Morgan Stanley Sacks Allergan … Co-Signs ‘Shock Exchange’

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Allergan has shocked the financial markets earlier this month when it sold its Restagis patents to St. Regis Mohawk tribe. The tribe has sovereign immunity and can dismiss the inter partes review “(IPR”) from Myland. Investment analysts and the media were abuzz with out innovative Allergan’s CEO Brent Saunders was and how the partnership could usher in similar arrangements:

The Shock Exchange Parses The Patent Sale

The Shock Exchange was more skeptical of the patent sale, however. The timing was curious given that Allergan’s growth was dead and Restasis made up 9% of the company’s total revenue. A loss of Restasis would have been devastating to Allergan and the Shock Exchange was loud about it. We thought that the Restasis sale was yelling, [i] “We are desperate to keep Restasis” and [ii] we do not have the R&D capability to replace it. Restasis was Allergan’s Achilles heel and it was dangerous to bring more attention to it:

I believe the arrangement is dangerous for Allergan for the following reasons:

It makes Restasis key to Allergan’s narrative – There remains a risk that Allergan could lose the federal court case pursuant to Restasis. A loss could sink the stock. Even if it won the patent case the company still might not be out of the woods. It dominates the dry eye market but has faced resistance from Shire’s (SHPG) Xiidra which entered the market in the second half of 2016. Restasis’ Q2 revenue fell 9% Y/Y and could continue to fall due to a loss of market share to Xiidra which is still ramping up. If Restasis is the focal point of Allergan’s Q3 earnings report then bulls could be disappointed.

It could indicate Allergan’s inability to develop new products – Allergan has tried hard to position itself as a traditional biotech company. If that is the case then it should be able to generate new products from its R&D machine. Taking unconventional measures to protect Restasis could connote to the market that its product development capabilities are lacking. Sans new acquisitions and an efficient R&D shop it could be difficult for the company to justify its robust 15x EBITDA multiple.

Mylan recently called Allergan “desperate” and Senator Sherrod Brown vowed to remove any loopholes that could the company to thwart competition. Allergan’s share price is off over 10% since the partnership was announced. Sentiment soured after the Shock Exchange asked, “Who downgrades Allergan first? S&P Or Moody’s?”ngs downgrade by either Moody’s or S&P.

Morgan Stanley Sacks Allergan … Co-signs ‘Shock Exchange’

After the Shock Exchange highlighted Allergan’s dependence upon Restasis and queried the next rating downgrade Wall Street had to act. Earlier this week Morgan Stanley analyst David Risinger downgraded Allergan from “Overweight” to “Equal-Weight.” In doing so he co-signed the Shock Exchange verbatim:

Specialty drug maker Allergan (AGN) raised more than a few eyebrows this month when news broke of the deal it made with the Saint Regis Mohawk Tribe of upstate New York to protect patents for one of its blockbuster drugs.

In fact, one of Wall Street biggest drug analysts cited the deal as one of three reasons it has downgraded Allergan’s stock and slashed its price target.

Allergan decided earlier this month to transfer ownership of the patents protecting the dry eye treatment Restasis, Allergan’s second biggest selling drug, to the tribe to prevent the scrutiny of the U.S. Patent & Trademark Office. The tribe, which will get paid $15 million annually, looks to use tribal sovereign immunity to prevent the patent challenge.

It is a creative maneuver. It is also untested, says David Risinger, an analyst with Morgan Stanley who argues that Allergan’s efforts to sidestep IPR action could mean more patent risk for Restasis.

With lawmakers questions its patent sale and Wall Street souring on the on the company, Allergan’s stock will likely continue to fall. Shock Exchange rates AGN a sell.

On Shock Exchange

Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead explains the stock market and U.S. economy through the eyes of the New York Shock Exchange, a financial literacy program Ralph Baker started in 2006 to share his passion for investing and basketball with his 11-year-old son and other boys his age. The book predicts the “pain ahead” for the U.S. economy, the demise of China, the pending stock market crash and social unrest.

Shock Exchange has been trumpeted by President Obama, the Senate Finance Committee and House Ways and Means Committee. However, they conveniently forgot to cite the source. Critics try to make and unmake authors, but the market always decides. The book was also recently added to Trump Syllabus K12, crafted by Dr. Kaye Wise Whitehead of Loyola University Maryland. Shock Exchange is the best book on Wall Street in the past 20 years, and on economics, it may be the most important book since the Great Depression.

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