Patent crusade benefits whom?
Is it possible that an aggressive hedge fund manager could be out to make the world a better place for patients who depend on crazy-expensive medication to battle serious illnesses?
Don’t be ridiculous.
The hedge fund manager in question is Kyle Bass of Hayman Capital Management in Dallas. Bass has been making waves lately by challenging the patents that drug and biotech companies hold for some of their most important and lucrative medicines.
In public comments, Bass has criticized a “small minority of drug companies” that he said have used illegitimate patents to sustain an “anticompetitive high-price monopoly to the detriment of Americans suffering from illness.”
So far, six patents have been challenged this year by an organization called the Coalition for Affordable Drugs, which sounds like a big tent full of rightfully outraged patients but is actually a wholly owned subsidiary of Bass’s investment business.
“A small number of monopolistic drug franchises that have gone unchecked have become our special focus,” Bass wrote to leaders of the House Judiciary Committee in April. He said drug patent abuses “are taxes on the US economy, public welfare, and every citizen afflicted by diseases that range from multiple sclerosis to narcolepsy.”
Last week, the coalition challenged a patent held by Biogen Inc. covering Tecfidera, the Cambridge company’s oral treatment for multiple sclerosis. Tecfidera happens to be the best selling drug at the biggest biotech company in Massachusetts and generated a whopping $825 million in sales during the first three months of this year.
More on Biogen and Tecfidera in a minute.
Bass became a star in the hedge fund world eight years ago, when he made a fortune betting on a housing market crash in the United States. He’s since made bold investments anticipating a debt crisis in Japan that has not happened so far, and a big business recovery for General Motors Co., which has improved modestly.
Bass announced his plans to challenge drug patents in January, promising to target more than a dozen companies with a combined market value of $450 billion. He has followed through in recent months, using a relatively new law written with a very different purpose in mind.
The America Invents Act of 2012 included a process meant to help companies fight so-called patent trolls holding them up in court. Trolls often acquire dubious intellectual property, claim the products of established companies infringe on their patents, and demand payments.
The new law gives third parties the ability to request a review of any unexpired patent by the Patent and Trademark Office, avoiding a lengthy court challenge in the process. It’s an express lane for patent challenges, a process that typically costs big money and takes years to resolve in lawsuits.
The Coalition for Affordable Drugs used that process to challenge patents held by Shire Pharmaceuticals and Celgene Corp.
Though Bass mentions the economic hardship suffered by patients — which could be an entirely legitimate complaint — hedge funds are in the business of making money.
So how does that work?
Bass doesn’t talk about it (I got only an e-mailed copy of his company’s statement on the subject) but stock analysts who follow the drug industry believe Hayman Capital attempts to drive the company’s stock price down with the patent challenge and profit on that decline. Multiple news accounts report that Bass’s strategy is to short a drug company’s stock — betting it will lose value in the future — and then file a patent challenge for the world to see.
That worked when the coalition filed its first challenge. The shares of Accorda Therapeutics Inc. fell about 10 percent as a result.
But most of the other companies challenged by Bass have not been hurt so far in the stock market. Shire shares slipped briefly after the coalition filed a challenge but recovered. Other stocks appeared entirely unaffected.
Here’s the problem with the strategy: Patent challengers can only hurt a company, and drive down the value of its stock, if they create a clear opportunity for generic drug makers to get their hands on a particular treatment, said Jason Gerberry, a drug stock analyst at Leerink Partners in Boston.
Many drugs are covered by a half- dozen or more patents and may have additional legal protection. Invalidating one patent won’t do the trick.
“At the end of the day, the market has vetted a lot of this already,” said Gerberry. Professional drug stock investors “are not totally naïve to these patent issues.”
That was certainly the case at Biogen. Its stock showed no clear reaction when Bass challenged patent No. 8,759,393, covering Tecfidera.
“We don’t think it’s going to have an impact on our ability to continue to sell the drug,” chief executive George Scangos said last week in response to a question about the Bass challenge on a quarterly conference call with stock analysts.
Like other companies targeted by Bass, Biogen has a number of patents protecting its prized drug. Gerberry said that big institutional investors are also unlikely to dump Biogen because they see big potential in the company’s other products in development, particularly its drug for Alzheimer’s patients.
Kyle Bass may have a point about some pharmaceutical patents, and I’m certainly not about to canonize the people running drug companies. But hedge fund managers aren’t in the business of helping suffering Americans, unless there’s good money in it.
That doesn’t look like a good bet so far.