Judge William C. Bryson. Source: GW Law - The George Washington University
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Allergan’s federal trial to block Teva (TEVA), Mylan (MYL) and Pfizer (PFE) from infringing upon its Restasis patents is heating up. After transferring the patents to the St. Regis Mohawk Tribe the company now needs to prove the Tribe should be party to the litigation.

Teva Pharmaceuticals USA Inc., Akorn Inc., Mylan Pharmaceuticals Inc. and Pfizer Inc.-owned InnoPharma Inc. are fighting Allergan’s bid to add the tribe, so U.S. District Judge William C. Bryson ordered Allergan to make sure the defendants have all necessary documents and to clarify parts of the Sept. 8 transfer. The judge then denied a request by the generic-drug makers for even more information from Allergan, including depositions.

Specifically, Judge Bryson said it’s unclear whether Teva, Akorn, Mylan and InnoPharma have been given all the information the court has regarding the deal, an issue he said needs to be rectified. He then told Allergan to explain what the “good and valuable consideration” was when assigning the patent to the Saint Regis tribe, including any payments made by the tribe for “such considerations.”

The Mohawk deal has dominated the financial news cycle given the oddity of selling patents to an Indian tribe to benefit from its sovereign immunity. Now the federal patent case is heating up. Each move by Allergan could create counter moves by Judge Bryson, competitors and/or lawmakers. Below is my take on the federal case, and why it could end badly for Allergan.

Will Allergan Really Enjoin The Mohawks In A Federal Patent Trial?

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Allergan faces an inter partes review (“IPR”) in addition to the federal case. In its press release announcing the Mohawk deal the company said it would seek to use the Mohawks’ sovereign immunity to dismiss the IPR. Secondly, the deal had no impact on the pending abbreviated new drug application (“ANDA”) patent disputes. Allergan simply wanted to avoid the double jeopardy of both a federal case and an IPR. The logic made sense; to enjoin the Mohawks in a federal case would be equivalent to an attempt to undermine the entire U.S. patent system. Lastly, Allergan is known for its vaunted drug pipeline. How could it in good conscious apply for new drug applications while simultaneously defend Restasis by selling the patents to the Mohawk Tribe?

Four senators have since asked the Senate Judiciary Committee to launch an investigation into the unusual patent transfer. Senator Claire McCaskill even drafted a bill to abrogate the Mohawks’ sovereign immunity pursuant to IPR proceedings:

Under the deal, which McCaskill called a “brazen and absurd loophole” that “should be illegal,” the company transferred several of its patents to the St. Regis Mohawk tribe, which then asserted that its sovereign immunity exempted it from an inter partes review challenge from Mylan.

McCaskill’s bill, introduced Oct. 5, would scrap the use of sovereign immunity as a defense in IPR proceedings.

I believe the nuances in the communications between Allergan and lawmakers are important. Allergan has previously asserted the Mohawk deal was only to dismiss the IPR. Based on this fact pattern, I believe Senator McCaskill’s bill was designed to abrogate an Indian tribe’s sovereign immunity pursuant to and IPR.

I also understand that Allergan told Judge Bryson it expects to have the Mohawks as co-defendants in the federal case. However, no motion to join the Tribe has been forthcoming. Now the judge wants Allergan to prove the Mohawk Tribe should be a party to the litigation. In my opinion, mounting evidence that Allergan wanted to or might attempt to [i] enjoin the Mohawks in the federal case and/or [ii] use the Mohawks’ sovereign immunity to dismiss the federal case could spring Senator McCaskill (or other lawmakers) into action again.

Senator McCaskill has been clear of her intent to shut down attempts to use Indian tribes to avoid patent challenges:

“Any thinking person would look at what this company did and say, ‘That should be illegal.’ Well, I agree,” McCaskill said in a statement. “Congress never imagined tribes would allow themselves to be used by pharmaceutical companies to avoid challenges to patents, and this bill will shut the practice down before others follow suit.”

These new revelations from Judge Bryson could prompt Senator McCaskill to attempt to abrogate the Mohawks’ sovereign immunity pursuant to federal patent trials as well.

A Catch-22 For Allergan?

Allergan might be caught in a proverbial Catch 22. Its attempts to enjoin the Mohawks in the federal trial it could potentially be blocked by additional legislation abrogating the Mohawks’ immunity in the trial. If Allergan does not attempt to enjoin the Mohawks then [i] Judge Bryson could potentially view the Mohawk deal as a “sham” and [ii] it could potentially poison whatever other arguments it makes to prove patent infringement.

Generic rivals have objected to the Tribe joining the litigation. A spokesperson for Teva even welcomed regulatory scrutiny into the Mohawk deal:

In an email Tuesday, Teva spokeswoman Elizabeth DeLuca called Allergan’s patent reassignment “a new and unusual way for a company to try to delay access to high quality and affordable generic alternatives.”

“Teva will continue to pursue its [abbreviated new drug application] and accompanying patent challenges and also will be interested to see what comments are made about this tactic by regulatory agencies,” she added.

In my opinion, more regulatory scrutiny could draw criticisms similar to those drawn from Allergan’s potential IPR challenge.

Time To Price In Generic Restasis?

Given Allergan’s Catch 22 I mentioned earlier, I believe this risk of the company losing the federal case might have risen. If lawmakers abrogate the Mohawks’ sovereign immunity in federal cases it could eliminate that argument. Drawing the judge’s ire might not be a winning strategy either.  Jacob Sherkow, a professor at New York Law School, helped frame the matter:

Jacob Sherkow, a professor at New York Law School, said it is not clear that naming the tribe in the federal suit would automatically invalidate its immunity to the IPR challenge. He noted that the suit was filed when Allergan owned the patents.

Sherkow said that one thing, though, is clear: The judge in the federal case doesn’t appear happy with the situation.

One thing that’s a good general rule is that ‘sua sponte orders to brief an entire issue after the trial is closed generally mean the judge is upset about something,” Sherkow said. The term “sua sponte” refers to a judge taking action on his own initiative, without a motion from either side in a case …

But Sherkow argued that while it is impossible to know exactly how the judge is considering the issue, his order alone implies “some part of this is going to end in bad news for Allergan.”

In my opinion, these developments could increase the likelihood that Allergan loses the federal patent trial. It also believe AGN bulls should begin to brace themselves for generic Restasis. Restasis represents 9% of revenue and 15% of Allergan’s income. According to the IMS Institute For Healthcare Informatics, from 2002 to 2014 the price of medicines was reduced by 51% in the first year generics entered the market. A loss of market shares to generics and/or Shire’s Xiidra could amplify that decline.

Takeaway

I believe generic Restasis could punish Allergan’s earning and share price. AGN remains a sell.

 

 

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