Dec 7 (Reuters) - The Supreme Court heard arguments on Wednesday over whether Prometheus Laboratories should have been allowed to patent instructions for observing changes in a patient's body to set drug dosages in a decision that could affect the future of personalized medicine.

The case focuses on Nestle SA unit Prometheus' patents for using synthetic thiopurine compounds to treat gastrointestinal disorders like Crohn's disease and other auto-immune ailments.

Doctors are told to monitor patients taking the compounds for certain metabolites in red blood cells, with the goal of hitting certain levels to assure patients the best treatment with the fewest side effects.

Mayo Collaborative Services, however, argued that the observations made to determine dosage are akin to a natural phenomenon, which by law may not be patented.

There are hundreds, if not thousands, of patents that could be affected by the ruling.

Justice Stephen Breyer, whose wife sold Nestle stock on Wednesday morning so he could participate in the hearing, pressed attorneys for both sides on where the line was between "observation of a natural phenomenon," which cannot be patented, and "application of an observation of a natural phenomenon," which can be patented.

"Discovering a natural law is a very expensive process," he said. "What is your view about how much has to be added to make it (a natural law into) an application of a law of nature?"

Arguing for Mayo, Stephen Shapiro said that Mayo wanted to use different targets for metabolites, but was prevented by the fear of infringement. "This is very important for doctors around the country," he said.

Justice Elena Kagan seemed skeptical that the patent applications were well draft initially.

"I think that the difference that people are noting or some people are noting is that this is not a treatment protocol, it's not a treatment regimen, all you have done is pointed out a set of facts that exist in the world... and are claiming protection for something that anybody can try to make use of in any way and you are saying 'you have to pay us,'" she told Prometheus' lawyer Richard Bress.

Denise DeFranco, who filed a brief supporting Prometheus as part of the American Intellectual Property Law Association, said that the court's decision could have wide implications for investors.

"If the Supreme Court decides that Prometheus's diagnostic patent claims are not patentable, then patents directed to methods of diagnosing and/or treating disease may be vulnerable to attack. Moreover, innovative techniques in the burgeoning field of personalize medicine may also no longer be eligible for patent protection," she said in an emailed comment.

Consumer groups, like the AARP seniors' advocacy group, have sided with Mayo.

"Allowing patents on pure medical correlations... threatens doctors with claims of patent infringement should they discuss mere laws of nature with their patients, burdens the public with excessive health care costs and dulls incentives for real innovation in medical care," the AARP and Public Patent Foundation wrote in a brief to the court.

The fight began in 2004, when Mayo, a Prometheus customer, decided that it would bring out its own version of the $260 test. Prometheus sued, and Mayo's test has never come to market.

Mayo won the first round, as a district court invalidated the patents. Prometheus appealed to the U.S. Court of Appeals for the Federal Circuit, which hears patent appeals. That court twice ruled that Mayo was wrong, saying that what Prometheus patented was a "transformation" and thus could be patented.

Nestle bought San Diego-based Prometheus in July, making it part of Nestle Health Science.

The case is Mayo Collaborative Services et al v. Prometheus Laboratories, Inc. No. 10-1150.

For Mayo: Stephen Shapiro of Mayer Brown.

For Prometheus: Richard Bress of Latham & Watkins.

(Reporting by Diane Bartz)

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