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`http://www.wsj.com/articles/hedge-fund-manager-kyle-bass-challenges-jazz-pharmaceuticals-patent-1428417408
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`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 of Hayman 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
`
`A 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 believes
`are spurious, and invests in those that would profit if the patents are invalidated, said
`people familiar with the matter.
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`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.
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`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
`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.
`
`Acorda 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
`way 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.
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`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
`whose 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
`vulnerable.
`
`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 joseph.walker@wsj.com and Rob Copeland at
`rob.copeland@wsj.com
`
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