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Why This Small Victory Against Short Sellers Might Be a Big Deal for Biotech Companies

A 2012 reform meant to block patent trolls has opened drug makers to attacks by hedge funds

Acorda Therapeutics, a small New York-based drug maker, just won a round in a rather obscure patent fight with hedge fund manager Kyle Bass. You haven't been following this? The case matters a great deal to the biotech industry, and the implications may stretch far beyond. This is a strange wrinkle in the effort to stop so-called patent trolls.

Back in 2012, Congress reformed intellectual property law to protect tech companies from patent holders that don't seek to make or sell anything, preferring to pursue a strategy of stockpiling patents and suing productive manufacturers for alleged violations. Often trolls seek monetary settlements—a form of perfectly legal extortion—in exchange for dropping patent challenges and returning to their troll lodge.

Egged on by Silicon Valley, lawmakers in Congress "fixed" the problem by creating a streamlined procedure by which tech companies could preemptively knock out questionable patents and thereby defuse the entire troll gambit. As so often happens, however, the 2012 reform had unintended consequences. Hedge funds began using the accelerated challenge procedure, known as inter partes review, to attack pharmaceutical patents while shorting manufacturers' stock—a way of betting that shares will decline.

Bass, who runs Hayman Capital Management, has filed more than two dozen challenges against patents related to painkillers, blood thinners, and a cancer treatment. His moves have sent shudders through the biotech industry. On Monday, however, the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office ruled for the first time on one of Bass's attacks. The three-judge panel said that Bass hadn't produced sufficient evidence to kill two Acorda Therapeutics patents related to the multiple sclerosis drug, Ampyra. Bass, who is acting in these cases via a group he controls called the Coalition for Affordable Drugs, can't appeal the setback.

The panel tailored its seven-page decision to the particulars of this case and didn't tip its hand as to whether the patent office might look favorably on similar attacks by hedge funds against patents held by other companies. Bass certainly seems undeterred. His affordable-drug coalition filed three fresh challenges on Monday against patents related to the Insys Therapeutics cancer-pain treatment Subsys.

As Susan Decker of Bloomberg News astutely noted, the next skirmish is expected to come in about a month, when the Patent Trial and Appeal Board is to decide whether to institute reviews of patents related to two Shire drugs: one for ulcerative colitis and the second for short bowel syndrome. 

The stakes for small biotech companies can be enormous. Acorda derives 90 percent of its revenue from Ampyra, which helps multiple sclerosis patients walk. An outside lawyer for the company, Gerald Flattmann of the Paul Hastings firm, said the patent office's decision "further validates the strength of the Acorda patent portfolio protecting Ampyra." Acorda's stock dropped in February after Bass filed each of his patent challenges. Today the company's shares are trading at $33, up about $4 from Monday's close.

In his unsuccessful petition, Bass argued that Acorda had simply combined widely known information about Ampyra's active ingredient with optimal dosage methodology to jack up the price of the drug. His lawyers at the firm Skiermont Puckett didn't immediately respond to an e-mail seeking comment.

Bass hasn't said explicitly how he plans to profit from his drug-patent challenges. That he plans to cash in, he says, is a "truthful irrelevancy."  

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