Kyle Bass, the investor who shorted the market in residential mortgage-based securities a decade ago, with speculator success, is interested now in shorting the major pharmaceutical companies.
He is certainly entitled to try that play. But what is especially provocative and controversial is that he also seems willing to give his targets a push down the stock price charts, through a Congressionally approved procedure known as inter pares review (IPR).
Congress, in the America Invents Act (AIA), encouraged members of the public to request that the U.S. Patent Office reconsider the validity of a patent through an administrative hearing, lessening the costs inherent in a court challenge. Such hearings became available for all patents four years ago, that is, in September 2012.
Thus, Bass’ plan.
Through his alter ego, Hayman Capital Management, and its allies in the Coalition for Affordable Drugs, Bass challenges patents within the biotechnology sector, presumably in the hope not merely of serving the public by opening the way for the generic drug makers and their lower cost products instead: but by driving down the prices of Big Pharm equity and making his short positions profitable ones. Those who are wary about this as a business plan might find it appropriate that the acronym for this Coalition is CAD.
Jennifer Robichaux thinks its cricket. She’s a law student at the University of Houston Law Center and the editor-in-chief of the law review there. She also has a MS in biomedical engineering from Tulane. Those early-life credentials may not seem imposing to some, but her Comment on the subject of the use of IPR against biopharm patents, scheduled for a forthcoming issue of the Houston Law Review, is impressively researched and argued.
As a prelude to the nub.
Robichaux explains why biotech is a sensible target for this strategy. Biotech firms are often small, to begin with, and they derive their revenue from a small number of patent-protected products. Thus, invalidation “or even the prospect of invalidation, of a biotechnology patent is particularly likely to affect the stock price of the company,” she writes.
In February 2015, CAD challenged two patents concerning Ampyra, one of three products sold by New York company Acorda Therapeutics (NASDAQ: ACOR). Ampyra is useful for the treatment of patients with multiple sclerosis and with spinal cord injuries, improving patients’ pulmonary function, while reducing pain and spasticity. The challenges caused an immediate drop in stock price.
Critics of Bass characterize this as the exploitation of a “loophole” or a “weakness in the system” and contend that Bass’ behavior must be driving away investors, thus driving away potential innovation-supportive funds, thus harming both the case of health care and that of health capital markets.
Hans Sauer, for example, calls such challenges an “existential threat” to companies like Acorda.
The Nub of the Issue
Robichaux, on the other hand, believes that Bass performs a vital ecological role by seeking alpha in this way, because his actions help prevent the mischief of patent “trolls” and entrenchment of vested interests in biotech. She believes that many proposed reforms of the process would be counter-productive but that Congress might create penalties for abuse of IPR’s settlement process. The idea would be to short-circuit “pay to play,” to create the expectation that if a party challenges a patent, then either it will win or it will lose that challenge, because walking away with cash just for having brought the challenge will not be an option. With that understanding, the role of such challenges would be a more unequivocally positive one.
The underlying concern that the AIA addressed when Congress created the IPR system, after all, was the use of patents for non-novel or trivially novel facts, products, or processes. Until quite recently, human genetic sequences, which are facts of nature and thus by definition not the invention of any patent holder, were nonetheless subject to patent. For some time, patient groups had difficulty challenging patents in this field, Robichaux says, due to cost and accessibility concerns, and to the fact that the entrenched interests could outgun them in court. That created dysfunctions which serve as a case study in why there should continue to be an IPR and why well-heeled hedge funds should be free to continue to use it to challenge patents that should never have been granted in the first instance, and that serve chiefly to drive up prices, endangering patients and complicated health policy.
Of course, if in the process of challenging these challenge-worthy patents, hedge funds make a lot of money for themselves and their investors: so much the better.