This week's development of a legal judgment against Myriad Genetics (MYGN) is shaking the biotech world. On Monday, a judge in the District Court for the Southern District of New York ruled against Myriad and granted a motion for the plaintiffs, the American Civil Liberties Union(ACLU) and others, concluding that isolated DNA compositions are not patent eligible subject matter. This essentially invalidated Myriad patents BRCA1 and BRCA2 used in their breast cancer diagnostic tests. Intellectual Property (IP) is the raw material for the creation of biotech companies. Without an invention covered by a robust patent portfolio, venture funding can be very difficult. Since the beginning of the “genomic age” in the late nineties the patenting of genetic materials and methods have gone through a minefield of lawsuits and opinions but in the end  have significantly protected companies with well designed IP. However, patents on human genes have always been a gray area. In the Myriad case, the plaintiffs alleged  that the patents were invalid because human genes are products of nature. The decision by District Court Judge Robert Sweet determined that the purification of a product of nature, without more, cannot transform the product into patentable subject matter. Rather the purified product must possess “markedly different characteristics” in order to be considered eligible subject matter. An alert filed by the well-known Boston Law firm Brown Rudnick commented that the “decision will most likely be appealed; however this decision may have a significant impact on the biotechnology industry. The decision concludes that the discovery of new genes, gene variants, and proteins are not patentable when isolated from human cells and used as the basis of a diagnostic or therapeutic without proof of some ‘markedly different characteristics’ of those compounds from their natural form.” Many biotech stocks hit an 8 year high last week supported by promising clinical data, sales growth, M&A activity, and a buzz that positioned biological and genomic technology as the future of medical breakthroughs. The impact on the Myriad news earlier in the week was well contained, with many diagnostic stocks actually trading up: Abaxis(ABAX) , GenProbe (GPRO), Genoptix (GXDX), Quidel (QDEL) , and Sequenom (SQNM) all did fine. A Mid -Cap biotech index  of 34 stocks was down slightly and major ETF’s -FBT,IBB,PBE and XBI – were down less than 0.5%. The Myriad CEO Peter Meldrum says  he believes the final ruling will have no effect on the company’s operations. But the industry fallout from this gene-patent ruling remains to be seen. The public sector has absorbed it well so far, and we can say it has affected only a narrow segment of companies and markets. But it will be important in the coming weeks to see how the news is digested and what sort of industry analysis emerges on the ruling, especially from BIO, the Biotechnology Industry Organization. Rod Raynovich, a contributor to The Rayno Report, is the principal at Raygent Associates (www.raygent.com), a biotech investment consultancy.