If Kyle Bass’s Coalition for Affordable Drugs Series II hedge fund was hoping to reap a windfall from short positions in Shire Plc’s stock this week, it was dealt a major setback by a Patent Trial and Appeal Board (PTAB) decision to uphold Shire’s patent on its colitis drug, Lialda®. In a final written decision on U.S. Patent 6,773,720 (IPR2015-00988, Oct. 5, 2016), the PTAB found that Bass’s group had failed to meet its burden of proof that the challenged claims were obvious over the prior art.

According to the PTAB panel, “[a]t best for Petitioner, the record before us indicates a close call, but certainly not a strong case, regarding a showing of obviousness by the preponderance of evidence based on our analysis of the prior art. To the extent that it is a close call, it is noteworthy that the burden of persuasion is on Petitioner.” Final decision,. p. 23.

The patent in issue was directed to controlled release formulations of an active ingredient, 5-amino salicylic acid (5-ASA) having an inner matrix chosen from a list of lipophilic materials and an outer matrix of certain hydrophilic materials. Bass’s group relied on two references for its obviousness argument: Groenendall, which taught that 5-ASA could be delivered in a controlled release manner and Leslie, which taught the use of combined lipophilic and hydrophilic matrices – but not the specific lipophilic compositions listed in the patent’s claim.

The PTAB decision also concluded that even if Lelslie taught a lipophilic matric as recited in the Shire patent’s principal claim, it would not have been obvious to combine the references given the myriad of controlled release formulations:

Petitioner does not explain adequately, however, why one “would have been motivated to look to Leslie” in particular to “improve” the 5-ASA compositions disclosed in Groenendaal when one takes into account the crowded art of controlled release formulations generally.

Shire’s stock closed on Wednesday, October 5th essentially unchanged from the beginning of the week. Liadla® sales reportedly generated over $600 million last year (about 11 percent of Shire’s total revenue). The lack of any boost in Shire’s stock price may reflect the bigger battlefield over this drug. Shire is concurrently fighting several generic drug companies, including Teva, Mylan and Zydus in federal court patent infringement litigations based on the ‘720 patent.

The decision this week is the first final written decision to be handed down by the PTAB on the numerous petitions filed by Bass’s so-called Coalitions for Affordable Drugs (Series I-XI). These hedge funds had filed 33 petitions in 2015, and 18 were accepted for review. Decisions are also expected this month on two blood cancer treatment patents owned by Celgene Corp – and a decision on another Bass group petition (against U.S. Patent No. 7,056,886, for Shire’s Gattex, a treatment for short bowel syndrome) should be rendered by Oct. 23, 2016