Director’s orders

Director’s orders

Under threat from investors and generic rivals, pharma and biotech have become staunch opponents of the inter partes review regime. However, as they push for reform, they face a stiff challenge from the US Patent and Trademark Office and Congress

As he sat in a board meeting of the Biotechnology Industry Organisation (BIO) in New York in February 2015, Ron Cohen noticed a new message on his phone. As CEO of Acorda Therapeutics, a biotech company worth around $900 million, Cohen is used to a steady stream of texts and emails making demands on his time. But this one was different. The message informed him that Kyle Bass – a hedge fund investor who had risen to prominence on the back of a bet against the housing bubble in 2007 – and IPNav founder Erich Spangenberg had filed two inter partes reviews against a couple of Acorda patents. “It hit us like a thunderbolt,” Cohen recalls.

Bass’s move was not unexpected. Earlier that year he had signalled his intention to attack what he saw as weak patents in the pharmaceutical sector through inter partes reviews – the post-issuance review process introduced by the America Invents Act in 2012. “We are going to challenge and invalidate patents through the inter partes review process… (and) we are not going to settle,” Bass reportedly told a conference in Oslo. “The companies that are expanding patents by simply changing the dosage or the way they are packaging something are going to get kneecapped.” To help him profit from the inter partes reviews, Bass reportedly raised a $700 million war chest in the hope of reaping a return from trading against the stock of the pharma companies which he targeted.

Such was the threat Bass posed that his actions were already on the agenda at the BIO meeting when the message appeared on Cohen’s phone. However, the Acorda CEO little suspected that a business such as his could find itself in the firing line. “It never dawned on us,” he admits. “We thought he’d go after questionable drugs.”

An industry hobbled

In the almost two years since they started their campaign, Bass and Spangenberg have lodged a total of 34 inter partes reviews together and a further three individually, according to data from Lex Machina. Of those which they have brought together, 20 have been instituted by the Patent Trial and Appeal Board (PTAB) and seven have reached a final decision (at the time of going to press, the pair had won six and lost one).

However, more than their successes and failures at the PTAB, the pair have sharpened the focus of the patent market, the wider business community and US legislators on the threat that inter partes reviews now pose to patent owners – particularly in the biotech and pharma sectors. Just 13% of the inter partes reviews filed in the US Patent and Trademark Office’s (USPTO) 2016 financial year were targeted at biotech or pharma patents, compared with 55% against patents in electrical or computer patents.

However, in contrast to the high-tech industry – where a device such as a smartphone may incorporate many thousands of patents, with most worth very little – products in the pharmaceutical industry are usually backed by a handful of grants which depend on years of exclusivity to recoup hundreds of millions of dollars in R&D investment. Knock one of those out and the field could be opened up to generic competitors to issue imitation drugs at vastly reduced prices.

The danger that inter partes reviews now pose to the industry leave biotech and pharma companies facing an existential threat, which they claim is imperilling the billions of dollars that they invest to bring new products to market. However, those filing the inter partes reviews dismiss these complaints, claiming that for too long brand-name drug makers have used weak or questionable patents around minor changes such as dosage or formulation to maintain patent protection and stifle generic competition.

Ever since the Hatch-Waxman Act 1980 was introduced, generic pharmaceutical manufacturers have had a streamlined way to challenge brand-name drugs and bring cheaper imitations to market through the abbreviated new drug application (ANDA) process. This radically altered the competitive landscape. However, inter partes reviews are now making it even cheaper for generic businesses to challenge the patents behind brand-name treatments.

“A problem with inter partes reviews is that they have wholly disrupted the Hatch-Waxman process and the balance that exists between supporting innovation and providing a clear path to generic products at the right time,” claims Bart Newland, chief IP counsel of biotech company Biogen. “That balance has been disrupted because patents now face challenges at multiple times during a product’s lifecycle, on multiple fronts simultaneously, using different legal standards.”

Biotech and pharma players argue that much of what was intended when the inter partes review process was launched has been lost by the way it has been implemented. Many stakeholders are now calling for new patent reform legislation, with some even suggesting that biotech and pharma patents should be exempt from the inter partes review process. However, at a time when the pharma sector has been heavily criticised for the actions of a number of companies which have jacked up the price of some treatments without any real justification, it is becoming increasingly difficult for the sector to lobby for changes to the process. “Every drug that goes off patent saves Medicare $1 billion,” explains Scott Kamholz, a former PTAB judge and now a partner at Foley Hoag, referring to the US government programme which subsidises the healthcare of millions of (mostly older) Americans. “So no – Congress is not going to sign off on changes that exempt bio and pharma from inter partes reviews, unless offsetting money could be found elsewhere in the budget.”

Inter partes review – the numbers

Source: USPTO


Very real threat

By any measure, AbbVie’s branded Humira drug – a treatment for rheumatoid arthritis – is a blockbuster in the pharma industry. In 2015 it brought in around $14 billion in revenues, accounting for the lion’s share of the drugmaker’s annual turnover. With almost $8.5 billion of this generated in the United States alone, it was the second biggest seller last year in the world’s largest pharma market.

However, it is also a drug under attack, thanks to eight inter partes reviews filed by generics rivals. When one of those reviews was filed by Coherus BioSciences, AbbVie’s share price fell 3.5% according to Bloomberg, while its challenger’s soared by 16%.

Acorda’s Cohen is only too aware of the damage that an inter partes review can do to a company’s share price. When Bass and Spangenberg filed their first inter partes review against Acorda’s drug Ampyra, used to treat multiple sclerosis, the company’s stock plummeted by nearly 10%. As Cohen points out, that lessens a company’s ability to use its shares as currency to bid for a rival or acquire a new drug. There are also serious internal consequences: stock awards are often part of an employee’s remuneration, so a slump in the price can affect staff morale. “People start wondering why investors are abandoning us, which creates a swirl in the organisation that is deleterious, so we simply spend a lot of time doing damage control,” remarks Cohen. A drop of 10% is obviously enough to give any CEO sleepless nights and with Ampyra bringing in $436 million in net sales in 2015, the threat to the company was considerable.

However, according to research by J Gregory Sidak and Jeremy O Skog published in the UCLA Law Review in 2015, the next three inter partes reviews filed by Bass against Acorda had far less of an impact. The share price dropped by just under 5% after the second, but by just over 2% from the fourth, and it even rose by 2.49% on the day that the third was filed (in total, Bass and Spangenberg filed six against Acorda, four of which were instituted). Plus, when it was announced in August 2015 that the first two inter partes reviews would not be instituted, the company’s share price initially leapt by more than 30%, showing that there can also be an upside to PTAB decisions.

Bass and Spangenberg have made no secret of their motivation, pointing out that an unstinting profit drive is behind much of the pharmaceutical business. However, their campaign has also highlighted some of the absurdities of the sector, which sees brand-name drug companies refile for patent protection on some of their products simply by changing the recommended dosage or method of delivery. This practice, known as ‘evergreening’, has attracted widespread criticism.

Spangenberg even became aware of one of the drugs that he targeted individually – a flea treatment for dogs called Bravecto, owned by Merck – when it was prescribed to his long-haired miniature dachshund Otto by his local vet. Seemingly unconvinced by the merits of its own filing, the drug maker abandoned the patent a week after the second inter partes review was instituted.

Although, as a private investor, Bass is not required to make his results public, according to a February 2016 story in the Financial Times, he has closed the $700 million fund which he had raised to challenge the pharma patents and returned much of the money to investors. If the prospect of longer-term returns had been greater, it is safe to assume that Bass would have held onto the cash.

Perhaps the greatest threat to the biotech and pharma industries is not from investors looking to undermine a company’s share price – after all, there are few drug makers with the right combination of overdependence on one product and a sufficiently small market capitalisation that their share price will move significantly for a speculator to make a decent return. The far more serious challenge is from generics manufacturers which, thanks to the introduction of inter partes reviews, now have another, cheaper avenue through which to attack a brand-name manufacturer’s patents and then introduce a rival version. This has seen a number of investors and patent specialists opt for the generics route rather than Bass’s short-selling strategy.

Generic opportunity

Among these is Gerchen Keller Capital, a giant of the nascent litigation finance world, which has committed part of the $1.4 billion it raised from investors to its own pharma business, Neptune Generics. So far, according to Lex Machina, it has filed four inter partes reviews against Eli Lilly, AstraZeneca and Auspex Pharmaceuticals (which was bought by Teva in 2015).

However, few new entrants have that kind of backing. Rather, it is the likes of Koios Pharmaceuticals – a virtual generic business set up in 2015 – which show how inter partes reviews are changing the equation for start-ups in the sector. Koios was established by Kayvan Noroozi, a litigator in his early 30s who left his last law firm job in November 2014, set up Koios 10 months later and filed his first (and so far only) inter partes review in July 2016 against a patent owned by German company Medac GmbH.

Noroozi is following a familiar virtual model in which he has partnered with a generic drug manufacturer to develop a rival to Rasuvo, the arthritis treatment which his company has challenged at the PTAB. As Noroozi points out, other generic businesses such as Shire started out by using a low-cost model which sees most of the traditional functions of a pharma business outsourced. However, traditionally the route to challenging a brand-name drug and bringing a generic product to market was through the Hatch-Waxman Act and the ANDA process which it introduced.

While Hatch-Waxman is widely credited with dramatically opening up the generics market over the last 30 years, the related costs of challenging a brand-name company’s patent can still stretch to $10 million. The advent of inter partes reviews has changed this considerably – Noroozi claims that a business such as Koios can now challenge a drug patent for as little as $2 million in legal costs through a strategy that uses both inter partes reviews and some district court litigation.

“Before inter partes reviews, the cost, risk and time associated with [an ANDA-related challenge] meant that it was a multi-year, multimillion-dollar endeavour,” Noroozi explains. “In my view, inter partes reviews allow for an entirely different type of generics company and should dramatically increase the efficiency of the generics market.”

Ron Cohen

CEO, Acorda Therapeutics

“It never dawned on us that [Bass] would target our company. We thought he’d go after questionable drugs”

Kayvan Noroozi

CEO, Koios Pharmaceuticals

Inter partes reviews allow for an entirely different type of generics company and they should dramatically increase the efficiency of the generics market”

Phil Johnson

Senior vice president IP policy and strategy, Johnson & Johnson

“There is much that the Federal Circuit can do in ensuring that the USPTO is carrying out the America Invents Act was it was intended”

Pharma’s to-do list

Start-up businesses such as Koios Pharmaceuticals highlight the Sisyphean challenge that the biotech and pharma industries claim to face. To the brand-name giants, it is as much about how the rules around inter partes reviews have been interpreted and implemented by the USPTO as what the America Invents Act actually says. The implementation of the estoppel provisions, the broad standard used to interpret claims and the apparent inability to amend a patent that has been challenged in a review all give the impression that the PTAB favours those bringing inter partes reviews. In a comment in 2013 that attracted widespread attention, then Chief Judge of the Federal Circuit Randall Rader referred to the PTAB as “patent death squads killing property rights”.

Take, for example, the issue of claim amendments, which would typically give patent owners the opportunity to narrow the scope of their claims to ensure that they are patent eligible. Because an inter partes review is regarded as an adjudicatory process overseen by judges, and not a re-examination overseen by patent examiners who can engage in a back-and-forth discussion with the patent owner on the merits of a specific claim, claim amendments are rarely given the green light. However, some argue that this is not what was originally intended.

Here is how BIO’s deputy general counsel for intellectual property, Hans Sauer – who had a ringside seat for many of the policy discussions around the America Invents Act – remembers the discussions around amendments: “There is absolutely no doubt in my mind that Congress and all the stakeholders thought claim amendments would happen frequently and as a matter of course in these proceedings.” The reality is very different, with the USPTO considering just 192 motions to amend from patent owners out of over 1,500 completed trials (according to an April 2016 study) and granting the motion in 118 cases or 8% of those trials that had reached a conclusion.

“It has made a big difference to the way these proceedings are perceived,” Sauer adds. “Patent owners going into a review have learned that they will have no way to salvage an inherently difficult situation through amending their claims. The outcome will be binary in the sense that the patent will either fall or survive.”

Of the other gripes that much of the biotech and pharma communities have with the new inter partes review regime, one of the most significant is what they see as relatively weak estoppel provisions, which may do little to help prevent a patent owner from facing multiple petitions on the same patents. To brand-name manufacturers, petitioners have what appears to be a seemingly indefinite opportunity to challenge patent claims at the PTAB. “Our industry generally faces multiple patent challengers in district court and the PTO. Therefore, the estoppel has limited or no effect where it attaches to one challenger, but permits other challengers to bring serial or parallel actions,” maintains Henry Hadad, chief IP counsel at Bristol Myers Squibb.

Under inter partes review rules, defendants in parallel district court litigation have a year after a case is filed to bring a review against the patent which they have been accused of infringing. However, it is the manner in which some have been able to join other reviews after those 12 months are up that has alarmed many patent owners across all sectors – particularly biotech and pharma businesses.

“There is a great lack of finality because many patents are being adjudicated at the same time in district court as well as at the PTAB,” Sauer points out. “Worse, there are instances where patent validity was already decided in district court and is then being re-decided by the PTAB under different standards of proof, under different claim interpretation and, frankly, the outcomes are different too.”

That scenario is reportedly affecting how biotech and pharma companies choose to invest their capital. “The uncertainty brought about by the inter partes review process absolutely affects business planning and how we make long-term investment decisions,” insists Biogen’s Newland.

Making a change

While the biotech and pharma industries are lobbying for reforms to the inter partes review process, the question remains as to how any changes might be made. In the first four years of inter partes reviews, the courts have mostly thrown their support behind the USPTO, agreeing that the government agency has considerable leeway in determining how the new rules should be implemented.

In June 2016 the Supreme Court also had its say on two key parts of the inter partes review process in Cuozzo Speed Technologies, LLC v Lee. In that decision the court came down in favour of the USPTO, ruling that the decision to institute a review was not appealable and that deference should be given to the USPTO in its use of the broadest reasonable interpretation standard to review claims, rather than the narrower standard used in district courts.

However, more recently there has been a growing sense that the Court of Appeals for the Federal Circuit has been casting a closer, more critical eye over some of the PTAB’s practices. Earlier this year, for instance, in In re: Magnum Oil Tools Int’l the court rejected the USPTO’s argument that once an inter partes review has been instituted, the burden of proof shifts to the patent owner. There is also growing hope from several recent and upcoming cases that the court is more open to ruling against the USPTO on patent owners’ ability to amend claims.

That would certainly be welcomed by the bio and pharma sectors, but some insist that there is still plenty of scope for the Federal Circuit to help reshape the proceedings. “The America Invents Act doesn’t give the USPTO a blank cheque to write whatever regulations it might like. Going forward, it will be incumbent on the Federal Circuit to ensure that the USPTO’s regulations, practices and procedures are faithful to both the letter and spirit of the act,” insists Phil Johnson of Johnson & Johnson. Further, he maintains, the USPTO has a broad remit to address the perceived anti-patent owner bias of inter partes reviews. “A great deal of the perceived unfairness of inter partes review proceedings could be fixed by the USPTO itself. My hope would be that it takes a long-term view and realises that the public’s trust in the patent system is of paramount importance. Patent owners aren’t asking for these proceedings to be skewed in their favour, but simply that they be made fair for all parties.”

According to several of those who were involved in the negotiations around the America Invents Act, the expectation was always that the rules governing inter partes reviews would be finessed several years down the line, once stakeholders had had an opportunity to see how they worked in practice. The USPTO has made some changes – including to the amendment process and an increase in the number of pages permitted in a petitioner’s reply – but there is a clear sense among the biotech and pharma communities that more should be done.

The recent US election also means that we can expect a new USPTO director at some point in the New Year and a different approach to patent policy from the new government. Plus the new Congress will come into play with proposed patent legislation that has been introduced in both the House of Representatives and the Senate over the last couple of years, including several changes to the inter partes review process, such as shelving the use of broadest reasonable interpretation.

For some in the pharma world, Congress has a vital role to play in overhauling PTAB procedures. “I think there’s a place for the inter partes review process, but I think it needs to be more thought out by Congress with respect to how it fits with other mechanisms in place like Hatch-Waxman,” comments Lisa Samuels, senior corporate counsel at Pfizer.

The drugs don’t work

One of the problems for pharma and biotech and all those pushing for reform is that while they rail against the various injustices of the new review proceedings, another significant patent-owning constituency – the high-tech sector – has become the PTAB’s biggest fan. The likes of Apple, Samsung and Google regularly feature among the most active filers of reviews against the serial claims of patent infringement that they face.

For anyone who has been accused of patent infringement, the inter partes review now represents the most popular way of dragging out litigation. A review will generally conclude around 18 months after filing, but even that relatively expedited timeframe can appear interminable for a patent owner waiting for a damages award and a possible ongoing licensing royalty from a district court case. For the ‘efficient infringers’, as they have become known, the PTAB has become a popular venue through which to undermine claims of infringement. “Those who are interested in efficient infringement have a good friend in the inter partes review system because of its very high kill rates,” observes Johnson.

However, biotech and pharma have another, perhaps more serious problem on their hands. In a US health system where drugs are far more expensive than in many other countries, a series of recent scandals involving sky-high prices for treatments (many of which no longer have patent protection) has tarnished the image of the sector as a whole. In one case involving EpiPen – an auto-injection system which provides patients with a dose of epinephrine to prevent anaphylactic shock – owner Mylan hiked the price by around 500% after acquiring it in 2007.

Brand-name pharma companies like to point out that their patent-related concerns are far removed from the recent price scandals to hit the sector. However, it is clearly harder for legislators to radically overhaul an inter partes review system which should theoretically help more generics to come on the market and reduce the costs of those drugs that no longer enjoy patent protection.

Biotech and pharma companies are by no means the only patent owners calling for changes to the inter partes review process. The Coalition for 21st Century Patent Reform – a lobbying group which counts companies as diverse as GE, Johnson & Johnson and Caterpillar among its members – has called for a number of changes to help rebalance reviews between those filing petitions and patent owners. However, the big brand-name drug companies remain the loudest critics of inter partes reviews.

In hindsight, some in the pharma community admit that they were blindsided in the legislative process that led to the America Invents Act. “Yes, we took our eye off the ball,” Cohen says without hesitation. “Some of the troubling parts of the inter partes reviews came later on in the process and we were not vigilant enough.” The way Cohen remembers it, the new review procedures were pitched as a way of tackling the growing volume of infringement litigation which the high-tech community was facing from so-called ‘patent trolls’. “We thought that was a laudable goal and we didn’t want to stand in the way,” he adds.

The America Invents Act was also the product of what is these days a rare commodity in Washington DC: compromise. Those who had concerns about the new post-issuance review procedures were persuaded to throw their weight behind the bill in the interest of getting patent reform through Congress. This time around, it seems that biotech and pharma companies will be in a less accommodating mood.

More than anything, the threat that inter partes reviews now pose to both sectors has meant that patent validity has been elevated to a C-suite issue. It seems likely that as we await the new administration and the start of the next Congress, players in the biotech and pharma sectors will use every lobbying trick in the book to push for reform. Thanks to the likes of Bass and Spangenberg, Cohen and his peers have got the message loud and clear.

A match made in Congress

A timeline of biotech, pharma and inter partes reviews

  • April 2004 – A report from the National Academy of Sciences, titled “A Patent System for the 21st Century”, recommends that “Congress seriously consider legislation creating an open review procedure, enabling third parties to challenge the validity of issued patents on any ground in an administrative proceeding within the USPTO”. The report is the starting point for new patent legislation, which ultimately leads to the America Invents Act – although the new post-issuance review procedures will be narrower in scope than the academy recommends
  • June 2004 – A hearing on improving patent quality before the Sub-committee on Courts, the Internet and Intellectual Property in the House of Representatives focuses on the issue of post-grant proceedings. Jeffrey P Kushan, lawyer for biotech business Genentech, welcomes the prospect of “creating an effective administrative procedure for reviewing the validity of an issues patent”. However, he warns: “A system that allows frivolous challenges to be made or which can be used to tie up a patent in a long and endless administrative proceeding would fail to meet the needs of those users of the patents community and the needs of the public.”
  • April 2007 – In testimony before the same sub-committee, the CEO of biotech company Amgen raises concerns over proposals for a new post-grant opposition procedure as laid out in proposed legislation in the House of Representatives. He cautions that it may become a “vehicle to harass legitimate patent owners” and raises concerns over a “second window” in which filers could bring a review, suggesting that it would create more uncertainty and more litigation.
  • September 2011– President Obama signs the America Invents Act into law. Much of the focus is on moving from a first-to-invent to a first-to-file system, bringing the United States into line with much of the rest of the world. After the bill passes the House of Representatives and the Senate, both the Biotechnology Industry Organisation and the Pharmaceutical Research and Manufacturers of America issue statements welcoming the new legislation.
  • September 2012 – The Patent Trial and Appeal Board (PTAB) launches, overseeing the new post-issuance procedures: inter partes reviews, covered business method reviews and post-grant re-examinations. Although it is expected that the monthly average number of reviews will be around 50, they prove far more popular, with as many as 150 filed in some months.
  • October 2013 – In comments made to the American IP Law Association, Court of Appeals for the Federal Circuit Chief Judge Randall Rader refers to the PTAB as “patent death squads”, bringing attention to the high invalidity rates in the first year of reviews. An inter partes review filing becomes an accepted part of district court infringement litigation, with the vast majority filed against high-tech patents.
  • February 2015 – Hedge fund investor Kyle Bass and IPNav founder Erich Spangenberg file their first inter partes reviews against patents owned by biotech and pharma companies. Backed by a $700 million investment fund, the pair are widely expected to be shorting the stock of the companies that they file against.
  • June 2016 – In Cuozzo v Lee the US Supreme Court rules that the decision to institute a review is not appealable and defers to the US Patent and Trademark Office on its use of the broadest reasonable interpretation standard in assessing patent claims. Abolishing this in inter partes reviews remains a part of proposed patent legislation in both the House of Representatives and the Senate, with many biotech and pharma businesses pushing for the same standard as is used in district court litigation.

Results of initial final written decisions encourage Bass and Spangenberg

While there has been much debate about how Bass and Spangenberg might be able to profit financially from their inter partes review filing strategy, the early results from the reviews that they have filed together have been promising.

By the end of October 2016, the pair had seen six final written decisions in their favour from the Patent Trial and Appeal Board (PTAB), with just one in support of the patent owner. That should not come as a surprise – generally once a review has been instituted, the chances of victory for a petitioner are extremely good (although they tend to be lower for pharma patents compared with other sectors, such as high tech).

The pair’s early successes came against Celgene – where two patents were knocked out – and NPS Pharmaceuticals (now a part of Shire after a 2015 acquisition), which saw claims invalidated in one patent. Bass and Spangenberg’s only loss in a final written decision involved a patent relating to a drug called Lialda used to treat Crohn’s disease and ulcerative colitis, owned by Shire.

The news from these early results did not appear to have a material impact on the respective pharma companies’ share prices. On the day that its defeat at the PTAB was announced, Celgene’s share price remained fairly flat before jumping the following day on the back of strong third-quarter earnings. Meanwhile, Shire’s stock closed slightly down when its PTAB defeat was announced, but also dropped when its victory against another Bass/Spangenberg review was announced. As more detailed analysis has suggested, if the pair were looking to profit solely from shorting their targets’ stock, then they are unlikely to have had much success.


Richard Lloyd is the North America editor of IAM, based in Washington DC

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