Innovation & Technology January 21, 2010, 5:00PM EST

Making Personalized Medicine Pay

Medco and other pharmacy benefit managers say future profits depend on matching drugs to patients based on their genes

By John Carey

Browse Issues

Browse the BusinessWeek Archive

Story Tools

The dirty little secret about drugs is that they only work in about half of the people who take them. So says an educational nonprofit called the Personalized Medicine Coalition, and many drug executives concede as much. Of the $292 billion spent in the U.S. on prescription drugs in 2008, as much as $145 billion went to medications that didn't help individual patients, said Jerel Davis, project manager at McKinsey, at a recent conference. And billions more are being spent to treat adverse drug reactions and other complications. "When you look at the data, it's shocking," says Dr. Robert S. Epstein, chief medical officer at Medco Health Solutions (MHS), a $51 billion company that manages drug prescriptions for 60 million Americans.

Researchers know how to solve this problem. First, figure out the differences between those patients who respond to a drug and those who don't, then treat only to those who will benefit. But this personalized medicine approach "has been slower to develop than we thought 10 years ago," says Richard K. Schatzberg, CEO of Generation Health, a startup that offers targeted medicine services. Lack of enthusiasm in the drug industry is a big reason; companies would lose billions of dollars if only those who actually benefit were to use such blockbuster drugs as antidepressants, arthritis medicines, and cholesterol pills.

Now, however, the promise of personalized drug treatments appears more realistic, thanks to new players on the sceneand a new business model. The recent entrants are pharmacy benefit managers (PBMs) such as Medco and CVS Caremark (CVS). Medco is testing patients for genetic variations that explain why they respond differently to drugs like warfarin, a widely used blood thinner, and tamoxifen for breast cancer. CVS Caremark has taken a majority stake in Generation Health and expects to launch a similar testing program in May. The move by the PBMs "is transformative," says Edward Abrahams, executive director of the Personalized Medicine Coalition, whose members include scientists, health-care providers, payers, and patients' groups. "We are talking about better care for millions of people and keeping costs down for employers, whose insurance costs are exploding. It could be the tipping point."

PBMs plan to make money by selling personalized medicine services to employers, which are willing to pay them higher fees for improved health outcomes and lower prescription costs. Medco and other PBMs also hope to win market share from their slower-moving competitors. "It is a differentiator for us," says Dr. Jane Barlow, vice-president for Medco's personalized medicine business. Plus, they expect genetic testing will increase the percentage of patients using certain cheaper generic drugs, thus increasing profits. Medco has signed up 200 employers to its program, representing 7 million people. "This has been the fastest adoption of a new program in Medco history," says Epstein. One early—and eager—adopter: IBM (IBM), which expects better health outcomes and cost savings, says Dr. Martin Sepulveda, an IBM vice-president for health matters.

SECOND OPINION

The idea took a long time to bear fruit at Medco, even though it was an obsession for Epstein, an epidemiologist by training. "Back in 2000, Rob Epstein explained to me this would change the face of medicine—and make all the pharmaceutical companies nervous," recalls Schatzberg. "It took longer than he thought." The company's first foray into personalized treatments in 2002 foundered. Epstein wanted to do genetic testing on asthma patients to predict better which ones might end up in the hospital, "but I couldn't see the return on investment," he says.

The business case improved as scientists identified more genes linked to drug responses. For many medicines, enzymes produced in the liver are crucial.