This is not the easiest time to be a pharmaceutical company. Every other day it seems there's a new public relations battle to fight. One minute there are too few drugs because of the patent system; the next minute there are too many drugs, but not the right kind. The latest salvo, that two-thirds of new products approved between 1989 and 2000 were "knock-offs" of existing drugs, has amplified an already-clamorous debate over the cost of medicines and where research dollars are going.

The study, released this month by the Washington-based National Institute for Health Care Management Foundation, is treading dangerous ground. Calling into question the additional benefits of substitute drugs, the study overlooks the advantage of competition in the industry and implies that one size fits all in an era where adverse drug reactions are the fourth leading cause of death in the U.S.

In fact, with more knowledge now of genetics, we are on the cusp of a revolution in which so-called "substitute drugs" will actually target different patient groups' genetic profiles. Many are already playing a role in increasing health and safety.

Consider, for example, the evolution of categories like cholesterol reduction in which a follow-on drug like Pfizer's Lipitor had better results than precursors, stealing market share from Merck's Zocor. This is the way progress happens in any industry. The question is how substitutes can be tailored to help patients most.

Part of this effort is a field called pharmacogenomics which uses genetic information to make drugs safer and more effective. The trick is how the industry can make this a priority. With many companies facing lawsuits, staggering price controls in Europe and low reimbursements in the U.S., looking for the next blockbuster drug has become a tool of survival. The profit potential in fields like PGx has been discounted because the drugs target fewer patients.

Tailored therapies are admittedly more complex to bring to market. Companies have to cover the cost of screening patients using genotyping, a necessary step to relate the genetic characteristics of an individual to the efficacy and safety of a drug. Second, segmenting patients more narrowly has the potential to destroy the value of blockbuster drugs already on the market or in development. Drug companies also fear a scenario in which they must develop multiple variations of compounds to fend off niche players.

The concerns are not without merit, but looking at the math, the average annual turnover of a conventional drug is $338 million compared with $285 million for a drug developed using PGx techniques. When you run it out 30 years — the typical lifetime for a drug — and include development costs, the net present value of drugs developed under PGx turns out to be about $85 million higher on average than that of conventional drugs. That's more than a rounding error in an industry that faces ever slimming profit margins.

Primary cancers will probably be among the first targets, based on the cost of treating those diseases and high rates of adverse drug reactions. Genentech's PGx drug Herceptin has been an early success. A chemotherapy agent for the treatment of metastatic breast cancer, it was designed exclusively for patients who have multiple copies of the HER-2/neu gene—about 25% of patients.

PGx drugs will also begin to show up where drug response monitoring is difficult or expensive, as it is for Alzheimer's, or where the outcomes of chronic conditions are acute and expensive, as they are in cardiovascular diseases and obesity. At least 30 drugs on the market are known to have their therapeutic outcome determined by genetic variations.

The testing and approval process for tailored therapies is sure to present new challenges for the industry, but none that should be prohibitive. The strategy chosen by GlaxoSmithKline to test the safety of its anti-HIV drug, Ziagen, demonstrates how drug companies can use pharmacogenomics cost-effectively. The test is intended to identify the 5% of patients treated by Ziagen who are developing severe, potentially fatal hypersensitivity reactions. The company expects to submit the test for FDA approval within the next three to five years.

With so much of their business in flux, the industry needs to begin structuring to take advantage of the emerging technology. The blockbuster model eventually will be supplanted by a "portfolio view" of a given condition. In the near term, PGx may hold potential for new or modified patents on expiring blockbusters, by bringing more targeted and effective versions to market as follow-on therapies. In the longer term, PGx offers a strategy for market laggards to find new life for failed drug candidates by targeting specific sub-classes of patients.

Realistically, it may take 10 years for the industry to embrace pharmacogenomics. For drug companies coming to terms with the limits of scale, however, PGx could provide the wellspring of innovation in substitute drugs that breathes new life into the business of healing itself.

Mr. Duelli is a vice president with Bain & Company's Global Health Care Practice in Munich. Mr. Singh is a Bain vice president in Boston. Bain director Jim Gilbert and manager Andreas van de Locht assisted with this article.