Challenge the Patent and Short the Stock – Does it Really Work?

The Coalition for Affordable Drugs has been the subject of much controversy in recent months. The organization is backed by hedge fund billionaire Kyle Bass and Hayman Capital, who are using inter partes review filings (IPR) to challenge patents of public pharmaceutical companies. The ultimate goal for Bass and Hayman Capital presumably being to profit from the drop in share price caused by the IPR filings and subsequent rulings by the PTAB. However, upon closer analysis, it is not immediately clear if share price fluctuations are always a direct result of Bass and Hayman Capital’s IPR activities.

Envision IP took a detailed look at Bass and Hayman Capital’s perceived results over this past year. Notably, the Coalition for Affordable Drugs has filed IPR petitions against Biogen Inc., Jazz Pharmaceuticals, Shire plc, Celgene Corporation, and Acorda Therapeutics, among others. Of the petitions filed against these companies, only one petition, IPR2015-00988 against Shire’s US 6,773,720 has been instituted. The remaining petitions have been denied, or are still pending.

Regarding Biogen, the Coalition has filed three petitions against US 8,399,514 (IPR2015-01136 and IPR2015-01993) and US 8,759,393 (IPR 2015-01086). Institution of IPR2015-01136 was denied on September 2, 2015, with the remaining two petitions still pending.

Looking at the share prices surrounding the days, weeks, and month after each of these filings, Biogen’s stock reacted differently to each of the initial filings. Upon filing IPR2015-00136, Biogen’s stock actually gained 3.29% the next day, 6.55% within one week, and 5.19% over the following month. Conversely, with the filing of IPR2015-01086, Biogen’s stock did not move significantly the following day, but experienced an 8.66% drop over the following week, and a 5.11% drop over the following month. Only IPR2015-01993 appears to have immediately impacted the company’s stock upon the petition filing, with a 2.30% drop the next day.

IPR2015-01086 was the first to be filed on April 22, 2015. At that time, Biogen’s stock closed at 423.57. Today, the company’s stock is trading around 267, representing an almost 36% drop in share price since the first patent challenge launched by the Coalition. However, a large portion of this share drop may be attributed to Biogen’s disappointing Q2 earnings miss and reduced outlook in July, which resulted in a 20% drop in the stock during that month. Interesting to note that when IPR2015-01136 was denied on September 2, 2015, Biogen’s stock actually gained 3.12% the next day.

Biogen_IPR_Stock_Change_EnvisionIP

Regarding Jazz Pharmaceuticals, IPR2015-0108 against US 7,895,059 was filed on April 6, 2015, and the petition was recently denied on October 15, 2015. There was a subtle drop in the share price the day following the filing, and the stock subsequently rose over the next week and month. Upon denial of the petition, the stock gained 3.18% the next day.

The company’s stock has fallen approximately 26% since the first IPR petition was filed on April 6, 2015 however, with significant declines in September. Based on analyst commentary, it is not clear what caused the sudden price drop – possible selling in anticipation of a potentially unfavorable PTAB decision, or simply just a reaction to general market turmoil in the healthcare and biotechnology sectors in recent months?

Jazz_IPR_Stock_Change_EnvisionIP

The Coalition has filed three petitions against Shire plc’s US 7,056,866 (IPR2015-00990 and IPR2015-01093) and US 6,773,720 (IPR2015-00988). As mentioned above, the petition for IPR2015-00988 was instituted on October 7, 2015, while the other two petitions are still pending.

Upon filing of both IPR2015-00990 and IPR2015-00988 on April 1, 2015, Shire’s stock plummeted over 5% the following day. However, the stock rebounded in the following week, and ended positive 1.93% over the next month after the filings. The stock gained 2.2% following the filing of IPR2015-01093, with a slight decline of 1.85% during the following week, and ended up the following month up over 4%.

While we saw relatively significant rallies in share price when IPR petitions were denied for Biogen and Jazz, as discussed above, when IPR2015-00988 against Shire’s 720 patent was instituted, the stock slipped just 0.50% the following day.

Since the first IPR filing on April 1, 2015, Shire’s stock price has approximately 12%. However, the company saw a decline of >20% in August, possibly due to its unsolicited $30B bid for Baxalta.

Shire_IPR_Stock_Change_EnvisionIP

Regarding Celgene Corporation, the Coalition has filed two petitions against US 6,926,907 (IPR2015-01241) and US 6,045,501 (IPR2015-01092), which are still pending. Upon filing each of these petitions, Celgene’s stock price was little changed the following day. However, within a week after IPR2015-01092 was filed, the stock price had fallen 6.47%. Within a month after each filing, the stock price showed gains. Since the first IPR filing on April 23, 2015, Celgene’s stock has actually increased by 1.10%.

Celgene_IPR_Stock_Change_EnvisionIP

Acorda Therapeutics has been the target of four IPRs by the Coalition against two patents; US 8,663,865 (IPR2015-00720 and IPR2015-01857) and US 8,007,826 (IPR2015-00817 and IPR2015-01853). The campaign against Acorda may have been the most lucrative to Bass and Hayman Capital. Upon filing three of the IPR petitions, Acorda’s stock price fell the following day, with a 7.57% decline after IPR2015-00720 was filed on February 10, 2015. The stock continued to fall after this particular filing, ending the following month down 11.23%

Similarly, Acorda’s stock fell 4.84% after IPR2015-00817 was filed on February 27, 2015.

IPR2015-000720 and IPR2015-00817 filed in February 2015 were the first IPR petitions filed by the Coalition against any of the companies mentioned here. Judging by the steep immediate declines in Acorda’s share price for these two filings, Bass’ strategy may have worked well to induce share price declines by capitalizing on the media and financial industry’s fear of the unknown – leveraging the patent office to manipulate share price by attempting to invalidate key company patents.

Acorda_IPR_Stock_Change_EnvisionIP

The Coalition’s filings in subsequent months against Acorda, and the companies detailed above, did not generally show knee-jerk share declines in the following days. This may indicate that analysts and traders likely did not perceive the IPR filings as serious threats to these companies, as they initially might have with the first two Acorda petitions.

Upon denial of IPR2015-000720 and IPR2015-00817 on August 25, 2015, Acorda’s share price jumped 4.92% the following day. However, on September 16, 2015, Ron Cohen, Acorda’s CEO appeared on CNBC where he discussed the Bass patent challenges. The company’s stock subsequently entered a downward spiral for the next two weeks, falling from 31.99 to 25.78 on September 29, 2015.  The company’s stock is down approximately 29% since the first IPR against it was filed by Bass and Hayman Capital.

Acorda_Chart_EnvisionIP

In summary, it appears that generally many of the companies targeted by the Coalition have suffered significant losses over the year, and in the months following the filing of IPR petitions against them. However, many of the stock losses cannot be directly attributed to Bass’ patent attacks. For example, Biogen suffered a massive 20% decline after weak Q2 earnings and guidance, and Shire has been in an ongoing hostile takeover bid for Baxalta which does has lost steam in recent weeks, seemingly resulting in a drop in investor confidence. Furthermore, Celgene’s stock is up overall since the Coalition first filed an IPR against the company.

In addition, it appears that aside from the early Acorda IPR petition filings, the mere filing of the Coaltion petitions have done little to force downward pressure on the shares of these companies. Conversely, the denial of petitions against Biogen and Jazz resulted in relatively modest gains the following day. However, the institution of a petition against Shire hardly moved the stock, with only a 0.50% decline the next day.

We found interesting that Acorda’s stock went into a free fall after the company’s CEO appeared on CNBC to discuss the patent challenges from Bass and Hayman Capital. By drawing media attention to the matter and sparking investor worries, the IPR petitions may have indirectly resulted in stock declines for Acorda.

Bass and Hayman Capital likely have had success with their campaign, especially with Acorda and Shire whose stock prices experienced significant declines in the days following some of the IPR petition filings.  In an ideal scenario for Bass and Hayman Capital, they could have realized significant gains if their shorting strategy was timed to capture these share price drops.  However, the strategy at this point does not seem foolproof. Until the PTAB makes a determination in the Shire IPR that was recently instituted, it will be difficult to know if the costs involved with filing such IPR petitions and presumably shorting stocks on leverage is a viable and profitable strategy going forward.

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