WASHINGTON, October 18, 2017 – In our previous installment on the Allergan (symbol: AGN) patent brouhaha with the Feds, we explained how patent and formula maneuvers and other complicated legal stuff can often prolong patent protections for all manner of innovative products, including the formulation of breakthrough prescription drugs.
We also regaled you with the complex but hopefully interesting backstory behind Allergan’s controversial battle against the ability of generic drug companies and the Federal government alike to invalidate the company’s extended patent protection for Restasis, its highly profitable “dry eye” treatment. The upshot of an adverse Federal court ruling Monday pushed both the company’s common and convertible preferred shares (AGN/PRA) right off the investment cliff Monday
Allergan Tuesday-Wednesday scorecard
In Tuesday morning Wall Street trading action, both Allergan’s common and preferred shares got some of their mojo back. After an iffy start, both classes of stock suddenly surged throughout much of the day, with the preferred shares gaining roughly 20 points back ($20 per share) at one point.
Alas, some big sellers and short sellers flew in near the 4 p.m. ET market close Tuesday, pummeling both classes of stock once again on high volume. The result: AGN/PRA shares were off another $3+ per share, closing at an anemic $712.77 per share. The common stock was off fractionally as well, closing below $200 per share for the second horrible day in a row.
Wednesday update: In Wednesday afternoon trading action, both Allergan stocks looked like they might try yet again for a comeback. Such hopes have again proven short-lived. As of approximately 1 p.m. ET, Allergan common shares were getting slaughtered yet again. They are currently sitting at their session low of $187.53. That’s off a colossal $10.23 per share (-5 percent more or less) and the stock still looks weak.
In sympathy, AGN/PRA – the shares we currently hold in our portfolio – is getting hammered even worse. That’s due to its convertability feature, which currently permits each preferred share to be converted into 3+ shares of common. So, if AGN common is down $1, that means AGN/PRA will go down somewhat over $3 in tandem. The preferred shares are currently plumbing the depths of a fresh hell, hitting their low of the day (thus far), down $34.07 per share to stand at $678.70, a 4.78 percent loss on the day.
The only consolation for the preferred shareholder is the stock’s impressive quarterly dividend of $13.75 per share, giving it a current yield of $7.54 percent. Buying more shares right now, however, would be like trying to catch a falling knife. I’m beginning to wonder how far down these stocks will go before some buying interest returns.
Given the huge and ongoing stream of bad news about the Restasis patents – Allergan derives up to 10 percent of its current income from this drug, according to analysts – it will take this company’s stock a long time to get back to higher prices once again. This will likely hold true despite the company’s likely excellent quarterly report. That’s due out early next month.
As for now, management has earned a black eye for its thus far failed legal maneuver. This epic fail will continue to weigh on the shares in coming weeks, no matter how good the company’s quarterly P&L numbers might look. Both stocks are grossly oversold at the moment, given the value of Allergan’s extensive portfolio, including its legendary cash cow, Botox. But when heavy panic selling and shorting is in full force, as it is again today, the selling climax will happen when the Allergan bears declare it so, and not until.
The continuing and not always predictable danger of headline risk
The ongoing Allergan brouhaha is yet another example of what we constantly fear in this column and as investors: the caprice of random headline risk. Bad headlines, justifiable or not, can kill a perfectly good investment in a perfectly good company in a New York minute. We’re watching this phenomenon unfold right now in Allergan’s preferred shares, and it’s not a very good feeling.
As our longtime readers know, we’re rather heavily-invested in these shares, given their current high yield and mandatory conversion feature that’s scheduled to click in on March 1, 2018. But the past three days running amount to a bonafide selling panic in both the preferred and common shares of Allergan. This corrosive selling (and likely shorting) action is digging a considerable and sickening hole in our largest portfolio, something we hadn’t expected to happen. But them’s the breaks when you’re playing this game.
You generally know which stocks are likely to incur some headline risk, since you can read about what’s happening in either the newspaper (for those who still subscribe) or online. Thus, you can generally avoid them until the risk has passed. However, with Allergan, we frankly never saw this one coming.
Pharmaceutical companies always have major drugs either coming off patent or are involved in patent lawsuits. It’s another reason (good or not) why brand new drugs are priced so high. The company knows it will have to battle, and sometimes settle, any number of bogus and/or valid lawsuits at all times, and their expensive lawyers expect a handsome paycheck for their efforts to counter these suits.
That this current Allergan brouhaha would so violently affect the company’s shares was not in our headline-risk warning list. Too bad for us. You can generally avoid stocks that will get hit by this risk, but not if you don’t have a strong clue at the outset. We didn’t. Oh, well.
Right now, a nip of single malt scotch will make things feel better.
The future for Allergan investors in the weeks and months ahead
On the whole, Allergan stock analysts remain positive on the common stock, given what appears to be an excellent new-drug pipeline for 2018 and beyond. That should go a long way to offset the negative earnings potential that will eventually arise as Restasis is forced to meet eventual generic competition.
Despite their continued optimism for Allergan shares in 2018 and beyond, these analysts have also realistically lowered their earlier price targets to around $250 per share from earlier estimates in and around $300 to reflect the eventual erosion of Restasis’ pricing power.
Looking back, why did Allergan try this controversial and now bad-looking patent protection move in the first place? We discussed the company’s options in our previous article.
But to recap: All pharmaceutical companies – not just Allergan – will do whatever they can to keep hot, new patented drugs off-limits to the competition for as long as they can. But in many ways, Allergan’s novel attempt to escape legal double-jeopardy from the U.S. Patent bureaucrats may finally motivate Congress to reconsider the way patents are handled – or botched – by the Federal government in ways that are detrimental to pharmaceutical companies and consumers alike.
Silver lining for Allergan: Despite the obvious tsunami of selling and short-selling that occurred Monday in shares of both Allergan common and preferred, Allergan has managed to accomplish what was likely the company’s actual aim when it stirred up the current hornets’ nest to begin with.
Given the molasses-like process of lawsuits and litigation in this country and given the upcoming appeals process with regard to yesterday’s one-judge ruling, it could be late 2018 or even some time in 2019 before Allergan is forced by the courts to give way to generic versions of Restasis.
True, a 2018-2019 time frame isn’t the 2024 time frame Allergan thought it had won for Restasis. But delaying generic competition a bit longer likely allows the company an additional year or two to rake in continued high profits on their blockbuster drug. Had the company not pulled its St. Regis Mohawk patent gamble, buying time in Federal courts and at least momentarily stymieing the Patent Office in the process, they might well have lost this game to the generics prior to Christmas, 2017.
Downside for Allergan: In this age of social networking, controversy and 24/7 trollery, Allergan’s upper management is already being subjected to withering criticism for a legal maneuver that seems (and perhaps really is) decidedly anti-consumer. This may tarnish the company’s shares for some period of time, preventing or stalling an inevitable snapback rally, getting disgruntled current shareholders even more PO’d than they already are in the process.
On the other hand, most longtime investors (like this one) think yesterday’s selling and shorting tsunami was grossly overdone. Most company analysts today agreed with that sentiment, keeping their “Buy” and “Strong buy” recommendations intact, but understandably reducing their previous price targets for Allergan’s common shares.
If today’s early (but aborted) buying in both AGN and AGN/PRA shares revives soon and is even moderately sustained, Monday’s cliff-dive and Tuesday’s late-day negative follow-through in these shares will prove to have been an excellent buying opportunity, the likes of which we rarely see.
That’s why we picked up a few more still-expensive AGN/PRA shares near yesterday’s close. Fingers crossed. We’ll either make more money in the end, or (choke!) double down on an eventual nasty loss.
Postscript and Irony Alert: Making this ongoing Allergan patent soap opera all the more interesting, here’s a pop quiz for you:
Do you recognize the name of at least one of those pharma companies that brought the Federal Court Restasis patent suit against Allergan? Does the name “Mylan” ring a bell?
Yep, you guessed it. Mylan is the notorious pharmaceutical company that was gang-tackled by Congress last year for grossly inflating the price of its vital EpiPen pocket insulin injector product. It made that move while maneuvering to prevent – wait for it – generic competitors from entering the insulin-injector market by offering similar products at a considerably better price.
Irony continues to abound in the wonderful world of business. Capitalism remains a great economic system. But it does have its flaws, and the Mylan and Allergan affairs provide ample proof of that fact.