The fight to protect Allergan’s (AGN) Restasis patents is heating up. Friday the St. Regis Mohawk Tribe filed to have Mylan’s (MYL) challenge to the patents removed:
In a filing to the U.S. Patent Trial and Appeal Board, the Saint Regis Mohawk Tribe asked that Mylan’s case seeking to invalidate Allergan’s patents on dry-eye medicine Restasis be thrown out on the grounds that the board has no jurisdiction over the tribe.
The move was expected after Allergan announced on Sept. 8 that it had transferred Restasis patents to the tribe in order to protect them from administrative challenges.
… In its court filing on Friday, the tribe said it is sovereign government that cannot face litigation in an administrative court unless it expressly waives its immunity or the U.S. Congress abrogates immunity.
“Neither of these exceptions apply here,” the tribe said.
Earlier this month Allergan sold the patents to St. Regis in order to protect them from generic competition. Apparently, St. Regis’s sovereign immunity allows it to dismiss the inter partes review (“IPR”) requested by Mylan. Generic rivals have also file abbreviated drug applications (“ANDA”) pursuant to Restasis in federal court; the St. Regis partnership does not impact the ANDA, yet it could allow Allergan to forgo the double jeopardy of an IPR.
The Situation
Restasis has about 70% share of the $1.8 billion dry eye market; Shire’s (SHPG) controls about 20%. The drug was approved in 2002 to treat patients with keratoconjunctivitis sicca whose tear production is presumed to be suppressed due to ocular inflammation. It was set to lose exclusivity in Q2 2014, but Allergan was able to get it extended to 2024. Mylan asked the patent board to invalidate the patents late last year.
The sale of the patents to St. Regis could potentially thwart the IPR sought by Mylan. Last week Mylan called Allergan desperate and claimed the patent sale was a last minute attempt to shield the patents from inevitable cancellation. Mylan also vowed to fight Allergan’s delay tactics. The situation appears to be up to the U.S. Patent Trial and Appeal Board (“PTAB”). If the Tribe owns the patents then does the board have jurisdiction over the Tribe?
The board might decide that since Allergan still has an economic interest in Restasis that the arrangement with St. Regis could simply be a ruse to protect the patents. Allergan will pay St. Regis an up front fee of $13.75 million and annual royalties of $15 million. However, Restasis generated Q2 revenue of $354 million (9% of Allergan’s total revenue), and at Allergan’s total EBITDA margin of 40% that could equate to quarterly EBITDA of $143 million. The difference between Restsas’s EBITDA and the $15 million royalty payment could be considered Allergan’s remaining economic interest.
Will Senator Sherrod Brown Weigh In?
Last week Ohio Senator Sherrod Brown blasted the arrangement between Allergan and St. Regis, saying it rips off customers, and he vowed to investigate how to close loopholes so drug companies could not skirt competition. The potential avenues Senator Brown could take appeared open-ended. St. Regis appears to have thrown down the gauntlet when it implies “cannot face litigation in an administrative court unless it expressly waives its immunity or the U.S. Congress abrogates immunity.” Would Congress go so far as to abrogate the Tribe’s immunity or simply abrogate it in cases where entities attempted to protect patents by selling them to the Tribe?
Whether the patents are immune from generic competition could take a while to determine. The legal battles between St. Regis, Mylan, Allergan and potentially Congress, could become contentious and arduous. Ultimately it could put a huge spotlight on Allergan’s business model and its ability (or lack thereof) to develop new drugs. At 9% of revenue Restasis is very important to Allergan whose organic revenue growth is practically nil. In my opinion, the longer the patent battle goes on the more likely investors are to price in the worst case scenario – a loss of patent protection for Restasis.
Conclusion
Allergan’s growth is dead, yet its 14x EBITDA multiple might not reflect it. AGN is down over 12% since it announced its partnership with St. Regis and it could fall further. AGN is 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.
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