Generic Restasis Could Hurt
Allergan can still defend against the IPR but it will not be allowed to claim sovereign immunity. After Judge Bryson’s invalidation of the patents in federal court I believe the odds of Allergan prevailing are extremely low. The IPR could be a formality at this point. The only thing keeping generic Restasis off the market might be a lack of FDA approval. Mylan (MYL) previously estimated it could meet FDA guidelines for generic Restasis by year-end 2017. That could mean a generic version of Restasis could be approved within weeks.
Allergan has alerted investors that generic Restasis could arrive by Q2 2018. Some believe generic Restasis is already priced into the stock. Restasis represents 9% of Allergan’s revenue and about 12% of its income. Allergan also faces a loss of exclusivity (“LOE”) for Estrace vaginal cream (2% of revenue) and Combigan (eye drug) which represents about 3% of revenue. Mounting LOE with no immediate launches from its R&D pipeline could put AGN under further pressure.
Allergan’s management team has engaged in layoffs and cut operating expenses in response to LOE. Q4 2017 R&D was about 9% of total revenue – down from about 17% last year. I believe once the FDA actually approves generic Restasis that AGN could fall hard. What would be the catalyst to drive the stock higher? Allergan’s R&D pipeline might not bear fruit until 2019 or beyond. Selling investors on cost cuts to offset revenue declines implies AGN may no longer be a growth stock. AGN trades at over 10x run-rate EBITDA. This could be difficult for investors and analysts to justify once generic Restasis arrives.
Conclusion
The only impediment to Mylan’s generic Restasis appears to be a lack of FDA approval. That could come any week now. Sell AGN.
