It was a bit of a roller coaster day for US biotech Myriad Genetics as it share price plunged 9% on news that the US Supreme Court would be reviewing it '782 patent directed towards the BRACA1 and BRCA2 genes. The court wants to look at the questions of whether isolated genes should be patentable or not under US Patent Law. The share price regained - presumably as other traders picked up "bargains" - and lost only 1.4% at the end of the day. Nonetheless it's an informative lesson to see how IP-based businesses, such as Myriad Genetics, react to changes in patent law and decisions of courts on their basic patents.
The background to the case is fairly simple. Myriad Genetics was founded by Walter Gilbert (1980 Nobel Prize winner) and Mark Skolnick of the University of Utah, who had performed the sequencing of the BRACA1 gene. This gene had previously been linked to an increase in breast cancer. A subsidiary of Myriad Genetics markets test kits for testing for breast cancer. A number of plaintiffs filed for revocation of the patents and the suit was demised in the Southern District of New York. The Court of Appeals for the Federal Circuit decided in favour of the patent holders and the American Civil Liberties Union filed a petition for a writ of certiorari (review) with the US Supreme Court.
Much of Myriad's revenue is derived from selling kits for testing for breast cancers and ovarian cancers and the patents held by Myriad are clearly important for maintaining the price of the tests (and thus justifying the share price). Any decision by the Supreme Court rejecting the notion that even isolated genes should not be patentable will impact on Myriad's revenues since it would open up the cancer testing market to competition.
Myriad argue strongly that their tests are fairly priced and that this has been demonstrated by independent economists. The ACLU (and others) argue that the market would be better served by having greater competition. There is certainly a moral argument to be made - but that should be in the realm of competition law and (possibly) compulsory licences. The role of the patent system is to support innovation and ensure that companies invest in research and development stimulated by the opportunity to obtain a limited degree of monopoly. In Myriad's case this is reflected by the company's expenditure in 2012 of almost 10% of revenue (and about 25% of profits) in R&D. 
Myriad are careful to explain the impact of the suit in their 2012 Annual Report. They explain that they do not think that an adverse judgement would be issued and, even if it did, they do not believe that others will be able to commercialise genetic tests. Their 10-K filing with the SEC notes correctly that that there could be a material adverse impact on the company from an adverse opinion. It's difficult to discuss the statement without going into great detail about what the patents might and might not cover. Sales of the BRACAnalysis test comprise 82% of the company's revenues and so any competition is likely to impact. On the other hand, the dispute only relates to protection in the US. Myriad have already prevailed over an opposition in Europe filed by a number of interested parties. Their patents on isolated DNA has been upheld (but limited in scope than the original request). aWhilst still at least theoretically open to challenge in national courts, the patent is presumably much stronger having survived the challenge and thus the risk of revocation is much less than the uncertainty prevailing in the US.
Given this background, it's not surprising that the share price dipped on announcement of the review. It's going to add to uncertainty in revenues which needs to be considered by investors. The long-term effect on the stock price will ultimately depend on the Court's decision expected in 2013.
