The Supreme Court unanimously agreed that companies can't own natural DNA, but Thursday's ambiguous yet far-reaching ruling also said manipulated genes could be patented.
The case, Association for Molecular Pathology v. Myriad Genetics (MYGN), challenged Myriad's patenting of genes it isolated and turned into its BRACAnalysis test, which estimates susceptibility to breast and ovarian cancer.
The case was closely watched by companies eager to protect products based on genetic research. Some doctors and scientists have argued gene patents would restrict competition and drive up costs for patients.
The court ruled that the original genes — BRCA1 and BRCA2, — are "products of nature" and can't be owned. But to turn the genes into usable products, Myriad synthesized them in a form called complementary DNA. The court ruled cDNA patents are valid due to the degree of manipulation involved.
Analyst Jose Haresco of JMP Securities told IBD that cDNA patent protection was likely why investors initially sent Myriad shares to a four-year high.
"That's the stuff that actually matters," he said. "It's the bridge between the naturally occurring gene and the actual product.
Rival Tests Loom
Haresco said the decision removed uncertainty over the stock since the suit was filed in 2009. Many JMP clients liked Myriad's business model and growth — its EPS Rank is a strong 90 — but couldn't "pull the trigger" due to the patent issue.
But competition immediately surfaced. Bio-Reference Laboratories (BRLI) said Thursday that in August it will offer "a suite of comprehensive genetic tests for inherited cancers including BRCA1 and BRCA2 genes.
The tests involve next-generation gene sequencing, which Morningstar analyst Charlie Miller has flagged as a threat to Myriad's more old-school tests.
"As such technology is able to glean significantly more information at a fraction of the cost, we believe the market will evolve from limited mutation tests like BRACAnalysis to comprehensive multigene panels and whole-genome assessment," Miller wrote in a research note Thursday.
Myriad, up 13% early, ended off 6%. Bio-Reference and Quest Diagnostics (DGX), which plans BRAC tests this fall, rose 1%.
Attorney Michael Shuster of Fenwick & West is also concerned about the relative simplicity of Myriad's test in light of the Supreme Court's 2012 patent decision, Mayo v. Prometheus.
Prometheus Laboratories had patented a test to gauge the correct drug dose for patients with autoimmune diseases, by giving the drug and measuring their response. The court saw this as simply perceiving a "law of nature" and not anything patentable.
A 'Simple Correlation'?
"The concern that I have is whether that reasoning from Mayo can be extended to claims that are a simple correlation between the occurrence in a DNA sequence of a mutation and an enhanced risk of cancer," Shuster said.
Both cases have implications to many companies with patents on genetic products. Haresco cites examples from Roche's (RHHBY) Genentech, which has been developing drugs based on patented antibody sequences, to Monsanto (MON), which owns patents on certain genetic strains of crops.
It's far from clear how the court's recent decisions will be applied to future patent cases.
"The concept that the court is trying to get at is, once you have a natural phenomenon you can patent in that space, but you've got to add enough," said attorney Chuck Hauff of Snell & Wilmer. "Mayo specifically didn't tell you what would have been enough had they added it, and this case really doesn't do that.
The court's willingness to challenge the Patent Office, as well as lower courts, has implications for any IP-heavy industry, such as software, Hauff said. The "challenge will be for patent attorneys to figure out how best to draft patents." he said.