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Allergan’s odd patent transfer to the St. Regis Mohawk Tribe is gaining a lot of scrutiny. It sued rivals from offering generic Restasis, its blockbuster dry eye treatment. Now the judge in he case, Judge William Bryson, has asked for details of the patent transfer meant as an IPR defense. According to Allergan it sold the $14 billion Restasis patents in exchange a promise of immunity from the Mohawks:

The Saint Regis Mohawk Tribe agreed to assert immunity during patent challenges and extend that immunity to Allergan Inc. in exchange for Allergan giving it ownership of patents protecting the dry eye treatment Restasis, the drugmaker said Tuesday after a federal judge in Texas told it to prove the deal wasn’t a “sham.”

The tribe agreed not to waive its sovereign immunity when facing challenges at the U.S. Patent and Trademark Office, including inter partes reviews, or during other administrative proceedings trying to invalidate the drug’s patents, Allergan said. Additionally, the tribe agreed to give Allergan a limited field of use exclusive license, and then continue to assert its immunity in any related PTO proceeding.

By my calculation the Restasis patents are worth over $14 billion. Restasis had Q2 revenue of $354 million at an estimated EBITDA margin of 68% or $241 million. That equates to annualized revenue and EBITDA of $1.4 billion and $963 million, respectively. AGN trades at 15x EBITDA so that would make Restasis worth $14.4 billion. Allergan is paying the Mohawks [i] $13.75 million up front and [ii] $15 million in annual royalties to “rent” its immunity. The Mohawks received $14 billion in value, in addition to annual payments, to take Restasis off Allergan’s hands. That sounds like a sham to me.

Why Parsing The Sham Transfer Is Important

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The judge wants to know if the sale was a “sham”. Allergan alerted Judge Bryson that the Mohawks would be co-plaintiffs in the federal patent case, yet never filed a motion. Allergan needs to show the judge and the defendants – Teva, Mylan and Pfizer – why the Mohawks should be added as co-plaintiffs. I will not impact the federal case but it could impact the IPR brought on by Mylan. If the judge determines the transfer was a sham then the IPR – where the Mohawks are claiming sovereign immunity – could potentially deem the same thing. AGN could sell off if investors believe the IPR will have a slim chance of winning without sovereign immunity.

The federal case will be decided by the end of the month. I believe a loss in the federal case could also punish the stock. Allergan is now claiming the Mohawks own the Restasis patents, so a loss in federal court and/or in impaired claim of immunity could both hurt Allergan. Restasis is of the utmost importance to the company. It represents 9% of revenue and 15% of income. Allergan’s growth is dead and I estimate AGN could be downgraded by Moody’s or S&P. Generic Restasis could cause Restasis prices to fall by over 50% in the first year; including a loss of market share, Allergan’s sales from the drug could fall by over 80% in year of generic competition. A loss of Restasis would make a ratings downgrade a near certainty.

Allergan’s robust trading multiple implies “financial soundness” and “strength.” The stock has also been propped up by the media – CNBC in particular – and a bevy of Wall Street analysts. A ratings downgrade would likely pierce the veil of financial sound and crush the stock. Shocking The Street , a premium service we run in conjunction with Seeking Alpha, has a sum-of-the parts value of $95. That is more than 50% below where AGN is currently trading. Now it should be clear why Allergan and CEO Brent Saunders are so desperate to keep Restasis, even at the expense of the company’s brand and reputation.

 

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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