Allergan (AGN) has dominated the news cycle after it sold patents for dry eye drug Restasis to the St. Regis Mohawks. Some thought it was an innovative way to protect patents from an inter partes review (“IPR”) brought on by Mylan (MYL). Last month Judge William Bryson invalidated the patents in a federal court hearing. Five senators have now requested information about the deal, implying it was a “blatant attempt to further Allergan’s market monopoly“:
In a letter to Allergan CEO Brent Saunders Tuesday, Sens. Sherrod Brown, D-Ohio; Maggie Hassan, D-N.H.; Amy Klobuchar, D-Minn.; Al Franken, D-Minn., and Patty Murray, D-Wash., requested documents and information about the deal, calling it a “blatant attempt to further Allergan’s market monopoly” on its $1.5 billion eye drug, Restasis.
“It is difficult to conceive of Allergan’s transaction as anything other than a sham to subvert the existing intellectual property system,” the senators wrote. “Put simply, Allergan paid another entity to take possession of its property, and then guaranteed annual payments for doing no more than holding the property and asserting a special legal standing to quash all disputes related to said property.”
A potential senate inquiry into the patent sale, Allergan’s potential “market monopoly” in dry eye and/or other matters could keep the company in the public eye for several more weeks. This might not be good for Allergan’s brand or the stock.
Potential Knock On Effects Of A Senate Inquiry
The Mohawk deal could be the rationale for the inquiry; once an inquiry starts it could lead to other areas about Allergan that the public and/or regulators were not aware of. In my opinion, below are the potential knock on effects of such an inquiry:
Lawmakers Could Get Wise To Restasis Price Hikes
The $1.8 billion U.S. dry eye market is a duopoly with Restasis controlling over 70% of the market and Shire’s (SHPG) Xiidra controlling just over 20%. Restasis controlled the U.S. market until Xiidra entered last year. Of the 16 million dry eye sufferers only about 1 million have prescriptions, which leads me to believe the market is under-served. The annual cost for both Restasis and Xiidra is around $5,000, which could be a deterrent to getting a prescription. The price of Restasis more than doubled since 2008; Allergan’s market dominance might have given it the clout to raise prices.
Optically, rising prices in an already under-served market does not look good. To help bring prices down and potentially bring more dry eye sufferers into the market, lawmakers could demand price cuts. Another alternative could be to accelerate FDA approval of generic Restasis. I understand Allergan faces an IPR on Restasis early next month. If it loses the IPR then FDA approval could come shortly thereafter.
Lawmakers Could Investigate Shire’s Claims That Allergan Blocked Xiidra’s Medicare Access
Shire recently accused Allergan of blocking Xiidra from certain Medicare Part D drug plans. Over 85% of commercially insured patients have access to Xiidra; the figure is 13% for Part D patients. If lawmakers investigate Shire’s claims and push to have Xiidra added to more Part D plans it could [i] offer Medicare patients another dry eye alternative and/or [ii] reduce Medicare sales for Restasis.
Lawmakers Could Push For Accelerated Review Of Linzess Patents
One of the patents on Restasis’s active ingredients was set to expire in 2014. Allergan obtained additional patents extending its protections to 2024. It sued for patent infringement to stymie generics rivals and sold the patents to the Mohawks to dismiss an IPR. Last month, Allergan (amongst others) accused Teva (TEVA) of infringing upon a patent for Linzess, which treats irritable bowel syndrome with constipation (“IBS-C”) and chronic idiopathic constipation (“CIC”). In my opinion, Allergan’s Linzess patent defense mirrors that of Restasis.
Linzess received FDA approval in 2012 for the treatment of IBS-C and CIC. In Q4 2016 Allergan sued Mylan (MYL) and Teva for attempting to offer generics before Linzess’s patents had expired. In July 2017 patent ‘371 titled, “Treatment for Gastrointestinal Disorders,” was issued pursuant to Linzess. Allergan (amongst others) got the Linzess patent extended while [i] previous patents were set to expire and [ii] it was under siege by generics rivals. The October claim was that Teva infringed upon the ‘371 patent issued in July.
Pursuant to Restasis, Allergan CEO Brent Saunders claims the company is simply protecting its patents from an unfair IPR process:
“Allergan is not attempting to artificially extend patents, we’re trying to protect our investment in intellectual property against a system that exposes our products to the double jeopardy created by the unfair IPR process,” the company said in an emailed statement. It also pointed out the constitutionality of the IPR process is due to be heard by the U.S. Supreme Court.
However, Linzess is not subject to an IPR, and Allergan’s defense of Linzess appears to mirror that of Restasis. Lawmakers could potentially conclude that artificially extending patents is endemic to Allergan’s corporate culture. It could also prompt lawmakers to push for an accelerated review of Linzess patents. Linzess represents about 5% of Allergan’s total revenue and could be the next drug to cause angst for AGN bulls.
Potential Headline Risks For AGN
AGN is down over 25% since it sold the Restasis patents to the Mohawks; at $172 it hovers slightly above its 52-week low of just under $170. I believe the following headline risks could cause the stock to breach its 52-week low.
I understand Allergan faces an IPR of the Restasis patents in December. Despite having the patents invalidated by Judge Bryson, the results of the IPR are still not certain. Senator Claire McCaskill drafted a bill disallowing tribal sovereign immunity to be used to block U.S. Patent and Trademark Office review of patents. Such a bill could thwart Allergan’s ability to claim sovereign immunity to dismiss the IPR. The final verdict is expected to be handed down next month. AGN could trade lower days before for IPR and continue to fall if the company loses. A loss would make generic Restasis a reality.
FDA Approval Of Generic Restasis
An IPR loss could create a debate about if or when the FDA would approve a generic version of Restasis. The FDA has been accelerating generics approvals as a way to fight rising drug prices. Its October approval of generic Copaxone, Teva’s blockbuster multiple sclerosis treatment, came a year earlier than expected. The news sent TEVA down by 14% in one day, as the drug represented over 45% of its EBITDA. I believe a press release finally announcing the approval of generic Restasis could send AGN lower as well.
I believe there are potential knock on effects of a senate inquiry into Allergan’s Restasis patents. Such knock on effects and the expected results of an IPR next month could send AGN lower. The stock remains a sell.
Trump And The Global Economy
The second installment of Trump And The Global Economy Town Hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Wuyi Jacobs (AfroBeats Radio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead.
The event was well-received by the community. We parsed through President Trump’s proposed tax plan and [i] how it was pure economic folly and [ii] high net worth individuals could potentially game the system by shifting income around. Apparently, Kansas Coach Bill Self did this when the state of Kansas cut taxes in the past. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership vis-a-vis Obama? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?