New York (HedgeCo.net) – One of the latest types of hedge funds are ones that try to take advantage of patent laws to short biotechnology stocks. The gist of the strategy is to file patent challenges and then short the stock of the target company.
One such hedge fund is Dallas-based Hayman Capital Management. Fund manager Kyle Bass has filed 15 “inter partes reviews” or IPRs and according to a recent CNBC article, he has 14 more drugs in his sights.

The CNBC article was authored by Joseph Gulfo, the Executive Director of The Rothman Institute of Innovation and Entrepreneurship at Fairleigh Dickinson University. He has more than 25 years of experience in the biopharmaceutical and medical-device industries and is former CEO of Mela Sciences. In his article, he refers to these types of maneuvers as being opportunistic “reverse trolls”.

Another point that Gulfo makes in his article is that the practice has “the tone of stock manipulation” and that something needs to be changed about the requirements for filing an IPR.

“One thing is for sure: Something needs to be done about the unintended consequences of IPR. Developing new products is a difficult, time consuming, expensive and uncertain enough process. Laws that inadvertently permit practices that dissuade companies from developing new products stifle innovation and are not good for our country.”

The patent board is expected to make a ruling next month regarding the first IPR challenge and there will be a lot on the line for both biotech sector and the hedge fund industry. If the challenge is successful, you can expect more IPR challenges and more funds taking advantage of the practice. It will also change how biotech and pharmaceutical companies proceed with new drug developments.

Rick Pendergraft
Research Analyst
HedgeCoVest