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http://vwvw.djreprints.com.
`
`http://vwwv.wsj.com/articles/hedge-fund-manager-kyle-bass-challenges-jazz-pharrnaceuticals-patent-1428417408
`
`BUSINESS
`
`New Hedge Fund Strategy: Dispute the
`Patent, Short the Stock
`
`Hayman Capital seeks to invalidate patents while betting on a drop in target's shares
`
`Kyle Bass, founder ofHayman Capital Management, made a name for himself betting on the housing market crisis last
`decade. PHOTO: BRENDAN MCDERMID/REUTERS
`
`By JOSEPH WALKER and ROB COPELAND
`
`Updated April 7, 2015 7:24 p.m. ET
`
`‘ well—knoWn hedge—fund manager is taking a novel approach to making money: filing
`
`and publicizing patent challenges against pharmaceutical companies While also betting
`
`against their shares.
`
`Kyle Bass, head of Hayman Capital Management LP—which made a fortune Wagering on
`
`the housing bust—is targeting patents that he says have little Value other than to drive
`
`up prescription drug prices. His new fund bets against companies Whose patents it
`
`u elieves are spurious, and invests in those that would profit if the patents are
`
`invalidated, said people familiar with the matter.
`
`VIRNETX EXHIBIT 2022
`Mangrove v. VirnetX
`Trial IPR2015-01046
`
`Page 1 of 4
`
`

`
`His latest challenge seeks to employ a relatively new and inexpensive petition process to
`
`invalidate a Jazz Pharmaceuticals PLC patent for Xyrem, a narcolepsy drug with sales
`
`of $779 million last year, two-thirds of Jazz’s 2014 revenues.
`
`Mr. Bass created the Coalition for Affordable Drugs, an organization that is the lead
`
`petitioner in several patent challenges filed with the U.S. Patent and Trademark Office.
`
`He says he plans to pursue the cases regardless of share price moves. “We will not
`
`settle,” he said in an interview.
`
`Jazz Pharmaceuticals, of Dublin, Ireland, didn’t respond to requests for comment on
`
`Tuesday.
`
`Mr. Bass previously challenged patents held by Acorda Therapeutics Inc., of Ardsley,
`
`N.Y., and Shire PLC, of Dublin. Acorda and Shire said they would defend the patents,
`
`and said the patents targeted represent a portion of the intellectual property protecting
`
`their drugs.
`
`Mr. Bass, 45 years old, insists his challenges will help reduce drug prices, which he says
`
`are kept artificially high because of patents. In the U.S., drugs generally enjoy a 20-year
`
`period of market exclusivity from the date of patent filing before generics can be sold at
`
`steep discounts.
`
`The pharmaceutical industry contends Mr. Bass is exploiting a process designed to aid
`
`patent holders in defending themselves, twisting it to provoke fear among his target’s
`
`investors, and then gain from the fallout that may result.
`
`“There’s nothing in this man’s history to suggest he has any interest in lowering health-
`
`care costs,” said James C. Greenwood, chief executive of the trade group Biotechnology
`
`Industry Organization.
`
`Mr. Bass’s strategy taps an administrative process known as Inter Partes Review, or IPR,
`
`that allows petitions to strike down patents to be heard by a patent office panel. The
`
`process was created by Congress in 2011 to help companies fight so-called patent trolls,
`
`nonoperating companies that extract cash settlements from companies they accuse of
`
`patent infringement. The panel is a cheaper and faster option than trials in federal
`
`courts.
`
`IPR challenges are evaluated by a panel of three administrative patent judges who use a
`
`broader set of criteria than the courts when deciding whether patents should be
`
`invalidated, making it much easier to strike down patents, experts said. Some 77% of
`
`Page 2 of 4
`
`

`
`patents evaluated through the IPR process have been invalidated or disclaimed by their
`
`owners, according to an analysis published last year in the University of Chicago Law
`
`Review.
`
`‘ corda Chief Executive Ron Cohen said the petition process was never intended to be
`
`used as Mr. Bass is employing it. Congress has inadvertently created a “mirror image
`
`problem of ‘reverse patent trolls”’ that use the system to invalidate operating
`
`companies’ patents, he said.
`
`Mr. Bass has teamed up with intellectual-property consultant Erich Spangenberg, who
`
`opponents call a patent troll because of his frequent patent suits. Mr. Spangenberg, 54
`
`years old, made his name and fortune by acquiring technology patents and using them
`
`to sue such firms as Apple Inc. and Exxon Mobil Corp. for infringement.
`
`He also has worked as an adviser to other patent holders, assembling dossiers on alleged
`
`infringement in exchange for collecting a percentage of the holders’ future winnings, a
`
`person familiar with the matter said.
`
`One of Mr. Spangenberg’s firms, nXn Partners LLC, is a paid consultant to Mr. Bass’s
`
`more than $2 billion Hayman Capital, according to filings with the patent office. Both
`
`men are named as “real parties of interest” in the petitions.
`
`Messrs. Bass and Spangenberg, both based in Dallas, met last year through mutual
`
`friends, according to people familiar with the matter. Mr. Spangenberg was looking for a
`
`ay to capitalize on what he perceived as the vulnerability of certain pharmaceutical
`
`patents through the IPR petition process, one of these people said. Two weeks later, the
`
`men agreed to work together.
`
`Under their arrangement, Mr. Spangenberg sizes up potential patent targets, using a
`
`predictive analytics software program he acquired several years ago, that helps
`
`determine the strength of certain patents.
`
`“A small minority of drug companies are abusing the patent system to sustain invalid
`
`patents,” Mr. Spangenberg said in a prepared statement.
`
`Months after their meeting, Mr. Bass was pitching wealthy individuals and institutions
`
`to invest in a dedicated fund that would bet against, or short, the shares of companies
`
`hose patents Mr. Bass believed to be specious, and wager on rivals that could benefit.
`
`In particular, Mr. Bass was interested in older patents which he believed to be more
`
`lnerable.
`
`Page 3 of 4
`
`

`
`The fund requires a minimum $1 million investment, and Mr. Bass’s firm will keep 20%
`
`of all profits earned, according to a person familiar with the matter. The trades also will
`
`be part of Hayman Capital’s main fund.
`
`Mr. Bass is no stranger to controversial gambles. He was one of the handful of hedge-
`
`fund managers to spot trouble in the subprime mortgage markets before the finance
`
`crisis, earning hundreds of millions of dollars in trading profit, investor documents
`
`show. Mr. Bass is willing to press this latest effort in patents for three years—longer
`
`even than his bet against subprime, a person familiar with his plans said.
`
`More recently, his firm has struggled. He predicted long-term insolvency for Japan
`
`amid demographic pressures—an outcome that hasn’t come to pass. And he forecast a
`
`dramatic recovery for the largest U.S. auto maker General Motors Co. , but its share
`
`price has lagged his targets. Last year, Hayman Capital’s main fund posted a small loss, a
`
`person familiar with the matter said.
`
`The patent office hasn’t yet decided whether it will review the Coalition for Affordable
`
`Drugs’ petitions, and it is unclear whether the challenges will succeed. But says Jacob S.
`
`Sherkow, an associate professor at New York Law School who studies pharmaceutical
`
`patents, “It’s hard to be more upbeat than a lot of CEOs are about the strength of their
`
`intellectual property.”
`
`If Mr. Bass is right about their reliance on weak patents, CEOs ought to “be very
`
`worried,” Mr. Sherkow adds.
`
`Write to Joseph Walker at j oseph.walker@wsj.com and Rob Copeland at
`
`rob.copeland@wsj.com
`
`Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved
`
`This copy is for your personal, non-commercial use only. Distribution and use of this material are govemed by our Subscriber Agreement and by
`copyright law. For non-personal use orto order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.
`
`Page 4 of 4
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`Page 4 of 4

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