Opioid abuse litigation hammers Allergan, Apple polishes iOS

Allergan convertible preferred shares take a serious beating Tuesday as markets freak over rent-seeking, state-led opioid litigation. But the sun shines on iOS.

A kit made for injecting street drugs, notably opiates (note the promethazine and roxicodone tablets). Image and description via Wikipidia entry on "opioid epidemic."

WASHINGTON, September 19, 2017 – Returning to our own private trading desk today was an unpleasant experience after a rare vacation weekend up in Ohio. Stocks continue to wander aimlessly, taking averages generally up to be sure. But looking a bit deeper, not all stocks are participating in these daily or every-other-daily records. Particularly not ours.

Trading Diary

The atmosphere of gloom and doom pervading the pharmaceutical sector was our big problem today. Though other drug companies were drug companies were hit, we’re specifically to the shares of pharma giant Allergan (symbol: AGN), and its temporary companion stock, Allergan Convertible Preferred “A” shares (AGN/PRA, your broker’s symbol may vary).

Both stocks – particularly AGN/PRA have been in their predictable quarterly declines lately, with AGN/PRA declaring another fat dividend in August, already paid to shareholders in early September. After the ex-dividend date AGN/PRA always goes down rather nastily during periods that generally range from 20-40 days. Any decline in the common stock accelerates the decline in AGN/PRA, given that the stock is convertible.

After dropping some 50 points from its roughly $900 per share peak in early August, the preferred shares started taking those predictable hits, pulling the shares down to the $800-820 range until late last week, when the decline began to accelerate. But today, AGN/PRA took a vicious beating from traders, following the trajectory of the common down with a vengeance. The preferreds closed off a whopping $20.45 per share, a staggering 2.58 percent loss on the day.

The reason why? AGs in a significant number of states confirmed they are ramping up the pace of their investigation into what contribution, if any, the pharmaceutical industry is making to the current opioid epidemic in the U.S. Investors rightly smell the smoldering desire for a nice chunk of pharmaceutical baksheesh particularly in those mostly rural states where the opioid abuse problem is at its worst.

This writer smells 2-3 years of litigation after which the pharma giants involved will cave and offer massive “settlements” to get the states off its collective back. The money would be dedicated to treating opioid abuse in the various states, just like the tobacco settlement money won years ago from that industry was targeted to solve all manner of health issues, but particularly the addiction to tobacco products.

Unfortunately, the tobacco extortion money – for that’s really what it is – whether in the form of ongoing payments, or a lump sum via notorious “tobacco bonds,” ended up being diverted into the usual rent-seeking pockets. Just try to find a viable anti-smoking entity in any state that gets these funds today. You won’t. It’s all been diverted to fund pet projects.

The same will happen if the various states involved in this new anti-opioid litigation either win cases or get the companies to agree to another extortion-like settlement. Pious promises will be made that the money will only go to opioid prevention and treatment plans. But all the money will be efficiently diverted to vote buying efforts the moment the public and the media lose interest in the story.

But to make our long story short, this has been what’s clobbering the Allergan common, particularly today, when the formal story came out, naming Allergan, Teva and other major pharma companies as the targeted villains in this story.

For our sake, we hope that today’s violent selling panic will reside in a day or two as it often does. Today’s waterfall decline in our AGN/PRA shares might mark a current bottom, if buyers step back in to snatch up the big yield offered by the shares. Or the panic may continue, killing both the common and the preferred until the panic selling exhausts itself.

Needless to say, our large position in AGN/PRA put a healthy dent in our portfolio today – a dent, we’re sure is temporary, but nonetheless disconcerting.

On the other hand, our recent new purchase of Apple (AAPL) shares, which, of course, took their usual dip right after last week’s big product announcements, seems to be firming so we picked up a few more shares. The company this week is flogging the release of its latest iOS operating system update for iPhones and iPads that includes support for third-party augmented reality apps.

That got the shares moderately excited today, getting us back up to our own break even point and perhaps paving the way to the usual Apple winter quarter ramp up in excitement and stock price. We’re excited, too. Any ramp in AAPL shares will help offset the bleeding we’re experiencing in AGN/PRA. Meanwhile, we’re hanging on to both.

Sometimes attitude improvement is more important than profit and loss. This is one of those times.


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