Patent investors looking for risk uncorrelated to the equity markets may want to consider a new trading strategy focused on disputes over biologic and biosimilar patents developed by the partners of a high-end boutique IP law firm, its investment consulting affiliate and an affiliated hedge fund.
Gaston Kroub, Zachary Silbersher and Sergey Kolmykov are former Locke Lord attorneys who set up Kroub, Silbersher and Kolmykov and the affiliated Markman Advisors in New York in December 2013. Markman Advisors provides a subscription service to institutional investors, family offices and individual investors for consulting on pending patent litigations affecting public companies.
The firm has written research on life-sciences stocks including (CELG, CBST, AUXL, DEPO, ACT, JAZZ, ENZ, TEVA, MNTA, MYGN), high-tech (PANW, CRDS, CALL, OTIV, GOOG, AAPL, ANET, CSCO) and on patent-monetization companies (VRNG, VHC, PRKR, FNJN, WDDD, MARA, SITO, SPEX, UPIP, PPRO), among others.
It also provides ongoing strategic advice and guidance to investors interested in implementing trading strategies based on patent litigation event-driven situations. The firm also works on behalf of inventors to monetize existing patent portfolios, including providing patent brokering, litigation analysis, and investment procuring services.
The law firm also represents patent owners and defendants in enforcement actions. The legal work doesn’t involve biologics or biosimilars or Hatch-Waxman Act patent disputes. The Hatch-Waxman Act provided an abbreviated approval process for new drugs and provided a mechanism for litigating patent infringement disputes in the federal district courts.
In addition, Markman Advisors is affiliated with a Houston-based hedge fund firm called Perdix Capital Management, which is run by Brent Reynolds. Markman Advisors has a small equity position in Perdix, which was built through consulting work done for Perdix. Reynolds started Perdix in October 2014, after having been director of IP strategy at Ocean Tomo from Sept. 2011 to May 2014. Perdix currently is in capital raising mode for a fund to invest in patent-related, event driven sectors such as biologics and biosimilars. It currently has a few million dollars in assets under management.
“Last year, we decided to work together. I do the trading and they provide consulting work. We collaborate on trying to evaluate the outcome of event-driven patent-related disputes. They’re very knowledgable patent attorneys who understand how patent litigation is likely to go.” Silbersher said the development of Markman Advisors’ trading strategy based on patent disputes over biologics and biosimilars grew out of the realization that investing in publicly traded patent licensing companies no longer offered the returns it once did prior to the America Invents Act of 2011.
The AIA created the inter partes review (IPR) and covered business method (CBM) review processes to allow companies to challenge weak patents before the Patent Trial and Appeal Board. Patent licensing companies have struggled ever since to bring in licensing revenue as defendants chose to litigate and avail themselves of IPRs or CBMs rather than settle.
“The NPE space is dead,” Silbersher said. Investing in patent related disputes over biologics and biosimilars “is the next big thing.” A biologic is a medicinal product such as a vaccine, blood or blood component, allergenic, somatic cell, gene therapy, tissue, recombinant therapeutic protein or living cell used to treat a disease, invented, patented and manufactured by a pharmaceutical company. A biosimilar is an almost identical copy of a biologic product invented, patented and manufactured by a rival company.
In 2010, Congress enacted the Biologics Price Competition and Innovations Act (BPCIA), which similar to the Hatch-Waxman Act provided an abbreviated approval process for biosimilar versions of biologics drugs. Under the BPCIA, after a biosimilar application is filed, a biologic innovator can bring an enforcement action against the biosimilar applicant. The enforcement action takes place in a district court under the BPCIA.
Although the BPCIA was enacted more than five years ago, it wasn’t until 2015 that the first wave of enforcement actions under the BPCIA were filed. To date, few such such applications have been filed and few enforcement actions triggered, though Markman Advisors says “as more biosimilar applications are filed, more patent cases are likely to be filed.”
“BPCIA cases are likely to yield increased trading opportunities over the traditional sectors marking an intersection between patent cases and the market, including Hatch-Waxman cases,” Markman Advisors said in its report “The Rise of Biologics and Biosimilars.” According to Silbersher, the stakes for biologics innovators may be even larger than for small-molecule developers. “Biologics are high-priced and high-revenue drugs, which means they are more likely to be material to companies selling biologics,” he said.
Moreover, because the revenue at stake is so large, the outcome of the BPCIA cases will likely impact both sides of the dispute, namely, the innovator and the biosimilar applicant. Furthermore, the companies with the financial and technical wherewithal to participate in the biologics or biosimilar market are typically large-cap, deeply liquid companies (e.g., Amgen, AbbVie, Sandoz, Johnson & Johnson (Janssen), Hospira, Apotex, Regeneron.)
Among the BPCIA cases Markman Advisors is following are the biologic Humira manufactured and sold by AbbVie (ABBV). AbbVie rival Amgen (AMGN) filed a biosimilar application with the FDA in November 2015, which is likely to trigger an enforcement action under the BPCIA. The firm said it expects the case to be filed by the third quarter of 2016.
Similarly, Janssen, a unit of Johnson & Johnson, filed an enforcement action patent suit against Celltrion (CONIF) and Hospice (PFE) over a biosimilar of Remicade in March 2015. While Janssen originally asserted six patents against Celltrion, Markman Advisor said it views only one patent to be material to the outcome. Celltrion recently filed a motion for summary judgment to invalidate that patent, and the outcome of that motion in the next several months will likely be material to both companies.
Amgen, which gets about $5 billion, or a quarter of its annual revenue from Enbrel, filed an enforcement action under the BPCIA in March against Sandoz’s (NVS) proposed biosimilar. Amgen is asserting numerous patents, including two that don’t expire until 2013. Amgen also is involved in enforcement actions against proposed biosimilars of its Neupogen, Neulasta and Epogen products.
“Our clients, who include Brent, actively ask us about these cases,” Silbersher said. “They’re very interested in trading.” Silbersher said that while “trading is not in our wheelhouse,” Markman Advisors’ client typically are trading options. “If there’s an event [such as a BPCIA patent litigation or an IPR] they’re going to build a position. They may go long or short and then hedge their bets on the other direction.”
The new trading strategy has already attracted the attention of many who follow the patent investing market including IP Navigation Group founder and owner Erich Spangenberg. Spangenberg and billionaire J. Kyle Bass, who runs Hayman Capital Management, have focused their trading strategy on identifying weak Orange Book small molecule patents held by major pharmaceutical companies that may be invalidated under the IPR process.
They have won institution of 11 IPR petitions so far and had 11 denied. Another 12 or so are pending. Their 50% institution rate is lower than the 74% average for IPRs across all industries. Their strategy also includes the shorting of pharmaceutical companies whose patents they believe are invalid. While the strategy had some early successes in knocking down share prices of some of the companies they targeted, more recently the effects have dissipated.
Indeed, Bass announced earlier this year he was largely closing Hayman Capital’s patent fund, giving back about $620 million of a $700 million fund to investors. “I would put [Markman Advisors] in the top tier of analysts not because they are always right, but because their understanding and analysis reflect a deep understanding of IP related issues,” Spangenberg said. “Biologics are no different than small molecule,” Spangenberg said. “Some of the patents are likely invalid.”
Markman Advisors has “identified an area where there will be significant patent litigation related to publicly-traded companies, which means they’ve identified an area where there will be volatility and, by proxy, event-driven investing opportunities,” said Mark Gober, a director at 3LP Advisors in Silicon Valley. “They’re focusing on a new domain, but the fundamental investment principles don’t seem very different from other IP licensing/litigation-based investing. This simply means there will be more opportunities for investors to consider.”
Some patent market observers are skeptical that a trading strategy based on the filing of IPRs against biologics patents will be any more effective than Bass and Spangenberg’s filing of IPRs against small molecule patents. “The IPR approach will continue to be mixed,” said Brian Lathrop, a patent attorney with the Law Offices of Brian K. Lathrop in Falls Church, Virginia. Lathrop is an expert on biologics patents who has represented many biologics innovators over the years. He previously was a patent attorney with Drinker Biddle & Reath LLP from 2007 to 2014 and at Merchant & Gould P.C. from 2005 and 2006. He also has worked as a patent examiner at the U.S. Patent and Trademark Office.
The post-grant review (PGR) process, which took effect on September 16, 2012, and generally applies to patents issuing from applications subject to first-inventor-to-file provisions of the AIA, may offer a better better chance for success, he said. “In an IPR you can only challenge a patent based on the prior art,” Lathrop said. “In a PGR, you can also challenge on grounds related to the adequacy of the disclosures of the invention.”
In the patent application process, the point is to provide enough detail to allow a skilled artisan to make and use the invention. Section 112 of the Patent Act requires an adequate written description of the invention and an enablement requirement. “If you have a broad claim you have to support it with a very detailed disclosure. What it comes down to is that biologics are very unpredictable.”
The unpredictability comes from the added complication process of trying to get approval from the Food and Drug Administration. To get FDA approvals, drug companies often must reformulate a drug to improve its safety and efficacy. With biologics, however, the actual protein itself must be altered. Such alterations may be much more numerous and the outcomes harder to predict. As such, when seeking to patent a biologic, companies often try to claim more than just the invention of the compound to encompass any changes they need to make to get FDA approval.
“The patent has to cover the clinical process plus the backup you need to get FDA approval, so the patent claims have to be broad. You’re also trying to bring in exclusivity. Because biologics are so unpredictable it’s hard to describe which formulations will be needed to get FDA approval. The Court of Appeals for the Federal Circuit in AbbVie Deutschland GMBH v. Janssen Biotech in 2014 held that antibodies and other biologics are inherently vulnerable to written descriptions because of their unpredictability. “There is a lot of buzz in the IP community right now about this decision, because 300 working examples were not enough to overcome the written description challenge raised by Janssen,” he said.
Indeed, the Federal Circuit explained: “The essence of the written description requirement is that a patent applicant, as part of the bargain with the public, must describe his or her invention so that the public will know what it is and that he or she has truly made the claimed invention.” In the case, he said the question before the appellate court was “whether the patents sufficiently otherwise describe representative species [i.e., examples] to support the entire genus [i.e., the claimed group of engineered antibodies]” In this case the genus was described “functionally,” meaning that the claimed genus included all antibodies that possessed the claimed amount of activity.
He said the appellate court concluded that 300 examples were not enough because protein engineering is unpredictable: “Functionally defined genus claims can be inherently vulnerable to invalidity challenge for lack of written description support, especially in technology fields that are highly unpredictable, where it is difficult to establish a correlation between structure and function for the whole genus or to predict what would be covered by the functionally claimed genus.”
Lathrop said this dilemma means it has become difficult to make a legitimate case that predictions on reformulations of biologics wouldn’t have been obvious. “PGRs will become the killing ground of biologics,” he said. “I would think Kyle Bass and Erich Spangenberg and their lawyers are waiting for when these biologics will become subject to PGRs.”
Spangenberg declined to comment further. Bass didn’t return an emailed request for comment.
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