Earlier this week U.S. District Judge Rodney Gilstrap dismissed Allergan’s (AGN) suit against Mylan (MYL) and Teva (TEVA) for patent infringement of Delzicol, the company’s ulcerative colitis drug:
A Texas federal judge on Tuesday dismissed a suit brought by Allergan USA subsidiary Warner Chilcott against Teva Pharmaceuticals USA Inc. and Mylan Pharmaceuticals Inc. alleging infringement of its ulcerative colitis drug Delzicol, and put off ruling on counterclaims from the defendants to allow their generic alternatives to go forward.
The ruling from U.S. District Judge Rodney Gilstrap affirmed a decision by U.S. Magistrate Judge Roy Payne, who recommended that motions for summary judgment filed by Mylan and Teva be granted and a judgment of noninfringement be entered in the consolidated patent infringement cases.
Judge Gilstrap’s ruling likely paves the way for a generic version of the drug to enter the market.
The Situation
Delzicol is used to treat mildly to moderately ulcerative colitis and for the maintenance of remission of the illness. According to the Mayo Clinic:
Ulcerative colitis is an inflammatory bowel disease (IBD) that causes long-lasting inflammation and ulcers (sores) in your digestive tract. Ulcerative colitis affects the innermost lining of your large intestine (colon) and rectum. Symptoms usually develop over time, rather than suddenly.
Though there is no cure for the disease it can go into remission if treated properly. Delzicol received FDA approval in 2013. According to the company Asacol/Delzicol generated Q2 revenue of $46 million, down 62% Y/Y. Sales were negatively impacted by the introduction of generic a version of Asacol and reduced demand for Delzicol.
The introduction of generic Delzicol by Mylan and Teva will likely make sales of Delzicol fall even more. The drug only represents about 1% of Allergan’s $4 billion in quarterly sales. However, Allergan’s growth is dead and it needs every dollar of sales it can muster. Though Q2 revenue grew 8% Y/Y, the company’s organic growth was around 1%. This is important. AGN currently trades at over 13x run-rate EBITDA, which implies it is a growth company. If organic growth is around 1% with the potential to fall further, I believe it would warrant a lower trading multiple.
The Hits Keep Coming For Allergan
In addition to the loss of exclusivity for Delzicol, Allergan’s patents for its dry eye drug Restasis were invalidated by Judge William Bryson earlier this month. Restasi represents 9% of total revenue and about 15% of the company’s income. Generic Restasis could hit the market some time next year. The company is currently in a patent battle with Teva pursuant to Linzess, which treats irritable bowel syndrome with constipation and chronic idiopathic constipation. Allergan is arguing that Teva infringed on a patent that was approved months ago, despite the fact that Linzess received FDA approval in 2012. Linzess represents about 4% of Allergan’s total sales.
Lastly, Imprimis (IMMY) is attempting to come to market with a cheaper version of Restasis that also includes cyclosporine – an off-patent chemical used in Restasis. Imprimis plans to launch the drug next week for $1,000 per year – much cheaper than Restasis which costs about $5,000 per year.
I previously assumed Allergan would take measures to block Imprimis’s drug since Imprimis has not garnered FDA approval. However, no news of any injunctions or regulatory actions have taken place as of yet. If Imprimis launches next week then it could potentially hurt Restasis sales and cause negative sentiment for AGN.
Conclusion
The loss exclusivity for Delzicol could further hurt Allergan’s organic sales growth and make it difficult for the company to justify its trading multiple. AGN remains a sell.
