It was a sad week for biotech companies as one judge changed the landscape of patent law with the flick of his pen.
The ruling nullified Myriad Genetics' (Nasdaq: MYGN) claims on patents for two genes -- BRCA1 and BRCA2 -- that increase the susceptibility to breast cancer. Myriad has the exclusive license from the University of Utah, which gives it a monopoly on the genetic test.
At a reported cost of nearly $4,000 per test, patients' groups were a little miffed about the monopoly. The American Civil Liberties Union and the Public Patent Foundation sued on behalf of patients claiming that patents on genes aren't valid because you can't get a patent on something found in nature. The U.S. Patent & Trademark Office has issued patents on thousands of genes because the DNA is isolated. The judge, however, disagreed with the patent office and threw out the patent claims on the DNA sequences -- apparently isolated DNA was still natural enough to not warrant a patent.
Myriad dropped nearly 5% on the news yesterday, but that may be unjustified at this point. The company claims that it still has other patents that cover its tests, and Myriad is appealing the ruling to the federal appeals court. This one seems bound for the Supreme Court and, even if the other patents aren't as strong, I doubt any genetic test maker is likely to launch a test before the high court sorts this one out. Unlike at-risk launches by generic drug companies like Teva Pharmaceutical (Nasdaq: TEVA), Mylan (Nasdaq: MYL), and Novartis (NYSE: NVS), the need for infrastructure to launch the test would likely make the risks outweigh the rewards.
IP makes the world go round
The problem here is that the ruling on Myriad, if it sticks, could have far-reaching consequences for drug companies like Pfizer (NYSE: PFE), Amgen (Nasdaq: AMGN), and Biogen Idec (Nasdaq: BIIB). The drugs they develop are typically covered under other patents, but an initial patent on the gene can help tide them over while the drug discovery process works itself out.
The ruling could also hamper the development of personalized medicine -- or at least make it more expensive to develop those therapies. Drug companies are increasingly using companion genetic tests in clinical trials so that the trial only enrolls patients who can be helped by the drug. The development of the test is often partnered out to a company that specializes in tests. If the drug company can't offer an exclusive license to the genetic test because it can't get a patent, then the testing company will require a payment for developing a test that may have no commercial value if the drug fails.
Universities will also be big losers if all gene patents are invalidated because they hold many of the patents, which they license out to drug and genetic-testing companies. Investors can't buy shares in public and most private universities, but they do indirectly benefit from the royalties that flow into universities. Much of the basic science is carried out at universities, and the loss of royalty income may affect the ability to perform the basic research that drug companies base their drug discovery on.
Investor takeaway
Just like patent squabbles between brand- and generic-drug makers, unless you're a patent attorney -- and maybe even if you are -- it's nearly impossible to know how this will eventually end. Besides keeping abreast of the situation, there's not much investors can do. The potential loss of intellectual property is just another risk that investors have to deal with in this high-risk, high-reward industry.
