Hedge Funds and Inter Partes Review: Robin Hood or Troll?
For many, the term hedge fund does not bring pleasant thoughts to mind. These investment vehicles, typically reserved for wealthy and sophisticated investors, gained their name from the hedging techniques used by the first of the funds to take advantage of market arbitrage opportunities. Hedge funds have since diversified and now employ a wide variety of investment strategies, but they still share a common trait — they seek out market opportunities that will provide returns to investors. So what does it mean that recently some of these funds have turned their attention to the patent system?
An organization called The Coalition for Affordable Drugs is the lead petitioner in several challenges to pharmaceutical patents currently before the Patent Trial and Appeal Board (PTAB). The coalition was formed by Kyle Bass, head of Hayman Capital Management LP, in order to challenge pharmaceutical patents that Bass claims have little value other than to drive up prescription drug prices. Bass’s mission, ostensibly, is to invalidate spurious patents and pave the way for competition, a move that would likely bring reduced drug prices to consumers. However, this might not be the full story.
The pharmaceutical industry paints a much different picture of Bass’s motives. The industry contends that Bass is seeking to profit off his challenges by simultaneously shorting the patent-holder’s stock in order to benefit from the adverse market reaction that may follow a challenge or eventual invalidation. Further undercutting Bass’s proclaimed Robin Hood motive, some commentators have noted that even if Bass were successful in invalidating the patents he has challenged, other patents would still prevent generic drug manufacturers from entering the market for many of the drugs being targeted. If Bass and the other funds that have followed in his footsteps are indeed seeking to profit off market reactions, they may be more accurately characterized as patent trolls than as do-gooders attempting to bring lower cost medicine to the American public.
Motives aside, there is evidence that shorting a pharmaceutical company’s stock in the face of a patent challenge may be an effective investment strategy. In February, the coalition filed Inter Partes Reviews (IPRs) against two patents covering the drug Ampyra, and the result was a near ten percent slide in the drug manufacturer’s stock price. Given the leveraged nature of many stock shorting strategies, a ten percent change in a stock’s price can be quite lucrative.
For many, the term hedge fund does not bring pleasant thoughts to mind. These investment vehicles, typically reserved for wealthy and sophisticated investors, gained their name from the hedging techniques used by the first of the funds to take advantage of market arbitrage opportunities. Hedge funds have since diversified and now employ a wide variety of investment strategies, but they still share a common trait — they seek out market opportunities that will provide returns to investors. So what does it mean that recently some of these funds have turned their attention to the patent system?
An organization called The Coalition for Affordable Drugs is the lead petitioner in several challenges to pharmaceutical patents currently before the Patent Trial and Appeal Board (PTAB). The coalition was formed by Kyle Bass, head of Hayman Capital Management LP, in order to challenge pharmaceutical patents that Bass claims have little value other than to drive up prescription drug prices. Bass’s mission, ostensibly, is to invalidate spurious patents and pave the way for competition, a move that would likely bring reduced drug prices to consumers. However, this might not be the full story.
The pharmaceutical industry paints a much different picture of Bass’s motives. The industry contends that Bass is seeking to profit off his challenges by simultaneously shorting the patent-holder’s stock in order to benefit from the adverse market reaction that may follow a challenge or eventual invalidation. Further undercutting Bass’s proclaimed Robin Hood motive, some commentators have noted that even if Bass were successful in invalidating the patents he has challenged, other patents would still prevent generic drug manufacturers from entering the market for many of the drugs being targeted. If Bass and the other funds that have followed in his footsteps are indeed seeking to profit off market reactions, they may be more accurately characterized as patent trolls than as do-gooders attempting to bring lower cost medicine to the American public.
Motives aside, there is evidence that shorting a pharmaceutical company’s stock in the face of a patent challenge may be an effective investment strategy. In February, the coalition filed Inter Partes Reviews (IPRs) against two patents covering the drug Ampyra, and the result was a near ten percent slide in the drug manufacturer’s stock price. Given the leveraged nature of many stock shorting strategies, a ten percent change in a stock’s price can be quite lucrative.
David K. Bailey is a J.D. candidate, 2017, at NYU School of Law.
