Trading Diary: Allergan hearts NY Mohawks and other action

When it comes to patent protection antics, big-pharma company Allergan takes the cake when it comes to legal patent protection creativity.

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Administration and community building of St. Regis Mohawk Reservation in upstate New York. (Image via Wikipedia entry on St. Regis Mohawk tribe, CC 3.0, GNU 1.2 licenses)

WASHINGTON, September 12, 2017 – As we note in our companion article Tuesday, big news today will involve Apple’s (stock symbol: AAPL) massively hyped 2017 annual product announcements, which this year will focus on the all-new (more or less) breathtakingly exciting (reportedly) iPhone 8 which, according to the rumor mill, may or may not be immediately available.

Typically, whether Apple’s announcements are perceived as good, bad, or indifferent, the stock generally gets a run-up until the announcement date and then gets slaughtered for a few hours or a few days during and after said announcement.

Right now (11:15 a.m. ET), AAPL is off a measly 25 cents – not much for a stock currently priced at $161.25 per share. But we’ll need to wait until 1 p.m. ET for the show to get underway in order to see where Mr. Market finally decides to take the stock short term at least. To view all this excitement live via streaming video, click this link at 1 p.m. ET or 10 a.m. PT if you live on America’s Left Bank.

Trading Diary


We’re currently out of Apple shares, having taken profits in our holdings earlier this summer. We may get back into Apple stock if AAPL shares get hammered after today’s announcement. We’ll wait and see.

As our regular readers will remember, in 2016, we took a large position in the convertible term-preferred shares of Dublin-based the big-pharma company known as Allergan (AGN; preferred shares symbol: AGN/PRA, though brokerage symbols may vary on this one). Our initial attraction to these shares was due to articles we’d read via generally reliable sources that AGN/PRA shares, trading at a discount and thus yielding over 7 percent at the time, would be mandatorily redeemed at par (in this case, $1,000 per share) in March 2018. That was more than good enough for us.

However, after we’d made our big commitment, we discovered our sources were wrong on one key point: While the shares will indeed be redeemed next March, there’s no $1,000 per share par value guarantee. Instead, these shares will be converted into common shares at one of two conversion rates, TBD by the price of the common on the date of mandatory conversion.

On one level, that’s a disappointment. We’d prefer the guaranteed $1,000 per share we’d been counting on. However, over long periods of time, pharma stocks have been incredibly lucrative for investors.

My late father swore by the pharma giants. When he passed away in 2009 – right at the generally accepted tail-end of the Great Recession, BTW – his shares in pharma giants like Merck (MRK) and Abbott Labs (pre-Abbvie spinoff) had appreciated an average of 300-400 percent (!) over time. Hard to beat that. He’s also re-invested the uncommonly high dividends these big pharma companies still tend to offer.

Will we sell our shares of AGN/PRA on the next up-surge, which tends to happen just prior to the next ex-dividend date? (In this case, that date is November 2017). Or we hold those shares and let them convert in March 2018? We have no clue at present, so we’ll wait and see what happens.

Which is where things are starting to get interesting. Since AGN/PRA is continuously convertible – we can convert these shares to common right now – it tends to track not only along with its current yield, like most preferred stocks do. It also fluctuates, sometimes wildly, along with the underlying common stock (AGN), given the conversion factor.

AGN jumped up hugely on an otherwise lackluster trading day last Friday, September 8, 2017, when it made an astounding announcement regarding patent litigation against the company by generic drug manufacturers apparently trying to jump the gun on a major Allergan moneymaker. This one is complicated, so let’s quote from a detailed CNBC piece on the topic:

“Pharmaceutical companies do some creative things to try to extend their patents, but Allergan may have just taken the cake.

“Allergan said Friday that it transferred all the patents for its billion-dollar eye drug Restasis to the Saint Regis Mohawk Tribe, which then granted the drug giant back an exclusive license.

“For its trouble, the tribe will get $13.75 million from Allergan, plus potentially $15 million in annual royalties.

“Why? Restasis is facing multiple patent challenges, including some under a system known as inter partes review, or IPR.

“The tribe, Allergan says, holds sovereign immunity against these kinds of legal challenges, and thus is now filing a motion to dismiss the IPR.

“The result: Allergan potentially gets a legal challenge off its back.

‘”I believe it’s novel,’ Allergan CEO Brent Saunders told CNBC in a telephone interview after the agreement was announced.

“‘The actions today really allow us to focus the defense of the Restasis patents in the federal court system and avoid the double jeopardy created by the IPR system,’ Saunders said.”

CNBC further notes in an apparent update to its original piece that

“There is no precedent for this kind of move in the pharmaceutical industry, at least that Saunders said he was aware of.

“But it has been done before with state universities, said Bob Bailey, Allergan’s chief legal officer.

“Bailey said Allergan was approached with the idea in early August.

“‘My first reaction was: ‘This is brilliant,’” he said Friday.

“The pharmaceutical industry has railed against the IPR system for patent challenges ever since hedge fund manager Kyle Bass used it to launch a series of attacks against drugmakers, while shorting their stocks.

“Saunders pointed out the legality of the IPR process has been challenged and is expected to be heard by the United States Supreme Court this fall.

This is a complicated issue. In general, we’re against big pharma companies playing games to extend patent rights, ultimately costing consumers millions by delaying generic pharma companies from manufacturing and selling cheaper alternatives to breakthrough drugs.

On the other hand, generic pharma companies like Teva (TEVA) and others often look for ways to jump the patent fence ahead of time by taking advantage of government rules and regulations, which, at least in part, are meant to protect patents to a certain point, allowing the creators of new drugs and therapies to at least earn back the massive R&D costs they’ve put in to developing breakthrough technologies.

Like big tech, big pharma also has to be on the lookout for legal offices that function like patent trolls who work 24/7 to sue bigger firms for alleged patent violations themselves with the goal of forcing settlements that enrich these law offices but don’t really help the consumer in the end.

It’s a mess. But Allergan seems to have figured out – for now – a way to finesse the endless litigation involving patents and patent expirations on lucrative new drugs and treatments.

The market has been taking some of Allergan’s Friday rally away over the past two trading days, and this case is far from over. But, given the link of AGN/PRA to AGN, this novel patent game, which involves taking advantage of (but also handsomely rewarding) a New York-based American Indian tribe based on its peculiar status in the American legal system, this will be a headline-grabbing maneuver for quite some time.

And, as we’ve noted before, “headline risk” is a key element individual investors need to watch out for as they battle the rich guys and the supercomputers in the ever-more-challenging market environment we continue to face in the 21st century.

We’ll keep you posted on this one. But we’re still holding, and are not much worried about making money on this particular holding. We think we will profit handsomely. However, it’s no longer certain exactly when and how that profit will occur. We’d prefer sooner rather than later!

Stay tuned.

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