By Rob Copeland And Joseph Walker
A well-known hedge-fund manager is taking a novel approach to
making money: filing and publicizing patent challenges against
pharmaceutical companies while also betting against their
shares.
Kyle Bass, head of Hayman Capital Management LP--which made a
fortune wagering on the housing bust--is targeting patents that he
says have little value other than to drive up prescription drug
prices. His new fund bets against companies whose patents it
believes are spurious, and invests in those that would profit if
the patents are invalidated, said people familiar with the
matter.
His latest challenge seeks to employ a relatively new and
inexpensive petition process to invalidate a Jazz Pharmaceuticals
PLC patent for Xyrem, a narcolepsy drug with sales of $779 million
last year, two-thirds of Jazz's 2014 revenues.
Mr. Bass created the Coalition for Affordable Drugs, an
organization that is the lead petitioner in several patent
challenges filed with the U.S. Patent and Trademark Office. He says
he plans to pursue the cases regardless of share price moves. "We
will not settle," he said in an interview.
Jazz Pharmaceuticals, of Dublin, Ireland, didn't respond to
requests for comment on Tuesday.
Mr. Bass previously challenged patents held by Acorda
Therapeutics Inc., of Ardsley, N.Y., and Shire PLC, of Dublin.
Acorda and Shire said they would defend the patents, and said the
patents targeted represent a portion of the intellectual property
protecting their drugs.
Mr. Bass, 45 years old, insists his challenges will help reduce
drug prices, which he says are kept artificially high because of
patents. In the U.S., drugs generally enjoy a 20-year period of
market exclusivity from the date of patent filing before generics
can be sold at steep discounts.
The pharmaceutical industry contends Mr. Bass is exploiting a
process designed to aid patent holders in defending themselves,
twisting it to provoke fear among his target's investors, and then
gain from the fallout that may result.
"There's nothing in this man's history to suggest he has any
interest in lowering health-care costs," said James C. Greenwood,
chief executive of the trade group Biotechnology Industry
Organization.
Mr. Bass's strategy taps an administrative process known as
Inter Partes Review, or IPR, that allows petitions to strike down
patents to be heard by a patent office panel. The process was
created by Congress in 2011 to help companies fight so-called
patent trolls, nonoperating companies that extract cash settlements
from companies they accuse of patent infringement. The panel is a
cheaper and faster option than trials in federal courts.
IPR challenges are evaluated by a panel of three administrative
patent judges who use a broader set of criteria than the courts
when deciding whether patents should be invalidated, making it much
easier to strike down patents, experts said. Some 77% of patents
evaluated through the IPR process have been invalidated or
disclaimed by their owners, according to an analysis published last
year in the University of Chicago Law Review.
Acorda Chief Executive Ron Cohen said the petition process was
never intended to be used as Mr. Bass is employing it. Congress has
inadvertently created a "mirror image problem of 'reverse patent
trolls'" that use the system to invalidate operating companies'
patents, he said.
Mr. Bass has teamed up with intellectual-property consultant
Erich Spangenberg, who opponents call a patent troll because of his
frequent patent suits. Mr. Spangenberg, 54 years old, made his name
and fortune by acquiring technology patents and using them to sue
such firms as Apple Inc. and Exxon Mobil Corp. for
infringement.
He also has worked as an adviser to other patent holders,
assembling dossiers on alleged infringement in exchange for
collecting a percentage of the holders' future winnings, a person
familiar with the matter said.
One of Mr. Spangenberg's firms, nXn Partners LLC, is a paid
consultant to Mr. Bass's more than $2 billion Hayman Capital,
according to filings with the patent office. Both men are named as
"real parties of interest" in the petitions.
Messrs. Bass and Spangenberg, both based in Dallas, met last
year through mutual friends, according to people familiar with the
matter. Mr. Spangenberg was looking for a way to capitalize on what
he perceived as the vulnerability of certain pharmaceutical patents
through the IPR petition process, one of these people said. Two
weeks later, the men agreed to work together.
Under their arrangement, Mr. Spangenberg sizes up potential
patent targets, using a predictive analytics software program he
acquired several years ago, that helps determine the strength of
certain patents.
"A small minority of drug companies are abusing the patent
system to sustain invalid patents," Mr. Spangenberg said in a
prepared statement.
Months after their meeting, Mr. Bass was pitching wealthy
individuals and institutions to invest in a dedicated fund that
would bet against, or short, the shares of companies whose patents
Mr. Bass believed to be specious, and wager on rivals that could
benefit. In particular, Mr. Bass was interested in older patents
which he believed to be more vulnerable.
The fund requires a minimum $1 million investment, and Mr.
Bass's firm will keep 20% of all profits earned, according to a
person familiar with the matter. The trades also will be part of
Hayman Capital's main fund.
Mr. Bass is no stranger to controversial gambles. He was one of
the handful of hedge-fund managers to spot trouble in the subprime
mortgage markets before the finance crisis, earning hundreds of
millions of dollars in trading profit, investor documents show. Mr.
Bass is willing to press this latest effort in patents for three
years--longer even than his bet against subprime, a person familiar
with his plans said.
More recently, his firm has struggled. He predicted long-term
insolvency for Japan amid demographic pressures--an outcome that
hasn't come to pass. And he forecast a dramatic recovery for the
largest U.S. auto maker General Motors Co., but its share price has
lagged his targets. Last year, Hayman Capital's main fund posted a
small loss, a person familiar with the matter said.
The patent office hasn't yet decided whether it will review the
Coalition for Affordable Drugs' petitions, and it is unclear
whether the challenges will succeed. But says Jacob S. Sherkow, an
associate professor at New York Law School who studies
pharmaceutical patents, "It's hard to be more upbeat than a lot of
CEOs are about the strength of their intellectual property."
If Mr. Bass is right about their reliance on weak patents, CEOs
ought to "be very worried," Mr. Sherkow adds.
Write to Rob Copeland at rob.copeland@wsj.com and Joseph Walker
at joseph.walker@wsj.com
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