How To Interpret Thursday's Supreme Court Ruling Involving Myriad

By Tim Parker | June 18, 2013 AAA

Judging by the 15% swing in Myriad Genetics (NASDAQ:MYGN), investors changed their minds after further digesting the Supreme Court’s Thursday ruling regarding “products of Nature.” Once the market had time to gauge the implications, it found itself questioning the future prospects of this segment of Myriad’s business despite the company’s assurance that the ruling is largely insignificant.

Here’s what you should know about the case and the ruling in order to make your own judgment.

Unless you spend much of your research time in the biotech space, you’ve likely never heard of Myriad Genetics. This $2.5 billion company focuses on developing predictive tests that gauge a person’s genetic predisposition to certain cancers and the level of reaction to certain drugs in order to optimize dosage, primarily in cancer patients.

In its fiscal third quarter, the company reported a 21% year over year increase in revenue to $156.5 million. The BRACAnalysis test, the subject of Thursday Supreme Court ruling, produced $115.4 million in the quarter—a year over year increase of nine%.

SEE: The Ups And Downs Of Biotechnology

BRCA 1 and BRCA 2
At the center of the multiyear legal battle are the BRCA 1 and BRCA 2 genes. These are human genes that belong to a class of genes known as tumor suppressors. In healthy cells, the genes help to prevent uncontrolled cell growth. If the genes mutate, a person is at much higher risk for developing hereditary breast and ovarian cancer.

In the late 1990s, Myriad patented these two genes and developed a test, called the BRACAnalysis test, to screen for these mutated genes.

The Ruling
For years, scientists and other biotech firms have taken Myriad to court claiming that patenting something that naturally occurs in nature shouldn’t be allowed. Lower courts had allowed the patents to stand but on Thursday, the Supreme Court overturned the rulings and, in a unanimous decision, said that “products of nature” cannot be patented.

This seemed to be a catastrophic ruling for Myriad but the second part of the ruling upheld the company’s cDNA patents. cDNA, or Complimentary DNA is artificially produced and therefore, not a product of nature. Myriad uses cDNA as part of the BRACAnalysis testing process.

How This Affects Myriad
According to the company, this will have little impact on BRACAnalysis revenue. It claims that out of the 24 patents associated with the test, only 5 were invalidated by the ruling.

Ronald Rogers, a Myriad spokesman said, “We don’t expect today’s decision to impact our business operations.” But judging by the 15% swing in the stock that started around 2:00 p.m. on the day of the ruling, Wall Street isn’t so optimistic. The University of Washington and Ambry have sold DNA tests that looked a numerous genes linked to higher cancer risk but because of the patent, the BRCA genes could not be included in those tests. As a result of the ruling, these and other tests can include screening for these genes. It’s not expected to take long to add these genes to the tests.

Shortly following the ruling, a Quest Diagnostics (NYSE: DGX) spokesperson said, “We now intend to validate and offer a BRCA 1 and BRCA 2 test service to physicians and patients later this year.”

Explosion in Popularity
Since actress Angelina Jolie revealed that she had a double mastectomy as a result of testing positive for the mutated gene, genetic counselors have been overwhelmed with calls. Bloomberg reports that at Massachusetts General Hospital in Boston, the waiting list has jumped to five months—up from two months before Jolie’s announcement.

Similar reports from healthcare providers around the national indicate that the popularity of the test is soaring as a result of such a public figure telling her story.

Take Action
Myriad has had a virtual monopoly on the test but with the Supreme Court ruling, that is likely to change but that doesn’t mean that it’s a large-scale blow to the company. With its cDNA patents still in place, that may still allow the company to differentiate its tests from competitors.

It will take time for those competitors to enter the market place and with the recent coverage as a result of the ruling and the Angelina Jolie story, genetic cancer testing as gained a lot of press and has healthcare providers scrambling to meet the demand.

This could be a positive catalyst for Myriad, Quest, and for companies exposed to this space including Geron Corporation (NASDAQ:GERN) and StemCells Inc. (NASDAQ:STEM).

Disclosure: At the time of this writing, Tim Parker had no position in the above named securities.

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