Bayer Diagnostics will be split into two business units this summer. The move, which Bayer described as a way to encourage growth in its diagnostics components, will create a consumer health arm that develops and markets tests directly to patients, and a “professional” unit that sells assays to reference labs and hospitals.
But this realignment, quietly disclosed in a statement posted on Bayer’s web site late last week, may be more significant than the company lets on. Buried in the two-page statement, which can be seen here, is Bayer’s explanation that it took the step “to accelerate the company’s concentration on consumer health.” On June 2, this unit will be known as the Self Testing Systems, or STS, business.
What’s news is what is missing: Bayer makes no such statement for the second unit, which will be called Professional Testing Systems, or PTS. And the fact that Bayer went out of its way to promote STS in this subtle way has raised some eyebrows in molecular diagnostics circles. Some have begun speculating that Bayer hopes to shower the consumer diagnostics side with greater corporate attention and R&D dollars at the expense of the PTS unit. Others believe the move will enable Bayer eventually to divest the professional side.
“Bayer is in a state of flux. They’ve been dissatisfied with recent product launches, and [the] diagnostics [unit] failed to achieve its [revenue] target last year,” said Andrew Benson, who covers Bayer for Smith Barney Citigroup in the UK. “They’re trying to take steps to improve performance.”
Bayer reported overall revenue in 2003 fell 3 percent to €28.6 billion ($33.8 billion) over 2002, and receipts for its consumer care and diagnostics businesses, which will comprise the STS and PTS arms, respectively, fell by more than 11 percent to €3.3 billion. This fall-off followed a nearly 9-percent drop in sales between 2002 and 2001, the company reported.
By comparison, Bayer’s other divisions, including animal heath, crop sciences, and pharmaceuticals, performed better during the year. In fact, animal health and crop sciences grew in 2003 by 7 percent and 23 percent, respectively.
“I think the idea is to get that [diagnostics division] right, because that’s the area of underperformance,” Benson told Pharmacogenomics Reporter this week.
Interviews with analysts, corporate partners, and molecular diagnostics insiders agree there are two steps Bayer can take to improve the standing of its diagnostics division: It can either beef up the consumer side or sell the professional side.
Either way, the split “may pave the way for other strategic actions in the future,” said Richard Barker, president of New Medicine Partners, a consultancy based in Boston.
“Historically, [Bayer] has always had the right technology — and may have even had the right products — but they could never manage to break the stranglehold of Abbott and Roche in the laboratories,” said an analyst who spoke on condition of anonymity. He said Bayer has been stung by slumping sales of its recently released ADVIA Centaur immunoassay system, which will be at the heart of its PTS unit. The unit will be run by Hans Hiller, senior vice president of Bayer’s lab-testing business. It will be based in Tarrytown, NY.
“If they’re not going to get a big enough sales base, then they’re not going to afford the cost of keeping up with Roche and Abbott on the R&D side — and therefore it’s no longer a particularly viable business longer term,” said the analyst. They’ve really tried to turn [the business] around. But profitability still seems to be sort of sub-par.”
Michael Eastwood, an analyst for Morgan Stanley, agreed: “Bayer does not have the skill set nor the aspirations to develop professional machines” such as the Centaur. “My guess is that the focus of this company ... is going to be much more on the consumer areas.”
Several insiders said this performance has forced Bayer to turn its attention to consumer products, perhaps at the expense of its reference lab business. To these people, the consumer market has its draws: Last year, patients spent $46 million in the United States on at-home diagnostic products, according to a survey by market research firm Theta Reports. These products, which are relatively inexpensive to develop and require less regulatory oversight than molecular diagnostics, range from tests that detect hypercholesterolemia and HIV to gene-based assays that determine an individual’s risk of developing colorectal cancer or hemochromatosis. Theta expects this market to increase by almost 20 percent to $55.2 million by 2009.
“Home tests are growing in popularity and scientific advancements in the accuracy of the tests have fueled demand and expansion of the types of tests available,” he report said.
Many insiders acknowledge this dynamic and say that for Bayer, which sells a family of products for blood glucose monitoring called Ascensia, shifting more of its resources to these kinds of products is “the right thing” to do.
“There’s a lot of companies now who are focusing on direct-to-consumer and consumer health issues,” said Timothy Alcorn, director of molecular pathology at Esoterix and a former director of infectious diseases at LabCorp. “That’s becoming more common in the industry.” He said even reference labs are becoming hip to this trend, and have begun focusing more of their attention on direct-to-patient advertising and marketing as a way to generate additional revenue.
Alcorn said Bayer already has in place the sales and marketing force to ensure that new consumer-oriented products hit the ground running. “They have the machinery all set up to expand,” he said. “The actual testing will be the easy part.”
Bayer’s STS business, which is based in Elkhart, Indiana, will be overseen by Joe Martin, senior vice president of the self-testing business.
On the other hand, some insiders take the position that the consumer market has its own issues, and that toughing it out in the hospital and reference-lab space will eventually pay off.
These markets, which are core to Bayer’s PTS unit, are highly competitive, suffer from long lead times and narrow profit margins, and are always under tight regulatory scrutiny. But they also has a proven track record and are growing rapidly.
Bayer has recognized this growth, and has said it’s eager to begin selling its Trugene platform to some of these providers. It’s even partnered with GE Healthcare on a bet that GE’s newly acquired Amersham BioSciences technology — namely, the MegaBACE gene-sequencing platform — will help it get there [see 2/29/04 Pharmacogenomics Reporter].
Today, Bayer Diagnostics markets a suite of products based on the Trugene and Versant platforms, including genotyping tests and assays for HIV and hepatitis B and C.
Plus, according to experts, the consumer health market has its own drawbacks. “Except for a few product areas, home testing has not really caught on,” said Tom Tsakeris, who specializes in molecular diagnostics for the Devices & Diagnostics Consulting Group in Rockville, Md. “You hear a lot about consumers and their desires. They say, ‘Yes, I want to be more in control of my health.’ If you advertise a test for flu or vaginitis or strep throat, yes, you’ll hear from these people.
“But, in fact, the big drawback is that ... most home tests are not reimbursable,” said Tsakeris. “And that’s certainly a big economic shortcoming. But even more so, the problem is that home testing hasn’t caught on in the imagination of the doctors. So then the strategy becomes to raise the awareness of the doctors by going to consumers.
“This strategy is undoubtedly working well enough in the pharmaceutical area, [but] to what extent would this work in the form of lab tests?” he asked.
A more extreme view of the impending split is that it is an overture to a divestiture. Specifically, some believe that Bayer, frustrated with the performance of its molecular diagnostic products, seeks to sell the entire business.
“There’s this big strategic re-think going on” at Bayer, said the analyst who asked not to be named. “And maybe [a company] has made them an offer for a deal that suggests to clean up their diagnostics business, which will allow Bayer to concentrate more on their consumer health” business.
He said he thinks that a potential suitor would be GE, which recently acquired Amersham, with whom Bayer has recently signed a collaboration to develop high-throughput HIV-resistance tests for the reference lab market. The analyst said that acquiring Bayer’s PTS arm would help GE Healthcare gain a firmer foothold in the molecular diagnostics arena.
“Diagnostics has been this perpetual under-performer,” said the analyst. “Obviously, it would offer them a solution if they could get out” of the business. “[Bayer’s] been struggling with it, not knowing what to do with it over the last two to three years. And they weren’t necessarily convinced they could sell the whole [division] in one bit. My guess is that GE has come up to them with an offer, and that they'll do something with GE.”
Officials from Bayer Diagnostics were unavailable for comment.