Kyle Bass wants you to save money on prescriptions. He also wants to make ridiculous amounts of money. Good thing those two concepts are not mutually exclusive.
In fact, Bass has developed a new business strategy that leverages part of the America Invents Act (AIA) to at least potentially make him a boatload of money. Many patent experts who are wary of a new wave of potential patent reform note that we are still learning the implications of the AIA a mere four years after its passage. This new strategy by Bass and his hedge fund demonstrates another potential unintended consequence of the act.
Bass is the head of Hayman Capital Management LLP and knows a thing or two about making money in an unexpected fashion. In fact, he made a great deal of money betting on the housing bust a few years ago. Now, like the guy who gets sneered at for playing the “don’t pass, don’t come” line on the craps table at Vegas, Bass is looking to leverage another unusual strategy to line his own pockets.
One of the processes created by the AIA was inter partes review(IPR). An IPR proceeding begins with a third party filing a petition, asking the Patent Trial and Appeal Board to review the validity of a patent. It was intended to help companies that were engaged in frivolous patent infringement suits (often with non-practicing entities or “patent trolls”) to knock out weak patents. But now, Bass is planning to turn these IPR proceedings into a weapon that would weaken smaller pharmaceutical companies and help him make money.
As part of his strategy, Bass has created an entity called the Coalition for Affordable Drugs (CAD), ostensibly to help drive down the cost of prescription drugs, but, in reality, to make money. Bass claims that pharma patents, which grant companies 20 years of exclusive rights to a drug, drive up costs by preventing competition from other companies that could make cheaper generic versions of the same drugs. The pharma companies, of course, would state that they need the patents and exclusivity to recoup the money invested in research and development of the drug.
But now, the CAD is acting as the lead petitioner in several IPR challenges, targeted at pharmaceutical companies that are less diversified. Bass plans to target 15 companies, though only seven IPR petitions have been filed so far, against such companies as Jazz Pharmaceuticals, an Irish company that derives two-thirds of its nearly $800 million in yearly revenue from one patented drug. Bass hopes to use these IPR petitions to knock out pharma patents while investing his money in competitors who would then be able to churn out generic drugs and potentially make some market headway.
“Companies with not many patents are scared,” says Arlene Chow, partner at Hogan Lovells. “This is shaking up certain types of companies that are smaller and less diversified. It will worry companies that are investing in these pharma companies that that are more vulnerable to hedge fund attacks by way of IPR.”
It seems that Bass and his team have found an interesting way to use these IPR proceedings that was not anticipated by the creators of the AIA, but it remains to be seen if this loophole will be closed. “Anyone can file an IPR, so the big question is if the U.S. Patent and Trademark Office or Congress will change the law to restrict that,” says Chow.
For now, Bass is using a method that was intended to be a tool used by competitors to fight each other’s patents and has made it a tool for making him money, all under the auspices of doing something noble for Americans. It’s a fascinating strategy—and one that rightfully worries some people—so it will be interesting to see how it plays out.