By Tony Daltorio - July 20, 2012 | Tickers: A, BMY, LLY, QGEN, RHHBY.PK | 0 Comments

Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

Nearly every investor has heard about the patent cliff facing the major pharmaceutical companies. But there is another, quiet revolution occurring in the pharmaceutical sector right nowwhich very well may change its current business model drastically. That revolution is 'personalized medicine.'

Personalized medicine is the result of advances in genetics and molecular biology. While still in its early stages, it promises improvements in patients' treatment while at the same time reducing healthcare expenditures. It does so through molecular biology and the use of diagnostic tools, which is pivotal to determine whether an individual patient will benefit from a particular drug used to treat a specific disease such as cancer.

A recent advance in personalized medicine happened when the U.S. Food and Drug Administration approved a test called Therascreen from Qiagen NV (NASDAQ: QGEN) that will be used in conjunction with the drug Erbitux (used for colorectal cancer) that ismarketed by Eli Lilly (NYSE: LLY) and Bristol-Myers Squibb (NYSE: BMY). The test will allow the two companies to identify the 60 percent of patients who do not have a mutation in the KRAS gene and will benefit from the drug, thus avoiding giving the drug to patients who do have the mutation and will not benefit.

Based on history, this should be a big boost for sales of Erbitux. AstraZeneca's lung cancer drug Iressa, launched in 2002, had little success because of its high failure rate. But after a diagnostic test was developed in 2009, sales began to grow as the 10 percent of patients (with an EGFR mutation) helped by the drug were identified.

Theokayfor Therascreen is a milestone since the FDA has only approved a handful of drugs with companion tests over the past decade. Perhaps best known is Herceptin from Roche ADR (NASDAQOTH: RHHBY.PK), which is given to the quarter of women with breast cancer that have a so-called over-expression of the Her2 gene. The diagnostic test is a joint venture of Genentech, now owned by Roche, and the Danish diagnostics company Dako which is now owned by Agilent Technologies (NYSE: A). Agilent bought Dako in June for $2.2 billion in cash from the Swedish private equity firm EQT.

The recent FDA approval underscores the growing importance of 'companion diagnostics' used to analyze a patient's genetics to determine whether that patient will benefit from a specific drug. This may change pharmaceutical companies' entire business models to include companion diagnostics with all of their major drugs on the market. For example, Roche says that 60 percent of the drugs in its current pipeline are linked to a companion diagnostic.

Think about it...in the future, such diagnostic testing will nearly eliminate failure of drugs to work in certain patients and those costly side effects will be avoided because drugs will only be given to patients where the genetics have been determined to be compatible with the drug.

Even though some drug companies are keeping the companion diagnostics in house, the advancement of personalized medicine is potentially great news for companies in the diagnostics business such as Agilent Technologies, which is expanding its life sciences business into a fourth division at the firm, and Qiagen, which already manufactures 30 companion diagnostic tests.

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Personalized Medicine Plus Diagnostics Equals Profits for Investors