Allergan’s (AGN) unusual patent transfer to the St. Regis Mohawk Tribe  continues to draw scrutiny. Judge William C. Bryson, who is overseeing the federal patent infringement case, is questioning whether the deal is a “sham”:

Judge William Bryson, who is overseeing the federal patent infringement case, noted that on Sept. 8, after the case went to trial, Allergan told him that it expects to have the Mohawk tribe join Allergan “as a co-plaintiff in due course.”

But “no motion to join the Tribe has been forthcoming during the month since,” Bryson wrote in the order in U.S. District Court for the Eastern District of Texas, where Allergan is suing Teva Pharmaceutical, Mylan and other companies to block them from selling competitors to Restasis on patent-infringement grounds …

Bryson ordered Allergan and the defendants to file briefs by Oct. 13 “addressing the question whether the Tribe should be joined as a co-plaintiff in this action, or whether the assignment of the patents to the Tribe should be disregarded as a sham.”

A judgment in the federal case could be rendered by the end of the month. I assumed the case would be smooth sailing and the the uncertainty would potentially come from the inter partes review (“IPR”). This throws a wrinkle into the scenario. Will Allergan have briefs filed by the imposed deadline? Will the Tribe join Allergan as a co-defendant or not?

Having the judge question whether the transfer of Restasis patents was a “sham” or not could be another concern. Will the ploy negatively impact Judge Bryson’s ruling? This is likely the most important question I would ask myself if I was long AGN.

The Situation

Restasis, Allergan’s top-selling dry eye drug, is under siege from generic drug makers like Teva (TEVA), Mylan (MYL) and Pfizer (PFE). Allergan sued in federal court to block them from offering a generic version of the drug. Last month Allergan put out a surprise press release stating [i] the St. Regis Mohawk Tribe owned all Orange Book-listed patents for Restasis, [ii] Allergan had been granted exclusive licenses in the patents and [iii] the Tribe was filing a motion to dismiss the IPR based on its sovereign immunity.

Allergan was adamant the Mohawk deal was designed to remove the “double-jeopardy” of having to face a federal trial and an IPR. It referred to the IPR process as “flawed and broken.” The company also made it clear the Mohawk deal had no impact on the patent litigation being tried in federal court. However, legal experts said the maneuver could be used to protect patents from challenges in federal court also. I assumed the threat that other companies [i] could avoid disputes by selling patents to an Indian Tribe and [ii] could potentially invoke sovereign immunity in federal patent cases made the Mohawk deal a dangerous precedent.

Double-Jeopardy For Allergan?

Allergan might not be able to have it both ways. If it names the Tribe as co-defendant in the federal case it might jeopardize its ability to claim immunity from the IPR:

But Dan Ravicher, a law professor at the University of Miami, says the judge’s order puts Allergan in a tough position, raising the question of whether naming the tribe as a co-plaintiff in the federal case could invalidate its sovereign immunity to the IPR challenges.

“It’s a Catch-22,” Ravicher said. “Once they appear in federal court, they’ve now waived their tribal immunity.”

The sovereign immunity to IPR challenges exists essentially because parties with that protection have to consent to be sued, Ravicher said. Enter into claims in federal court, waive your immunity in the IPR system, he said.

If the Tribe does not join Allergan as a co-defendant then Judge Bryan could potentially disregard the Mohawk deal as a sham. It then begs the question, “Is the the lawsuit to block a generic version of Restasis a ‘sham’ also?” That’s what generic rivals are claim. Restasis was approved in 2002 and its exclusivity ended in 2014. That same year Allergan filed additional patents extending its protections to 2024. While Allergan accuses generic drug makers of violating its patent protections, generic rivals see litigation as a veiled attempt to extend exclusivity for Restasis.

New Revelations Could Send Lawmakers Into Uncontrollable Fury

The patent transfer has gotten lawmakers’ dander up. Last week four senators asked the Senate Judiciary Committee to launch an investigation into the patent transfer. They referred to the deal as “anti-competitive” and an “attempt to keep drug prices high.” They also requested [i] agreements and communications between Allergan and the Mohawk Tribe pursuant to the Restasis patents, and [ii] analyses from Allergan pursuant to current and projected Restasis sales, and market share.

Senator Claire McCaskill drafted legislation disallowing tribal sovereign immunity to be used to block U.S. Patent and Trademark Office review of patents. In its rebuke of the proposed legislation The Mohawk Tribe used the IPR process as cover:

The Saint Regis Mohawk Tribe is outraged that U.S. Senator Claire McCaskill (D-MO), has introduced legislation that specifically targets Indian tribes, yet exempts state universities and other sovereign governments engaged in the very same IPR process. The double standard that is being introduced by the Senator as a solution for a perceived abuse of the IPR proceedings does nothing to solve the underlying problem.

Allergan has gone on for weeks about the ineffectiveness of the IPR process. When lawmakers questioned the Mohawk deal as a threat to the entire patent process Allergan asserted it would not use the Mohawk deal in federal court. While Allergan said the Mohawk deal had no impact on the federal case, the company had actually told Judge Bryson “it expects” to have the Mohawk Tribe to appear in federal court as a co-defendant.

On the surface, the departure between Allergan’s behavior and its rhetoric appears to be duplicitous. This revelation could potentially send lawmakers into an uncontrollable fury. It could also embolden them to push through Senator McCaskill’s legislation and/or draft additional legislation to block Allergan’s patent transfer to the Mohawks.

The Play For Investors

Having Judge Bryson imply the the Mohawk deal could be a sham, or further infuriating lawmakers is not in the best interest of Allergan or its shareholders. The goings on between Allergan and the Mohawk Tribe raises more questions than it provides answers. Allergan’s growth is dead and it appears desperate to hold onto its dry eye income stream. Restasis represents 9% of Allergan’s total revenue and about 15% of income. I believe uncertainty surrounding the federal patent trial could create volatility for the stock next week.

AGN is down over 10% since its patent transfer was announced. I would look for AGN to trade lower as the judgment from the patent trial approaches. AGN currently trades at 15x EBITDA. While Allergan’s actions imply desperation in my opinion, the stock nor its trading multiple reflects it. The longer the patent drama continues the higher the likelihood investors price in a loss of Restasis. I believe a patent loss could create negative sentiment for AGN and send the stock lower.

Conclusion

More patent drama could send AGN lower next week. AGN remains a sell.

LEAVE A REPLY

Please enter your comment!
Please enter your name here