Judge William Bryson
In a much-anticipated ruling the Patent Trial And Appeal Board ("PTAB") of the U.S. Patent And Trademark Office ruled the St. Regis Mohawk Tribe could not claim sovereign immunity to void an inter partes review ("IPR") for dry-eye drug Restasis:
Upon consideration of the record, and for the reasons discussed below, we determine the Tribe has not established that the doctrine of tribal sovereign immunity should be applied to these proceedings. Furthermore, we determine that these proceedings can continue even without the Tribe’s participation in view of Allergan’s retained ownership interests in the challenged patents. The Tribe’s Motion is therefore denied.
In early September Allergan (AGN) partnered with the Mohawk Tribe to help stave off a patent challenge for Restasis brought on by Mylan (MYL), Teva Pharmaceutical (TEVA) and Akorn. Allergan granted exclusive licenses for the patents to the Mohawk Tribe, yet the lion's share of the economics from the patents remained with Allergan. The Mohawks received an upfront fee of $13.75 million and annual royalties for their troubles.
When the Mohawk deal was announced in September AGN bounced over 10%. The stock is off over 29% since then. The recent PTAB ruling could have further negative implications for Allergan.
The Situation
Allergan's patent transfer immediately sparked the ire of lawmakers and the public. Allergan was accused of attempting to circumvent patent laws to protect high prices for Restasis. In October 2017 Judge William C. Bryson invalidated the Restasis patents in federal court due to "obviousness." He also questioned the validity of the Mohawk deal and Allergan's attempt to pay the Mohawks to "rent" their sovereign immunity.
In December Chief Judge David Ruschke ruled the University of Minnesota waived its immunity in an IPR by filing patent infringement charges in federal court. The PTAB affirmed state universities were immune from an IPR. However, the judge ruled the University of Minnesota waived its its Eleventh Amendment immunity by filing an action in federal court. The ruling likely struck a blow to Allergan who also filed patent infringement charges in federal court, yet sought to use sovereign immunity to defend against an IPR. That is a long-winded way of saying the PTAB's ruling not to allow the Mohawks to claim sovereign immunity in the Restasis IPR might have been predetermined by Judge Ruschke's ruling.
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.
