Fool contributor and health-care sector editor Brian Orelli hung out at the Bio International Convention this week. This concludes his series on the hot topics at the conference that will affect the industry and the stocks you invest in.
Personalized medicine is coming, and investors should be looking to jump aboard this slow-moving train as it begins to pick up speed. The interesting thing is, the engineer isn't the drug companies. Instead, diagnostic tests are really driving the move toward personalized medicine.
One stop shop
When a drug company decides to develop a companion diagnostic test, as Genentech (NYSE: DNA) did for Herceptin, negotiations with a diagnostic test maker can be complicated: Which company will pay for what during development? Who pays royalties to whom? What happens if the drug fails?
But that's not so for Johnson & Johnson (NYSE: JNJ). It has pharmaceutical and diagnostic test divisions all under one corporate roof, which should -- in theory -- help it develop personalized therapies more quickly than an average drug company.
The easiest point for developing diagnostic tests is during the clinical stage of development. Johnson & Johnson is also working on tests to predict whether patients will respond to its already-approved schizophrenia drugs -- Risperdal and Invega. By determining why some patients respond to its drugs and other patients don't, Johnson & Johnson hopes to differentiate its drugs in the market and convince doctors to put patients on Risperdal or Invega instead of other antipsychotics, such as Eli Lilly's (NYSE: LLY) Zyprexa or Pfizer's (NYSE: PFE) Geodon.
The problem is that there are so many genes that could control the drugs' absorption, distribution, metabolism, and excretion (ADME), that finding genetic markers is like looking for one particular needle in a needle factory. Sure, genomic arrays developed by Illumina (Nasdaq: ILMN) and Affymetrix (Nasdaq: AFFX) can help, but this won't be an overnight success.
Finding a balance
Rather than developing companion diagnostics to find out whether or not a drug will work, privately held XDx is designing tests to help doctors figure out the right amount of drug to use.
XDx has developed AlloMap, a blood test that measures the expression levels of 20 genes to determine if a heart transplant patient is rejecting the transplanted heart. That information helps doctors prescribe the right amount of immunosuppressant for the patient.
XDx is also developing tests for other organ transplants and autoimmune diseases. The latter is an interesting target, especially considering the side effects of immunosuppressives like Abbott Labs' (NYSE: ABT) Humira. A test that allowed doctors to prescribe an exact amount of drug could reduce the number of side effects and perhaps increase the use of immunosuppressive drugs even more.
Getting it paid for
All of this sounds exciting, but enlisting insurers to pay for the tests hasn't been at all easy. The complication is that a test that's been in the public domain for years is often reimbursed at the same rate as a company's proprietary test. If the company can't recoup its investment in developing the test by charging a premium, then there's no way for investors to benefit.
A lot of CEOs were complaining about this at Bio, but it looks like a short-term problem to me. Insurance companies want to save money, and it's in their best interests to pay for a test now if it leads to savings in medical costs later. They may be slow to change their billing codes, but ultimately I think insurers will see the light.
Diagnostic tests are the new black
Don't take my word for it -- or the words of the companies at Bio. The acquisition deals that have been made for companies like Third Wave Technologies and Ventana Medical Systems underscore the potential growth of this industry.
Fools would be well advised to jump aboard this high-growth industry.
Read other reports from biotech's biggest conference:
- Find out why follow-on biologics might not be so bad for biotech companies.
- Learn what activist investors are up to.
- See how companies make money selling drugs to just a few people.
