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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 companies. Immediately 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.
While you can certainly make huge gains in biotech and pharmaceuticals, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.