fortune.com
`
`http://fortune.com/2015/09/30/drug-prices-stocks-kyle-bass/
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`Why drug price controversy is great news for this hedge fund
`manager
`
`By Jen
`Wieczner
`
`September 30, 2015, 12:07 PM
`EST
`
`As drug stock prices tumble, one hedge fund manager’s loss is another hedge fund
`manager’s gain.
`
`Before there was Martin Shkreli, the hedge fund short-seller turned biotech CEO who last week set off a political
`firestorm with a 5,000% drug price increase, there was Kyle Bass. Also a hedge fund manager, and best known for
`successfully shorting subprime mortgages before the housing market collapsed, Bass has effectively been on the
`other side of Shkreli’s bet, investing big money in an apparent attempt to reduce drug prices charged by certain
`companies. And with pharmaceutical stock prices tumbling in recent weeks, Bass’s side may be starting to pay off.
`
`Under an organization he formed called the Coalition for Affordable Drugs, Bass and his firm Hayman Capital
`Management (with $2 billion in assets under management) have lately filed dozens of challenges to drug patents
`held by a number of biopharmaceutical companies, all the while shorting those drugmakers’ stocks. Bass has insisted
`that the investments aren’t just about making money, but about invalidating patents that keep drug prices “sky high.”
`In April, he told a Congressional committee that he intends to “police the abusive patent tactics used by the worst
`offending drug companies” that are “harming Americans suffering from illnesses.”
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`Since February, Bass’s Coalition for Affordable Drugs has petitioned against patents owned by Celgene CELG
`3.66% , Biogen BIIB -0.98% , Acorda Therapeutics ACOR 1.46% , Jazz Pharmaceuticals JAZZ 4.19% , NPS
`Pharmaceuticals (acquired by Shire), Anacor Pharmaceuticals ANAC 5.08% and others.
`
`Until recently, Bass’s biotech shorts didn’t seem to be playing out so well; though the stocks’ prices often dipped on
`the news of his challenges, they quickly recovered—especially after the first of his petitions were denied by the U.S.
`Patent and Trademark Office over the last few weeks.
`
`Bass’s luck, however, took a turn for the better the other day, after outrage over Turing Pharmaceutical CEO Shkreli’s
`price move took over the headlines. The increase riled up politicians from Hillary Clinton to Donald Trump, who
`strongly denounced the move, spooking investors that greater drug price regulation was coming. Biotech stocks fell
`into a bear market last week, with the Nasdaq Biotechnology Index now down more than 24% from its July peak.
`
` A
`
` spokesperson for Hayman Capital did not respond to requests for comment, and it wasn’t possible to determine
`precisely how Bass’s portfolio has performed recently. But stocks in Bass’s short book have clearly suffered,
`presumably to the hedge fund manager’s gain (even if his patent challenges didn’t precipitate their downfall). The
`biggest contributors to the biotech index’s decline are Celgene and Biogen, which have fallen 20% and 29%,
`respectively over the same bearish period. Jazz shares have fallen nearly 28%, while shares of Acorda, Anacor and
`Shire have each declined at least 20%. Bass also scored another victory this week when patent regulators ruled that
`his strategy of challenging drug patents for his own monetary gain was itself valid, rejecting a challenge from
`Celgene. “Profit is at the heart of nearly every patent,” the officials said in their decision.
`
`Meanwhile, according to his firm’s latest holdings disclosure, Bass has long positions in certain other drug
`companies, with his largest stakes in Perrigo PRGO -0.20% and Mylan MYL 2.27% , which both make generic,
`cheaper versions of branded drugs. He also owns smaller stakes in Pfizer [fortune stock symbol=”PFE”], Regeneron
`REGN 2.73% , Vertex Pharmaceuticals VRTX 1.11% and Valeant Pharmaceuticals VRX 0.37% . As Bass explained
`to The Wall Street Journal, “We invest in companies that we think have strong intellectual property and we invest
`against companies we think have weak intellectual property.”
`
`Still, even Perrigo and Mylan—unlikely targets of pharma price regulation, as their generics are generally credited
`with keeping drug prices lower—have not been immune to the biopharma selloff. Perrigo shares have fallen more
`than 16% since the stock showed up in Bass’s portfolio at the end of June, while Mylan’s shares are down 41%.
`Those declines, however, have more to do with Mylan’s involvement in hostile takeover battles, including its ongoing
`pursuit of Perrigo.
`
`Ironically, some of Bass’s bullish biopharma picks have also been implicated in the fallout over high drug prices.
`Valeant’s shares fell 16.5% on Monday after lawmakers pressed for answers on why it has raised the price of drugs,
`and the stock is down 26% over the last quarter since Bass has owned it.
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