Becton Dickinson's Magic Markers

Becton Dickinson thinks the continued automation of diagnostics is a no-win, low-margin game. Instead, it's making a big bet on discovering new, proprietary tests. And while the gamble is both high-cost and high-risk, the company figures the drug industry has now funded enough infrastructure and genomic research to make BD's search affordable. One other gamble: BD will have to partner out much of what it discovers since it doesn't have all the requisite testing platforms on which to run the assays.

BD bets that the diagnostics game will be lost or won on novel content

by Roger Longman

• While discovery of new diagnostic markers is a high-risk, high-cost business, BD believes the drug industry has funded enough genomic research to allow it to dig for new, proprietary diagnostics on a far lower-cost basis than ever before.

• Without major platforms in the three biggest diagnostic technologies, BD will have to license its discoveries to partners and competitors, hoping for high royalties or other assets in return.

• Since few companies have created both proprietary and must-have tests—criteria necessary for signing high-value licensing deals and generating significant testing volumes—BD is betting on research productivity in an industry which has seen very little.

• Most competitors prefer to spend research money on creating assets of predictable value: automation that replaces current systems or improvements of existing tests.

• BD argues that such strategies are diminishing in value; labs are already largely automated, most tests are sensitive enough. Without novel content—new, proprietary tests—margins will continue to decline.

Overall, it has not been a good decade for Becton Dickinson & Co. 's diagnostics business. The business's sales between 1992 and 1996, now annualizing at about $1 billion, were basically flat. BD sank millions into an automated immunoassay system called the Affinityonly to pull the plug on the program in 1992. Its scientists invented an innovative DNA amplification process, strand displacement amplification (SDA)—but the company's first attempt to turn it into a product, the ProbeTec, likewise failed. Meanwhile, its growing flow cytometry business wasn't making much money either—and hadn't been for more than a decade (See "Becton Dickinson at a Crossroads: Diagnostics on the Fence," IN VIVO, February 1998).

BD needed a radical alternative. And its current strategy turns the usual industry growth logic on its head. Instead of looking largely to new instrument platforms—expanding from microbiology, flow cytometry, and its nascent molecular diagnostics systems into the much larger (if slow-growing) chemistry, immunoassay, and hematology markets—BD is instead opening itself to the flood of genetic and biological information pouring out of universities, the biotech industry and pharmaceutical companies. The goal: turn these discoveries into new proprietary diagnostic tests for use on whichever platform they're best suited and, within the next decade, add more than $500 million in annual revenues to the business.

With a few significant exceptions, all companies have access to the same markers of disease—the proteins and chemicals which clinicians look for in our bodily tissues to diagnose our illnesses. High levels of prostate specific antigen (PSA) in a man's blood is a marker for prostate cancer and since the PSA marker itself isn't patented—or rather the use of the PSA for diagnosing prostate cancer—any company can theoretically develop a PSA cancer test.

Since everyone has access to the same markers, price becomes the major differentiator, in the absence of anything else. Thus, companies have focused on instrumentation: making testing faster, cheaper and more accurate, improving their own systems where they had them, and buying other companies' when they didn't. The more platforms, the stronger the diagnostics player—theoretically—since hospitals would prefer to buy their diagnostic equipment from consolidated suppliers, so long as their systems were up to snuff. People barely considered looking for brand new markers they could patent and charge high-prices for—the investment in basic biology was far too risky and expensive, the realm of profit-rich drug companies.

And besides, customers needed automation. In the first place, the methods diagnosticians used to process tests for the same old markers were changing. Diagnostic systems used to look for particular markers using radioactive tags. But as disposal became more problematic, lab technicians and hospitals wanted non-isotopic alternatives. And given that cost pressures were forcing customers to do more tests with fewer workers, they wanted them in ever more automated, ever more flexible random access systems. "Reference labs were dealing with capitated contracts; they needed high volume platforms. The imperative clearly was not discovering new markers," says BD's Vincent Forlenza, SVP, corporate strategic planning and development. One executive at Abbott Laboratories Inc. recalls advocating a program to develop a new marker. "We presented the idea to management and told them how much it would cost. They said: ‘We could spend that money adding two or three tests onto the IMx or TDx [then Abbott's only automated immunoassay instruments].' End of presentation."

Nor was it any different at BD, which until very recently had been spending "zero" on new marker development, says Forlenza—at least in the microbiology and molecular diagnostics businesses he ran until September 1998. On the other hand, BD's flow cytometry business was spending quite a bit of money on markers, albeit for the research market (BD sells its flow systems and reagents to both the research and clinical diagnostics markets). Under the leadership of Deborah Neff, the unit acquired reagent makers PharMingen [See Deal], all the while collaborating with other companies and universities to acquire other reagents. Nearly all these reagents are intended for the research, not clinical, markets. Indeed, partly because of its research-reagent business, flow cytometry is BD’s fastest growing operation.

Neff, who is largely credited with turning around the flow cytometry operation, now heads a unified diagnostics business, called BD Biosciences, which combines the once separately managed $300 million flow and $500 million microbiology businesses (it also contains BD's $120 million labware business). In part, she believes that she can use marker discoveries made for the flow cytometry research markets on the clinical diagnostics side of BD Biosciences.

More importantly, however, the scientific and business models of the two sides of the division share a key characteristic: through partnerships, exploit the R&D largely financed by the pharmaceutical industry to supplement marker discovery. Once BD's got the markers, it can sell them on its own platforms in flow and molecular diagnostics. Or license them to the major players in immunoassay and hematology, trading them for substantial royalties or other useful assets without the trouble of creating and maintaining its own high-cost automated systems. (For more on another, albeit much smaller, diagnostics company exploiting pharmaceutical research to find new diagnostic markers, see "Biosite's Play for High-Value Diagnostics,"IN VIVO, April 1999.)

There's no question that BD is playing a high-risk game. Only one company has made a sustainable business out of a truly proprietary marker—Chiron Corp. , with its hepatitis C diagnostic. And Chiron couldn't turn its asset into a major diagnostic operation, as the sale of its Chiron Diagnostics unit makes clear. Moreover, even supplemented by the drug industry's investment in research, BD is spending an extraordinary amount of its own money on finding new markers.

Thus, in its deal with the Millennium Predictive Medicine Inc. (MPMx) division of Millennium Pharmaceuticals Inc. , BD gets to piggyback on this biotech's enormous discovery infrastructure, an infrastructure built on the back of a series of high-value deals with half-a-dozen major drug companies [See Deal]. And while the deal involves a much smaller external funding commitment, BD’s internal funding of assay development could be substantial.

Meanwhile, BD has by no means abandoned automation, which still absorbs three-quarters of its R&D costs. Thus far weak in the identification/susceptibility piece of microbiology—its strength lies in growing bacteria, not identifying it—BD is completing work on an automated identification and susceptibility system, the Phoenix, to compete with the sophisticated instruments of bioMerieux SA and the Dade MicroScan Inc. unit of Dade Behring Inc. It bought its way into the industrial microbiology business with the purchase in March 1997 of Difco Laboratories Inc. [See Deal]. And it is set to launch the first two assays for its ProbeTec ET, its second-generation molecular diagnostic system.

But these platforms are only step one in a bigger strategic game. "Having the leading platform is a transient state," says Caroline Popper, MD, general manager and VP of BD Gene. "Over time they'll all tend toward parity. You can wrap them with other products, with service, with software—but eventually you arrive at parity. The game will be lost or won on novel content."

Avoiding the Grind

BD's content strategy seems to have been born out of both success and failure. On the one hand, BD began to recognize that automation development didn't provide returns commensurate with its risks. It spent plenty on the Affinityimmunoassay program of the late 1980's and early 1990's. But, BD killed it both because its engineers couldn't get it to work smoothly and because competitors (particularly Ciba-Corning with its ACS system) had snuck up and leapfrogged it with a higher throughput, random access instrument.

"That experience taught us something," says Forlenza: the need to hit the instrument market with a clearly superior product. Using just that logic, in 1996 they killed another program, the first ProbeTec, and focused instead on developing a second-generation instrument.

BD's first ProbeTecsystem was overly complex. "We couldn't have aggressively placed it into labs because of its service requirements," says Forlenza, who was running BD's microbiology business. Three years after the death of ProbeTec I, BD is expecting FDA approval of its first two tests (chlamidia and gonorrhea) for the ProbeTec ET "any day now," he says.

Still, while Forlenza claims the ProbeTec ETtechnology puts it way ahead of its competitors, it does so only for a little while. Once its competitors have caught up again, BD would be battling largely in a marketing- and pricing-driven business. Says Forlenza: "We just don't want to grind it out against Roche and Abbott and Beckman," among other rivals in molecular diagnostics.

Meanwhile, BD's flow cytometry business was likewise undergoing significant changes. In the first place, the business environment was improving because drug companies needed help sorting through the potential pharmaceutical targets tumbling out of genomics programs. The function of very few of these proteins was understood, let alone their validity as drug targets. BD's flow cytometry business could help. "The whole gene discovery process was moving downstream," says Deb Neff. "People had to know the impact [of a gene and its protein] on cells—and testing for that was our core capability."

BD was thus suddenly working more and more with drug and biotech companies. To get the reagents its growing group of pharma/biotech clients needed, it bought PharMingen, Transduction Labs and Clontech, and added new tools as well. Among others, it acquired Biometric Imaging Inc. [See Deal], which had a simpler flow cytometry system as well as a joint venture with Perkin-Elmer Corp. [See Deal] to develop pharmaceutical screening products. It signed a deal to apply Aurora Biosciences Corp. 's fluorescent recorder technology to the development of novel reagents for pharmaceutical screening with flow cytometry. In the space of about two years, (and generally unnoticed by much of the medical industry) the company best known for its low-tech products like needles, syringes and Vacutainer blood collection tubes, had burrowed deep into pharmaceutical research.

BD's efforts directed specifically to helping pharmaceutical companies are producing less than $10 million of its annual $300mm to the research market, says Neff (although she also notes that most of it has sprung into being in the last year). And it is by no means alone in competing for this business. Diagnostics rival Beckman Coulter Inc. , for example, offers a probably larger and growing pharmaceutical research program based in part on its own flow cytometry system as well as an extensive product line, history, and contacts within the research community. So too does sometime collaborator Perkin-Elmer.

Indeed, the research side of BD is beginning to look like a kind of proto-Perkin-Elmer. The Norwalk, CT-based instrument company has profited from the explosion in gene research; BD wants to similarly profit from the explosion in cellular analysis (See "Perkin-Elmer Eyes the Value Chain,"IN VIVO, June 1997).

The difference, contends Neff, is in what she calls "the hooks." Perkin-Elmer has made plenty of money selling sequencers and reagents to researchers looking to identify genes. But it didn't go further. Unlike the service-based intermediaries at companies like Incyte or Millennium (which have exploited Perkin-Elmer technology on behalf of their own partners and clients, retaining milestones, product royalties, and product rights), Perkin has kept little of the downstream upside from its technology platform (or at least until its Celera Genomics Corp.joint venture with TIGR [See Deal]).

Trawling, Not Just Fishing

BD isn't going to make the same mistake, says Deb Neff—and the upside it wants to keep will largely fall to the diagnostics business. "We learned from them," says Neff who claims that she's been structuring hooks into her company's reagent and screening agreements with drug and biotech companies. "We're either getting rights to technology we developed together, with royalties flowing back and forth, or, when it appears we're working on a path that may lead to a diagnostic or monitoring tool, we make sure we capture those rights coming back to BD." In one deal, for example, BD and its partner are funding a program to see whether a given set of markers are actually useful for a therapeutic screening program. If they are, and the program is continued, BD keeps rights on the diagnostic side while the pharma company keeps rights to the therapeutic.

BD executives aren't counting on many research reagents to leap the clinical divide into the realm of diagnostic assay. Its CD61 test to more accurately quantify platelet counts, licensed to Abbott for use on its hematology system, is one research-clinical crossover. But Vince Forlenza isn't expecting many followers. Neither the PharMingen or Transduction Labs acquisitions have yet led to new clinical markers, although they've found new markers for the research markets. "We did those deals," he says, "because the research business is a good business on its own. Obviously, we'd love to see new clinical markers come out of them. It could happen. But I'm not counting on them." Adds Caroline Popper: "These are new enterprises for BD Bioscience. Through acquisitions like Clontech and PharMingen, we're getting closer to biotechs. They should deliver markers and they'll augment what we're doing with TIGR and Millennium. But I'd liken the research reagents side more to fishing—you throw in your line and with luck a fish bites. With Millennium and TIGR, we're trawling, and we're using a huge net."

Off the Treadmill

And Popper figures that BD can afford nothing less. To actually transform BD's diagnostics business from one completely dependent on continual development of incrementally improved platforms, slugging it out against price-warring, look-alike competitors, BD executives believe they need plenty of scope for finding new markers. The chance of failing in any one research area is high, which means BD would need to explore a broad field. But the broader the field of exploration, the greater the investment. In order to increase the chances its bet would pay off, BD needed to raise the stakes.

This BD Gene strategy did not spring up full-blown. It evolved, notes Caroline Popper, over the course of about a year. It began in late 1997, when Vince Forlenza, then president of the microbiology division, gave Popper the task of determining whether "we could succeed" in molecular diagnostics, she says. Eventually Popper and her group came to the conclusion that the only way off the treadmill of platform development and price declines was the ownership of proprietary tests, developed from research now largely being sponsored by the pharmaceutical industry. No one company could have all the new tests, but winners would have at least some, either to sell directly themselves or to use as trading chips to access, for example, must-have markers—hepatitis C, for example—owned by other companies.

Developing such novel content would take years, which is to say that BD's near-term diagnostic business is heavily dependent on the success of the ProbeTec ETand Phoenix rollouts, and of flow cytometry. But even within the longer time frame, BD Gene was synchronizing its programs.

In a May 1998 presentation to top BD management, Popper says her group proposed an "internal venture structure that would allow us to use the big company infrastructure" to identify and flesh out ideas and technologies "that might not otherwise be able to bubble to the top of a major diagnostic company". (Most diagnotics companies, presumably, focus on instrument development, and can't afford the diversion of funding and management attention). The group would span two divisions, BD Biosciences (which was officially created some months after BD Gene) and specimen collection, since the integrity of a molecular sample is crucial to accurate testing.

Because molecular diagnostics would first exploit infectious disease testing, in particular markers for a particular microbe's susceptibility or resistance to various antibiotics, BD Gene searched for an infectious disease partner. (Further down the scientific road would be cancer markers.) Given the complexity of human physiology, cancer markers would take plenty of time to find, verify and reduce to assays. But, notes Popper, no diagnostic could be more crucial to the physician's decision-making. Just as importantly, the complexity of the disease would also increase the chance that a novel marker discovery could also be strongly patented.

Exploiting the Drug Industry

In neither case did BD have anything like the scientific infrastructure required to find new clinical markers. But it knew where to get it. The government, biotech companies and the pharmaceutical industry had poured millions of dollars into the creation of massive genomic and proteomic databases, and technologies, in the hope of finding new drugs. Relatively little of this investment, however, was being exploited by the major diagnostic companies, and even less by the work's drug and biotech sponsors. BD executives felt that even if BD ended up having to make a significant investment in a partner with the requisite technology for hunting down new markers, it would be getting millions of dollars worth of necessary additional work for free. "If this whole genomic thing wasn't occurring, we wouldn't be going after this aggressively," says Forlenza.

For infectious disease markers, BD Gene eventually ended up at TIGR, the not-for-profit gene sequencing group founded by J. Craig Venter, PhD, who is widely credited with lighting the fuse that led to the explosion in large-scale genetic sequencing. TIGR has done plenty of microbial sequencing, and while BD can't direct its research, the deal it signed allows BD scientists to review the research, search databases, and sit at the table when the programs are reviewed. If something of interest pops up, BD has an option to license it. Total upfront funding is relatively small, says Vince Forlenza; BD pays significant sums only when it exercises one of its options.

The MPMx deal is something else again: the largest alliance ever signed between a major diagnostic player and a biotech company. BD paid $18 million up-front, divided between a $3 million licensing fee and a $15mm equity investment (BD has an 11% stake in the division). BD also agreed to pay MPMx up to $51.5 million in research funding and license fees over the five-year term of the deal, not including other success milestones. (For more on MPMx and its strategy, see "Chutzpah: Millennium Takes on Diagnostics,"IN VIVO, December 1998)

Popper says her group first visited MPMx in January 1998. "We were impressed by their technological depth and breadth," she recalls, "but they were out of our league—far too expensive, particularly because we were just in the early stages of creating our strategy." Popper and her group spent another several months visiting "with most of Millennium's peers," she says, looking at less expensive deals of narrower scope.

Meanwhile MPMx wasn't having luck in finding the major diagnostics partner it wanted. MPMx went fairly far down the road with Roche , but the deal died when Jean-Luc Bélingard, then head of its diagnostics business and apparently the chief mover of the alliance idea, resigned to return to France.

Meanwhile, BD's strategy had evolved. In order to manage the drastic change of direction they were contemplating, BD wanted to limit themselves to a few partners with whom they could work closely. But they also recognized that, given the risk that research in any one cancer would yield little or nothing, they needed to spread their bets over a much broader territory.

They circled back to MPMx, the only player they felt had the requisite technological and clinical expertise to find enough medically important markers and do so cost-effectively and quickly. The MPMx deal expanded and while the cost did as well, the investment would now be spread over a much wider field.

The deal aims to find markers for six cancers to which BD gets exclusive diagnostics rights (the only major cancer not included is lung cancer). BD also has an option in pharmacogenomics (that is, using the tests to determine the appropriateness of particular pharmaceutical therapies). If BD funds a pharmacogenomic program, which would likely involve a drug in clinical trials, then it would get a co-exclusive right to sell the pharmacogenomic that results; if MPMx or another company funds it, BD would retain no rights.

BD isn't spending all this money simply to add incrementally to its diagnostics business. With sales of its clinical testing systems about $500 million today, Popper figures that the company, by adding novel content, will be adding at least another $500 million in annual sales within the next eight to ten years. These additional revenues, she figures, will be split about evenly between cancer and infectious disease tests, with cancer eventually taking a bigger share. The market for new markers in cancer and infectious diseases overall, she guesstimates: $1-2 billion.

Markers Are Always Good, But…

The fact that both the clinical and research businesses will ultimately be driven by genomically-derived, proprietary markers makes them more similar than different, however many clinical markers flow from the cytometry side of the company. The recognition of that strategic similarity, says Forlenza, led the company in September 1998 to put the two businesses together into a single diagnostics division.

And Neff argues that the genomic and proteomic work is in fact pushing BD's primary diagnostic technologies even closer together. Genetic discoveries could be tested on nucleic acid systems like the ProbeTec. But they might also uncover a cell surface marker that could be measured in a flow cytometer.

But all BD executives agree that many of the most valuable clinical reagents to come out of its research programs won't be suited to any of its instrument platforms. More than likely, many, if not the majority, of the markers from the MPMx collaboration will end up as immunoassays, a platform BD doesn't have. "We didn't start out with the idea of developing new markers for the immunoassay side; we wanted molecular tests," says Forlenza. "But there's no way to know beforehand whether the test is going to be looking for a gene or for a protein." Most clinicians would prefer the antibody tests—currently much cheaper and easier to perform.

And for BD's competitors, the lack of an important platform means the marker strategy is flawed. "Proprietary content is always good," says Jay Steffenhagen, VP corporate development, strategic planning and investor relations at Beckman. But "the whole concept" of inventing and developing new markers "is very tricky and tremendously risky."

A new marker without the automation to run it is an open invitation to competition. In the first place, patent protection on a new marker is far less certain than patent protection on, say, a new drug, largely because a marker generally doesn't come protected with an iron-clad composition-of-matter patent. Hybritech's Tandemmonoclonal sandwich assay, in which format it marketed the prostate specific antigen test, was a powerful piece of intellectual property. But Abbott still got around it—indeed, Abbott took the market almost entirely away from the test's inventor because it was able to provide the test on an automated immunoassay system.

Nor is it clear that a new marker is a better investment in improving medicine than enhancements in automation, a new analytical method, or even just an improvement in the test itself. Steffenhagen's colleague, David Heibel, strategic marketing manager for immunodiagnostics, argues that clinicians can often as effectively change disease outcome by using new analytical technologies to find the presence of known markers earlier, when the prognosis is better, as by detecting heretofore unknown markers. "That's the importance of viral load testing," he says. "It's pretty easy to determine that you need to do HCV and HIV early to improve prognosis. That's not true with a brand new cardiovascular marker."

Likewise, argues Steffenhagen, an improved version of an existing marker might also be the medical equivalent of a new marker, and with far less business risk attached to it. A chemistry test, for example, reformulated to extend its dynamic range and thus avoid re-testing might provide significant extra utility to a lab. With a new marker or with an improvement to an old one, the challenge is the same: "to come up with an improvement that's worthwhile," says Steffenhagen.

Delayed Adoption

Beyond improving analytical methods, companies also have to modify platforms. "As the patient moves out of the hospital, he doesn't need a hospital-based instrument. We need to invest in point-of-care and self-testing systems as well," argues Heibel. Indeed, he says, the cost of developing a new immunoassay is so great—up to $50 million, one diagnostic executive estimates—that developers need to be able to leverage it onto a variety of platforms. This is a far more economical situation when, like Beckman, a company has three major platforms (chemistry, immunoassay, and hematology) and will soon have a fourth (nucleic acid testing).

Moreover, the lack of automation can also mean, says Steffenhagen, a delay in adoption. "If the inventor's only got content," he argues, the marker "won't be widely adopted" because it's not easy to use. Getting a new marker adopted requires far more than proving its clinical utility, notes Richard Barker, PhD, now Chiron's SVP, corporate development (and former CEO of Chiron Diagnostics). Don't be misled by the example of Chiron's hepatitis C test, which was broadly adopted as a required blood screening assay almost as soon as it was available, says Barker: "The hepatitis C market was unusually prepared. A unique marker in cancer, infectious diseases, or antibiotic resistance will give you a good return only granted adequate market preparation." Steffenhagen agrees. "It can easily take eight years from the time an assay is first available from a reference lab until it's generally available at the local hospital clinical lab because doctors have to request it. PSA took seven to eight years to get going. And Medicare only began reimbursing for routine screening relatively recently." With a new marker, says Heibel, "you make a certain amount of investment—and then you go into a holding pattern."

The Balancing Act

Not that Beckman and others aren't pursuing new markers. Steffenhagen notes a program looking for bone disease markers and cites its new "free PSA" test, licensed semi-exclusively (along with Abbott and Chugai) from the Wallac Inc.division of EG&G Inc. in August 1996. (Per the original deal with Wallac, Abbott sublicensed to Beckman the automated version of the test in February 1997). Indeed, Beckman hopes to use free PSA to regain share in the overall PSA market: the new marker can help determine whether a patient with an equivocal PSA reading should have a biopsy. Steffenhagen also says the company finances a few new-marker programs with biotechs, but didn't want to list them for fear of tipping off competitors.

Beckman's approach, says Heibel, is carefully balanced between investments in automation, analytical methods, improved tests, and new markers. But it's probably safe to say that only a small percentage of its R&D spending goes to the invention and development of proprietary clinical markers.

Balance is exactly the right issue, says Barker. "The debate shouldn't be whether proprietary markers are a good thing, but about how much of an investment to make in them."

Nobody at BD disagrees. They just tilt the balance significantly more towards the marker side, which now accounts for about 25% of their microbiology/molecular diagnostics R&D budget. And Caroline Popper thinks that the spending will increase, particularly as discoveries move into the later stages of assay development.

This rebalancing in favor of markers is only sensible, BD and its supporters argue. Industry logic that pushes instrument development is outdated, contends Ken Conway, the CEO of MPMx: while the investments to create a new system are still high, the returns are diminishing. "Going from 190 tests an hour to 220 tests just doesn't make as much sense as going from 50 to 190," he says. "The automation game in chemistry and immunoassay has been played. Labs areautomated." The same largely holds for improving tests, he contends: "The PSA is probably at 90% of its development. You can't improve it much more. People have been working on free PSA for years."

In short, on a risk/reward basis, Conway argues, the returns from most platform development, once relatively generous, have now probably sunk too low for the risks entailed in the investment—and definitely so for new players wanting to get into existing, mature areas of lab automation. Granted that its investment in new markers will yield results for platforms it doesn't have, "the strategic question," says Forlenza, "is whether we acquire our way back into traditional chemistry, immunoassay and hematology. We said no. In terms of platforms, there's more opportunity in the new emerging areas—cellular-based reagents and molecular diagnostics."

Also helping to add weight to the marker side of the balance, says Deb Neff, is the fact that BD doesn't have to support the breadth of platform development its competitors do. And even on a per-platform basis, BD's costs are lower. Outsiders estimate the ProbeTec ET's development cost at less than one-fifth the cost of a new immunoassay analyzer. "My sense," she argues, "is that Beckman Coulter has got big chemistry, big hematology, big immunoassay to deal with. Playing that game, competing with Abbott and Bayer, takes a lot of energy and focus"—which leaves little left over for marker development. Adds Ken Conway: "There's too much risk in doing both the [marker] research and the platform development. That's how you get into trouble."

Finally, BD had a bureaucratic advantage: easier access to marker funding. BD's research reagent program is frequently funded by client work (and by acquisition funds, which puts much of the price on the corporate balance sheet, not the divisional P&L). And BD Gene receives a separate corporate allocation, a sharp contrast to the way most diagnostic companies budget for discovery work. Notes Patrick Plewman, VP corporate development at diaDeXus LLC, MPMx's principal diagnostic competitor, "If you're the general manager of a diagnostics division, can you afford to pay an additional $10 million a year for research? It's very tough. They don't have the margin to make it within their own P&Ls." DiaDexus, he says, has discussed collaborations "with all of these guys. They keep saying: ‘We'd love to talk—but come back when you've got something in later stages, after you've demonstrated clinical utility." Plewman figures that diaDexus will "have to do go all the way to the later stages ourselves—to actually do trials with a few thousand patients to demonstrate the clinical value of a serum marker."

Platform Neutral

The corporate allocation idea didn't completely obviate divisional P&L issues, though it clearly made the program more affordable for BD Biosciences. But now BD Gene would impact the budgets of all BD business, notes Popper, whose presentation to the company's top managers included all its division presidents. She was able to get support for the investment from non-diagnostic executives in part because her presentation showed how BD as a whole would benefit. Since the new markers won't all work on BD diagnostic instruments, Popper aims to swap markers for assets required by any of several BD businesses. The point of the internal venture structure, she emphasizes, is to help BD corporate wide, which could mean trading with diagnostics partner for products or distribution helpful to BD's medical supplies, diabetes, or other businesses.

That swapping strategy means BD must do deals with diagnostic competitors. "What we won't do," adds Popper, "is to replicate the platforms other companies have. It's nice to have one or two platforms—flow cytometry, ProbeTec, but we've got to stay platform neutral. Diagnostics is the business of information, preferably to direct therapeutics." BD should simply be in the position of choosing which platform its assays are best suited for—and then signing licensing deals.

One example, says Neff: the company's deal with Abbott on CD61, a test developed by BD's flow cytometry group [See Deal]. When a blood sample shows a platelet count below 10,000, a dangerous level, it is often tested manually, the object being to see whether the patient should have a platelet transfusion. But platelet readings below 10,000 are notoriously inaccurate—platelet levels could in fact be comfortably above 10,000. Meanwhile, because the manual test is slow, costly, and often yields nebulous results, doctors frequently skip it, presuming the necessity of a platelet transfusion—which may or may not be true. BD's test, she says, allows a very accurate count no matter how low the platelet levels are, and does so in an automated format on a basic hematology analyzer.

BD could potentially have tweaked a version of its flow cytometry system to accommodate the new test. "But it would have been more cumbersome," says Neff, "and wouldn't have been connected up with the rest of the blood count information" from a hematology analyzer, a product BD doesn't sell. Nor would customers have likely bought a new analyzer solely for such a comparatively low-volume test, argues Vince Forlenza.

Thus BD licensed the technology, which she claims is "virtually impossible to copy," to Abbott for use on its hematology system [See Deal]. But Neff says that BD isn't giving up the test's upside: BD charges Abbott a significant transfer price for the reagents, which is adjustable based on the test's market price, which Neff claims will be far above the level of a standard complete blood count. "And we don't have to develop an instrument system to do it," she says.

Positioned to Partner—or Merge

But BD does have to take the risk of failing to create a proprietary marker of broad utility. Richard Barker of Chiron argues that this risk may in fact be too significant for any one company. "Diagnostic companies can and should collaborate with each other" on the basic research of new markers, he maintains, "sharing semi-exclusive rights. It's like the oil industry: when a company needs to drill a well in deep and risky waters, it teams up." Chiron, he says, talked to a number of other diagnostic companies about such a collaboration but when the company began to rethink its commitment to the diagnostics business, the narrower deal was buried in broader discussions about joint ventures and acquisitions.

BD has apparently already had discussions about the possibility of collaboration with both diagnostic and pharmaceutical partners (the latter would help fund pharmacogenomics studies). At least one diagnostic company—it's not clear which—has some valuable intellectual property in colon cancer. It could decide to cut BD's financial risk by co-funding the colon cancer piece of the MPMx/BD program, in which case BD would end up with co-exclusive rights to any markers uncovered.

And BD's idiosyncratic path could make it a very easy company to partner with. In an industry with, as Ken Conway says, "too many players with the same platforms," BD is unusual since its businesses don't significantly overlap its diagnostic confrères. Many intra-diagnostic licensing deals have run into trouble when competitors in several areas try to cooperate in one. (Abbott and Johnson & Johnson , for example, engaged in a bitter legal fight following the former's acquisition of a license to hepatitis C, to which the latter had rights through Chiron. When Chiron itself tried to put the test on its own newly developed immunoassay system, J&J went to court to stop it.) But BD won't often run into potential partners in other areas of its business and thus steers clear of many of the obvious troublespots.

By virtually rejecting any possibility that it will develop an immunoassay, hematology or chemistry system, BD's marker strategy assures the industry that BD won't encroach much further on its competitors' territory (the exception being molecular diagnostics, in which it seems to hold a leading position). More intriguingly, neither does it commit the company to a life of corporate independence. BD's CEO Clateo Castellini is 63, nearing retirement, and has not yet publicly selected a successor, a happy situation for an acquirer since it can forestall the personality issues which often block deals. And however important novel content is, it can be far more profitable if the company which owns it also owns the platform on which the tests are performed.

Abbott is perhaps the most logical acquirer: it lacks flow cytometry and trails in molecular diagnostics; BD's cancer markers, granted their successful discovery and development, will more than likely end up as immunoassays—and they might as well run on Abbott's system as any others. Abbott's hospital products division could also comfortably fold in BD's hospital products with only minor overlap. With a market cap of about $9 billion, BD is more than a bite-sized morsel for the $73 billion-market-cap Abbott, but hardly impossible.

Abbott is by no means the only possible acquirer. J&J needs to do something about its suffering diagnostics business, under assault in immunoassay and actually declining in chemistry. Bayer AG , too, could turbocharge its own diagnostics business by adding BD, helping to pay for the deal by selling off BD's non-diagnostic pieces. And Bayer already has a strong working relationship with Millennium, with which it signed a major alliance [See Deal] not long before BD signed on with MPMx. In any event, the market seems to have long recognized some acquisition potential: BD's stock is trading at a pharmaceutical-like multiple of nearly 40 times earnings.

The fact that a number of industry observers are talking about BD as an acquisition candidate underlines to some extent the skepticism its marker strategy elicits. A company with both platforms and proprietary content would be far more profitable than companies with one or the other but not both. The question is whether any diagnostic company can manage both without some kind of alternative financing scheme—which perhaps would include acquisition.

In the short term, BD is far more likely to sign partnerships than merge with another company. In clinical diagnostics, its next technology deal will probably be on the specimen handling side—the interface between the sample and the testing system is troublesome for most molecular diagnostic systems. On the content side, says Forlenza, BD's got its hands full and isn't likely to make further biotech investments any time soon. "We've done what we need to do," says Forlenza. "We think we have the right balance: discovery deals, automation play, the research business. That's not to say we wouldn't do other things—but it may be that other partners would fund things with us."

Whatever happens, however—early-stage risk-sharing partnerships with large companies; later-stage content swaps; more biotech deals; a merger—BD is recalibrating the risk/reward ratios of the diagnostics industry. Unwilling to duplicate existing infrastructure with new automation development programs, BD is abandoning total self-reliance for a broad-based partnering strategy. In such a world, it needs bargaining chips, and its high-risk bet is that it can create them where they now don't exist.

But it's gambling that it can do so and successfully parlay those chips into high-value assets, thanks to the confluence of two separate trends. The first is the increasing amount of genomic and cellular research, financed by the drug industry, that could be applicable to diagnostic markers and acquired and exploited for much less than the cost of actually creating the information. The second is the declining returns from traditional diagnostic strategies, the diminishing value of improving automation or test sensitivity. In the land of the increasingly profit-parched, BD hopes to be selling water.