Bass's 'Short Activist' Pharma Strategy Notches Win with Anacor Review

Feb 25 2016 | 10:42pm ET

The U.S. Patent and Trademark office has ruled two patent challenges made by hedge fund manager and self-styled “short activist” Kyle Bass against Anacor Pharmaceuticals can proceed. 

The ruling, made by the PTO’s Patent Trial and Appeal Board, means the board believes the petitions filed by Bass’s Coalition for Affordable Drugs presented sufficient evidence to warrant an inter partes review of the two patents, which are for Anacor’s toenail fungus drug Kerydin. 

Bass argued in the petitions that the patents should be considered invalid because they were obvious when granted and thus not deserving of protection under intellectual property laws. “We conclude that petitioner has established a reasonable likelihood of prevailing on its assertions,” begins the board’s ruling. 

Bass, who runs $2 billion hedge fund Hayman Capital Management, embarked on a novel and ambitious strategy last year to challenge the validity and legitimacy of certain patents granted to pharmaceutical firms. 

In these challenges, Bass reportedly chooses companies for whom a particular drug is a predominant portion of annual sales and which relies on patents based on previously known technology and/or minor modifications to such things as dosage, packaging and tangential activities. 

Bass has stated he believes abuse of intellectual property protections is a contributing factor to sky-high drug costs in the United States. He allegedly shorts the stock of the company in question while challenging the patent, hoping to cash in on a cratering price should the IP protections be invalidated. 

Bass has filed 37 patent review requests under a relatively new mechanism for third-party challenges of patents initially designed to make patent operations smoother and faster. The U.S. PTO has refused a large portion of these petitions, including on medicines by Acorda, Shire and Biogen, although it has allowed several to proceed and squashed a claim by several targeted firms (and the drug industry in general) to declare that the existence of an economic motive for challenging a patent claim raises abuse of process issues.

For his part, Bass has described the existence of a financial interest in the revocation of a particular company’s unwarranted patent protection a “truthful irrelevancy.” Earlier this week, the Financial Times reported Bass has returned much of the $700 million he raised for the short patent strategy last year as pharmaceutical stock valuations have come down amid the market’s turbulence and as legal challenges to his approach mount. 

Nonetheless, the acceptance of his IPR petition for the Anacor patents is a win for the strategy. News of the PTO ruling was included in a regulatory filing made by Anacor earlier this week in which the company estimated that the PTAB would issue its final ruling on the matter within a year of commencing the review, and that the “the company's business, financial condition, results of operation and cash flows could be materially adversely affected" should the review result in a patent reversal.

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