Speaker 1: The Odd Thoughts podcast is brought to you by ex
Speaker 1: On Mobile Energy Lives here. Hello and welcome to the
Speaker 1: newest edition of Odd Lots. I'm Joe Wisenthal, Managing editor
Speaker 1: of Bloomberg Markets and the co host of What You Miss,
Speaker 1: And I'm Tracy Alloway, Executive editor of Bloomberg Markets. So Tracy,
Speaker 1: there's been a lot in the news lately about controversies
Speaker 1: in the pharmaceutical industry. It seems like there's another story
Speaker 1: basically every day. There were politicians blasting the proposed merger
Speaker 1: of Fiser and all organ basically accusing it of just
Speaker 1: being away for Fiser to pay less in US taxes.
Speaker 1: And then of course there's a lot surrounding specifically pharmaceutical pricing. Right.
Speaker 1: We've seen a lot of controversies in pharma stocks recently,
Speaker 1: especially in companies like Touring and Valiant. In Valiance case,
Speaker 1: we've actually seen the stock collapse recently on fears that
Speaker 1: the company is using this sort of shadowy network of
Speaker 1: pharmacies to get its brand name drugs prescribed more than
Speaker 1: cheap vir generics. Right. And then of course there was Touring,
Speaker 1: which got a ton of attention because it has this
Speaker 1: young CEO Martin Screlly, who is very came off very brash,
Speaker 1: and also he acquired a drug and then said he
Speaker 1: was going to immediately increase the price fiftyfold. So obviously
Speaker 1: that outraged a ton of people. Indeed, so given all
Speaker 1: these controversies, there have obviously been a lot of calls
Speaker 1: for investigations and changes to the laws in order to
Speaker 1: go after pharmaceutical prices. But what if the solution isn't
Speaker 1: with politicians but with hedge funds. Go on today, we'll
Speaker 1: be talking about a hedge fund with a very interesting
Speaker 1: strategy short farm accompanies and then challenge their patents in
Speaker 1: the courts in the hope that if their patents get overturned,
Speaker 1: the stocks eventually collapse. So the basic idea is someone
Speaker 1: short stock pharmaceutical stock. Shorting means you bet against the stock,
Speaker 1: you profit if it goes down, and then the way
Speaker 1: you make money on that in this case is you
Speaker 1: go to court and say, hey, this company, their drug
Speaker 1: is based on this patent, but we think the patent
Speaker 1: is invalid, and if the court rules that it is invalid,
Speaker 1: then presumably that company's business takes a huge hit, and
Speaker 1: shorting the company works out really. Well, that's right, sort
Speaker 1: of like a reverse patent troll. Yeah, exactly, So that
Speaker 1: sounds like a really weird strategy, but it also seems
Speaker 1: incredibly clever. So on that note, we want to bring
Speaker 1: in our guests, Guanyang. Guan recently completed his PhD and
Speaker 1: financed then his research both finance and intellectual property. He
Speaker 1: has his doctorate from n YU, so he's perfect to
Speaker 1: discuss this fascinating trade where where you have a marriage
Speaker 1: of finance and intellectual property. Guan is also a Bloomberg
Speaker 1: View contributor. So, guant, did we describe the strategy correct?
Speaker 1: Is that basically what the idea is? Yeah, that is
Speaker 1: basically what it is. Um. It used to be that
Speaker 1: when you wanted to challenge a patent, you can only
Speaker 1: do it. You can really only do it in court,
Speaker 1: and you can only do it if someone had actually
Speaker 1: sued you from fringing that patent. There wasn't really a
Speaker 1: an effective way for a third party like a hedge
Speaker 1: fund manager to come in and say, I think this
Speaker 1: patent is invalid even though we're all in some way
Speaker 1: affected by by drug hypbrug crisis to the patents. So
Speaker 1: up until recently let's say out there, I saw that
Speaker 1: some company had a patent and I thought it wasn't
Speaker 1: a valid patent. And we'll get to that in a
Speaker 1: second what that means valid patent. But up until recently,
Speaker 1: I couldn't have just gone int suit. I would have
Speaker 1: needed to be more directly tied to it. Yeah, there
Speaker 1: was there were a couple of administrative procedures who could
Speaker 1: have done that, the patent office, but um, they weren't
Speaker 1: very effective. They were expensive and slow, and that wasn't
Speaker 1: a great way to it's to challenge patents. And so
Speaker 1: what change? What was the law that enabled anyone to
Speaker 1: theoretically challenge a patent? So there was something called the
Speaker 1: America Invents Act of twelve. It's also called the Lady
Speaker 1: Smith Act, and it was a patent reform package that
Speaker 1: introduced something called interpartist review and it's basically a way
Speaker 1: to challenge a patent even if you're not directly involved
Speaker 1: in infringing it or have been sued by the patent owner.
Speaker 1: Was the idea behind it to go after patent trolls,
Speaker 1: which people have been complaining about for a long time.
Speaker 1: That was definitely part of the idea. But I don't
Speaker 1: think the I don't think the Congress necessarily imagine that
Speaker 1: you would have hedge fund managers using this process. Alright,
Speaker 1: So talk about specifically, there's this new law it enables
Speaker 1: outsiders to challenge a patent. Talk about what does that
Speaker 1: mean challenge a patent? Why are some patents weak? Why
Speaker 1: are some patents challengeable? Usually a patent can be challenged
Speaker 1: because it's obvious. Basically, a patent has to be UM,
Speaker 1: has to be new. You have to have some new
Speaker 1: innovation over the existing technology, the state of the art
Speaker 1: out there, and it also has to be non obvious.
Speaker 1: It can't be something that any pharmacist would be able
Speaker 1: to come up with if you present if you present
Speaker 1: him with with a particular problem. So um. Usually people
Speaker 1: who are sort of critical of the patent system or
Speaker 1: it's like me, talk a lot about software patents and
Speaker 1: business method patents. These are often patents on ways of
Speaker 1: doing business but on the internet, and even critics of
Speaker 1: the patent system often defend at least pharmaceutical patents because
Speaker 1: it's so obvious that it costs hundreds of millions or
Speaker 1: billions of dollars to to develop these drugs, and you
Speaker 1: need some kind of incentive to make that investment. So
Speaker 1: it can be surprising to some people that a lot
Speaker 1: of drug patents are can actually be weak, that there
Speaker 1: is prior art or some other way that the patent
Speaker 1: is flawed. How big of a deal is this, I mean,
Speaker 1: we hear a lot about you know, we talked about
Speaker 1: their controversies already in terms of surging prescription drug prices.
Speaker 1: But if you think about the role that intellectual property
Speaker 1: and patents play in the enormous cost that society pays
Speaker 1: for healthcare, there's this a significant issue that's worth going after.
Speaker 1: Drug spending in the US last year was about ten
Speaker 1: percent of total healthcare spending. So that doesn't sound like
Speaker 1: that much, except healthcare spending is pretty high in the
Speaker 1: United States compared to other countries, and it's also one
Speaker 1: of the fastest growing parts of about four trillion dollars
Speaker 1: per year. Yes, and prescription drug spending the US is
Speaker 1: a bit less than four hundibillion dollars, about ten percent.
Speaker 1: So one person who has decided to go after this
Speaker 1: particular sector is the manager of the hedge fund we've
Speaker 1: been alluding to, and that is Kyle bass Uh. Some
Speaker 1: people listening to this might already know who he is,
Speaker 1: but for others, maybe Joe, you could describe exactly who
Speaker 1: he is. Yeah, basically, Kyle Bass has been in the
Speaker 1: news as a hedge fund manager for a long time
Speaker 1: for various reasons. During the housing crisis, he made a
Speaker 1: lot of money. Here's one of the people that spotted
Speaker 1: the crash early and bet successfully that there would be
Speaker 1: a collapse there. He was also very well known for
Speaker 1: betting unsuccessfully for the most part, against Japanese government bonds.
Speaker 1: He warned that because of Japanese high Japanese government debt,
Speaker 1: that Japan could go bankrupt theoretically or of hyper inflation.
Speaker 1: That didn't work out. But there's new strategy he has
Speaker 1: is well, we've been talking about where he's shorting pharmaceutical
Speaker 1: companies and then challenging their patents. So guan, how did
Speaker 1: he embark on this path and what specifically is he doing.
Speaker 1: He hooked up the guy named Eric Spannenberg, who has
Speaker 1: sort of been on the other side of the patent
Speaker 1: litigation game. He used to buy up a lot of
Speaker 1: patents and and litigate them, and Spendenberg had identified a
Speaker 1: number of these pharmaceutical patents that he thought were weak
Speaker 1: and could be attacked in this way and basically enlisted
Speaker 1: Kyle Bass's help in in taking that strategy to the
Speaker 1: next level. So Bass shorted or his fun Hayman Capital,
Speaker 1: shorted a bunch of these pharma companies and then um
Speaker 1: petition to start inter partist review proceedings. One of the
Speaker 1: first patents that he went afterwards for a drug called Empure,
Speaker 1: which is a multiple scorrosive drug made by a company
Speaker 1: called the Court of Therapeutics. It costs about thirteen thousand
Speaker 1: dollars per patient per year, and he didn't succeed in
Speaker 1: that particular challenge, although he's refouled it with new evidence.
Speaker 1: But he has succeeded in convincing the Patent Trademark Appeals
Speaker 1: Board to start proceedings against Lealdo, which is inflammatory bowel
Speaker 1: disease drug, and a couple of drugs that cure multiple
Speaker 1: or that treat multiple myeloma owned by Celgene. I've given
Speaker 1: up trying to keep track of every single proceeding, but
Speaker 1: it's probably about a dozen proceedings that he has out
Speaker 1: there where he's either trying to get the patent office
Speaker 1: to start a trial to test this patent or they've
Speaker 1: already accepted it and there's going to be a trial
Speaker 1: at some point. So they are actually embarking on proceedings
Speaker 1: for some of these drugs. They are listening to Mr Bass, Yes,
Speaker 1: definitely they now after they decide to institute in a
Speaker 1: partist review proceedings, they have a deadline of one year
Speaker 1: by which time they have to be done with the trial. Basically,
Speaker 1: there's a few ways they had extensions, but this is
Speaker 1: much faster, a much faster process than if you had
Speaker 1: to go into district court and challenge patents. All right,
Speaker 1: let's take a real quick break for a word from
Speaker 1: our sponsor. You're listening to the Odd Thoughts podcast, brought
Speaker 1: to you by ex On Mobile Energy Loves Here. We're
Speaker 1: back here with our guest Guan Yang, talking about the
Speaker 1: strategy of shorting drug companies and trying to challenge their
Speaker 1: patents in court. So you mentioned that Kyle Bass, the
Speaker 1: hedge funder who's doing this. He hasn't had any outright
Speaker 1: successful victories yet, but it sounds like his strategy as
Speaker 1: to some extent working. Is he making money on his
Speaker 1: bet so far just merely by the fact that he's
Speaker 1: making these challenges, and some of these challenges have been greenlit.
Speaker 1: It doesn't look like I don't know when he entered
Speaker 1: these shorts, but it doesn't look like he's made any
Speaker 1: huge profits yet. It's still pretty uncertain whether he's going
Speaker 1: to succeed in these challenges, and it's also uncertain whether
Speaker 1: even if he manages invalidate a couple of patents or
Speaker 1: a couple of claims of those patents. For some of
Speaker 1: these drugs, at least they're covered by a whole bunch
Speaker 1: of patents, so there's there are a few more steps
Speaker 1: at actually turned these drugs into generics that that anyone
Speaker 1: would be able to produce, and that would really affect
Speaker 1: these drug companies earnings. So I'm curious how has the
Speaker 1: pharma industry reacted to this, and also how have patent
Speaker 1: lawyers and intellectual property rights people reacted as well. My
Speaker 1: sense is that the patent law profession is kind of
Speaker 1: split on whether this is a good idea. There are
Speaker 1: people who are saying that these patents are weak, they
Speaker 1: should be challenged, and the short selling profit motive is
Speaker 1: a good way to do it. Um Some of the
Speaker 1: so cell Gene, which owns a couple of the patents
Speaker 1: that he's challenged, has basically made a direct criticism, a
Speaker 1: direct attack on his strategy. Before the Appeals Board, they've
Speaker 1: said that the Congress, when they created this new inner
Speaker 1: partist review process, never intended for hedge fund managers for
Speaker 1: short sellers to be able to use it. That these
Speaker 1: are people who don't have a direct economic interest and
Speaker 1: invalid in the validity of these patents. And so far,
Speaker 1: at least in a couple of decisions, the Appeals Board
Speaker 1: has gone against sell Gene and basically validated his its
Speaker 1: overall approach. Are there any other industries that this could
Speaker 1: be applied to, this idea of challenging company's patents and
Speaker 1: then shorting them, or is there something unique about the
Speaker 1: drug industry that makes this work. There's something unique by
Speaker 1: the drug industry, and there's also something unique about the
Speaker 1: particular targets that he's got after, because if you think
Speaker 1: about it, you need a drug with some patents that
Speaker 1: are actually weak. If the patents are turned out to
Speaker 1: be valid, you know, he'll just have wasted a bunch
Speaker 1: of money and in order to profit from this. You
Speaker 1: also so Kalpass is not a generic drug manufacturer, so
Speaker 1: he can only make money in the financial markets, and
Speaker 1: he can only profit from the strategy if this particular
Speaker 1: drug is actually a big part of that pharma company's business.
Speaker 1: If it's a big, sort of diversified pharmaceutical company, their
Speaker 1: stock might not go down that much just by losing
Speaker 1: one drug. So like, if he found some weak patented fiser,
Speaker 1: for example, he could get it overturned, but it probably theoretically,
Speaker 1: but it wouldn't make a dent in the company's stock
Speaker 1: price most likely maybe not that big a dent. And
Speaker 1: fiser might also back a lot harder than some of
Speaker 1: these companies, and so this wouldn't necessarily work. And say
Speaker 1: software companies where the patent overturning a patent wouldn't necessarily
Speaker 1: change the business that much. I think the big problem
Speaker 1: with software patents is in large part that there are
Speaker 1: so many of them that you know, it's sort of
Speaker 1: whack a mole. You can get one, but then you
Speaker 1: still have thousands or tens of thousands of other patents
Speaker 1: owned by people who could sue you. What do we
Speaker 1: think about the prospect of the strategy actually starting to
Speaker 1: reduce expensive pharma prices. I think it's hard to imagine
Speaker 1: that he's going to be able to make a huge
Speaker 1: dent in pharmaceular costs, but these costs go up a lot.
Speaker 1: The statistic I saw was that US pharmaceutical spending went
Speaker 1: up in last year compared to the year before, and
Speaker 1: a lot of that growth in spending is due to
Speaker 1: just a few blockbuster drugs that are really expensive. And
Speaker 1: if he can take off a few percentage point of
Speaker 1: that growth, that would probably that would make a meaningful
Speaker 1: difference in the growth of how care spending in the country.
Speaker 1: Have any other investors done this, or any trying to
Speaker 1: glom onto his strategy or say, hey, this is smart
Speaker 1: or is it just him? As far as you know,
Speaker 1: as far as I know, it's just him. I think
Speaker 1: it's in large part because it is kind of a
Speaker 1: whiskey strategy. It's hard to know. He'll probably get a
Speaker 1: few of these patents invalidated as far as I can
Speaker 1: tell from people who have written about this, but it's
Speaker 1: hard to know whether it's actually going to be strategy.
Speaker 1: Also seems like it would be kind of easy to
Speaker 1: free ride, like one, if you you know what you
Speaker 1: don't have, It's like I could short those same companies
Speaker 1: that he has and let him bear all the research, couts,
Speaker 1: cause and all that stuff. Yeah, I think that's the
Speaker 1: case for a lot of these hedge fund choice strategies.
Speaker 1: I'm not really sure what the explanation is for why
Speaker 1: they still exist. So it's so rare that we actually
Speaker 1: mentioned these four words in the same sentence together, which
Speaker 1: would be hedge funds and societal good. But do you
Speaker 1: think that this is a hedge fund who might actually
Speaker 1: be able to affect some good for society? That's what
Speaker 1: Kyl claims. At least the entity that he's put together
Speaker 1: to challenge these patents is called the Coalition for Affordable Drugs.
Speaker 1: Who could be against that? All right? So, I mean,
Speaker 1: and I don't know if he really believes that, you know,
Speaker 1: obviously he's in it to make money, but I think
Speaker 1: it's definitely possible that, you know, even if he is
Speaker 1: sort of cynical about it, that the rest of us
Speaker 1: could benefit if he's ultimately successful. What about like the
Speaker 1: bigger picture, I mean, even outside of this um, outside
Speaker 1: of this specific strategy, do you think there's a lot
Speaker 1: of scope for just reducing the cost of the healthcare
Speaker 1: industry purely by I'm trying to think of exactly the word,
Speaker 1: but just the overfind reducing the financialization of healthcare just
Speaker 1: ringing a lot of costs out that people see as
Speaker 1: ridiculous that aren't really necessary for business models. So I'm
Speaker 1: not an expert in healthcare economics, but I definitely think
Speaker 1: there are things that could more that could be done
Speaker 1: with um for example, negotiating drug prices essentially, especially in
Speaker 1: the US, And there are other things that could be
Speaker 1: looked at, not just in terms of patent protection. There's
Speaker 1: also the FDA gives a certain period exclusivity between six
Speaker 1: months and seven years for certain new drugs and for
Speaker 1: certain generic drugs, and a lot of people who have
Speaker 1: researched drug prices think that some of those periods could
Speaker 1: be tweaked, either shortened or lengthen to provide better incentives
Speaker 1: for drug research. Going back to Kyle Bass for a second,
Speaker 1: do you think people would feel more comfortable with his
Speaker 1: strategy if he was sort of doing this out of
Speaker 1: the goodness of his heart and not necessarily to profit
Speaker 1: from shorting You know, he's clearly a rich man. Had
Speaker 1: he set up this group to go after weak patents
Speaker 1: out of the goodness of his heart. What do you
Speaker 1: think the reaction would be then? I think the reaction
Speaker 1: will be a lot more positive. I also think that
Speaker 1: if you had theoretically a nonprofit who had the strategy
Speaker 1: that that nonprofit might um might approach things differently. They
Speaker 1: wouldn't necessarily just go after targets that both have wheak
Speaker 1: patents and are and obvious short. Uh. They might go
Speaker 1: after Fieser for example. Right, instead of going just after
Speaker 1: companies that were highly exposed to a small amount of
Speaker 1: intellectual property. They could actually just go after any weak
Speaker 1: patents that they saw, even if there weren't a direct
Speaker 1: opportunity to profit and financial markets. Yeah yeah, um, let's
Speaker 1: just say, you know, you're you've been a long term
Speaker 1: critic of a lot of intellectual property, and some people
Speaker 1: are really radical. They say, there really just shouldn't be
Speaker 1: any patents at all, and all patents are sort of
Speaker 1: an intervention in the free market that are unnatural, and well,
Speaker 1: I kind of get this argument for some technology like software,
Speaker 1: for example, it seems harder to defend for pharmaceuticals. Could
Speaker 1: you envision us having a pharmaceutical industry without patents, without
Speaker 1: intellectual property protection? I think I could so I'm not
Speaker 1: as radicals as a lot of these critics, of course,
Speaker 1: but um, I think the pharmaceutical patents are an area
Speaker 1: where if you did abolish patents, you'd have to replace
Speaker 1: it with something. They would have to be some would
Speaker 1: have incentive to spend all these billions of dollars on
Speaker 1: farm of research, and part of that could be UM.
Speaker 1: A lot of a lot of the funding for healthcare
Speaker 1: in general, especially globally, comes from governments anyway, so you
Speaker 1: could take a lot of that, and by that you
Speaker 1: mean just basically in terms of Medicare, Medicaid, all these
Speaker 1: big government programs that ultimately exactly addition to basic research
Speaker 1: in drugs UM and you could take a lot of
Speaker 1: that money, and you could spend more money on public
Speaker 1: financing of drug research. And you could also have more prizes.
Speaker 1: So if you had, you know, ten a ten billion
Speaker 1: dollar prize for the curative cancer or something, a drug
Speaker 1: company that that meets the criteria would get that prize,
Speaker 1: but then the drug would have no patent, it would
Speaker 1: just be a generic. Well, thank you very much, Gwanyang.
Speaker 1: That was fascinating. I learned a lot about pharmaceuticals, and
Speaker 1: thank you for joining us. Thank you. So I'm really
Speaker 1: I don't know about you, but I'm really fascinated now
Speaker 1: to see how this trade works out for Kyle mass
Speaker 1: It seems like it could be a fairly revolutionary tactic
Speaker 1: if he makes a lot of money out is Yeah,
Speaker 1: same here. It's definitely one to watch. We'll keep watching
Speaker 1: Valiant and Touring as well. I'm intrigued by the idea
Speaker 1: of a world without patents. I'm also intrigued by kind
Speaker 1: of the entrepreneurship of a trade likeness. I mean, normally,
Speaker 1: when you think of a hedge fund trade, you think
Speaker 1: of someone looking over financial market data and concluding something
Speaker 1: that something is overvalued or undervalued. But this takes a
Speaker 1: lot of effort going to court, and obviously there's science
Speaker 1: involved in identifying what a week patent actually looks like.
Speaker 1: So I kind of admire the moxie that a trade
Speaker 1: like this requires to execute. Yeah, I guess we'll have
Speaker 1: to wait to find out whether that moxie pays off.
Speaker 1: All Right, and that's it for today's edition of Odd Lots.
Speaker 1: I'm Joe Wisenthal. You can follow me on Twitter at
Speaker 1: the Stalwart, and I'm Tracy Alloway. I'm on Twitter at
Speaker 1: Tracy Alloway. Thanks for joining us. You've been listening to
Speaker 1: the Odd Lots podcast, brought to you by ex On
Speaker 1: Mobile Energy lives here. Joe and I are very proud
Speaker 1: of our new podcast, Odd Lots, but we are also
Speaker 1: very proud of Bloomberg's other growing suite of original podcast
Speaker 1: all designed to help you navigate the complexities of business,
Speaker 1: financial markets, and the global economy. So in addition to
Speaker 1: our own podcast, please don't miss Benchmark with Dan Moss,
Speaker 1: Tory Stillwell and Aki Edo, an informative, jargon free look
Speaker 1: at the inner workings of the global economy. Then there's
Speaker 1: Deal of the Week with our M and A reporter
Speaker 1: Alex Sherman, which is a breakdown of the biggest M
Speaker 1: and A deals and gives you an inside peak at
Speaker 1: corporate boardrooms. All three shows are available on iTunes, SoundCloud,
Speaker 1: pocket Cast for Android, Bloomberg dot Com, and of course,
Speaker 1: the Bloomberg Terminal.