Introduction
Companion diagnostics sit at the intersection of two mega-trends in healthcare: precision medicine and targeted drug development. A companion diagnostic is an FDA-required test that must be performed before a patient can receive a specific therapy, creating a direct, regulatory-mandated revenue linkage between drug sales and diagnostic test volume. For healthcare bankers, CDx represents a growing deal flow category that bridges the diagnostics and biopharma sectors.
How the CDx Model Works
When the FDA approves a targeted therapy (a drug designed to work only in patients with a specific biomarker), it often simultaneously approves or requires a companion diagnostic test that identifies patients with that biomarker. The drug's label specifies that the CDx test must be performed before prescribing. This regulatory mandate guarantees diagnostic testing demand: every patient considered for the therapy must be tested, and every positive test result generates a drug prescription.
- Companion Diagnostic (CDx)
An FDA-approved in vitro diagnostic device that provides information essential for the safe and effective use of a corresponding therapeutic product. CDx tests identify patients who are most likely to benefit from a particular treatment, patients who are likely to face increased risk of adverse events, or patients whose response should be monitored for treatment adjustment. Unlike laboratory-developed tests (LDTs), CDx tests have undergone FDA review and received formal approval or clearance, typically alongside the corresponding drug's approval.
The CDx model creates a powerful flywheel. As more targeted therapies are approved, more CDx tests become required, driving molecular testing volume. This volume growth benefits CDx developers (Foundation Medicine, Roche, Thermo Fisher), molecular testing platforms, and the clinical laboratories that perform the tests. The number of FDA-approved CDx tests has grown from approximately 30 in 2015 to over 55 today, and the pipeline of targeted therapies in clinical development suggests continued acceleration.
The Co-Development Model
The FDA increasingly expects companion diagnostics to be developed in parallel with the drug, not as an afterthought. Co-development means the diagnostic company works alongside the pharma sponsor during clinical trials to validate the test's ability to identify the right patients. This collaboration typically begins in Phase II (when biomarker hypotheses are tested) and continues through Phase III (when the CDx is used to select patients for the pivotal trial).
Co-development creates commercial partnerships between diagnostic companies and pharma sponsors that span 5-10+ years, from early clinical development through commercial launch. The diagnostic company typically bears the development cost of the CDx test in exchange for guaranteed market access when the drug is approved. These partnerships are significant for diagnostic company valuation because each co-development agreement represents a probability-weighted pipeline of future CDx revenue.
| CDx Application | Test Type | Market Leaders | Revenue Per Test |
|---|---|---|---|
| HER2 testing (breast cancer) | IHC/FISH | Roche (Ventana), Dako | $200-$500 |
| PD-L1 expression (immunotherapy) | IHC | Dako, Ventana | $200-$400 |
| NGS tumor profiling (multi-biomarker) | Next-gen sequencing | Foundation Medicine, Guardant | $2,000-$3,500 |
| BRCA1/2 mutation (PARP inhibitors) | PCR/NGS | Myriad Genetics | $500-$2,500 |
CDx and M&A
The CDx market generates deal flow through two channels. First, pharma companies acquire or invest in diagnostic companies to secure CDx capabilities for their pipeline. Roche's acquisition of Foundation Medicine for $2.4 billion (2018) was the landmark transaction, giving Roche in-house CGP capabilities for its oncology pipeline. Second, diagnostic companies acquire each other to build broader CDx menu coverage and clinical trial partnerships. The convergence of diagnostics and therapeutics makes CDx assets increasingly strategic for both pharma and diagnostic acquirers.
The next article covers how to value CROs, CDMOs, and life sciences tools companies, including the sub-sector-specific metrics and methodologies that distinguish tools valuation from other healthcare valuations.
