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Challenges from investment firms to biopharma patents spur the industry to action to protect its drug franchises
Recent activities by investment firms, in particular those of Kyle Bass, have biopharmaceutical companies crying foul and seeking relief from Congress. The actions generating angst among industry insiders are investment firms filing inter partes review (IPR) petitions seeking to invalidate biopharma patents. For a life sciences company that falls within an investment firm’s crosshairs, an IPR has the potential to wipe out a patent critical to a drug franchise’s revenue stream.
The America Invents Act (AIA) of 2011 created new post-grant review proceedings that allow a petitioner to ask the United States Patent & Trademark Office (USPTO) to reconsider whether it should have issued a patent. An IPR allows a petitioner to submit a petition along with evidence from experts to explain why earlier printed publications or patents disclose the invention or show that the claims encompass an obvious change. The rules governing IPR proceedings make it an attractive way to challenge patents. First, any entity can file an IPR petition-the patent owner need not have threatened the filer with infringement. Second, the USPTO will define the claims using a standard that will likely result in a broader construction than if a district court heard a challenge. Finally, the USPTO only requires a challenger to show by a preponderance of the evidence (“more likely than not”) that the prior art discloses the invention. This standard is lower than the district court standard, which requires clear and convincing evidence of invalidity. These rules have motivated many entities to challenge patents using an IPR.
Under these rules, petitioners have had success in having the USPTO cancel at least some claims in over 75% of the proceedings that reach final decision. Although the majority of IPR filings deal with patents in the high-tech industry, several biopharma patents have confronted IPR petitions. Generic drug companies seeking to market copycat products have submitted many of these petitions. But investment firms’ uses of IPR against biopharma patents have garnered the largest reaction.
The straw that broke the camel’s back?
The Coalition for Affordable Drugs and Hayman Capital Management, entities related to Kyle Bass, have filed several of these IPR proceedings. Kyle Bass asserts that he filed these challenges to prevent drug companies from extending patent protection and associated higher prices for products based upon questionable patents. But altruism may not be the sole reason for Mr. Bass’s filings. It is thought that the Bass entities have taken short positions in companies that rely upon the challenged patents to protect drug franchises. This investment strategy may pay dividends if the challenged patent protects a drug franchise that generates a majority of the revenue stream for a biopharma company. In fact, the first such filings by the Bass entities may have succeeded under this scenario. In February, the Bass entities filed challenges against two patents owned by Acorda Therapeutics covering its Amprya franchise. The first filing caused about a 10% drop in stock price, while the second caused about a 5% drop. Surely, those holding a short position on this stock welcomed the drops the filings appear to have precipitated, while Acorda and those holding a long position in the company were likely blindsided by these events.
The Bass entities have not limited their petitions to Acorda. They subsequently filed petitions against patents covering Shire’s Lialda and Gattex, Jazz Pharmaceuticals’ Xyrem, Pharmacyclics’ Imbruvica, Biogen’s Tecfidera, Celgene’s Revlimid, Pomalyst, and Thalomid, and Horizon Pharma’s Vimovo. Investors’ reactions to these filings appear mixed. Some of the challenged companies’ stocks rose while others fell around the time of the filings. For those that closed lower, the drops were not as pronounced and long-lasting as those experienced by Acorda. Thus, with the potential exception of an April 1 filings against Shire’s patents, those holding short positions in the challenged companies may have found it difficult to profit from the IPR filings.
Biopharma Goes to Washington
The filings by investment firms have caused many in the biopharma industry to seek the assistance of Congress to address what they perceive as a misuse of the post-grant proceedings created by the AIA. Recent testimony by Hans Sauer of the Biotechnology Industry Organization (BIO) evidences this view. In March, Sauer testified before the Senate Judiciary Committee about what he described as “misuse of the patent system” to support “investment schemes” by a “hedge fund.” According to Sauer, biotech companies are particularly vulnerable to these schemes because they “tend to be small, derive most of their revenues from one or two products on the market, and have a handful of very valuable patents protecting those products.”
Congress has taken heed of the industry’s complaint by proposing legislation that may address the concerns. The Protecting American Talent and Entrepreneurship Act (PATENT Act) started as a bill in the Senate to address concerns about “non-practicing entities” seeking to enforce their patents in federal district courts. The House of Representatives is considering the Innovation Act, which also seeks to raise the bar on “non-practicing entity” patent suits. Many companies in the high-tech field have championed such reform. As initially drafted, neither the PATENT Act nor the Innovation Act included provisions seeking to reform post-grant proceedings.
Recognizing that the PATENT Act appears to have sufficient support to pass Congress, members of the biopharma community have thrown their support behind it, but have highlighted the need to add provisions that level the playing field in post-grant proceedings. The industry has proposed revisions that seek to make it more difficult for a challenger to institute an IPR and ultimately prevail in showing a patent claim invalid. Examples of the proposed changes advocated by those in the industry can be gleaned from recent testimony provided to the U.S. Senate Committee on the Judiciary. Henry Hadad of Bristol-Myers Squibb succinctly put forth several proposals that minimize some of the risks that post-grant proceedings present to biopharma patents. These proposals include affording patent owners more opportunities to submit evidence, aligning the claim construction used by the USPTO with that applied by district courts, and applying a clear and convincing evidence standard to prove invalidity.
The Senate has responded to the pleas of the industry by amending the PATENT Act to include some of the provisions suggested. The amendments include allowing patentees additional opportunities to submit evidence before the USPTO decides whether to institute a proceeding, applying the same claim construction standard as a district court and allowing the USPTO to deny institution of the petition if it will not serve the interest of justice. Although not in the current version, there has been some discussion about modifying the PATENT Act to prevent the use of post-grant proceedings against patents involved in challenges under the Hatch-Waxman Act or Biologics Price Competition and Innovation Act. But the House version of patent reform has not adopted any changes to post-grant proceedings other than to craft rules that will prevent investment firms from initiating a challenge.
The use of IPR proceedings by investment firms has highlighted the threat that current post-grant proceedings present to biopharma companies. This threat flows from petitioners’ successes at invalidating claims through IPR proceedings as compared to the expected success in a district court challenge. The amendments to the PATENT Act proposed by many in the industry should more closely align the success rates seen in IPR proceedings with those in district courts, while still maintaining the low cost and quick resolution of patent disputes sought when Congress created post-grant review proceedings. Although the Senate has accepted many of the industry's proposals, the House has not. Hence, the industry will need to lobby members of the House to prevent the success in the Senate from dying on the floor of Congress. Further, the industry should continue to lobby members of Congress to seek a prohibition against using post-grant proceedings in generic and biosimilar challenges. This would insulate a drug franchise revenue stream from challenges in a petitioner-friendly forum.
Until the drug industry convinces Congress to modify the post-grant proceeding rules, it is vital for those in the industry to factor post-grant challenges into their business planning. These proceedings provide a competitor a lower hurdle to offering a competing product. Further, the competitor can bring a challenge at any time, increasing the need for a patent owner to conduct due diligence earlier in a product life cycle to ensure strong patent protection. When acquiring drug products, a company will need to consider whether a post-grant challenge has the potential to devalue the acquisition. Finally, a drugmaker will have to modify its thinking as to what patents may be vulnerable to a challenge. In the past, only those entities potentially subject to an infringement suit had a meaningful path to challenge a patent. Thus, a patent owner could evaluate the market to identify whether a potential competitor existed. That has changed with the introduction of IPR proceedings because any entity can bring a challenge. A biopharma patent owner can no longer simply ask if there is another company out there that wants to sell a competing drug. In considering that a larger cast of characters exists that may challenge a patent, a patent owner will have to conduct due diligence on additional patents or accept the possibility it may be drawn into a patent battle it never saw coming.
Brian W. Nolan is a partner at Mayer Brown. He can be reached at firstname.lastname@example.org.