pathway for advanced measurement science and systems into clinical application," Patrick Terry, head of the pricing, reimbursement, and market access practice at life sciences consulting firm Scientia Advisors, told PGx Reporter. "Agilent can … be a real player in clinical diagnostics and personalized medicine."

According to Agilent, 85 percent of Dako's sales are to pathologists in laboratories. The company makes the bulk of its revenues from sales of antibodies, reagents, scientific instruments, and software.

Dako's main presence is in the anatomic pathology market, which Holmkvist estimated to be a $2.2 billion market growing at a rate of 8 percent to 10 percent annually. "While our channel is focused primarily on pathology and research markets, our capabilities include regulatory experience and manufacturing, which could easily be leveraged into other diagnostic areas," Holmkvist said.

Agilent CEO Bill Sullivan added that Dako will also help the company in the rapidly growing molecular diagnostic market, valued at $4.5 billion currently, and growing at 10 percent to 15 percent annually.

Dako last week announced that it was working with the Van Andel Research Institute to develop cancer diagnostics based on the Met4 antibody. Under this collaboration, Dako will develop diagnostics based on the antibody and will be responsible for commercializing the tests globally.

"The application of the Met4 antibody in Dako's extensive pharmDx development pipeline will expand the growing numbers of high-quality companion diagnostic pharmDx kit solutions released from Dako and further improve patient characterization and selection for tailored drug treatment," Holmkvist said in a statement discussing the partnership.

Dako's established presence in the molecular diagnostics field advances Agilent's recent efforts to lay the groundwork for its own entrance into the space.

Last year, Agilent registered a manufacturing facility in Cedar Creek, Texas, with the FDA as a medical device establishment, a move that will allow the firm to manufacture diagnostic products at the site. Then, earlier this year, Agilent announced it was working with Integrated Diagnostics to develop multiplexed protein-based biomarker assays for early disease detection.

Agilent has highlighted that Dako's expertise in ISH technologies will complement its SureFISH business. Sullivan noted that with Dako's regulatory expertise, Agilent is hoping to "quickly and broadly" launch SureFISH products for cancer and other applications.

In turn, Agilent will help grow adoption of Dako's products in the US, Europe, and emerging markets such as India and China. Dako employs 1,000 people based largely in Denmark and Carpinteria, Calif., and its products are currently sold in more than 100 countries. In 2010 the company posted revenues of about $340 million.

Holmkvist acknowledged that as an independent firm, Dako hasn't been able to pursue some opportunities in the anatomic pathology space due to insufficient funding, which has held it back against competitors such as Roche subsidiary Ventana.

Analysts have also noted Dako's difficulties in the market.

"While we have long been enamored with the compelling secular growth and profitability dynamics of other established anatomical pathology franchises (Ventana/Vision), Dako has struggled to maintain its position in the legacy IHC advanced staining market, where such competitors have made inroads through the commercialization of instrumentation platforms with greater automation capabilities in recent years," analyst Jon Wood of Jefferies Equity Research wrote in a note last week.

Holmkvist noted that, with Agilent's help, Dako now hopes to "surprise the market" with new product launches in the next 12 months and get the unit growing at or above market level in two to three years.

Not revealing what those upcoming product launches may be, Holmkvist said, "I do keep a few things under my sleeve … and not all the upside is reflected at this time."

Agilent will operate Dako as an independent unit under its aegis until 2014. The parent company will break out Dako's revenues in future earnings statements.

Agilent expects Dako to generate $373 million in revenue and $68 million in operating profit in fiscal year 2013, and yield $63 million in cost synergies. The company projected that the revenue synergies from the deal will add $39 million to its top line and $25 million to its bottom line in the next fiscal year.

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