Biotechnology and the Future of DNA-Based Patents

Should human DNA be patentable? Or, to put it another way, should elements of the human body be commodifiable? If you're Myriad Genetics  (NASDAQ: MYGN  ) , you'd answer yes. However, if you're the Association for Molecular Pathology, you'd answer no. Ultimately, it's the Supreme Court who will have the final say, and this could have a major impact on Myriad's bottom line, as well as impact other biotech companiesImmediately following the Supreme Court's decision to hear the case, shares of Myriad fell 9% and ended the trading day down 3.8%. So, what does this mean for your portfolio? 

A brief history of time
Year-to-date, shares of Myriad have climbed more than 30% this year.  

One of the reasons for the company's recent success is its strong competitive advantage -- and this is due, in part, to a strong patent portfolio. However, Myriad's greatest advantage could also be its greatest risk going forward. Here's the problem.

Show me the money
Myriad's biggest earner is its BRACAnalysis test, which uses BRCA1 and 2 genes to help detect for mutations that can lead to an increased risk of breast and ovarian cancer. Additionally, these genes are used to help inform treatment options. More importantly, this is the gold standard of tests for breast and ovarian cancer, which makes this test a huge money-maker for Myriad.

In fact, according to Myriad's 2012 annual report, the BRACAnalysis tests accounted for 81.7% of Myriad's total revenue for 2012. A big reason for this is Myriad's exclusive rights to 24 U.S. patents that cover BRACAnalysis testing.

 Well, the Supreme Court will be ruling on Myriad's patents regarding BRCA1 and BRCA2. That means that the product that accounted for the majority of Myriad's total revenue in 2012 could be in jeopardy. I know... ouch.

Should a company be allowed to own parts of the human body?
Arguably, Myriad did discover these isolated genes and their mutations related to breast and ovarian cancer. However, the fact that these genes are naturally occurring has led many to argue that patenting them is on par with turning the human body into an object or commodity.

Additionally, because Myriad currently has a patent on BRCA1 and 2, opponents of the patent argue that standard clinical testing of these genes is restricted, hindering scientific developments of new treatments for both breast and ovarian cancer.

 Myriad responded to these criticisms in a press release by stating that contrary to their opponent's claims, Myriad supports, and helps facilitate, research regarding BRCA1 and BRCA2. Furthermore, Myriad states that as of this date, more than 18,000 scientists have studied the genes in question, making them some of the most widely researched genes in history.  

Round one goes to...
This isn't the first time Myriad has been involved in a legal suit over its patents of BRCA1 and 2. In August, the U.S. Federal Circuit Court of Appeals ruled 2-1 that Myriad has the right to patent "isolated" genes.

But, in a similar case, the Supreme Court unanimously overturned a ruling by the Federal Circuit that said Prometheus Laboratories could patent its blood test used in treating autoimmune disorders. Contrary to the Federal Circuit's ruling, the Supreme Court found that Prometheus' patent fell under the laws of nature, and therefore, could not be patented. The Association for Molecular Pathology argues that Myriad's patent is the same: "patenting of natural phenomena and basic human knowledge and thought." 

Down, down, down...
Although a decision from the Supreme Court isn't expected until June, this case has, and is, causing waves in the biotech industry.

For almost 30 years, the U.S. Patent and Trademark Office has issued DNA patents to companies like Amgen  (NASDAQ: AMGN  ) , Gilead Sciences  (NASDAQ: GILD  ) , and Biogen Idec  (NASDAQ: BIIB  ) . But, if the Supreme Court rules that genes can't be patented, then according to Biotechnology Industry Organization -- the industry's main trade association -- biotech companies would receive a major blow in their ability to be innovative. This may lead to lost investments, which will result in job losses, and a continued inability to be competitive.  

In a friend-of-the-court brief, Hans Sauer, BIO's associate general counsel for intellectual property stated:

In many cases, gene-based patents are critical for a biotech company's ability to attract the capital and investment necessary for the development of innovative diagnostic, therapeutic, agricultural and environmental products... The ruling could deal a major blow to the biotech industry because so many of its companies are small organizations that have yet to bring their products to market or to attain profitability... Unprecedented constitutional and statutory challenges to the patenting of isolated DNA molecules go far beyond the BRCA1 and BRCA2 genes at issue in this case.  

Well, that sounds bad for biotech...
To put it simply, many biotech companies need gene-based patents to function.

In fact, the loss of gene-based patents is so worrisome that biotech executives have supported a letter that states that if Myriad loses the lawsuit over its patents, the ramifications of such a ruling could "tear down a whole class of intellectual property that is important to the rest of the U.S. economy and the biotech industry alike." 

As every long-term investing Fool can tell you, if a company heavily relies on one product and prospects for the future look bleak, investing in it is probably not a good idea. And this is exactly why the Supreme Court's decision could have such a huge impact on this company in the long run.

What to look for in the days ahead
There's no way of knowing for sure which way the Supreme Court will go. Both sides have strong cases, but what it really comes down to is should gene-based patents be allowed, even though genes are naturally occurring? Rest assured that I will be following this case and will update you as I get new information.

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  • Report this Comment On December 12, 2012, at 5:17 PM, RMR103051 wrote:

    As one who has invested in Myriad from long before it went public it makes me upset when journalists don't do their homework and make irresponsible statements which do not represent the facts. Ms Spence writes as follows:

    "In fact, according to Myriad's 2012 annual report, the BRACAnalysis tests accounted for 81.7% of Myriad's total revenue for 2012. A big reason for this is Myriad's exclusive rights to 24 U.S. patents that cover BRACAnalysis testing.

    Well, the Supreme Court will be ruling on Myriad's patents regarding BRCA1 and BRCA2. That means that the product that accounted for the majority of Myriad's total revenue in 2012 could be in jeopardy. I know... ouch."

    As one who has followed Myriad for years I know that there are patents covering the BRACAnalysis testing that are not being challenged by the ACLU lawsuit. To make certain I was correct I contacted investor relations at Myriad and got the following response:

    "Myriad currently has approximately 500 claims within 24 patents covering the test and the methods necessary to perform the test. The ACLU case is only disputing 15 of these claims. Myriad believes that it has a patent estate that will allow the company to exclusively offer the test until 2018 and perhaps beyond. As the author details, this case is important for many industries and for future innovation, but it does not have a direct impact to Myriad’s business other than the headline reaction on Wall Street."

    I wonder if Ms. Spence ever attempted to contact the company or whether she bothered to listen to the conference calls. If she had she would have learned something about patent law and might have written a more responsible article. I am sure her uneducated opinion is shared by many others causing the stock to drop but has anything really changed. I think not. Ouch!

    Ms Spence, I welcome your response.

    Bob

  • Report this Comment On December 12, 2012, at 7:31 PM, TMFKSpence wrote:

    Hi Bob,

    Thank you for reading, and your comments. It's true, ACLU is not suing Myriad over every patent. It's suing over the legality regarding Myriad's patents on BRCA1 and BRCA2 genes. Currently, Myriad has a monopoly on the “isolated” forms of the two genes, which, according to ACLU, "means it patented the human gene once removed from the cell. This includes the BRCA genes from every person in the United States. Myriad has enforced its patents on the genes so that it has a monopoly on BRCA genetic testing." A monopoly on BRCA genetic testing is a large contributor to Myriad's financial health.

    To see how Myriad has maintained that monopoly, I'd invite you to go to ACLU's site, specifically, here: http://www.aclu.org/blog/womens-rights-free-speech/are-human...

    Furthermore, as stated in Myriad's Annual report (I suggest you read the "Risk Factors" section... It is more detailed than I can fully summarize here):

    "Our commercial success will depend, in part, on our ability to obtain additional patents and licenses and protect our existing patent position, both in the United States and in other countries, for predisposing genes we identify and related technologies, processes, methods and other inventions that we believe are patentable. Our ability to preserve our trade secrets and other intellectual property is also critical to our long-term success. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to maintain profitability." pg. 28

    In other words, if the Supreme Court rules against gene-based patents, this could absolutely hurt Myriad's business as stated in the annual report.

    Additionally, (pg. 29 of Myriad's Annual Report):

    "Specifically, as disclosed in Part I Item 3, of this Annual Report on Form 10-K, we are a defendant in a lawsuit brought by the Association for Medical Pathology and others. While we do not believe that an adverse decision from this case will enable others to commercialize genetic tests that are competitive with our BRACAnalysis test, our business could be materially adversely impacted in the future from an adverse opinion."

    I think that sums it up quite nicely, don't you? :)

    Granted, Myriad's Annual Report was released before the Supreme Court agreed to hear the case (the court case in reference was for the Court of Appeals), but in light of the Supreme Court's ruling against Prometheus' blood test, the above mentioned risk is all the more true.

    Also, please look at Myriad's own wording to you:

    "Myriad believes that it has a patent estate..."

    I'm sure you know that just because a company believes something to be true, that does not necessary make it so.

    To answer your other assertions: No, I didn't contact investor relations; I read the 10-K and the Annual report. Which is what they quoted to you. It's on pg. 33 in the 2012 10-K if you'd like to confirm.

    Again, thanks for reading!

    TMFKSpence

  • Report this Comment On December 14, 2012, at 5:01 PM, kingsquag wrote:

    Where is the thumbs up button for Bob and the thumbs down button for TMFKSpence?

    Taking investment advice from a "Risk Factors" section of a 10-K is the biggest rookie move ever. Companies put stuff in there to cover any conceivable scenario (and many inconceivable ones as well).

    Bottom line is that the supreme court case outcome will not affect BRACAnalysis nor MYGN's revenues.

    But spinning it the other way does make for a great story. And great stories sell (are read online by the masses).

    Disclosure: Long MYGN.

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