David Pyott was chairman and chief executive of Allergan, a pharmaceutical company, from 1998 to 2015. He currently serves on the boards of several companies and educational institutions.
America leads the world in ingenuity. Innovation is how we created the Internet, sent a man to the moon, discovered vaccines to eliminate polio and developed therapies that treat the world’s deadliest and most debilitating diseases. But now medical innovation is under attack.
The aggressors are predatory hedge funds with a new investment strategy: taking short positions on the stock of companies that create innovative medicines, then — in a very public manner — challenging the patents on those medicines. The stock falls and their bet against the company pays off. These billionaire-led hedge funds obviously have no intention of making these medicines, so why challenge a patent? To make more money.
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It sounds like a financial scam, but it’s perfectly legal thanks to a well-intentioned but flawed 2011 law that created a process called “inter partes review,” or IPR. By law, hedge funds aren’t allowed to bring patent challenges in district court, where these cases have traditionally been decided. But the IPR process gives them a forum to challenge other organizations’ patents with a significantly lower standard for overturning them, compared with district court. These predatory investors want to make a quick buck, but it is patients who will suffer when medical innovation is stopped in its tracks.
Why is IPR such a big threat to medical innovation? The problem with the IPR system as it stands is that it reverses the long-standing presumption that the government’s grant of a patent is valid — highly concerning news for any innovative company that is heavily invested in research and development. It can take more than 10 years and $2 billion to get a single new drug to market. Imagine telling a scientist who has spent years in a lab — and the investors backing his work — that their patent will be reevaluated almost as if they’d never had a patent at all. That is precisely what happens in the IPR system.
If American patents can’t be relied upon, investors will shy away from making the big investments necessary to shepherd a new drug through the lengthy FDA approval process. That means less innovation and fewer new medicines. I’ve experienced firsthand the threat posed to innovation. Until recently, I was the chairman and chief executive of Allergan — where we created new drugs to treat everything from chronic migraines to severe incontinence to glaucoma. Now Allergan is one of the companies that was targeted by some of these predatory hedge funds whose goal was to dismantle the company, slashing R&D expenditures by 90 percent for short-term profit.
Recently, the U.S. Patent and Trademark Office’s panel that hears the IPR cases ruled that this abuse is an appropriate use of the system. Read that again: They determined that it is appropriate for these billionaire hedge funds to exploit someone else’s work — not to create new cures, but to line their own pockets. It is an outrage.
I appreciate that the 2011 law was passed to address a problem faced by the tech community — so-called “patent trolls” who extort companies by challenging patents over a line or two of computer code. This is certainly a problem worth fixing. But the biopharma industry got swept up, too. For a small biotech firm that has only one patented medicine (these firms are a significant part of our industry), a challenge can put its entire existence in jeopardy. The unintended consequences of IPR are far-reaching and severe.
Patents can be challenged under IPR even if they’ve already been upheld in district court, heretofore the final word in drug patent disputes. And challengers can — and do — file an IPR again and again and again against the same patent. For drug companies, this means procedural battles that never end — forcing them to spend too much of their time and limited resources in court and not enough in the lab. Particularly for small biotech firms, often the most innovative of all, even the threat of an infringement suit can put them out of business.
So how can we fix this? By simply returning to what has worked for 30 years. Drug patents can, and regularly are, challenged under a system known as the Hatch-Waxman Act. It balances the benefits of bringing more lower-cost generics to the market with recognition of the immense level of funding it takes to develop new drugs. That system has been a resounding success — once enacted, we saw an explosion of innovation in the life sciences space, and a parallel rise in the availability of generics. In fact, generic versions are now available for 90 percent of all prescription medications. Patients and consumers have been the big winners under Hatch-Waxman, benefiting from both low-cost generic medications and innovative new cures and treatments. But now even if a drug patent passes muster under Hatch-Waxman, it can still be challenged under IPR.
Congress is now considering patent reform legislation, giving them an opportunity to fix the problem of predatory investors once and for all. Unfortunately, current versions of the bill don’t address this problem. Congress must act to reform the system to ensure that patent disputes are resolved the right way — by reaffirming that Hatch-Waxman is the sole standard for patent disputes on FDA-approved medications. This will keep medical innovation charging forward to the benefit of the patients in the United States and around the world.
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