Last week Allergan (AGN) lost an appeal in its attempt to protect its Combigan eye drug from generic competition posed by Novartis AG’s (NVS), (NVSEF) Sandoz division:
Allergan Inc said on Friday that it had lost its appeal in a patent battle with Novartis AG over its Sandoz division’s rival version of Allergan’s Combigan eye drug and said it would file a petition to for a rehearing of the case.
Allergan said the U.S. Court of Appeals for the Federal Circuit affirmed the U.S. District Court for the Eastern District of Texas’ earlier decision that the Sandoz rival did not infringe two of Allergan’s patents and reversed a decision on a third patent in favor of Novartis.
Allergan is in litigation with Sandoz in New Jersey pursuant to a different patent for Combigan, which it thinks could prevent Sandoz from launching generic Combigan. The company also plans to appeal the recent decision from Texas.
The Situation
Glaucoma connotes damage to the optic nerve known as “cupping.” Combigan received FDA approval in 2007 to help reduce elevated intraocular pressure for patients with glaucoma or ocular hypertension. Lowering eye pressure is one of the only ways to treat glaucoma. Lowering eye pressure can be done through medicines, laser or surgery. While the ailment can be controlled there is currently no cure.
In Q3 2017 Allergan generated $136 million in revenue from Alphagan/Combingan, practically flat compared to the $135 million generated in the year earlier period. The company is known for having a highly-diversified portfolio of products. At 3% of total revenue it was Allergan’s 7th best-selling drug. Botox and Restasis were Allergan’s top-selling drugs; they were 19% and 9% of total revenue, respectively.
The launch of generic Combigan could sting Allergan. Per Reuters Sandoz currently sells a generic version of Alphagan; both Combingan and Alphagan are based on the same chemical, brimonidine. Generic Alphagan could explain why Q3 sales growth of Alphagan/Combigan was flat. The launch of generic Combigan could potentially be the catalyst that causes combined sales of both drugs to decline.
According to the IMS Institute For Healthcare Informatics, the price for branded drugs can fall over 50% in the first year generics enter the market. Taken in isolation the potential hit to Combigan might not appear too ominous. However, Allergan’s image as a “growth pharma” is becoming more difficult to defend. Q3 revenue was up 11% Y/Y, but sans acquisitions its growth was practically dead.
Management has taken pains to change the narrative. It sold patents for Restasis to a Mohawk Tribe to protect it against generic competition. In September the company announced a $2 billion share repurchase plan. During its Q3 earnings announcement management divulged major cost cuts to offset a loss of exclusivity in key products. Nonetheless, AGN is down over 25% since its Mohawk deal. A potential hit to Combigan would only add to Allergan’s woes.
How Many Hits Can Allergan Take?
Analysts have pointed to Allergan’s vaunted R&D pipeline as a rationale for why its sum-of-the parts could exceed its trading value. However, many products in its pipeline might not reach the market until the second half of 2018 in 2019. The EU is currently investigating whether Esmya (ulipristal acetate) is linked to liver damage. Allergan recently had its new drug application for ulipristal acetate approved by the FDA. Some had estimated the drug could generate revenue of up to $500 million. In addition to mixed results in a mid-stage test for cenicriviroc (treats liver disease NASH), the Esmya investigation could create a cloud over the company’s pipeline.
Meanwhile, Allergan remains locked in a patent battle for dry-eye regimen Restastis, which represents 9% of revenue and 12% of its total income. In October Judge William Bryson invalidated the patents due to obviousness. An inter partes review (“IPR”) is pending. A loss during the IPR process could clear the decks for generic Restasis. Given potential hits to Allergan’s product portfolio a Cantor Fitzgerald analyst also believes 2018 consensus sales estimates might be too high.
Generic competition could reduce EBITDA when the company can least afford it. Allergan’s $30 billion debt load is at 4.0x. A hit to the company’s EBITDA could hurt its credit metrics and potentially call into question Allergan’s ability to service its massive debt load. While debt servicing costs might be priced into the shares of highly-indebted names like Valeant (VRX) and Teva (TEVA), I do not believe this is the case for Allergan; nor I do not believe its lack of organic growth justifies its 10x EBITDA multiple. The arrival of generic Restasis could be the catalyst that causes even the staunchest AGN bulls to capitulate.
Conclusion
In my opinion, Allergan’s Restasis patent ploy might have created negative goodwill among certain lawmakers and/or judges. The adverse patent ruling could move Novartis one step closer to launching generic Combigan. Headline risks for Restasis and Combigan make AGN a sell.
On Trump And The Global Economy
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?
