WASHINGTON, October 6, 2017 –Our position in Allergan convertible preferred A shares (symbol: AGN/PRA, your brokerage’s symbol may vary) continues to get hit, once again due to the apparently never-ending legal controversy surrounding parent company Allergan’s (AGN) sale of patent rights for its top-selling dry-eye treatment to a northern New York Indian tribe essentially to short circuit U.S. court hearings on the case.
Our brokerage service picked up a good, succinct summation of the way Allergan’s novel maneuver is going over in The Swamp, aka, the Nation’s Capital:
“Democratic Senator Claire McCaskill has introduced a bill that would prohibit tribal sovereign immunity from being able to block certain types of patent challenges after Allergan (AGN) transferred some patents to a Native American Tribe last month.
“Earlier this week, The US Congress’ Committee on Oversight and Government Reform on Tuesday sent a letter to Allergan (AGN) requesting information on the company’s agreement to transfer six patents for its Restatis dry eye treatment to the Saint Regis Mohawk Tribe.
“Allergan said in September that it was approached by the tribe ‘with a sophisticated opportunity’ to strengthen the defense of its Restasis intellectual property in the upcoming inter partes review proceedings before the Patent Trial and Appeal Board.
“The committee said the implications of Allergan’s patent transfer raise questions as the exchange may ‘impair competition across the pharmaceutical industry and ultimately dissuade companies from pursuing less-costly generic alternatives to brand drugs.’”
I’m not a lawyer (and I don’t play one on TV). But the way I parse the whole developing story is that Allergan has apparently negotiated an agreement or agreements with a major competitor or competitors, agreeing to keep “biosimilar” (vaguely equivalent to “generics”) versions of Restasis off the market until the early 2020s. The agreement is apparently legit from a legal standpoint, and I believe that the Restasis patents are supposed to be in effect to the agreement date anyway.
Where the problem lies, apparently, is that other potential competitor pharma companies planning to produce their own biosimilars are not involved in the agreement, so have been suing Allergan in the Federal courts to block Allergan’s agreement, thus opening the floodgates to a host of (presumably) cheaper Restasis biosimilars.
The ur-issue involved is the never-ending battle over just how long a company’s proprietary new drug formula should be allowed to remain on the market without competition – a situation that allows them to recoup R&D costs for the formula and, finally, profit on their latest discovery.
Given that exclusivity allows a company to set any price it wants for a product – in this case, a breakthrough drug or treatment – that exclusivity is, by definition, anti-competitive. It’s designed that way, actually, to encourage pharmaceuticals small and large to keep spending money on developing new breakthrough treatments for dreaded or hard-to-treat diseases or genetic problems.
It all sound perfectly fair and normal, until you start reading about pharmaceutical companies that jack up the prices of exclusive or even commonplace drugs or treatments because they can, which is one of many reasons behind continuing hyperinflationary drug price increases in recent decades.
This, in turn, has made the whole industry a whipping boy for Congressional Democrats in particular. After all, it’s the Democrats who passed that ill-advised monster known as Obamacare without a single Republican vote. Now that nationalized health insurance has demonstrably failed on a variety of fronts, the Dems are looking for a whipping boy.
For their part, pharmaceutical companies that zealously protect and even manage to extend patent protections on key drugs or treatments while jacking up prices to the stratosphere (which either the Feds, the Obamacare-Medicaid-Medicare patient or the insurance company involved – or all three – ultimately have to pay) make a convenient and, it must be said, an often justified political target.
That’s where Allergan, generally a well-regarded pharma giant, stepped into a giant pile of cow bi-products. With a badly underperforming Senators like McCaskill (D-MO) popping off on this transaction, mainly to get ad footage for her imperiled 2018 re-election campaign, Allergan’s clever maneuver, which may or may not fail, will keep it in the MSM headlines, thus adding plenty of headline risk for what may very well be a spectacular quarterly report.
Allergan’s legal wrangling pertains to the preferred stock since those shares, at the moment, are convertible to 3+ shares of the common. Indeed, conversion will be forced in March 2018 when the preferred stock is called.
So at a time when investors should be eager to capture the final, bountiful pair of AGN/PRA’s preferred dividends of $13.75 per share – currently the equivalent of 7.3 percent – they’re running away from the shares just like they are from AGN common. Both had been in the midst of an impressively sharp recovery early this week.
But with McCaskill opening her vote-trolling trap, and joined by quite a few others on the Hill, both stocks will be subject to serious headline risk until they get past the court ruling on their patent sale.
Ironically, Allergan in the end will win this issue either way. If they win the anti-patent sale battle, they’re home free and clear on Restasis. But even if they lose and the original patent case re-convenes, they’ve still stalled judgment in the case for many, many months and perhaps even a year or two. And every day this legal action wastes is another day that Restasis remains on pharmacy and doctor shelves without competition.
Frankly, we have a healthy distaste for the death grip large pharma companies have on the prices of major and/or breakthrough drugs or treatments.
As die-hard capitalists, we do think pharmaceutical companies are fully entitled to earn back their R&D costs for breakthrough drugs, which costs include the many drugs or treatments that fail in trials and never make it to market. They’re also entitled to make a decent or perhaps even an above-average profit in these drugs or treatments, given the ordeals they have to endure to finally bring the product to market.
Even so, however, enough is enough at some point. When company pricing policies become unjustifiably greedy at some point, there will be a negative reaction, particularly from the political left, which hates any company at all that dares to make a profit. Obvious greed and/or patent-milking in the pharmaceutical industry will invariably cause disastrous headlines, damaging the company’s stock and its stockholders alike.
We’re not sure whether or not Allergan is guilty of price gouging and/or anti-competitiveness when it comes to Restasis. But its current actions to shut down patent litigation altogether begin to fail the smell test even for conservative, pro-capitalist traders and investors.
Unfortunately, our position is now in the middle of this mess. But it happens. We’ll see how things turn out.