Richard Lloyd

Earlier this week US hedge fund investor Kyle Bass got the wires buzzing when he reportedly outlined his plans to wage an inter partes review (IPR) war on big pharma at the USPTO’s Patent Trial and Appeal Board (PTAB). According to Bass, pharmaceutical companies are ripe for attack because of their predilection for regurgitating what he claims are essentially the same products under slightly tweaked patents to extend their IP protection.

Bass, the founder of Hayman Capital Management, was one of the few who bet big on the bursting of the US housing bubble before the most recent economic crisis and reaped the rewards. In other words, you sit up and take notice when he talks. According to the reports here’s what he had to say: “We are going to challenge and invalidate patents through the IPR process… (and) we are not going to settle. The companies that are expanding patents by simply changing dosage or the way they are packaging something are going to get knee capped.”

Now, it should be stressed that Bass’s comments have been picked up by a number of news platforms and all seem to be based on the same source. Our attempts to check the veracity of the reports with Hayman and to get further comment from Bass have so far met with silence. However, if they are accurate then Bass is about to open a new chapter in activist investor involvement in the patent market following on from the pressure that the likes of Starboard Capital have previously brought to bear on AOL and Tessera. Analyst and blogger the IP Hawk has an interesting investor take on the news on Seeking Alpha. As he points out, in a market that doesn’t have a full understanding of the IPR process how Bass’s plans unfold could have outsized implications for some pharmaceutical companies’ share prices.  

Bass’s plans could also open a new chapter in the IPR story. More pharma claims are already being challenged via the process at the PTAB, but they still make up a small chunk (so far 8% in the current financial year) of the total instituted IPRs. If Bass is a trailblazer for other investors then obviously we’re going to see that number increase.

It is also apt, as the new Congress gets underway in Washington, to ask how this will play out in DC? The IAM blog has written before about the dynamics of the pharma sector being exposed to IPRs and the impact that could have on its involvement in the reform debate.

Bass’s comments brought to mind a point that Google patent policy expert Suzanne Michel made to IAM last October. “What is it in the patent system that makes hedge funds want to invest in patent litigation?” she asked. “I think that’s an important question for society to think about because wouldn’t we rather have hedge funds invest in biotech start-ups? Wouldn’t that be better for the economy overall than investing in patent litigation? And that’s what we’re facing, we’re facing a world which litigation investment is seen as a high return on investment kind of proposition – I don’t think that’s good for anybody.”

Michel was talking broadly about the patent system and not the pharmaceutical sector and she was referring to the profit made directly from cases themselves, not from the carnage a case causes to a company’s share price. But it’s easy to imagine this kind of message being picked up by big pharma and relayed to US legislators. Of course, it was the creation of the PTAB by the America Invents Act – legislation that both Google and the pharma sector supported – that has allowed Bass to unveil his strategy. What he is doing is, arguably, one unintended (and certainly unforeseen by most at the time) consequence of the law. This may lend weight to arguments being made that it is far too early to embark on another big reform push and it is best to wait for a longer time to get a better picture of how the previous one plays out. That said, it seems likely that new reform moves will be made and if that is the case, we may see the pharma sector and its very deep pockets lobby legislators to bring the PTAB into balance with district courts over claim interpretation (the PTAB’s interpretation is currently much broader). Now, that really would set the cat among the pigeons.