Hedge funds have found a new way to make money: challenge a pharma company’s patent on a specific drug and then make a killing as they short the stock and the share price goes weak in the knees.
But the long-term prognosis for this investing strategy is far from clear, as drug companies seek to close the regulatory opportunity they accuse hedge funds of abusing.
The gray area causing all this upset is a relatively new legal proceeding at the US Patent and Trade Office (US PTO) which allows individuals to challenge patent validity, known as inter partes review.
Drug companies point out that this new procedure has allowed parallel challenges of the same patent in federal district court and at the patent office. In the past, a hedge fund would not have had the legal standing to challenge patents through the courts but now the US PTO’s door has been opened for funds.
Since each proceeding can produce different outcomes, brand drug makers say they have effectively been subjected to “double jeopardy.” The pharma industry claims smaller biotech firms are at a special disadvantage because such challenges scare investors and venture capitalists. Hedge funds are misusing the process at the US PTO, the drug companies insist.
However, in a recent ruling involving Kyle Bass’s Hayman Capital Management and the drug company Celgene CELG -0.31%, the patent office’s trial board declined to sanction Hayman’s short-selling as Celgene had sought, noting that “it is legal, and regulated.” Profit motives underlie patents as well as patent challenges, the trial board noted.
Source: forbes.com
