‘Coalition for Affordable Drugs’ (CAD) sounds like the name of a group of health activists engaging in litigation and advocacy to bring down prices of medicines. It is in fact a series of hedge funds formed by billionaire American Hedge Fund manager Kyle Bass. Surprisingly, CAD manages to pitch for cheaper drugs and bring revenue to the Hedge Fund through a single strategy- employing a procedure in US patent law called the Inter Partes Review (IPR).
The Inter Partes Review is a procedure similar to the Post Grant Opposition in Indian patent law, through which parties can request to cancel one or more claims of a patent as unpatentable due to obviousness or lack of novelty. CAD’s strategy is to challenge ‘frivolous’ pharmaceutical patents through the IPR Mechanism and ‘short’ the stocks of the companies that own these patents. Shorting is a process through which traders (usually hedge funds) capitalize on an anticipated fall in share price by selling borrowed shares when the price is high and purchasing them at a lower price from the open market once the price drops, thereby making a profit. In essence, the CAD bets on the price of shares falling as a consequence of the IPR being filed. The stated intention of the CAD is, however, to change the way pharma companies “manage their ‘BS’ patents”.
The logic of the strategy appears sound- an IPR puts patents of the affected pharma company at risk, and as patents are crucial capital for these companies, the uncertainty around their valuation will lead to a drop in share prices. But it is still unclear how successful CAD’s strategy will be in the long-term. In February, when CAD filed an IPR against Acorda Therapeutics’ patent on a drug for multiple sclerosis, its share price fell by 7.6%; the second IPR against Shire PLC resulted in a 5% drop in share price- a pretty decent outcome. However, this article by Gregory Sidak and Jeremy Skog undertakes a thorough review of every IPR that CAD has filed since February and its impact on share prices, and the authors find that barring the first couple of IPRs, the subsequent ones have had no significant impact on the prices of shares at all. Sidak and Skog contemplate that a possible reason could be that the market has somehow adjusted to the threat of IPRs and the companies that they target are not ‘punished’ for these challenged beyond the first few times.
It must also be noted that Kyle Bass’ objective is to profit from a fall in share prices as a reaction to the filing of the IPR petition itself- and not from a subsequent fall in drug prices. An IPR petition, though considered a fairly quick mechanism, usually takes around one year to be disposed of. And then there’s the process of Appeal. I am no hedge fund manager, but waiting around for a fall in drug prices due to a (possible) invalidation of a patent (a year or more later) does not sound like a good ‘shorting’ strategy to me. Moreover, the invalidation of one patent may not even result in generic companies capitalizing on the same and bringing down prices by manufacturing substitutes, if there are several other secondary, dependent patents that still subsist on the drug. So undoubtedly, Kyle Bass and CAD are not very interested in affordable drugs per se. On a side note, Kyle Bass similarly ‘shorted’ the subprime mortgage crisis in the US in 2008 and profited enormously from the same. He is simply a spectacular speculator, as opposed to an altruistic activist…so to speak.
Celgene Corporation, one of the pharma companies whose patents have been challenged by CAD has used similar reasoning to file a motion for sanctions against CAD for ‘misusing’ the IPR process. According to IPWatchdog, Celgene alleges that CAD’s actions constitute an ongoing abuse of the process which results in unwarranted burden on resources of the Patent Trial and Appeal Board as well as Celgene itself. CAD has rightly replied by saying that being motivated by profits alone does not constitute a misuse of process- those who usually use the IPR mechanism are generic companies, and they are purely motivated by profits as well.
There appear to be larger implications in this saga- the US Senate is currently debating the Patent Act and the Innovation Act with respect to solutions that address the problem of Patent Trolls. IPR, being quick and effective, is one of the mechanisms that are being debated. Techdirt and Medium report that some pharma companies are lobbying to stall the progress of these Bills and ensure that the IPR provisions are watered down, citing the ‘abuse of process’ by CAD as an excuse. On the whole, this is ridiculous as the IPR provisions already had safeguards to protect frivolous claims (such as a high threshold for acceptance of the petition).
In a way, Kyle Bass and CAD are the opposite of Patent Trolls, as their mode of operation results in the weeding out of bad patents. It is indeed interesting that this Anti-Troll is using the same mechanism (the IPR) that can potentially weed out the Trolls. Whether or not CAD makes money, I hope two things: That their actions lead to a few frivolous pharma patents being invalidated and drug prices consequently being lowered, and that big pharma does not succeed in lobbying for dilution of IPR provisions.