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`http://vwwv.wsj.com/articles/hedge-fund-manager-kyle-bass-challenges-jazz-pharrnaceuticals-patent-1428417408
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`BUSINESS
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`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
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`‘ well—knoWn hedge—fund manager is taking a novel approach to making money: filing
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`and publicizing patent challenges against pharmaceutical companies While also betting
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`against their shares.
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`Kyle Bass, head of Hayman Capital Management LP—which made a fortune Wagering on
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`the housing bust—is targeting patents that he says have little Value other than to drive
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`up prescription drug prices. His new fund bets against companies Whose patents it
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`u elieves are spurious, and invests in those that would profit if the patents are
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`invalidated, said people familiar with the matter.
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`VIRNETX EXHIBIT 2022
`Mangrove v. VirnetX
`Trial IPR2015-01046
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`Page 1 of 4
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`His latest challenge seeks to employ a relatively new and inexpensive petition process to
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`invalidate a Jazz Pharmaceuticals PLC patent for Xyrem, a narcolepsy drug with sales
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`of $779 million last year, two-thirds of Jazz’s 2014 revenues.
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`Mr. Bass created the Coalition for Affordable Drugs, an organization that is the lead
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`petitioner in several patent challenges filed with the U.S. Patent and Trademark Office.
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`He says he plans to pursue the cases regardless of share price moves. “We will not
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`settle,” he said in an interview.
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`Jazz Pharmaceuticals, of Dublin, Ireland, didn’t respond to requests for comment on
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`Tuesday.
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`Mr. Bass previously challenged patents held by Acorda Therapeutics Inc., of Ardsley,
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`N.Y., and Shire PLC, of Dublin. Acorda and Shire said they would defend the patents,
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`and said the patents targeted represent a portion of the intellectual property protecting
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`their drugs.
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`Mr. Bass, 45 years old, insists his challenges will help reduce drug prices, which he says
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`are kept artificially high because of patents. In the U.S., drugs generally enjoy a 20-year
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`period of market exclusivity from the date of patent filing before generics can be sold at
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`steep discounts.
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`The pharmaceutical industry contends Mr. Bass is exploiting a process designed to aid
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`patent holders in defending themselves, twisting it to provoke fear among his target’s
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`investors, and then gain from the fallout that may result.
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`“There’s nothing in this man’s history to suggest he has any interest in lowering health-
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`care costs,” said James C. Greenwood, chief executive of the trade group Biotechnology
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`Industry Organization.
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`Mr. Bass’s strategy taps an administrative process known as Inter Partes Review, or IPR,
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`that allows petitions to strike down patents to be heard by a patent office panel. The
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`process was created by Congress in 2011 to help companies fight so-called patent trolls,
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`nonoperating companies that extract cash settlements from companies they accuse of
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`patent infringement. The panel is a cheaper and faster option than trials in federal
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`courts.
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`IPR challenges are evaluated by a panel of three administrative patent judges who use a
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`broader set of criteria than the courts when deciding whether patents should be
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`invalidated, making it much easier to strike down patents, experts said. Some 77% of
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`Page 2 of 4
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`patents evaluated through the IPR process have been invalidated or disclaimed by their
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`owners, according to an analysis published last year in the University of Chicago Law
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`Review.
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`‘ corda Chief Executive Ron Cohen said the petition process was never intended to be
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`used as Mr. Bass is employing it. Congress has inadvertently created a “mirror image
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`problem of ‘reverse patent trolls”’ that use the system to invalidate operating
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`companies’ patents, he said.
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`Mr. Bass has teamed up with intellectual-property consultant Erich Spangenberg, who
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`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
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`to sue such firms as Apple Inc. and Exxon Mobil Corp. for infringement.
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`He also has worked as an adviser to other patent holders, assembling dossiers on alleged
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`infringement in exchange for collecting a percentage of the holders’ future winnings, a
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`person familiar with the matter said.
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`One of Mr. Spangenberg’s firms, nXn Partners LLC, is a paid consultant to Mr. Bass’s
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`more than $2 billion Hayman Capital, according to filings with the patent office. Both
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`men are named as “real parties of interest” in the petitions.
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`Messrs. Bass and Spangenberg, both based in Dallas, met last year through mutual
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`friends, according to people familiar with the matter. Mr. Spangenberg was looking for a
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`ay to capitalize on what he perceived as the vulnerability of certain pharmaceutical
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`patents through the IPR petition process, one of these people said. Two weeks later, the
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`men agreed to work together.
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`Under their arrangement, Mr. Spangenberg sizes up potential patent targets, using a
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`predictive analytics software program he acquired several years ago, that helps
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`determine the strength of certain patents.
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`“A small minority of drug companies are abusing the patent system to sustain invalid
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`patents,” Mr. Spangenberg said in a prepared statement.
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`Months after their meeting, Mr. Bass was pitching wealthy individuals and institutions
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`to invest in a dedicated fund that would bet against, or short, the shares of companies
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`hose patents Mr. Bass believed to be specious, and wager on rivals that could benefit.
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`In particular, Mr. Bass was interested in older patents which he believed to be more
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`lnerable.
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`Page 3 of 4
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`The fund requires a minimum $1 million investment, and Mr. Bass’s firm will keep 20%
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`of all profits earned, according to a person familiar with the matter. The trades also will
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`be part of Hayman Capital’s main fund.
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`Mr. Bass is no stranger to controversial gambles. He was one of the handful of hedge-
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`fund managers to spot trouble in the subprime mortgage markets before the finance
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`crisis, earning hundreds of millions of dollars in trading profit, investor documents
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`show. Mr. Bass is willing to press this latest effort in patents for three years—longer
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`even than his bet against subprime, a person familiar with his plans said.
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`More recently, his firm has struggled. He predicted long-term insolvency for Japan
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`amid demographic pressures—an outcome that hasn’t come to pass. And he forecast a
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`dramatic recovery for the largest U.S. auto maker General Motors Co. , but its share
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`price has lagged his targets. Last year, Hayman Capital’s main fund posted a small loss, a
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`person familiar with the matter said.
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`The patent office hasn’t yet decided whether it will review the Coalition for Affordable
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`Drugs’ petitions, and it is unclear whether the challenges will succeed. But says Jacob S.
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`Sherkow, an associate professor at New York Law School who studies pharmaceutical
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`patents, “It’s hard to be more upbeat than a lot of CEOs are about the strength of their
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`intellectual property.”
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`If Mr. Bass is right about their reliance on weak patents, CEOs ought to “be very
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`worried,” Mr. Sherkow adds.
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`Write to Joseph Walker at j oseph.walker@wsj.com and Rob Copeland at
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`rob.copeland@wsj.com
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