January 3, 2017
By Mark Terry, BioSpace.com Breaking News Staff
In the first half of 2016, investors were watching the Pfizer -Allergan merger deal, which was scuttled in April by the U.S. Treasury Department. Part of the fascination, besides the fact it would have created the largest pharmaceutical company in the world, was over how in about seven years Allergan’s chief executive officer, Brent Saunders, had gone from heading the consumer health division at Schering-Plough to being the chief-executive-in-waiting for the biggest pharma company on the planet.
Max Nisen, writing for Bloomberg, looks at why everyone is going to keep watching Saunders—either to see if his approach flies and should be emulated, or whether in a let’s-stop-and-watch-the-car-crash way, expecting him to fail.
At the moment, many analysts believe Allergan is undervalued. At least part of that is related to the company’s emphasis on acquiring high-risk early-stage drugs, rather than placing a larger emphasis on developing drugs in-house. The company has been in the process of selling its legacy Actavis generics portfolio to Israel’s Teva Pharmaceutical Industries for $40 billion. They’ve used some of that money on acquisitions.
Nisen writes, “This approach deviates from big-pharma orthodoxy in important ways. Instead of spending money discovering drugs, Allergan is buying others’ discoveries and developing them. Other firms do this, but nobody else of Allergan’s size does this so exclusively.”
He also notes that Allergan made a public vow in September to hold drug price increases to less than 10 percent a year. Nisen writes, “This is all part of Saunders’s effort to shed the now-pejorative ‘specialty pharma’ label, which saw Allergan lumped in with companies such as Valeant Pharmaceuticals International .”
From the public perspective, that’s probably a good move. From a policy and political perspective, it’s safe. Although no one’s really clear what the Trump administration might do about drug pricing, President-elect Trump has said he would bring down drug prices.
Saunders has dubbed the company’s new model “growth pharma.” That appears, in a company slide deck, with some umbrella buzzwords like “category leadership,” “operational excellence,” and “customer intimacy.” It’s hard to say specifically what those mean, although the one focus that comes through is “growth.” That’s not exactly unique to Allergan, although the company is projecting double-digit sales growth to 2019. Wall Street projects about half, or 6.7 percent.
Allergan has about 70 mid-to-late-stage research-and-development projects, and it’s adding more through its string of acquisitions. Nisen notes that the pipeline acquisitions have had some very high-risk buys. Examples include its $50 million acquisition of Akarna Therapeutics, which has a drug candidate for nonalcoholic steatohepatitis (NASH), an indication many drug companies are interested in but haven’t been able to crack—and the drug’s never been tested in humans. Allergan also acquired RetroSense Therapeutics for $60 million. It’s a gene therapy company, another tough area, and its compounds haven’t been tested in humans either.
Nisen writes, “Financially, these deals are relatively small potatoes, compared with the more than $100 billion in deals the company has done over the past five years. Taking lots of small and relatively inexpensive bets and paying for them with a diversified base business is a fine strategy.”
Of course, some of those bets need to pay off. And the company also needs to protect its margins, having reported a 45.8 percent adjusted operating margin in the third quarter, which is one of the highest in the industry.
Nisen writes, “Saunders has already had a unique career, to say the least. But he can’t be called a true pioneer until he demonstrates his new model can work sustainably, earning Allergan the ‘growth pharma’ label and valuation it seeks.”
