* Decision could affect business of personalized medicine
* Court says patenting laws of nature would curb innovation
* Biotech industry warns of chilling effect (Adds comment from biotech industry group)
By Diane Bartz and James Vicini
WASHINGTON, March 20 (Reuters) - The U.S. Supreme Court rejected two patents on a method for monitoring a patient's blood to determine the best dosage for a drug, a decision that may affect the profitability of personalized medicine.
The justices unanimously overturned on Tuesday a ruling by a U.S. appeals court that allowed the patents for Nestle SA unit Prometheus, with the high court saying that companies could not patent observations about a natural phenomenon.
The patent challenge, brought by a unit of the Mayo Clinic, had been closely watched because it could affect the burgeoning field of personalized medicine, which can also involve determining whether a patient is genetically susceptible to a disease or which patient would respond best to which treatment.
The Supreme Court's opinion, written by Justice Stephen Breyer, concluded that Prometheus' process for monitoring a patient, and adjusting dosage as needed, could not be patented.
"We conclude that the patent claims at issue here effectively claim the underlying laws of nature themselves. The claims are consequently invalid," Breyer wrote in the 24-page opinion.
The biotech industry warned the Supreme Court's ruling could threaten hundreds or thousands of exiting patents, and deter future patent applications for personalized medicines, many of which are the product of lengthy and expensive research.
"We are surprised and disappointed in the Court's decision," said Hans Sauer, a deputy general counsel for the Biotechnology Industry Organization.
Other patent experts contacted by Reuters also said the ruling could have a chilling effect on similar patents.
In the Prometheus process, doctors are told to monitor patients taking synthetic thiopurine compounds to treat gastrointestinal disorders such as Crohn's disease and other auto-immune illnesses.
The goal is to hit certain levels to ensure the best outcome with the fewest side effects. Prometheus markets a diagnostic test that uses the technology covered by the two patents.
A unit of the Mayo Clinic, based in Rochester, Minnesota, argued that the method used to determine dosage was akin to a natural phenomenon and thus not eligible to be patented.
The fight began in 2004, when Mayo, which had been a Prometheus customer, said it would begin using its own version of the $260 test. Prometheus sued for patent infringement, and Mayo's test has never come to market.
Mayo won the first round when a district court invalidated the patents. But the U.S. Court of Appeals for the Federal Circuit, which hears patent appeals, twice held that Mayo was wrong and ruled that the method Prometheus came up with was a "transformation" that could be patented.
The American Medical Association and 10 other medical groups supported Mayo, while trade groups for the drug and biotechnology industries supported Prometheus.
Courtenay Brinckerhoff, a Foley & Lardner LLP patent expert, said that there could be less funding for research because of this decision. "This is a disruption of the status quo," she said.
But Bruce Wexler, a patent litigation expert with the law firm Paul Hastings LLP, said the top court's decision should have a limited effect because the court itself sought to refrain from straying much beyond the patents in the lawsuit and precedent.
"The Supreme Court in this opinion made the decision depend specifically on the facts and its prior precedent rather than make a broad pronouncement about a technical field of science," he wrote in an email.
Breyer, for his part, argued that allowing the Prometheus patents could potentially stifle innovation.
"This court has repeatedly emphasized a concern that patent law not inhibit future discovery by improperly tying up the use of laws of nature and the like," he wrote in the decision.
"Rewarding with patents those who discover laws of nature might encourage their discovery. But because those laws and principles are 'the basic tools of scientific and technological work,' ... there is a danger that granting patents that tie up their use will inhibit future innovation," he wrote.
Experts are also watching legal battles over patents held by Myriad Genetics. Last July, the U.S. Court of Appeals for the Federal Circuit allowed Myriad to patent two genes that account for most inherited forms of breast and ovarian cancer.
The case has been appealed to the Supreme Court, which has not said if it would take it up.
Nestle bought San Diego-based Prometheus in July 2011, making it part of Nestle Health Science.
The Supreme Court case is Mayo Collaborative Services v. Prometheus Laboratories, No. 10-1150. (Reporting by Diane Bartz and James Vicini; Editing by Lisa Von Ahn and Tim Dobbyn)