Not every drug works for every patient. In oncology, response rates to targeted therapies often range from 20% to 40% in unselected populations. The majority of patients receive treatments that won’t help them — exposing them to side effects without benefit.
Companion diagnostics change this equation.
These tests identify which patients are likely to respond to a specific drug before treatment begins. They’re the gatekeepers of precision medicine — matching the right drug to the right patient based on measurable biology rather than trial and error.
For biotech companies, companion diagnostics shape development strategy and regulatory pathways. For investors, they represent both competitive moats and development complexity. For patients, they mean receiving treatments more likely to work.
This guide explains what companion diagnostics are, how they work, the regulatory framework governing them, and why they’ve become essential to modern drug development.
Companion Diagnostics: The Basic Definition
A companion diagnostic (CDx) is a medical device — typically an in vitro diagnostic test — that provides information essential for the safe and effective use of a corresponding therapeutic product.
The FDA’s definition: A companion diagnostic is an in vitro diagnostic device that provides information that is essential for the safe and effective use of a corresponding therapeutic product.
In practice, this means a test that must be performed before prescribing a specific drug. The test result determines whether a patient should receive the treatment.
Why Companion Diagnostics Exist
Companion diagnostics solve a fundamental problem in medicine: biological heterogeneity.
The Problem
Patients with the same disease diagnosis often have different underlying biology. A breast cancer patient with HER2 overexpression has fundamentally different tumor biology than one without — even though both have “breast cancer.”
Drugs targeting specific biological mechanisms only work when that mechanism is driving the patient’s disease. Giving a HER2-targeted therapy to a HER2-negative patient provides no benefit and only risk.
The Solution
Companion diagnostics identify patients whose biology matches the drug’s mechanism. This enables:
- Higher response rates — Treating only patients likely to benefit
- Better risk-benefit ratios — Avoiding toxicity in non-responders
- Efficient clinical trials — Enriching studies with likely responders
- Regulatory approval — Demonstrating efficacy in defined populations
- Appropriate prescribing — Ensuring drugs reach the right patients
How Companion Diagnostics Work
Companion diagnostics detect specific biomarkers that predict drug response. The process works as follows:
Step 1: Sample Collection
A patient sample is collected — typically tumor tissue from a biopsy, but increasingly blood samples for liquid biopsies.
Step 2: Biomarker Testing
The sample is analyzed for the specific biomarker the companion diagnostic measures. This could be:
- Gene mutations — DNA sequencing to detect specific alterations
- Gene amplifications — Measuring extra copies of genes
- Protein expression — Immunohistochemistry (IHC) to detect protein levels
- Gene fusions — Identifying chromosomal rearrangements
- Microsatellite status — Measuring DNA repair deficiency
Step 3: Result Interpretation
The test produces a result — typically positive/negative or a quantitative score — compared against a validated cutoff.
Step 4: Treatment Decision
Based on the result, physicians determine whether to prescribe the corresponding drug:
- Positive result → Patient eligible for treatment
- Negative result → Patient should receive alternative therapy
The Regulatory Framework
Companion diagnostics face unique regulatory requirements because they directly influence treatment decisions.
FDA Oversight
In the United States, companion diagnostics are regulated as medical devices by the FDA’s Center for Devices and Radiological Health (CDRH), while the corresponding drugs are regulated by the Center for Drug Evaluation and Research (CDER) or Center for Biologics Evaluation and Research (CBER).
Approval Pathways
Companion diagnostics typically require Premarket Approval (PMA) — the most rigorous FDA pathway for medical devices. This requires:
- Analytical validation (the test accurately measures what it claims to measure)
- Clinical validation (the test result predicts clinical outcomes)
- Clinical utility (using the test improves patient outcomes)
Co-Development Requirement
The FDA expects companion diagnostics to be developed alongside their corresponding drugs. Ideally, both receive approval simultaneously, ensuring the test is available when the drug launches.
FDA guidance states: “If safe and effective use of a therapeutic product depends on an IVD companion diagnostic, the therapeutic product and IVD companion diagnostic should be approved or cleared contemporaneously.”
Labeling Requirements
When a drug is approved with a companion diagnostic:
- The drug label specifies that testing is required
- The drug label identifies the approved companion diagnostic by name
- The companion diagnostic label references the corresponding drug
- Prescribing the drug without testing is considered off-label use
Types of Companion Diagnostic Designations
The FDA categorizes diagnostic tests related to drug therapy into several categories:
Companion Diagnostic (CDx)
Definition: A test that is essential for the safe and effective use of a corresponding drug.
Requirement: Testing is required — the drug should not be prescribed without it.
Example: HER2 testing before prescribing trastuzumab for breast cancer.
Complementary Diagnostic
Definition: A test that identifies patients who are most likely to benefit, but the drug may still be prescribed without it.
Requirement: Testing is recommended but not required.
Example: PD-L1 testing for some pembrolizumab indications — the drug can be prescribed regardless of PD-L1 status in certain cancers, though testing may inform the decision.
Pharmacogenomic Test
Definition: A test that identifies genetic variations affecting drug metabolism, dosing, or adverse event risk.
Requirement: Varies — may be required, recommended, or informational.
Example: HLA-B*5701 testing before prescribing abacavir (HIV medication) to avoid hypersensitivity reactions.
Landmark Companion Diagnostics
Several companion diagnostics have transformed treatment in their respective diseases:
HER2 Testing + Trastuzumab (Herceptin)
Disease: Breast cancer, gastric cancer
Biomarker: HER2 protein overexpression or gene amplification
Test methods: Immunohistochemistry (IHC), fluorescence in situ hybridization (FISH)
Impact: Transformed HER2-positive breast cancer from aggressive, poor-prognosis disease to highly treatable. Established the companion diagnostic paradigm.
EGFR Mutation Testing + EGFR Inhibitors
Disease: Non-small cell lung cancer (NSCLC)
Biomarker: Activating EGFR mutations (exon 19 deletions, L858R)
Test methods: PCR-based mutation detection, next-generation sequencing
Drugs: Erlotinib, gefitinib, osimertinib, others
Impact: Shifted lung cancer treatment from histology-based to mutation-based approach.
BRAF V600 Testing + BRAF Inhibitors
Disease: Melanoma, colorectal cancer, NSCLC, others
Biomarker: BRAF V600E and V600K mutations
Test methods: PCR, sequencing
Drugs: Vemurafenib, dabrafenib (often combined with MEK inhibitors)
Impact: Enabled targeted therapy for BRAF-mutant cancers across multiple tumor types.
ALK Rearrangement Testing + ALK Inhibitors
Disease: Non-small cell lung cancer
Biomarker: ALK gene fusions
Test methods: FISH, IHC, next-generation sequencing
Drugs: Crizotinib, alectinib, ceritinib, others
Impact: Identified a distinct molecular subtype of lung cancer with high response rates to targeted therapy.
PD-L1 Testing + Checkpoint Inhibitors
Disease: Multiple cancers
Biomarker: PD-L1 protein expression
Test methods: Immunohistochemistry
Drugs: Pembrolizumab, atezolizumab, others
Complexity: Multiple PD-L1 tests exist with different antibodies, scoring systems, and cutoffs — creating challenges for standardization.
MSI/dMMR Testing + Pembrolizumab
Disease: Any solid tumor (tumor-agnostic)
Biomarker: Microsatellite instability-high (MSI-H) or mismatch repair deficiency (dMMR)
Test methods: PCR, IHC, next-generation sequencing
Impact: First tissue-agnostic FDA approval — drug approved based on biomarker regardless of cancer type.
The Companion Diagnostic Development Process
Developing a companion diagnostic alongside a drug is a complex, parallel process:
Early Development (Phase 1-2)
- Identify candidate biomarkers through preclinical research
- Develop prototype assays for clinical trial use
- Validate analytical performance
- Generate initial clinical correlation data
Pivotal Development (Phase 3)
- Finalize assay specifications and cutoffs
- Prospectively test all patients in pivotal trials
- Demonstrate clinical validity (biomarker predicts outcomes)
- Establish clinical utility (testing improves outcomes)
- Prepare PMA submission in parallel with drug NDA/BLA
Regulatory Submission
- Submit PMA to FDA’s CDRH
- Coordinate review timeline with drug application
- Address both analytical and clinical validation
- Align labeling between drug and diagnostic
Approval and Launch
- Ideally achieve simultaneous approval
- Ensure diagnostic availability matches drug launch
- Establish laboratory testing infrastructure
Challenges in Companion Diagnostic Development
Companion diagnostics add complexity to drug development:
Development Timeline Alignment
Drug and diagnostic development must proceed in parallel. Delays in either program affect both. Diagnostic validation requires clinical trial data that may not be available until late-stage development.
Biomarker Validation
Identifying biomarkers that reliably predict response is difficult. Many candidates fail to validate. The biomarker cutoff (positive vs. negative) significantly impacts clinical utility and must be carefully established.
Testing Standardization
Different test platforms, antibodies, and scoring systems can produce different results. PD-L1 testing illustrates this challenge — multiple tests exist with limited interchangeability.
Tissue Requirements
Many companion diagnostics require tumor tissue, which may be limited or inaccessible. Liquid biopsy approaches are emerging but require separate validation.
Economic Considerations
Developing a companion diagnostic costs tens of millions of dollars. The diagnostic market is much smaller than the drug market, creating commercial challenges for standalone diagnostic companies.
Access and Reimbursement
Even approved companion diagnostics face insurance coverage challenges. Testing delays can delay treatment initiation.
Companion Diagnostics and Clinical Trial Design
Companion diagnostics fundamentally shape how clinical trials are designed:
Biomarker-Selected Trials
Enroll only patients positive for the biomarker. This “enrichment” strategy increases the proportion of responders, improving the probability of demonstrating efficacy.
Advantage: Higher response rates, smaller trials, clearer results
Risk: Drug only approved for biomarker-positive population (potentially limiting market)
All-Comer Trials with Biomarker Stratification
Enroll all patients regardless of biomarker status, but stratify by biomarker for analysis. This allows assessment of both the overall population and biomarker-defined subgroups.
Advantage: Understand drug activity across patient segments
Risk: May fail to show efficacy in the overall population even if a subgroup benefits
Biomarker-Driven Adaptive Designs
Begin enrolling all patients, then adapt enrollment based on emerging data — potentially restricting to biomarker-positive patients if they show greater benefit.
Advantage: Flexibility to optimize strategy as data emerges
Risk: Statistical and operational complexity
The Business of Companion Diagnostics
Companion diagnostics create complex commercial dynamics:
For Drug Companies
Advantages:
- Higher response rates support approval
- Clear patient identification aids commercial targeting
- Premium pricing justified by defined responders
- Competitive moat if companion diagnostic is proprietary
Challenges:
- Market limited to biomarker-positive patients
- Diagnostic development adds cost and complexity
- Testing delays can slow drug adoption
- Dependence on diagnostic company execution
For Diagnostic Companies
Advantages:
- Guaranteed market tied to drug utilization
- Premium pricing for companion diagnostics
- Regulatory pathway clarity
- Partnership opportunities with pharma
Challenges:
- Development timeline tied to drug program
- Risk if drug fails
- Smaller market than drug
- Potential competition from laboratory-developed tests
Partnership Models
Drug and diagnostic development often involve partnerships:
- Co-development agreements: Pharma partners with diagnostic company from early development
- Licensing: Pharma licenses diagnostic technology
- Acquisition: Pharma acquires diagnostic company or assets
- Service agreements: Diagnostic company provides testing for clinical trials with option for commercialization
Companion Diagnostics and Investment Analysis
For biotech investors, companion diagnostic strategy significantly impacts risk and opportunity:
Positive Signals
- Clear biomarker hypothesis with preclinical validation
- Companion diagnostic development partner identified early
- Biomarker-selected Phase 2 showing strong enrichment effect
- Regulatory alignment on companion diagnostic pathway
- Testing infrastructure feasible for commercial launch
Warning Signs
- Biomarker strategy unclear or changing
- No diagnostic development partner
- Late-stage attempt to identify biomarker after unselected trial disappointment
- Complex or expensive testing limiting practical adoption
- Multiple competing biomarkers without clear validation
Due Diligence Questions
- Is a companion diagnostic required for approval?
- What is the biomarker prevalence in the target population?
- How will the diagnostic restrict or define the addressable market?
- Is diagnostic development on track to support drug launch?
- What testing infrastructure exists for the biomarker?
The Future of Companion Diagnostics
The companion diagnostic field continues to evolve:
Next-Generation Sequencing Panels
Comprehensive genomic profiling (CGP) panels test for hundreds of genes simultaneously, identifying multiple actionable mutations in a single test. FDA-approved panels like FoundationOne CDx serve as companion diagnostics for multiple drugs.
Liquid Biopsy
Blood-based tests detecting circulating tumor DNA (ctDNA) enable non-invasive biomarker testing. FDA-approved liquid biopsy companion diagnostics now exist for several drugs, with more in development.
Multi-Marker Approaches
Moving beyond single biomarkers to signatures combining multiple markers — gene expression profiles, mutation combinations, or integrated scores — for more precise patient selection.
Tumor-Agnostic Indications
Companion diagnostics supporting biomarker-defined approvals regardless of tumor type — MSI-H, NTRK fusions, tumor mutational burden — are expanding precision medicine across cancers.
Real-Time Monitoring
Companion diagnostics evolving from single pre-treatment tests to longitudinal monitoring — tracking resistance mutations, minimal residual disease, or treatment response over time.
Tracking Companion Diagnostic Developments
Companion diagnostic approvals, new biomarker validations, and testing advances shape competitive dynamics in precision medicine. Staying current requires monitoring:
- FDA companion diagnostic approvals
- Drug approvals requiring or recommending testing
- Clinical trial designs and biomarker strategies
- Diagnostic technology advances
- Testing guideline updates
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The Bottom Line
Companion diagnostics are the gatekeepers of precision medicine. They ensure that targeted therapies reach the patients most likely to benefit — improving outcomes, reducing futile treatment, and enabling drug approvals in defined populations.
For drug developers, companion diagnostics are increasingly mandatory rather than optional. For investors, they represent both risk (development complexity, market restriction) and opportunity (competitive moats, regulatory clarity). For patients, they mean receiving treatments matched to their biology rather than one-size-fits-all approaches.
Understanding companion diagnostics is essential for anyone serious about modern drug development. They’re not peripheral to precision medicine. They’re what makes it possible.
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