WASHINGTON, October 19, 2017 – As our regular readers know, we’ve been following the ongoing Allergan (symbol: AGN) Restasis patent disaster this week. After spending much of 2017 recovering nicely from earlier issues, both Allergan and Allergan convertible preferred “A” shares (AGN/PRA) have lost nearly half their peak value in October alone.
Most of this ongoing decline started with Allergan’s involvement in serious patent litigation. It came to a head Monday when a Federal judge abruptly invalidated the company’s patent protection for its blockbuster dry-eye treatment, Restasis®. Given that this product’s sales account for an estimated 10 percent of Allergan’s bottom line, disaster ensued for the company’s common and preferred shares.
We take the ongoing Allergan horror show personally here. That’s because we’re rather heavily invested in the Allergan convertible preferreds. To add an additional kicker, these shares are mandatorily redeemable on March 1, 2018, when they’ll be swapped out for approximately 3.1+ shares of the common. Now, that swap-out is likely to be worth a whole lot less.
Two additional issues:
- As a new issue, AGN/PRA shares were priced with a $1,000 per share par value. That means that nearly everyone who acquired and held these shares is down approximately $320 per share at 12:30 p.m. ET today, with AGN/PRA shares currently offered at $680 per share, give or take.
- One of the inducements for acquiring the preferred shares was the rather handsome 5.5 percent dividend, payable on a quarterly basis. That was a great yield at the time (and still is for most stocks).
Our holdings are to some extent covered when measured against these issues/benchmarks. That’s because we acquired most of our shares by averaging down the last time they took a big tumble. Our average cost per share is actually below $800 per share.
Plus, we’re still getting that decent fixed dividend, which, given the preferred stock’s current price, would yield a buyer today approximately 8.2 percent. That’s something that might bring some buyers back soon.
On the other hand, if we hold our shares to conversion, the end result will be a holding that at least for now will be a lot worse than we originally anticipated. First of all, that big dividend disappears. It would be replaced by the common stock’s more anemic dividend, currently worth about 1.5 percent when priced against the currently devalued common shares of Allergan.
Allergan tried to clear the murk today by issuing a detailed interim statement on the recent adverse Federal court ruling.
Key items derived from Allergan’s Thursday commentary:
Common wisdom is that even if generic Restasis alternatives get a clear go-ahead – Allergan is currently planning an appeal of the judge’s opinion – generics may not become available until late 2018 or some time in 2019 due to the legal and Federal (FDA) hoops competitors still need to jump through if and when the judge’s opinion is formally sustained.
In addition to the first point, Allergan will seek injunctive relief from Monday’s Restasis ruling, pending appeal. If granted, injunctive relief could keep generic competition for Restasis off line at least until 2019 effectively, given how the drug approval system works.
But – and this is a very big but – if Allergan is not granted injunctive relief, generics, once approved, could possibly be on the market by mid-2018. Since research analysts had originally estimated that generics could hit the market in 2022 at the earliest, all earnings and stock price estimates have been substantially marked down.
All estimates and predictions are wisely based on worst-case estimates. It’s a prudent course, as investors in the company – those who haven’t yet left – need to have some idea where the bottom in Allergan stock prices might be.
The company concluded its online memo with the following comment, regarding the entirely separate matter of the U.S. Patent and Trademark office’s internal patent review process. By law, that’s entirely separate from the current Federal court case, but could be affected by the judge’s abrupt invalidation of Allergan’s patents.
“The IPR process, which will continue to play out, is distinct from the district court litigation.
“That is the essence of the ‘double jeopardy’ we have been discussing.”
That last statement references the real reason Allergan has been doing flip-flops to protect its Restasis patents. These actions include the company’s controversial patent “sale” to the St. Regis Mohawk tribe, as a potentially innovative way to protect its continuing patent protection for Restasis through 2024.
Most pharmaceutical companies, in fact, hate current drug approval and patent defense reality. Today, if someone challenges a company’s patents, that company usually has to fight the challenges not only in court but before the Patent and Trademark office as well. Hence, the “double jeopardy” comment. Worse, many of these patent challenges come from “patent troll” attorneys and firms as a way of extorting a settlement out of the company that’s under attack.
For all its collective flaws, the pharmaceutical industry is certainly within its right to seek relief from endless and often frivolous patent battles. But only Congress can fix it with legislation. But we all know how fast that happens these days.
For more details on Allergan’s position, read the company’s entire interim statement here.
As for the rest of our portfolios, with the exception of AGN/PRA, things were doing fine until this morning. That’s because the market finally decided to take a short (we hope) but nasty break from this week’s irrational exuberance, causing traders and computers alike to hit that big SELL button.
Markets opened off about 100 Dow points, but have been trying to recover. As we approach 1 p.m. ET, all three averages are off, with the tech-heavy NASDAQ getting hit the worst, off 0.66 percent.
Since we’ve been observing heavy sales of some of our favorite holdings near each closing bell this week, we’re gradually unloading some of our profitable positions, as the signs are there for at least a moderate correction in markets, and soon.
We’ll see you again tomorrow, or possibly Monday if Friday proves to be boring. These days, you never know.