An October 2016 report estimates the number of hedge funds at a staggering 11,000, managing an aggregate of $3 trillion or more. Each firm seeks ways to make a profit for investors and managers through a variety of ways – including conventional methods like identifying certain market-influencing events, mispriced stocks, and betting that share prices will either rise or fall. Dallas-based Hayman Capital is one such firm, led by billionaire investor J. Kyle Bass. According to its website, the minimum contribution required to participate in Hayman’s investment activities is $5 million. He is well known in the finance industry for notable bets against the American sub-prime housing securities as well as other major contingencies around the world.
In 2015, Bass formulated a novel move with an eye toward pharmaceuticals. He saw value in challenging the validity of patents at the United States Patent Trials and Appeals Board (PTAB) through inter-partes review (IPR). A procedure established by the America Invents Act (AIA) and effective since September 2012, the IPR process allows anyone to initiate a proceeding against an existing patent on the basis that a prior art or printed publication makes the claims invalid (37 CFR § 42). That same year, Bass and the Coalition for Affordable Drugs (CFAD) started filing various suits at the PTAB against a number of different patents in the pharmaceutical industry.
CFAD’s ostensible goal was to identify and target weak patents used to elongate a patent monopoly on brand-name drugs, and thus make the market more competitive for generic drugs and prices more accessible. However, as one would expect a hedge fund to do, it is widely believed that Bass was engaging in this practice to make a profit by shorting the stocks of the patent holder pharmaceutical company, perhaps in reaction to the ripple effect created by a weakened confidence in the security of its intellectual property. In fact, on February 10, 2015, the day of the first filing against Acorda Therapeutics, the company’s share price fell 9.65%. Other target entities include well-known firms like Biogen, Celgene, and Bristol-Myers Squibb.
Empirical results, however, cast doubt on the effectiveness of the practice. To begin with, not all petitions are instituted by the PTAB, and the institution rates for petitions (1) aimed at patents in biotech and those (2) filed by hedge funds are significantly lower than the overall institution and invalidation rates observed in the early days of PTAB. As for CFAD’s challenges, records show that its 32 IPR proceedings have now concluded at the agency level (subject to judicial review). Eighteen of those petitions were instituted, and among them, and with the last remaining determinations issued in March 2017, nine resulted in the invalidation of claims (directed to only four different patents in total).
|Review No.||U.S. Patent No.||Respondent||PTAB Decision|
|IPR2015-01835||8618135||University of Pennsylvania||Upheld|
|IPR2015-01836||7932268||University of Pennsylvania||Upheld|
|IPR2015-01993||8399514||Biogen Idec MA||Upheld|
To make matters worse for Bass, a November 2015 survey showed that, after the initial shock for Acorda, no significant pattern indicated that the pharmaceutical companies’ stock prices indeed dropped at either the filing date or the institution decision. The result perhaps shows that the market has already internalized such risks, and a mere threat implied by an IPR petition is not a strong factor in stock price fluctuations. What then, one might ask, is the benefit of CFAD’s activities, if at all?
While Bass himself claims that he is merely in it to distinguish “between ‘patent squatters’ and true innovators” and thus root out “undeserved monopoly” and arbitrary drug prices, the actual investment strategy is still under wraps. Several theories, other than the short-term exploitation of stock prices, might explain Bass’s motivation, such as a long-term bet on the branded drug pricing in the entire pharmaceutical industry.
Even though the PTAB acknowledged that it cannot determine that the alleged ‘shorting’ practices as illegal stock manipulation, there has been no significant activity, subsequent to the initial round of filings in 2015, that represents a similar attempt. Whatever Bass’s actual goals were, the lack of repeat behavior is perhaps an indication that this practice did not deliver the results and was thus abandoned. That is to say, the IPR process seems to be working as it is intended to, at least insulated from abuse by opportunists who wield big wads of cash but have no vested interest in the innovative aspects of inventions.