It seemed only right that James Watson, who co-discovered the structure of DNA with Francis Crick and Rosalind Franklin, was the first to receive a DVD holding the sequence of his own DNA produced by 454 Life Sciences, a division of the Swiss drug giant Roche, and academic researchers.

While DNA mapping technology under development at Roche and other companies has the potential to bring the long-awaited era of personalized medicine closer, it’s clear that enormous ethical, legal and investment hurdles exist to building successful business models based on decoding an individual’s DNA, according to Wharton faculty and executives in the industry.

According to Stephen Sammut, senior fellow in Wharton’s Healthcare Systems Department and a venture partner at Burrill & Co., the San Francisco life sciences venture capital firm, the emerging industry is fraught with complexity. “Most of us are learning that every time you have an answer to a new question, the answer invites another 10 questions,” he says.

Eventually, though, he predicts the technology will lead to new medical applications in testing, drug development and services related to genetic counseling. “From an investor point of view and a manager’s point of view, what we’re looking at here is a market with a series of products, but it is not clear at the current time how they’re going to integrate into the clinical practice of medicine.”

Demystifying the Complexities

At the moment, much of investors’ attention has been focused on companies that make the processing equipment that now allows for increasingly high-powered analysis of genetic material. These powerful new machines are speeding the process of decoding individual DNA and driving the price down. 454 Life Sciences sequenced Watson’s DNA with the Human Genome Sequencing Center at Baylor College of Medicine for less than $1 million. Other companies working on decoding systems include Solexa (a division of Illumina), Applied Biosystems and Helicos.

“It’s an exciting time,” says Christopher McLeod, president of Connecticut-based 454 Life Sciences. “It’s the dawn of a new era when you can look at not just all the genes, but all the genetic information that an individual has. We’re just on the cusp of making that economically feasible.”

Another group of companies is exploring business models that hinge on testing and analysis of genetic information. Google recently invested in a company called 23andMe, co-founded by the wife of Google co-founder Sergey Brin. The company has not laid out its exact plans but has said it will use the Internet and software tools to help consumers understand their genome.

“Can entrepreneurs such as myself and my partner demystify the complexities to provide a product simple enough for individuals to use and still be accurate, relevant and above reproach, and can that information be delivered in an ethical and responsible manner? That is the challenge. We believe we can,” says Julian Awad, cofounder of Smart Genetics, a web-based genetic testing and counseling start-up based in Philadelphia, Pa.         

For the moment, venture capitalists are cautious about personal DNA tests, says Sammut. “It does not look like there is a head-long rush into investing in companies whose business model is based on clinical lab services for genetic testing,” he notes, pointing to privacy and other ethical issues as major sources of uncertainty. “I think this is a case where the ethical problems are so great that there is concern the market may not materialize.”

So far, he adds, the most successful application of genetic testing technology has been as a diagnostic tool tied to a companion drug therapy. He points to Myriad Genetics, a biotech firm that makes molecular diagnostic tests to determine the risk of breast cancer, ovarian cancer, colon cancer, endometrial cancer and melanoma skin cancer in individuals with a family history of cancer. “The synergy between the genetic research and testing has interesting synergy for its drug development,” says Sammut, adding that Myriad provides education directed at patients and physicians, and does its own testing in a specialized laboratory. It offers several ways of covering the costs, including advanced approval with insurers for selected tests.

Provisions for privacy are built into Myriad’s business, says Sammut. “The company’s decision to control execution of the testing as opposed to licensing to other labs assures not only quality, but protects patients in terms of privacy and accumulation of history.”

According to Sammut, there have been relatively few pure genetic testing firms attractive enough to receive venture capital funds. He says that could be related to the investment disaster with genomic and proteomic platform companies in the late 1990s, or worries that potential acquirers will pay not pay enough for these operations.

McLeod thinks that companies hoping to develop the predictive testing market, at least in the near term, will continue to be limited by the vast amount of information that remains unknown. “The challenge is we still need to build a better base of knowledge that suggests which DNA is involved in disease and drug response. I think it will take some time” to do that.

The industry’s ethical concerns are not linked to morality, as was the case in the debate about stem-cell research, Sammut notes. With genetic testing, the ethical issues are focused largely on privacy and the relatively uncharted territory of addressing the emotional consequences of informing a patient that he or she has a genetic predisposition toward a disease for which there may be no effective treatment.

The issue is even more complicated, he says, when one adds the dimension of time to the equation. How will doctors know when to begin administering a drug that may alleviate a genetic-driven illness without risking toxicity or immunity that might develop from years of use? He takes the hypothetical example of a five-year-old girl being screened for a predisposition to breast cancer. When should that child be given a drug treatment that might prevent development of the disease? At age 40? 30? “And what if she contracted breast cancer at 41?” Sammut asks. “You’re going to need a huge amount of data to know what to do. One might argue that it’s going to be a field day for trial lawyers. We haven’t begun to deal with these issues.”

Discrimination and “Genetic Spying”

Arthur Caplan, director of the Center for Bioethics at the University of Pennsylvania, agrees that ethical concerns will play a major role in the development of personal DNA testing.

On the upside, he says, the technology could be extremely useful for physicians as they talk to patients with certain genetic risk factors about changing their lifestyles to avoid disease later on. Patients could also rely on genetic information to make major life decisions based on their long-term health prospects. Eventually, testing will become important in so-called personalized medicine where drugs can be targeted to genetic profiles, making these drugs more effective and less likely to create harmful side effects in certain individuals.

On the downside, Caplan says, the technology could also allow schools, employers, governments and insurers to require that individuals have their genes mapped. The information could then be used in ways to discriminate against people based on their predisposition toward a disease they may never actually contract.

For some people, widely available genetic information could lead to discrimination in acquiring life or health insurance in countries like the United States that do not have universal coverage. It could even lead to more pressure to create universal health care in the U.S., argues Caplan. “I think it would be a big motivator [to create] a minimal universal health care program” if rich and powerful people suddenly found that they couldn’t get insurance “because of their genetic information.”

He says people could engage in “genetic spying” against others using genes obtained secretly from coffee cups or bedding. There could even be romantic implications, suggests Caplan. “Someone might not want to marry you because your genes are going to produce offspring with problems.”

Heightening these privacy concerns is the notion that much of what scientists know about genetic risk remains incomplete, adds Caplan, who wrote about many of these issues in a book titled, Smart Mice, Not So Smart People: An Interesting and Amusing Guide to Bioethics. “If you have the gene, that doesn’t mean you will get the disease,” he says. “People want to know if they’re going to get a disease or not. Most of genetics doesn’t work that way. There are still environmental considerations and relatively few certainties in genomics. Selling probability is hard.”

Caplan also points to what he calls the “Sword of Damocles Problem,” noting that Watson posted his DNA data on the Internet, except for information that might indicate a predisposition toward Alzheimer’s disease. At age 78, Watson didn’t want to know about that piece of his genetic makeup.”There are some things people don’t want to know if there is no cure and nothing they can do about it.”

Yet despite the problems, Caplan believes personal DNA technology will benefit society in the long term. “I think it definitely is the future, but it’s going to take some careful attention to the ethics and the law to maximize the opportunity because it’s a tricky area.”

IP Protection

At Smart Genetics, which grew out of the 2005-2006 Wharton Business Plan Competition, Awad and colleagues reject the traditional testing model in which doctors and insurers refer patients to laboratories for testing and a counselor if necessary. Smart Genetics will market directly to consumers, who themselves will pay for confidential test results. Awad and his business partner, Richard Watson, a researcher specializing in molecular virology at the University of Pennsylvania Medical School, already operate a company called HIVmirror that sells a $99 test for a gene that can slow the development of AIDS.

By paying out-of-pocket for tests, patients can prevent insurers or employers from discovering potentially damaging information, says Awad. The company has doctors and genetic counselors on staff to consult with patients who take its tests.

Trust and credibility are critical elements of any business centered on genetic data, Awad states. “The question for people who want to get into this business in any fashion is how to take something extremely complicated and help individuals across the spectrum understand it in a very simple way. Genetic conditions don’t discriminate when it comes to education levels. If you have a diagnostic product or genetic test, you have to really build the product for every different type of education level, and that’s tough.”

Awad says his firm has done product testing and found that even people with Ivy League educations and a background in science have trouble understanding what is involved in genetic tests.

Another major hurdle for companies hoping to build a business on predictive testing is intellectual property protection, Awad adds. In the current environment, biotech companies, large universities and research owners have 17- to 20-year patents and licenses on many of the processes related to the function of certain genes — a situation that could complicate business models related to personal genetic testing.

He uses the example of brain cancer to explain the complexity. “Imagine scientists come out and discover what causes brain cancer, but it’s a myriad of 30 different genes owned by 15 different organizations. You are an organization that wants to make the test available either to individuals or doctors. Who’s going to take the time to invest and aggregate all the licenses for all those patents? Who’s going to take the time and the money to move through that entire process, then go through the FDA and then deal with paying royalties?” Awad asks. “This is why there are so many dead soldiers in this field.”

Sammut agrees. “This is still an area with a lot of controversy and ambiguity but I think at the end of the day, the actual gene or gene sequence is not going to end up being proprietary.” He says that eventually the industry will become less technology dependent and more focused on efficient systems that can do the largest number of tests for the smallest amount of money.

Celebrity Volunteers

To speed up the process of commercialization of personal DNA decoding, the non-profit X Prize Foundation has launched a competition, called the Archon X Prize for Genomics, that will award $10 million to the first group that can decode the DNA of more than 100 people in 10 days. Celebrities — including Larry King, Lance Armstrong and Michael Milken — have signed on to contribute DNA to the project, hoping to spur development of new tests and treatments for diseases they are campaigning against.

Marc Hodosh, senior director of the Archon X Prize for Genomics, says four groups have already taken up the challenge, which he expects to be completed in three to five years. Without the prize, he estimates it would take 10 years to make personal DNA decoding commercially viable.

Along the way, he hopes the prize can accelerate resolution of the many ethical problems and other obstacles that are likely to arise and hamper companies’ progress in sequencing an individual’s DNA. “I think the medical breakthroughs will be revolutionary, but we want to make sure they are used ethically and wisely for individuals’ benefit, not for employers and not for insurers,” he notes. “We want to have our finger on the issues and create discussion. We feel the benefits far outweigh the risks.”

As with all new markets, particularly when it comes to health care, the commercial development of predictive testing will depend greatly on who is willing to pay for the technology. According to Awad, attempts to legislate privacy protection for genetic test results have stalled and could, potentially, disrupt insurance markets. If individuals have more information about their own health, they could make decisions based on that information to take on more insurance, or less. That process, known as adverse selection in the insurance industry, could hurt insurance companies that base their rates on medical outcomes across the population in aggregate. Awad, however, notes that the industry is working on new ways to overcome this problem. “It’s a short-term adjustment right now. This is not something millions of people are doing. It’s not really that commonplace yet.”

But Hold the Fries

Wharton Health Care Systems professor Mark Pauly says the new genetic testing services could increase demand on already strained healthcare systems. “What I would hope would happen is that people would be sensible and not rush out to get their DNA measured, because they have as good a chance as having bad news as good news.”

The future of personal genetic testing remains “a big if,” he suggests. “The connection between the ability to know what your DNA is and anything useful — other than discovering paternity — would have some health implications, but that really has still not happened.” Pauly says he read about an intriguing genetic discovery a week earlier, but had already forgotten what disease it affected in the seeming avalanche of discoveries that are announced — yet appear to have little link to actual treatments.

“It’s still as much a crap shoot as it ever was,” he says of genetic testing and treatment. “Knowing you have a predisposition to disease might change some people’s behavior, but it wouldn’t make them all behave. And the truth is, even if you have a bad gene, you might be hit by a truck tomorrow. So you might as well have a hamburger.”