By Anna Rose Welch, Director, Cell & Gene Collaborative
It all began with Acorda Therapeutics. In February 2015, Hayman Capital Management hedge fund director Kyle Bass launched the first of what would become 16 challenges to pharmaceutical company patents. According to Bass, these actions have been launched as part of an overall strategy to bring drug prices down and eliminate “pay-for-delay” tactics within the industry. However, Bass also stands to benefit by short-selling the stocks of those companies he considers to be “the worst offenders in the patent world.” Rather than challenging these patents in the district court, Bass has turned to the Inter Partes Review (IPR) proceedings established in 2012 as part of the America Invents Act (AIA). This process promises a more efficient approach to resolving patent disputes surrounding chemical structure, formulations, methods of dosing or administration, or drug combinations. So far, seven companies have seen product patents challenged by Bass, including Acorda, Shire, Jazz Pharmaceuticals, Pharmacyclics (recently acquired by AbbVie), Biogen Idec, Celgene, and Horizon Pharma. I reached out to Morrison & Foerster’s Matthew Kreeger and Goodwin Procter’s Nicholas Mitrokostas to get more insight into the IPR process and how it stands to impact pharma’s patents in the future.
Pharma is no stranger to patent challenges. Why should Bass’s efforts be a concern for pharma in the long run?
|Matthew Kreeger, Morrison & Foerster
Matthew Kreeger: The Kyle Bass strategy is a fundamentally different type of challenge from what we’ve seen before. Unlike traditional cases, which must be filed by someone who has been accused of infringing a patent or threatened with an infringement case (known as “standing” to bring suit), the Bass IPR strategy involves using the IPR process to attempt to influence a company’s stock price. That’s obviously a concern to pharma companies.
For many of the drugs involved in Bass challenges so far, however, there are additional patents that appear to protect the drugs. Overall, his challenges haven’t appeared to have much of an impact on stock prices. As Daniel B. Ravicher, Esq. described in his article, “Are Patent Challenges Paying Off For Kyle Bass?”, the company stocks hit hardest by Bass’s IPR filings were those of Acorda Therapeutics. In fact, Horizon Pharma — the last company facing a challenge from Bass in May — saw its stock prices go up from the date the challenge was filed. Shire, Jazz Pharmaceuticals, and Celgene all saw increases as well.
What should pharma CEOs be taking away from Bass’s actions? What challenges do his actions/the IPRs present, and how should pharma be responding to these new challenges moving forward?
|Nicholas Mitrokostas, Goodwin Procter
Kreeger: Pharma should continue to focus on innovating and obtaining strong patents to protect its drugs. Pharma companies can support efforts to reform the IPR process to reduce or eliminate the effectiveness of Bass’s strategy, but ultimately they will still need to develop patents that they can defend against challenges.
Nicholas Mitrokostas: In a report from Goodwin Procter on pharmaceutical patents at the PTAB, we note that since February 10, 2015, Kyle Bass’s Coalition for Affordable Drugs has filed sixteen IPRs on nine U.S. patents, impacting at least nine pharmaceutical companies. The pharmaceutical industry has done a tremendous job of drawing attention to this issue nationally, from press coverage to potential reforms of IPR proceedings in Congress. The Patent Trials and Appeals Board (PTAB) also appears to have noticed. In one recent IPR, the PTAB has indicated that discovery might proceed on the patentee’s claim that the Coalition for Affordable Drugs is abusing the IPR process by its strategy and should be sanctioned. The PTAB has discretion on issues such as abuse of process and sanctions, and we may very well see a decision by the PTAB that will discourage Bass and groups like the Coalition for Affordable Drugs from engaging in these tactics.
Will Bass’s attempts (or IPRs in general) impact generic firms in their own challenging of patents/drug pricing?
Kreeger: If Bass succeeds in knocking out the patent covering a branded drug that would presumably open the door for a successful generic launch. It could make the generic process much easier, as the generic would not have to show that the patent was invalid or not infringed upon.
A stat I found stated that only 8 percent of IPRs are directed toward pharmaceutical patents. Why is this percentage so low? Are there any trends or new developments in the pharmaceutical industry that you expect will lead to an increase in the percentage of IPRs filed?
Nicholas Mitrokostas: Not all technological sectors have been as eager to use IPRs since they first became available in 2012. Of the approximately 3,000 IPRs filed since it became available, only about 6 percent (as of June 2015) were directed toward pharmaceutical patents. Some generic companies appear to have decided that IPR petitions are not a useful part of their overall strategy. Recently, however, we have been seeing an uptick in the use of IPRs in the pharmaceutical sector, as other companies may perceive value in a strategy that includes IPRs. More IPR petitions have been filed on pharmaceutical patents in the first six months of 2015 than during the entirety of 2014. I think a major part of that growth in the use of IPRs is due to the belief by some companies that IPRs can be part of the overall generic-side strategy for Hatch-Waxman litigations. The lower standard for proving invalidity in the IPR proceeding, the early disclosure of validity positions by the patentee, and the relatively abbreviated timeline for the proceeding is perceived by some companies to provide an advantage. So far, however, we have not seen this strategy result in speeding up a generic approval of any product.
How is an IPR different from a conventional patent trial?
Kreeger: There are many differences between an IPR and a patent trial in district court. Some key differences include (a) an IPR is decided by specialized patent judges, while a district court trial is generally before a jury; (b) an IPR is a “trial” that is largely on paper, with written statements from the witnesses, cross-examination by deposition, and a two-hour final hearing before three administrative patent judges; and (c) in an IPR the patent claims are given their “broadest reasonable construction,” which is generally broader than would be appropriate in district court; and (d) patents do not have a presumption of validity in an IPR, so an IPR challenger need only prove invalidity by a preponderance of the evidence.
Are there currently any limits to filing an IPR?
Kreeger: According to the statute, anyone can file an IPR, although there are certain time limits by which one must file after being served with a patent infringement complaint. Of course, the patent holders in the IPRs filed by Bass claim that the filing of the IPRs in those cases were an abuse of process. If the PTAB rules in their favor, there would be an additional limit on who can file.
What were the biggest problems with the existing process? Why was the IPR a more appealing option for patent holders?
Kreeger: Before the AIA was enacted, there were a few options for challenging a patent, all with significant limitations. You could sue in district court for a declaratory judgment that the patent was invalid. However, in order to have standing to bring such a case, you needed to show a clear threat that you might be sued for infringement, and that was not an easy standard to meet. Then you’d be in district court, faced with a generally slow and expensive route to a final decision.
You could also bring what was known as “inter partes reexamination,” which was a proceeding in the patent office that was replaced with IPR. Inter partes reexamination was very slow, sometimes taking four years or more, with no time limit for a final decision. The proceeding was before a patent examiner, similar to ex parte examination of patents, and patent owners very frequently were able to persuade the examiner to allow the patent to issue. In supporting the AIA, companies favored a more effective, streamlined way to challenge patents in the patent office.
How do you expect the IPR process will affect drug development moving forward?
Mitrokostas: There are a lot of strategic issues to consider in deciding whether and when to file an IPR. I think it is too early to tell whether IPRs are going to lead to more invalidation of patents. So while I think the post-grant procedures are starting to play a role in litigation or resolution strategy, I do not think they have started to affect drug development, and I am not sure if they will impact development as much as IP and regulatory strategies for protecting these new drugs.
I’ve seen references to the IPR as a “patent killer.” BIO’s deputy general counsel told Bloomberg that he doesn’t know if “killing” these patents in this process has anything to do with the quality of the patent. What are your thoughts here — does Hans Sauer’s opinion hold weight? Is patent quality part of the problem here?
Kreeger: The “patent killer” reputation has come from statistics so far showing 70 to 80 percent of challenged patent claims are ultimately found unpatentable by the Patent Office Board. Although the law is about three years old, we still have a relatively small sample of final decisions — less than 100. In my view, a lot of the early success for patent challengers has been a function of the fact that many of the first cases were filed against vulnerable patents. We have seen some shifts over the past year suggesting that patent holders have been faring a bit better more recently. While I haven’t seen any definitive statistics, those of us practicing in the life sciences area have seen several recent anecdotal cases where the patent owner has prevailed. For example, we represented Genentech in an IPR filed against one patent covering its anti-cancer drug Kadcyla. We persuaded the PTAB not to institute trial.
Mitrokostas: The adoption of IPRs and other changes made in the AIA were intended to improve overall patent quality. So I do think there are some patents, or claims of some patents, that will be “killed” in an IPR because they were of questionable validity when they were originally allowed. However, claims that are carefully and thoughtfully crafted are more likely to survive IPRs, even with the lower standard of proving invalidity. And if that result encourages applicants to seek better claims from the get-go, overall, patent quality will improve.
Have there been any recent proposals to amend the IPR process?
Kreeger: I’m aware of two legislative efforts to address this issue. First, U.S. Representative Bob Goodlatte’s proposed amendment to the Innovation Act of 2015 would preclude a party from initiating IPR unless it certifies that (1) it does not own a financial instrument designed to profit from a decrease in the patentee’s stock value; and (2) it has not demanded payment from the patentee in exchange for foregoing an IPR unless the party has been sued for patent infringement. These provisions would specifically preclude Bass’s strategy.
Second, the proposed “STRONG” (Support Technology and Research for Our Nation's Growth) Patents Act would restrict IPR petitioners to parties sued for infringement or who possess standing to bring a declaratory judgment action. This would prevent entities with no relation to a current or brewing patent dispute, such as Bass’s hedge funds.
Do you expect the challenges posed by Bass’s actions and IPRs will lead to any changes to how/what pharma is able to patent in the future?
Mitrokostas: The pharmaceutical industry has done a tremendous job of drawing attention to this issue nationally, from press coverage to potential reforms of IPR proceedings in Congress. But there are a number of stakeholders involved, including from other technological sectors, and that typically means that any change in the law will be incremental. The AIA took several years, with several rounds of negotiations, to emerge as a viable bill that could get congressional approval and become law. With respect to changes in what pharmaceutical companies are able to patent, I believe the strategy will continue to be to patent the invention and product in a number of different ways. However, I think that focused, clearer patent claims that cover a pharmaceutical product and its competitors without capturing prior art are becoming even more valuable as a result of the use of IPRs.