Mylan CEO Heather Bresch
The Restasis patent battle between Mylan (MYL) and Allergan is heating up. Mylan heavily criticized Allergan for partnering with St. Regis Mohawks to protect the patents, calling the arrangement “desperate”:
Mylan has had no shortage of critics over the last year as it suffered from a stinging EpiPen pricing scandal. Now, the generic giant is dishing out barbs of its own, blasting Allergan for a new licensing deal with the Saint Regis Mohawk Tribe thats designed to shield eye drug Restasis from competition.
In a federal court filing, the generic player called the licensing maneuver desperate and a last minute attempt to shield the patents-in-suit from inevitable cancellation. Mylan is among the companies seeking to market copycats of Restasis, which generated $1.5 billion in sales for Allergan last year.
The Mylan also vowed to vigorously oppose the St. Regis partnership. This is shaping up to be a high-sta kes battle. I had the following takeaways on the matter.
Restasis dominates the $1.8 billion dry eye market. It was approved in 2002 to treat patients with keratoconjunctivitis sicca whose tear production is presumed to be suppressed due to ocular inflammation. The patent was set to expire in Q2 2014 – nearly 12 years after the drug was originally approved. Allergan was able to get the patent extended to 2024, thwarting potential generic rivals.
After Mylan, Teva (TEVA) and Pfizer (PFE) sought to produce a generic version of Restasis, Allergan sued them in federal court last month. It also sold the patents to the St. Regis Mohawk Tribe earlier this month to protect them from an inter partes patent review (“IPR”) brought on by Mylan. Allergan will keep the cash flow from Restasis, but pay the Tribe an up front fee of $13.75 million and annual royalties of $15 million. In effect, Allergan is attempting to rent the tribe’s diplomatic immunity. Becau se its a sovereign nation St. Regis Mohawks can claim immunity from an IPR.
Is The Partnership Legal?
Whether a judge will consider it legal for Allergan to sell the Restasis patents, keep the lion’s share of the economics from Restasis and protect the patents from generics remains to be seen. The fact is that this is likely uncharted territory. At a minimum the tete-a-tete with Mylan could delay any decision on the IPR. The longer the patent case remains it limbo, the longer it could be an overhang for the stock.
Since the St. Regis partnership was announced AGN has fallen nearly 6%. I believe upside from dismissing an IPR could be priced in; the downside from an IPR or a potential ruling to allow generic Restasis is not priced in. The longer this goes on the longer AGN bulls have to think about the potential damage to sentiment if generics enter the market. The longer they have to think about the erosion of Restasis revenue and loss of market share to Shire’s (SHPG) Xiidra. That cannot be good for the stock.
Importance Of Restasis To Mylan
Mylan is known for making the EpiPens auto injector which helps defend against certain allergic reactions caused by food, insect bites or stings. Mylan’s specialty segment – which includes Epipens – has enjoed higher revenue growth and profit margins than its generics business. However, generics has represented over 80% of its revenue and remains a key component of its business model. In Q2 the company’s $3 billion in revenue was up 15% Y/Y, likely driven by acquisitions and growth from the specialty segment. Though not a high flyer, the generics business provides a steady source of cash flow to help fund other growth opportunities.
If Allergan is allowed to protect Restasis patents from an IPR review it could hurt the ability of generic firms like MYL and Teva to generate future business. I think it would only be a matter of time before other pharmaceutical companies attempt to align themselves with St. Regis to protect their patents. In the short-term, All ergan’s protection of Restasis represents a lost opportunity for Mylan to sell generic Restasis. If Allergan gets its way it could strike a major blow to Mylan’s business model.
Importance Of Restasis To Allergan
On the surface it seems rather odd for Allergan to go to such lengths to protect Restasis. However, the drug represents 9% of the company’s total revenue. Allergan’s Q2 revenue was up 8% Y/Y on the strength of acquisitions. However, its organic growth is practically dead. A loss of Restasis could cause Allergan’s total revenue growth to turn negative. This illusion of growth helps sentiment and attributes to AGN’s 15x EBITDA.
A loss of Restasis patents could lead to a major erosion of the drug’s revenue and earnings. It would likely hurt sentiment, but also make it more difficult for Allergan to service its $30 billion debt. Shocking The Street, a premium service I write in conjunction with Seeking Alpha, intimates that a ratings downgrade from S&P or Moody’s could be on the horizon. A loss of the Restasis patents could hasten any ratings action.
Mylan is fighting back against Allergan’s attempt to shield its Restasis patents. Even if Mylan cannot force an IPR it could potentially delay any ruling. I believe the patent battle could create an overhang for AGN. The longer it goes on the longer the stock could slide. AGN remains a sell.
Disclosure: I am/we are short AGN, TEVA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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