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Sunday, 28 August 2016

Dispute the Patent, then Short the Stock


I was combing through WikiLeaks when I came across this article, shared in the e-mail archives of the Italian surveillance malware vendor, Hacking Team.

The Hacking Team CEO, David Vincenzetti, shared a Wall St Journal article called "New Hedge Fund Strategy: Dispute the Patent, Short the Stock" in the e-mail.

David's comment at the top of the e-mail was:
"Very Interesting. Undoubtedly, I find these hedge funds’ aggressive strategies utterly fascinating :-)"
Mr Kyle Bass's challenges are facilitated by a proprietary software which analyzes weak patents.





Key points from the article

Kyle Bass is the founder of Hayman Capital Management. He has created the Coalition for Affordable Drugs, an organization involved in several patent challenges. Along with it was a new fund that he created to sustain its activities.

His new fund challenges weak patents, and invests in those that profit if his challenges succeed.

He claims that his challenges will help reduce drug prices. Many people agree, drug prices are artificially high because patents prevent competitors from producing generic versions of the same drug.

His strategy involves a process called Inter Partes Review, which was created by Congress in 2011 to help companies fight patent trolls. IPR petitions are heard by a patent office panel. This means that the petitions do not need to enter court. Statistically, such invalidation challenges are more likely to succeed.


His detractors call him a "reverse patent troll". 

Unfazed, he has teamed up with Erich Spangenberg, who is known by many as a patent troll. Spangenberg identifies potential targets through a proprietary software.

Investment in his new fund requires a minimum $1 million. His firm takes a 20% cut of profits.

Drug patents are a barrier to affordable prices.


Which companies are targets?

April 2015: Shire PLC rejected Hayman Capital's petition on Gattex and Lialda. Lialda is an ulcerative colitis drug. Gattex is for treating adults with short bowel syndrome (SBS).

September 2015: Biogen's Tecfidera was attacked by Hayman Capital's petition. It survived. Tecfidera is the "top-selling drug" for multiple sclerosis.

March 2016: Acorda Therapeutics prices slumped 7% due to Hayman Capital's petition on Ampyra. Ampyra helps adults with multiple sclerosis to walk better. 

Kyle's fund has filed petitions against Hoffman-LaRoche, Bristol-Myers, and Aegerion. Other targets include Jazz Pharmaceuticals, Insys Therapeutics, Anacor Pharmaceuticals, Shire, Pozen, and Celgene. 


What I think.

It's a clever move by a clever hedge fund manager. He has figured out that, the parties initiate the patent war because they want to invalidate patents and enlarge their markets. But why let the plaintiff and the defendant have all the fun? 

With money, he could become the party to challenge the patent holder. Then he could bet against the share prices of the target companies.

Not every share investor can do that, but he can. He has the money.

Is it legal? The answer seems to be yes. 

Is it ethical? Maybe not. But he's a smart person who is out to make money.



The bit about keeping drug prices down for the masses is just to mask his true intentions. He knows that pharmaceutical companies make a lot of money. Maybe some of them are willing to settle with him, so that he won't dent their billion-dollar market.

They have to remember that when Kyle invalidates their patents, the generic drugs will start flooding the market. How will they profit, then?

In any case, he's gotten the media on his side. Like this piece by New York Times in November 2015. The media loves the story of a modern day Robin Hood who takes on the drug lords rich drug companies. Here is a quote:
Drug companies have cried foul, criticizing the coalition for trying to profit from successful challenges that may pressure a company’s revenue and shares. When drugs come off patent and can be sold by generic drug makers, their prices plummet.

Big pharmaceutical companies moaning about others profiteering at their expense? That’s rich.
And again from NY Times:
Mr. Bass and Mr. Spangenberg say the coalition’s aim is to bring down drug prices that are kept artificially high by dubious patents. And on Wednesday, they filed two new patent challenges that they’re pursuing on a pro bono basis. To help draw attention to their campaign, the coalition will pay all the costs of the two reviews and will have no financial interest in either outcome.

“Some patents and extensions to patents represent an unreasonable use of government regulation to enshrine monopoly power to the detriment of the public at large,” Mr. Bass said. “This system must be fixed or we will continue to pay more and more for the same old drugs we’ve been buying for decades.” 

I had just read about a drug called EpiPen.

Maybe Kyle should pay attention to EpiPen. Invalidate the patent and allow generics to flood the marketplace. But I bet you're wondering, why?


Here's a description from the Chicago Tribune about the drug:
The EpiPen, when pushed into a person's outer thigh, delivers a blast of epinephrine that can counter allergic reactions such as breathing trouble, a drop in blood pressure and swelling and hives around the face and lips.

Parents are "spending enormous amounts on a medication they hopefully won't (need) to use that expires in a year, or they're simply not able to afford it and depending on someone else's EpiPen or the school EpiPen to protect them," Boudreau-Romano said.
So here's why: The price of EpiPen had gone up more than 500% since 2008. People simply cannot afford to buy the drug. And the drug expires in one year. People are carrying around expired EpiPen just in case they need it. And there's a chance that it won't work when it's put to use.

Kyle really needs to focus his attention. Be the Robin Hood that he claimed he wanted to be.

Heather Bresch, CEO of Mylan Pharmaceuticals, which makes EpiPen, defended the price hike. She said: "I am running a business. I am a for-profit business. I am not hiding from that."
Bresch justified the price hike — which saw EpiPen costs rise from about $100 to $600 in the last nine years — as a necessary measure to pay for the company's investment in the product.
Here's a chart showing how EpiPen prices have gone up since 2011. In 2011, it was $164.98. In 2016, it's $608.61. Even I don't revise my fees like that. (It would be nice I could, though.)

Up, up, and away! EpiPen prices have gone up since 2007, when it was available for only $57.

Thanks for Reading.

Here are some other pieces from me.
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