WASHINGTON, October 17, 2017 – Big news on Allergan (symbol: AGN). The pharma giant’s novel but aggressive move to protect the patent on its blockbuster eye treatment, Restasis, invaded investor’s computer screens Tuesday, rocking this columnist’s portfolio in the process. And not in a positive way.
A release via the MT Newswire service provides a succinct wrap-up:
“Mylan (MYL) said late Monday that the United States District Court for the Eastern District of Texas ruled in favor of the company, invalidating Allergan’s (AGN) patent claim over Restasis, which was developed to help increase the eyes’ natural ability to produce tears.
“Allergan’s patent protection for Restasis ended in 2014.
“The company said the court’s decision also will be binding against the Saint Regis Mohawk Tribe, which the court added to the lawsuit.
‘”In ultimately allowing the Tribe to join the lawsuit, the Court expressed its concerns that ‘sovereign immunity should not be treated as a monetizable commodity that can be purchased by private entities as part of a scheme to evade their legal responsibilities,’ Mylan said.”
It’s a little tough to unpack the current news and the backstory behind this ongoing litigation for those who haven’t followed it, but we’ll give it a crack.
Aggressive patent protection
In a nutshell, the ongoing Restasis soap opera revolves around yet another example of how big pharmaceutical companies work ceaselessly on endlessly creative ways to gain and extend their patents on blockbuster products and treatments they’ve developed for a host of maladies.
The argument in favor of this tactic: The R&D effort it takes to develop breakthrough drugs and treatments is colossally expensive for pharmaceutical companies large and small. Likewise, the immense and costly time and resources consumed to push promising drugs through the historically sclerotic FDA’s overly cautious approval process. Add to this the massive future costs of the inevitable nuisance lawsuits that will be filed by ambulance chasing lawyers from almost the moment the new drug is available to the public, and you have a major reason for why it takes a new drug to even reach its breakeven costs, let alone achieve a measure of profitability.
This entire, painful scenario is why any novel drug or treatment developer fights like a corporate tiger to hold onto its exclusive patents as long as possible before they expire, allowing cut-rate generic manufacturers to create and market lower-cost alternatives to a blockbuster drug.
The argument against this tactic: We’ve just provided it – Allowing cut-rate generic manufacturers to create and market lower-cost alternatives to a blockbuster drug dramatically lowers the cost of dramatic, often life-saving new drugs to the American consumer who’s been in a decades-long losing battle against rampant healthcare inflation.
Astounding new miracle drugs are often amazingly expensive, so much so that insurers – now also under cost pressures from what’s left of Obamacare – are loathe to include these new drugs in their annual formularies; or worse, if they do include them, they allocate them to their lowest coverage tier, meaning consumers must bear almost the entire, ghastly cost of such breakthrough treatments. For the healthcare consumer, the quicker such new drugs come off patent, allowing generic competition to take hold, the better.
In other words, the first battle in the new drug game involves a massive expenditure of time, personnel and money by pharma companies not only to discover that next miracle cure, but to get it through the FDA’s torturous labyrinth as well and defend it against predatory lawyers thereafter. This creates an incentive for pharma companies to extend patent exclusivity and pricing power for the new drug as long as possible.
This, of course, works against our poor, beleaguered consumer who hasn’t had a significant pay raise for the last quarter century. It’s a big problem, and we won’t litigate it here.
Clever chemistry, bad headline vibes, bad consumer vibes
Which brings us back to Allergan and Restasis. As we read it, and to grossly over simplify, Allergan’s original patent on Restasis actually expired in 2014. But, by slightly altering Restasis’ original patented formula, they were able to create a “next-gen” patented version of the drug, which effectively got their Restasis patent extended to 2024.
Before you accuse Allergan of absolute villainy and consumer abuse, keep in mind that this tactic has been used for decades, perhaps longer, by numerous companies involved in all manner of trades and industries. A company I worked for once was involved in such an action, and I’ve seen how it works first-hand. It’s murky moral territory at best, and there are excellent cases to be made on such maneuvers pro and con. But profits and profitability always lie at the bottom of these fights.
Products that are the same, only different
Based on experience, I know that product formulas can be altered slightly. Both necessary and sometimes effectively inert ingredients alike can be added to a product or drug formulation to make it “brand new,” and/or “better” than the original. This allegedly “new and improved” product is then introduced and pitched as worthy of new or extended patent protection. Again, this description oversimplifies this maneuver somewhat, but this is essentially how it works
Take a well-known example of this maneuver, the product trajectory of Proctor & Gamble’s (PG) and AstraZeneca’s (AZN, UK listing) breakthrough acid-reflux drug, Prilosec. This hugely successful new prescription-only product was an instant godsend for the thousands, perhaps millions of individuals suffering from chronic, painful heartburn and its side-effects.
As patent expiration loomed for Prilosec, the company magically trotted out a “new and improved” prescription successor they called “Nexium.” Although a few companies had developed effective new, competing – but non-patent violating – formulas for acid-reflux disease such as Zantec over the years, P&G’s new, premium-priced Nexium was one effective way of keeping a higher-priced, patented clone of Prilosec on the market as the original came off patent.
In the meantime, to keep its hand in on Prilosec, P&G created a non-prescription version of the drug, as this class of “proton-pump inhibitors” was eventually permitted to be sold over-the-counter by the FDA.
Nexium was, in fact, judged to be marginally more effective than Prilosec or the new “Prilosec OTC,” but maybe not quite enough to justify the distinction. Prescription Nexium held up against challenges, irritating generic drug manufacturers. Nevertheless, the generic manufacturers went ahead with their own OTC versions of Prilosec, under its generic name, “omeprazole.” Eventually, “Nexium 24 HR” showed up OTC as well.
Allergan, Restasis, the U.S. Patent office and fun with tribal law
Returning to the Allergan / Restasis case, Allergan essentially hit on another flavor of the P&G approach to protect and/or extend its patent on this lucrative product. What got Congress, the courts and consumer activists up in arms, however, was the unique spin Allergan put on its successfully renewed, generic-fighting patents for Restasis. Last month, the company sold the relevant patents for the drug to the St. Regis Mohawk Tribe of upper New York state, with the company retaining all rights to market and sell the product.
The reason why Allergan’s attorneys tried this novel strategy is simple, at least in theory. Patent legalities today for drug manufacturers are further complicated by what I regard as a quirk in U.S. law, which subjects drug patents and patent disputes not only to lawsuits filed via the U.S. court system.
Patents can also be attacked and effectively litigated as well via the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office. This creates a kind of double jeopardy that Allergan and other pharma companies view as essentially illegal and unfair, in that if one court doesn’t get you than the other one will.
Which is where the St. Regis Mohawks come in. While Indian tribes must adhere to Federal laws in most cases like any other U.S. citizens, the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office has no legal jurisdiction over the tribe due to other laws that permit certified Native American tribes to effectively function as their own nation within a nation.
Thus, by selling and thus transferring its Restasis patents to the Mohawks, Allergan maneuvered to take the Patent and Appeal Board out of the legal equation by effectively placing patent-ownership out of the Board’s legal reach.
On paper, this clever move seemed like a slam dunk for Allergan and the Mohawks. But it attempts to break new ground in the area of patent law, attracting intense legal scrutiny. The maneuver also raised the ire of Congress, always happy to pound the table in opposition to evil capitalists as an election year approaches. That means the outcome of this part of the game is still up in the air.
The matter at hand: An adverse ruling by an adverserial court
With regard to the U.S. Court system, however, it’s another story. Given that both Mylan and Teva filed suit against Allergan’s Restasis patents in the East Texas Appellate Court – a jurisdiction that’s traditionally been an easy mark for plaintiffs in such cases – Allergan likely figured they’d lose their case in this court eventually. Further, they left the Mohawks out of this case, since, unlike the Patent Board, Indian tribes are, in fact, subject to the U.S. Appellate Court system.
Not only did the Appellate Court rule against Allergan Monday. The judge also decided to emphasize the point by making the St. Regis Mohawks party to this suit as well. It was a gratuitous move in my opinion, but one, I think, that expressed the court’s irritation at Allergan’s Patent Office ploy. It may also be an attempt by the judge to indirectly weigh in on the ongoing Allergan vs. Patent Office battle to affect its eventual outcome.
Allergan’s common and preferred stocks take a nosedive
Allergan has said it will appeal Monday’s ruling, of course. Nevertheless, given Monday’s sudden and seemingly definitive ruling against Allergan, the company’s common stock, as well as that of it’s convertible preferred “A” shares (symbol: AGN/PRA, your broker’s symbol may vary) were beaten to a pulp Monday afternoon, having already slid substantially from their summer highs, possibly in anticipation of Monday’s adverse court ruling. The preferred shares were off a whopping 34 points, give or take, while the common was down an equally horrific $7.11 per share (-3.5 percent) to close at $198.41.
Next: In Part 2, we witness – and attempt to deal with – the slaughter of Allergan’s common and preferred shares and reacquaint ourselves yet again with the horrors of headline risk.