Could A Hedge Fund Manager Trying To Short Stocks Of Pharma Companies With Bad Patents Derail Patent Reform?

from the that-would-suck dept

A few months ago, we wrote that it looked like much needed patent reform had stalled out in Congress, despite expectations that it would fly through Congress easily this year, having the strong support of both the majority party in Congress and the President. And this year, unlike last year, the trial lawyer lobby wouldn't be able to intervene. Of course, the one big obstacle -- as with every time patent reform is proposed -- would be the pharmaceutical industry. But even that seemed like it shouldn't be a huge problem because nearly all of the (relatively mild and fairly weak) reforms proposed really targeted trollish behavior, using overly broad patents to shake down innovative companies. Whether or not you approve of the way drug companies use patents, the trolling issue is a bit outside of that industry's concern, and thus it was believed that while pharmaceutical companies might whine a little bit, they wouldn't really stand in the way.

Except... something changed. As Julie Samuels explains in a blog post detailing the state of patent reform as it stands today, a Wall Street hedge fund guy got the pharma industry all riled up, by making use of a provision in the previous patent reform law to play some silly Wall Street game:

Enter Kyle Bass. The well-known hedge fund manager’s most recent enterprise involves using the IPR process to challenge weak pharmaceutical patents and then short the stock of the company that owns the patent. The pharmaceutical industry, which relies heavily on patent rights, is far from pleased. And despite the fact that the IPR process contains significant protections for patent holders and the fact that Mr. Bass’ actions can already be addressed by the SEC, the pharmaceutical industry has been able to shoehorn its issue into the larger reform efforts.

Let's unpack that a little. The "IPR" process stands for "inter partes review" and it's a process by which anyone can try to challenge a bad patent, by presenting specific evidence that it shouldn't have been granted because of prior art. This process is somewhat useful in helping to get the Patent Office to toss out some bad patent claims that it never should have approved in the first place. It's a fairly limited process too. You can file for an IPR, but the Patent Trial and Appeal Board (PTAB) will only take up the effort if it decides "there is a reasonable likelihood" that it will invalidate the claims based on the submitted material. In other words, it's a pretty high bar to cross, and anyone filing frivolous IPR claims won't get very far at all.

Now, back to Kyle Bass. He's been making news in the last few months by filing for an IPR against pharma patents, while simultaneously shorting the stock of the pharmaceutical firms that hold the patents. He's set up an entire organization to do this, called the Coalition for Affordable Drugs.

Kyle Bass, head of Hayman Capital Management LP—which made a fortune wagering on the housing bust—is targeting patents that he says have little value other than to drive up prescription drug prices. His new fund bets against companies whose patents it believes are spurious, and invests in those that would profit if the patents are invalidated, said people familiar with the matter.

His latest challenge seeks to employ a relatively new and inexpensive petition process to invalidate a Jazz Pharmaceuticals PLC patent for Xyrem, a narcolepsy drug with sales of $779 million last year, two-thirds of Jazz’s 2014 revenues.

Mr. Bass created the Coalition for Affordable Drugs, an organization that is the lead petitioner in several patent challenges filed with the U.S. Patent and Trademark Office. He says he plans to pursue the cases regardless of share price moves. “We will not settle,” he said in an interview.

The Coalition has been busy of late, filing a whole bunch of IPR petitions against a whole bunch of phamaceutical firms. And, boy, are those pharma firms pissed off. Celgene, for one, has talked about seeking sanctions against Bass, claiming that Bass is using the process as a form of extortion:

Celgene attorneys made this point in a June 3 email to the patent office. But there was more. They also alleged that his coalition threatened to challenge Celgene patents “unless Celgene met their demands.” Those demands weren’t specified, but the email states that “when Celgene did not pay,” the patent challenges were filed, according to the patent office order, which cited the email.

And, using this whole story, to argue that the whole IPR process is a disaster, the pharmaceutical industry is trying to revamp and effectively destroy the entire (important and useful) IPR process.

And while it seems likely that Bass's efforts are much more about enriching himself via the stock shorting than actually making drugs more affordable, arguing that his efforts somehow undermine the entire IPR process is a stretch. Indeed, as noted earlier, there are built-in protections that make it rather inefficient for anyone to really abuse the process the way pharma companies are portraying. Again, the special board in the Patent Office, the PTAB, has the ability to just outright reject any IPR petition it doesn't think has a chance of surviving. And, in fact, a recent report by the Patent Office shows that (1) less than half of all IPR requests result in actual challenges and (2) even then, the vast majority of claims being challenged are actually allowed to stand. As of the end of June of this year, you can see that the PTAB rejects most petitions, many more are "terminated," and of those that go to a full trial, many retain patentable claims that were challenged: Even more to the point, if you look at the total number of claims actually challenged, against those that end up being found unpatentable, it's a fairly tiny number: only 4,225 claims out of were challenged. That's less than 12%. Hell, even if you look at just those claims that the PTAB initiates proceedings on, less than 25% of them are invalidated. In short, the idea that the IPR process is making it easy to simply kill off good patents is not even remotely supportable. Instead, it appears to be doing what it's intended to do: make it more reasonable to help people kill off bad patent claims. If pharma firms are worried about what Bass is doing, it should only be if the patents they have are questionable in the first place. If they're legit, they won't pass the laugh test, and the whole process won't get anywhere.

And yet... because the pharma industry just doesn't like having to deal with Bass at all, it's trying to destroy the whole IPR process, saying that's the only way that it will support the other aspects of patent reform. But undermining IPR would do serious damage to patent reform as a whole, and take away a key tool that actually does work in more quickly invalidating crappy patents. Whether or not you approve of the way in which Bass is doing what he's doing, the process isn't really open to abuse in a manner that should raise any real concern. And, for everyone else, the IPR process remains an important element in stopping abusive patents.

Filed Under: inter partes review, ipr, kyle bass, patent reform, patents, pharma, pharmaceutical industry, ptab, short selling, uspto
Companies: coalition for affordable drugs, hayman capital management