[Ip-health] Hedge Funds Attack Drug Companies Patents and Short Their Stock
james.love at keionline.org
Sat Mar 21 19:42:32 PDT 2015
This is one way to finance expensive patent litigation. Jamie
Hedge Funds Found a New Way to Attack Drug Companies and Short Their Stock
March 20, 2015
(Bloomberg) -- Drugmakers are getting more and more nervous that hedge
funds have found a way to make money by putting their patents in jeopardy.
Taking advantage of new rules created by Congress three years ago, hedge
funds have increasingly been filing challenges to pharmaceutical patents.
Some may be angling for payouts to drop their claims, while others are
shorting the stock, betting that the manufacturers’ shares will plummet.
Activist investor Kyle Bass sent a shudder through the drug industry
earlier this year by embarking on a patent-challenging strategy. Now a New
York hedge fund, Ferrum Ferro Capital LLC, has made an even more brazen
move by seeking to invalidate an Allergan Inc. patent that has already been
upheld in court. Neither investment firm has said whether it’s betting
against specific stocks.
The Allergan case has become a rallying cry for companies calling on
Congress to alter rules that make it easier to get patents tossed by the
U.S. Patent and Trademark Office than in the courts.
"When we developed these proceedings, we never thought people would use
them this way, in an effort to move stock or as an investment vehicle,"
said Bernard Knight, the former general counsel for the patent office, who
was there when new rules for challenging patents were written.
A patent office review costs $23,000 to file, and the whole process is a
fraction of the millions of dollars in legal fees a challenger would spend
in a civil suit. Congress created the process in 2012 as part of a sweeping
overhaul of the U.S. patent system, designed to counteract what was seen as
an overabundance of patents being awarded.
The agency’s review process replaced a long and cumbersome system that
wasn’t used by third parties very much. Now it’s used a lot: While the
patent office had expected to get about 600 petitions, instead 3,000 have
been filed since September 2012.
"It’s an expedient and relatively inexpensive means to address patent
assertions," said Brian Oaks of Baker Botts in Austin, who successfully
invalidated eight telecommunications patents asserted against a client. "It
isn’t simply a specialized district court determining validity. It’s
administrative law judges at the patent office looking to see if they got
it right in the first place."
The legislation had an unexpected consequence: Hedge funds, which didn’t
have the right to challenge patents in court, now had a venue to bring such
"It is very effective at killing patents," said Hans Sauer, deputy general
counsel for the Biotechnology Industry Organization. "It’s easier to kill
patents in these proceedings than in district court. At the end of the day,
I don’t know how much that has to do with patent quality or fairness."
The mere filing of a petition is no guarantee the patent office will
invalidate a patent owner’s rights to an invention, or even consider the
case. In the past three months, the agency has agreed to hear only 70
percent of the petitions it’s received; for bio-related petitions the
number is 62 percent, said Michael Sander, founder of Docket Alarm Inc.,
which maintains statistics on the Patent Trial and Appeal Board, as the
patent agency’s review panel is known.
"It doesn’t matter what your motivation is," Knight said. "If you pay the
fee and you’ve properly filed your petition, you can go ahead and file it.
You wouldn’t bother unless you have something to gain or nothing to do with
Drugmakers only have anecdotal reports of third parties asking for money to
drop a patent challenge. In other industries, the practice has led to at
least one lawsuit. Chinook Licensing LLC said in a lawsuit it was
threatened with a patent challenge by Iron Dome LLC unless it gave the
company three transferable licenses. A judge dismissed the suit after Iron
Dome argued that it had the right to make a settlement offer and that a
demand letter can’t be "a crime of extortion."
Ferrum Ferro’s 33-year-old founder Kevin Barnes won’t say how his firm will
profit from challenging Allergan’s patent for glaucoma drug Combigan. He
only said that he sees "multiple pathways to monetization."
Questions about outsiders challenging patents are "a distraction from the
core public policy issue of monopolistic pricing for branded
pharmaceuticals with low-quality patents," he said.
The pharmaceutical and biotech industries don’t agree. The petition against
Allergan, after it’s been upheld by the courts, is "illustrative of
something that’s out of kilter," Sauer said.
Allergan’s patent was upheld only because the courts used a more stringent
standard of review, Barnes said. The impact of Ferrum Ferro’s patent
challenge to the drugmaker’s stock was minimal. Combigan and two other
treatments generated only $515.4 million of the company’s $7.2 billion in
sales last year. And Allergan, also known as the maker of Botox, was
acquired this week by Actavis Plc for $70.5 billion.
Bonnie Jacobs, a spokeswoman for Allergan, said the company had no comment
on the petition.
While Ferrum Ferro may be pushing the envelope by challenging a patent that
was upheld in court, Bass’s Hayman Capital Management has been the most
prominent user of the hedge-fund strategy. Bass has pledged to challenge
patents on numerous medications, accusing the drugmakers of misusing the
patent system to keep drug prices high and low-cost copies away from
Bass declined to comment for this story and, in particular, on whether he
is shorting the stock.
His first petitions targeted two of the five patents covering multiple
sclerosis drug Ampyra, which accounts for 91 percent of the revenue of
Acorda Therapeutics Inc. Acorda’s stock dropped after each of the filings:
by 9.7 percent on Feb. 10 and 4.8 percent on Feb. 27.
A variation of Ampyra’s active ingredient has been around for almost 100
years, and the patents don’t cover anything new, Bass’s Coalition for
Affordable Drugs said in its petitions.
Acorda declined to comment.
The call for Congress to alter the rules puts drugmakers at odds with some
technology companies, which say the new process has been a cheap and
efficient way to get rid of nuisance lawsuits and "patent trolls" -- a
pejorative term for firms that buy patents with the goal of suing to
For companies like Apple Inc. and Google Inc., which get sued the most in
the U.S., the reviews are a counterbalance to the courts in the Eastern
District of Texas, now No. 2 for patent disputes, which is where many
patent-licensing firms sue because of its reputation for being favorable to
Some 1,675 petitions were filed at the patent office in 2014, and
two-thirds of them were in the high-tech fields. Medical-related petitions
accounted for 12 percent, according to Unified Patents, which pools the
resources of tech companies to fend off patent claims.
The bulk of the health-related petitions are by generic-drug companies.
Apotex Inc. and Mylan NV were the top challengers, according to Docket
Alarm's Sander, who is also a lawyer with Kenyon & Kenyon in New York.
Life sciences companies are different than technology companies in that a
challenge to one or two of their patents can become an "existential
threat," Sauer said. "You don’t have that with a tech company."
A U.S. appeals court has upheld the agency’s rules for how the reviews are
conducted, though on March 18 patent office Director Michelle Lee said her
office is working to make changes based on feedback from users and the
"The agency is open to considering changes to ensure the most effective and
fair" trials in compliance with the law, Lee said. "We don’t claim we have
created a perfect system on our first try."
To contact the reporters on this story: Susan Decker in Washington at
sdecker1 at bloomberg.net; Caroline Chen in San Francisco at
cchen509 at bloomberg.net
To contact the editors responsible for this story: Crayton Harrison at
tharrison5 at bloomberg.net; Jon Morgan at jmorgan97 at bloomberg.net Elizabeth
Wasserman, Drew Armstrong, Niamh Ring
James Love. Knowledge Ecology International
KEI DC tel: +1.202.332.2670, US Mobile: +1.202.361.3040, Geneva Mobile:
More information about the Ip-health