Allergan (AGN) simply cannot escape patent drama related to its blockbuster dry eye drug Restasis. Restasis buyers recently hit Allergan with an anti-trust lawsuit, claiming the company blocked low-cost generics from entering the market:
A proposed class of Restasis buyers on Friday accused Allergan Inc. in Texas federal court of blocking low-cost generics for the dry-eye medication through improperly obtained patents, sham infringement suits and citizen petitions, and partnering with a Native American tribe to avoid patent challenges.
The direct purchasers, led by FWK Holdings LLC, say if Allergan hadn’t been allegedly gaming the system, there would have been generic drugs, which could have been purchased at a fraction of the cost, on the market as early as May 2014. Instead, Allergan has hurt consumers using a multifaceted approach to keep generics off the market, while making $3.9 billion off the drug over the last three years alone.
The lawsuit follows a ruling in October where Judge William Bryson invalidated the Restasis patents due to obviousness. In my opinion, the current lawsuit should also be taken seriously.
The rub for the plaintiffs is that Allergan extended Restasis’s exclusivity after one of its underlying patents was set to expire in May 2014. This opened generic drug makers like Mylan (MYL) and Teva (TEVA) up to patent infringement litigation. In August 2017 the company accused generic rivals of violating its patent protections, which culminated in the decision by Judge Bryson. In September Allergan sold the patents to the St. Regis Mohawk Tribe in order to dismiss an inter partes review brought on by Mylan. These events all occurred three years after one of the patents was due to expire.
The lawsuit claims Allergan used the patent system to thwart competition for its Restasis monopoly. Pursuant to the Mohawk deal it claims, “No objectively reasonable litigant could expect these shenanigans before PTAB to succeed.”
Judge Bryson Appears To Buttress The Plaintiffs’ Arguments
Whether Allergan actually believed its patents were being infringed upon or if it knowingly engaged in delay tactics is up to interpretation. Not only did Judge Bryson invalidate the Restasis patents, he also he also refuted Allergan’s rationale for extending the patents in the first place:
In a 135-page opinion (PDF) published today, Judge Bryson found that Allergan’s patents on later formulations were obvious in light of the Ding I patent, as well as two other patents known as the Sall patent and the Ding II patent.
A doctor testifying for Allergan claimed that a particular formulation of 0.05% cyclosporin and 1.25% castor oil was particularly effective at treating dry eye. The doctor said “[t]his result was surprising and completely unexpected.” That doctor’s declaration was instrumental in persuading the US Patent Office to grant applications for additional patents.
But in Judge Bryson’s review, the .05% cyclosporin/1.25% castor oil formulation “did not perform significantly better than other formulations known in 2003,” when Allergan patented its later formulation, which became Restasis.
An argument can also be made that Allergan benefited greatly by keeping generic Restasis off the market. 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. It implies that if Allergan charges $5,000 per year for the drug then its price and revenue could have been cut in half by generic competition. That also implies that for the past three years [i] dry eye users could have paid double for a dry regimen than they would have paid with generics on the market and [ii] some participants who could not afford Restasis might have been served by a cheaper dry eye regimen. This does not even account for the fact that the price of Restasis has more than doubled since 2008.
Certain Lawmakers Implied Allergan Wanted To Protect Its Market Monopoly
Five U.S. senators have requested information from Allergan about its Mohawk deal. They also called the deal a “blatant attempt to further Allergan’s market monopoly” on Restasis. Allergan commands over 75% of the U.S. dry eye market. It practically had the market to itself until Shire’s (SHPG) Xiidra entered the market last year. A monopoly position connotes Allergan has strong pricing power in the dry eye market, which could be key in determining the differential between [i] the price patients paid for Restasis and [ii] the price they would have paid had generics entered the market.
That price differential multiplied by the number of Restasis users could be the starting point to determine potential damages. Secondly, the senators’ reference to Allergan’s “market monopoly” could give the plaintiffs and the judge overseeing the case another data point pursuant to Allergan’s outsized power.
The Play For Investors
The lawsuit from Restasis customers creates more bad press for Allergan and its brand. It keeps the focus on Allergan’s desperation to protect Restasis, which cannot be good for sentiment or the stock. Lastly, it could create a sizeable pay out for the company. The fact pattern suggests the arguments Allergan made to extend the patents might have been erroneous. For over three years Allergan has benefited from keeping generics out of the market at the expense of customers. The potential damages to plaintiffs and whether a judge would side against Allergan remain to be seen.
That said, I believe a legal payout to the plaintiffs could be a real risk for Allergan. Allergan has about $5.7 billion in cash and securities. It also generates over $1 billion in quarterly operating cash flow. It could sustain a sizeable legal settlement; however, it could hurt liquidity and create more negative sentiment for the stock. The lawsuit combined with the potential loss of Restasis income (Restasis is 12% of total contribution margin) makes AGN a sell.
On 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?