Score one for logical, rational reasoning.
In what will undoubtedly prove to be a landmark case, the United States Supreme Court ruled last week that although the means with which it can be located and repaired is patentable, simply identifying which part of a DNA strand is linked to a particular disease isn’t patentable (and therefore not proprietary) information.
As such, the gene-mapping game just dramatically changed for companies like Illumina (ILMN), Complete Genomics (GNOM), and Sequenom (SQNM).
Against the Odds
If the equity market had a theme in 2012, patent litigation would be it. It was the year Apple (AAPL) successfully defended a handful of its patents against Samsung (SSNLF). That’s no big deal in itself — patents are defended all the time. What was odd was the nature of the patents in the first place, and that the court system as well as a jury didn’t even flinch at what would have likely been thrown out of court just a few years ago.
To be fair, some of Apple’s claims that Samsung copycatted aspects of its iPhone were legitimate. Others, however, felt a little whiny. One of the sillier ones was that some of Samsung’s smartphone screens visually “bounced” when the scrolling finger reached the top or bottom of the page. Perhaps the most alarming patent Apple now wields, however, is the patent on rectangular-shaped devices with rounded corners.
Both are notable characteristics of the iPad and iPhone, though one would be hard-pressed to call them innovations … which is ultimately what the U.S. Patent Office aims to defend.
Last year also was the year small IP company Vringo (VRNG) was technically victorious in a patent case against Google (GOOG).
The smaller company claimed the search giant used Vringo’s process for refining and improving a web-surfer’s search results. The company even claims the quality of its search engine got so high, it’s the reason Google became the world’s top web-search destination. Google argued (in simplest terms) that there are several ways to assemble an increasingly effective search engine, and that Vringo’s patent for the idea wasn’t valid in the first place — it’s what search engine companies are supposed to do. The jury somehow didn’t see it the same way, though, awarding Vringo a modest piece of Google’s bank account.
Point being, the patent landscape reached a tipping point in 2012 … one that seemed to encourage plaintiffs to nag other companies into submission rather than actually defend a true innovation.
That new mentality seemed to bode well for Myriad Genetics (MYGN) in its recently concluded patent fight with the Association for Molecular Pathology.
However, it seems the court system has finally put its foot down.
Myriad Genetics Vs. Association for Molecular Pathology
Scientists have long known that DNA exists and what it does. It has only been within the past few years, however, that science has been able to determine which parts of a DNA strand affect specific aspects of a human body. Although the human genome project released the entire 3 billion-character-long DNA map in 2003, the industry has only scratched the surface of figuring out which pieces of that map do what.
Myriad Genetics was one of the ground-breakers in the arena, figuring out not just the location of faulty DNA (on a DNA strand) that causes a propensity for ovarian and breast cancer, but also spotting the specific sequence of a DNA that likely leads to the diseases. Moreover, Myriad had been arguing for a few years that since it was first to identify where on the DNA strand certain cancers could be addressed, it had sole rights to perform diagnostic tests searching for those vulnerabilities.
The Supreme Court disagreed, ruling that while developing a means to repair broken DNA was patentable, simply figuring out how nature worked or was put together isn’t patentable in itself — it’s simply the discovery of information that applies universally.
Bigger-picture, it’s a cue that no genome-mapping company is going to be able to lay claim to what different pieces of a DNA strand “do,” or what specifically indicates a problem might exist.
On the flip side, the ruling also made it clear that solutions for repairing faulty DNA (“complementary” DNA) were plenty patentable.
The implications are twofold, even if neither is going to be felt immediately.
The first implication: This is bad news for companies that only do genome-mapping, or diagnostics. If any company can now perform genetic testing for the likelihood of breast and ovarian cancer, companies like Myriad will soon be feeling the squeeze from competitors with cheaper — and perhaps better — testing.
The end result will likely start with a wave of lower-priced genetic tests, not just for breast cancer, but for all sorts of genetic defects. As more genome-mapping is done, the number of tests will grow.
The second implication: This is good news for companies that can actually fix broken DNA with complementary DNA, or cDNA, as that is a human-made innovation.
It’s a distinction that could be as bad as it is good for Myriad. Though most of its patents are for cDNA, most of its current revenue stems from genome testing that its competitors can now legally perform. Indeed, within a few hours of the announcement, four of those competitors — including Bio-Reference Laboratories (BRLI) and Quest Diagnostics (DGX) — stated that their versions of the equivalent breast and ovarian cancer-risk tests would soon be available.
Something else worth noting: While DNA information itself can’t be patented, the way in which DNA information can be gathered is still a process that can be patented. Even what might be lost in terms of testing and innovation could eventually more than be made up for on the treatment side of the table.
While we can now perform DNA testing for several kinds of health risks, there’s still relatively little we can actually do about at-risk DNA. However, with more patients becoming aware of certain genetically driven health risks (as more tests become available), the heat could be turned up on demand for solutions.
Simultaneously, with time and more data (remember, genome-mapping is still relatively new), biotech companies will be able to make more — and better — complementary DNA. Truth be told, there aren’t a lot of publicly traded biotech companies that are waist-deep in the cDNA-creation business, but now that the court system has spoken favorably on the matter, it might make sense for biotech companies to go full throttle on efforts to directly repair human DNA.
It’ll be a while before real solutions hit the market, though. In the meantime, simple DNA tests are going to be a little commoditized.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities