Note: This article is adapted from a longer guest post on Forbes.com last week. To view the Forbes article click here.
Inter partes review (IPR) is a process established by Congress to permit defendants in patent infringement suits to quickly and inexpensively challenge patents asserted against them in an administrative trial at the U.S. Patent Office – and this process has proved to a potent weapon for patent challengers. In the roughly three-years that inter partes review has been available, over 80 percent of the trials have found patent claims to be invalid. Some in Congress are now questioning whether the IPR rules are perhaps skewed too far in favor of the challengers.
At the time the new patent law was enacted in 2012, it was assumed that the IPR process would be used primarily against so-called “patent trolls” rather than the holders of life science patents. And it is safe to say that no one in Congress intended this process to be an opportunity for Wall Street to get into the pharmaceutical patent-busting business. But the law of unintended consequences seems to have come into play.
Over the past five months, Kyle Bass, the manager of the Texas-based Hayman Capital Management, has launched at least seven new hedge funds for investors to challenge patents on FDA approved drugs. The funds, named the “Coalition for Affordable Drugs” (Series I – VII), have launched at least 16 challenges to patents owned by Acorda Therapeutics, Shire, Jazz Pharmaceuticals, Pharmacyclics, Celgene, Biogen and Pozen.
The scheme seems too simple to be true: short the stock of a publicly traded pharmaceutical company, file an IPR with the Patent Trial and Appeal Board (PTAB) that sends the stock price tumbling and then cover your short position by buying the stock at a hefty discount caused by the patent challenge.
But that appears to be exactly what Mr. Bass’s new funds are designed to do. Acorda Therapeutics (ACOR) is a public company with a $1.5 billion market cap that gets most of its revenue from the sale of Ampyra®, an FDA approved treatment for multiple sclerosis. On February 10, 2015, Bass’s first Coalition for Affordable Drugs fund filed its first IPR petition, challenging one of Acorda’s patents on Ampyra®. When news of the challenge broke, Acorda’s stock fell almost 10 percent. The Bass coalition filed another petition against a second Accorda patent on Ampyra® on February 27, 2015 – causing the stock to drop again, this time nearly 5 percent.
Shortly after the Acorda challenges were filed, on April 1, 2015 Bass’s second fund (Coalition for Affordable Drugs II LLC) went after Shire PLC’s (SHPG) patent on its Lialda/Mezavant® drug for treatment of ulcerative colitis. Sold under the Lialda or Mezavant trademark in different jurisdictions, the Shire product is a controlled release formulation of mesalamine that generated more than $USD 630M in sales worldwide in 2014.
On the same day, the Bass Coalition II also went after a second Shire patent, this time on the drug Gattex®, an FDA approved treatment for small bowel syndrome that recently had been acquired by Shire through a $5.2 billion purchase of NPS Pharmaceuticals Inc., in February. The dual attacks on Lialda® and Gattex® on April 1, 2015 appear to have had a significant short-term effect on Shire’s stock – the stock price had dropped over 12 percent by April 3rd. On April 23, 2015, the Series II Fund filed yet another IPR petition attacking Shire’s Gattex® patent. However, this time the IPR filing failed to depress the company’s stock price.
On April 6, 2015, Bass’s Series III fund launched an attack on one of several patents owned by Jazz Pharmaceutics (JAZZ) covering its narcolepsy drug, Xyrem®.
Next up was Bass’s Series IV fund, which filed an IPR petition against a Pharmacyclic (PCYC) patent on Imbruvica® for treatment-resistant mantle cell lymphoma.
On April 22, 2015, the Bass Series V fund filed an IPR petition against a formulation patent covers Biogen’s Tecfidere® drug, recently approved by the FDA for treatment of multiple sclerosis. This petition also had no effect on the Biogen (BIIB) stock price. In fact, two days after the attack, Biogen’s stock had risen over 8%. The Bass Series V fund filed a second IPR petition against Biogen on May 1, 2015. This petition challenged another Biogen patent directed to treatment of MS with Tecfidere®.
The most energetic attack so far has come from the Bass Series VI funds. In the space of two weeks (April 22-May 7, 2015), the Series VI fund filed five petitions challenging three different patents owned by Celgene (CELG) on its drug Revlimid® for the treatment of multiple myeloma.
The latest Bass fund to enter the fray is the Series VII fund, which filed two IPR petitions on May 21 and June 5, 2015 against patents owned by Pozen, Inc. (POZN). The challenged patents cover Pozen’s drug, Vimovo®, which is marketed through affiliates (AstraZeneca and Horizon Pharmaceuticals) as a treatment for pain or inflammation.
Thus, the seven funds that Bass has launched so far have filed sixteen patent challenges, targeting seven publicly traded pharmaceutical companies with blockbuster drugs.
Other hedge funds also appear to be gearing up to pursue similar strategies. For example, Ferrum Ferro Capital, LLC apparently filed an IPR petition on March 9, 2015 against a patent owned by Allergan (AGN) to the treatment of glaucoma by administering two known active ingredients, timolol and brimonidine, in a single composition.
The targeted pharma companies are beginning to fight back. In early June, Celgene sought and was given leave by the PTAB to file a motion for sanctions. Celgene’s motion will presumably be based on a claim that Bass’s challenges to Celgene’s patents for profit is an abuse of process. The sanction sought will be termination of the proceedings. Although the PTAB authorized Celgene to file this motion, the PTAB panel also made it clear that the authorization to file the motion was not a ruling on the merits of the patent owner’s argument that the filings were indeed an abuse of process. In a similar vein, Biogen has sought document production in its IPRs, specifically the fund formation offering documents filed with the SEC, to support its abuse of process claim.
However, for those who follow Mr. Bass, his new patent-challenging strategy should not come as a surprise. In January 2015, Bass announced this new “short activist strategy” business model at the Skagen New Year’s Conference in Copenhagen. Bass reported told attendees: “The beautiful thing is this will lower drug prices for everyone.”
But it remains to be seen whether the Bass-directed petitions can really eliminate all the patents that the drug innovators obtain for their products. And it is not at all clear that this is really a goal of Bass’s IPR petitions. In most cases, Bass’s funds have not challenged all of the patents that cover the target company’s drug. Unless all of the patents listed in the FDA’s so-called Orange Book are invalidated, any generic manufacturer trying to file an Abbreviated New Drug Application (ANDA) would still be subject to patent infringement litigation by the brand-name drug manufacturer (along with an automatic 30-month stay of their market entry while the suit is pending).
Morover, up until now, generic manufacturers really haven’t been interested in killing innovators’ patent portfolios. Makers of generic drugs typically are more interested in being the first ANDA filer and then settling with the patent owner to take advantage of at least part of the six-month co-exclusivity period afforded to a first filer under the Hatch-Waxman Act. Once the six-month co-exclusivity period expires, drug prices drop so fast there is little incentive for the other generics to manufacture and sell.
If we discount Bass’s ostensible goal of lowering drug prices for American consumers, the question is why are investors flocking to Bass’s new patent-busting funds? Apart from the short-term effects that Bass’s initial challenges had on Acorda and Shire stock shares, the filings of Bass’s petitions so far have had little effect on stock prices. However, the fact that the target companies’ stock prices have not yet dropped should not be cause for complacency. Bass may be counting on a second bite of the apple. His petitions eventually will be acted upon by the USPTO. If the petitions are deemed likely to have merit, trials may be initiated – and there may be much more market concern because the current trial rules (and statistics to date) do not bode well for patent owners.
We may not have too long to wait to see if this is indeed part of Bass’s master plan. The USPTO typically acts on IPR petitions according to a self-imposed schedule – usually within 3 months of the filing of a preliminary response by the patent owner. In the case of the first petition filed against Acorda, the patent owner’s preliminary response was filed on May 26, 2015. Accordingly, we can expect a trial decision on the first Acorda patent on or about August 26, 2015.
The issues raised by Bass’s petitions may have merit, but the question remains whether we really want a patent system where patents are challenged by private bounty hunters. Bass’s funds are able to file petitions because, unlike federal court proceedings, there is no standing requirement to file an IPR petition. Anyone can file a petition if they are willing to pay the $26,000 filing fee.
There may be a simple solution to stop hedge funds from using the IPR process to influence stock prices. The USPTO has a great deal of discretion in deciding whether or not to initiate a trial. Under section 325 of the law that created IPR proceedings, the USPTO can simply decline to hear the matter – and its decision is final and non-appealable! If the USPTO decides not to hear a case, entities that have a real interest in challenging patents (e.g., generic manufacturers) can still avail themselves of judicial proceedings and seek a judgment of patent invalidity based on the same arguments that the USPTO opts not to hear from Mr. Bass.