The New York Times, November 27, 2015. J. Kyle Bass made a fortune in the financial crisis when his hedge fund,Hayman Capital Management, bet big against subprime mortgages. Now Mr. Bass is wagering against pharmaceutical companies that he says exploit the patent system, keeping drug prices — and their profits — in the stratosphere.
He has a formidable colleague in the effort: Erich Spangenberg, a man who became reviled in Silicon Valley for bringing lawsuits against technology companies that he contended had infringed on a patent.
Through the Coalition for Affordable Drugs, a company they formed this year, Mr. Bass and Mr. Spangenberg identify pharmaceutical patents that they consider weak or abusive. Then they request that a unit of the United States Patent and Trademark Office review the legitimacy of the patents.
By mid-November, the firm had filed 33 requests for patent reviews, targeting 13 drugs from a dozen companies.
At the same time, on behalf of themselves and their investors, Mr. Bass and Mr. Spangenberg are short-sellers of shares in companies whose patents they consider vulnerable. They also buy stock in companies whose patents, they believe, reflect true innovation.
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.
The patent appeal board hasn’t given the complaints much credence. In a case brought by Celgene requesting sanctions against the coalition and its review requests, the board ruled against Celgene. It noted in its ruling that “profit is at the heart of nearly every patent” and nearly every patent review.
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.”
Mr. Spangenberg acknowledges that it is something of a paradox for him to be challenging patents instead of defending them as he did so aggressively — and successfully — at IP Navigation Group, a company he founded in 2003.
Two years ago, he said, he began delegating day-to-day management of IPNav to colleagues, focusing on nXn Partners, a company that uses big data to conduct predictive analysis for the government and corporations. The analytics developed by nXn can also predict patent validity, he said, adding that he now spends 80 percent of his time on coalition work.
One of the patents Mr. Bass and Mr. Spangenberg are challenging is forPropofol, an anesthetic marketed by Fresenius Kabi under the nameDiprivan. The other covers Suprenza, a weight-loss drug from Citius Pharmaceuticals.
Propofol, a 30-year-old therapy used in an estimated 80 percent of operations nationwide, is protected by a patent not on the drug itself but on the rubber stopper used in its container. Patent approval was extended in 2013 for 12 more years.
“A rubber stopper is the only thing standing between today’s high price for Propofol and its generic’s 90 percent discounted price,” Mr. Spangenberg said.
Fresenius dominates the sales of Diprivan in the United States, holding a 75 percent market share as of December 2014.
Geoffrey Fenton, a spokesman for Fresenius Kabi, said it had not seen the coalition’s submission, but said the company would respond. “Fresenius is one of the largest generic sterile injectable providers in the U.S.,” he said, “we understand the importance of drug availability and affordability.”
The Suprenza patent being challenged was granted in 2013 and extended protection on the drug into 2029. The patent was for an orally disintegrating tablet with a “speckled appearance.”
Extending the patent because of speckles consisting of “colored granules of a water-soluble sugar” is highly questionable, the coalition contends. Such speckles are not patentable because they are well known “to be useful to add to pharmaceutical compositions,” it argued in requesting a review. Thirty Suprenza tablets sell for about $120.
The company did not respond to a request for comment.
Companies try to extend patents on products shortly before they expire, when the door is about to open to generic makers. This practice, called “evergreening” or “product-hopping,” is among the forces keeping drug prices high, experts say.
“A drug company tries to hop over the generic that’s coming into the market by having a new drug with minor variations that does not offer much clinical benefit, but that extends the patent,” said Hagop M. Kantarjian, professor and chairman of the department of leukemia, division of cancer medicine, at the University of Texas MD Anderson Cancer Center. “They advertise the new drug heavily so it replaces most of the still patented, but old, drug on the market.”
Another tactic to prolong a patent’s life is known as pay-for-delay. This practice has come under scrutiny by the Federal Trade Commission and has been the subject of proposed legislation.
When a branded company’s drug approaches the expiration of its patent, generic manufacturers challenge the patent so they can start their own sales of the drug. But sometimes, after a challenge is made, the branded company pays a large monetary settlement to the generic maker if it agrees not to enter the market for a specified period. That keeps the drug’s price — and the branded-drug maker’s profits — aloft throughout the period.
Last year, the Federal Trade Commission identified 29 possible deals of this kind involving 21 branded drugs in 2013. Combined sales of these drugs were $4.3 billion in the United States.
“There are crazy things going on with prescription drugs costs, and pay-for-delay stands out as an enormous thorn,” Senator Klobuchar said in an interview. “The solution to a patent problem should not be doing something that is so anticompetitive.”
Mr. Bass said the coalition would not strike a settlement deal in any of its patent challenges.
So far, those challenges have a fairly good success rate: The coalition was batting .500 on its review requests before the two new patent challenges.
Of the 33 initial requests, the Patent Trial and Appeal Board accepted seven for review and rejected a review on the other seven. Once a petition has been accepted for a review, the proceedings, including an oral hearing, must conclude within 12 months.
The seven reviews granted to the coalition involve drugs from Celgene andShire Plc. Four will examine patents on Revlimid, a blood cancer drug; three others involve two patents on Gattex, a treatment for short bowel syndrome, and one on Lialda, a therapy for ulcerative colitis.
Mr. Bass and Mr. Spangenberg say they also hope their pursuit of reviews will bring scrutiny to the inner workings of the patent office, a government agency that is obscure but powerful.
“The U.S. Patent Office is providing drug companies with a government-backed monopoly,” Mr. Bass said. “It’s important to protect intellectual property that is new and original, but some drug companies are deliberately taking old and expired innovations and repricing them as novelties.”
I asked Scott E. Kamholz, a patent lawyer at Foley Hoag in Washington who is a former member of the Patent Trial and Appeal Board, about the coalition’s criticism.
The patent office “is working just about as well as it can,” Mr. Kamholz said. “The easy cases don’t go to litigation. We hear a lot about evergreening, but you don’t hear about the enormous iceberg of cases that the patent office is filtering out.”
Still, shedding light on patent missteps, especially given the high drug costs they enable, is a good thing. The efforts by Mr. Bass and Mr. Spangenberg to highlight problematic patents, whatever role they play in promoting their own investments, may also encourage others to make their own challenges.
“Zombie drugs — those unworthy of patent protection because they are not novel and truly innovative — are being artificially kept alive to the financial detriment of patients and taxpayers,” Mr. Spangenberg said. “This system is both broken and rigged.”