Think about it: the Dublin-based company that Saunders is running, along with chairman Paul Bisaro, was just a few years ago a generic drug firm called Watson Pharmaceuticals. It has now completely shed its skin and become a new kind of drug giant that doesn’t sell generics at all — or invent drugs. For that kind of re-imagination on the go, you probably have to go back to Saunders’ mentor, Fred Hassan, who, as chief executive of Pharmacia, bought Monsanto to get the arthritis drug Celebrex – and then spun the ag-tech company right back out.
For investors in the generic business, this may be a bit of a warning that stock prices are getting too heady. Saunders (I spoke to him between meetings this morning, as he went on just an hour of sleep) says he expects Teva stock to rise over the long-term, and thinks that the deal for Allergan will improve as that happens. But he also agrees that he’s getting an amazing multiple, and says that two factors led him to the “bittersweet” decision to sell: the great price, and the fact that consolidation among drug purchasers (CVS, Walgreens) and insurers (Aetna buying Humana, Anthem buying Cigna) led Saunders and Bisarro to realize that they had to either bulk up or get out. And they didn’t want to bulk up. Investors in Mylan Pharmaceuticals, which spurned Teva’s advances: Beware.
Instead, Saunders wants to do what he says Allergan has been doing with all its big deals: “move up the innovation chain.” In other words, don’t sell generics, which are commodities. Sell expensive branded drugs, like Allergan’s Botox or the antibiotics and antidepressants the company is now looking to develop.
What this deal does do is give Allergan a cash-and-stock infusion about equivalent to the debt it has built up with all those previous deals. Saunders says he doesn’t just want to pay down debt, though. He wants to ante up again. “[W]hat this does do is it accelerates our ability to think about the transformational deal,” he says.
Wall Street is already salivating. Over the weekend, Umer Raffat, the specialty pharmaceuticals analyst at ISI Evercore, polled his buy-side clients about what Allergan should do next. The smart money’s ideas: buy Biogen, or AbbVie, or merge with Pfizer. Transform again.
Saunders is obviously game. One thing that distinguishes him from Valeant billionaire Michael Pearson, the drug industry’s other great consolidator, is that Saunders comes to this from a different place. A decade ago, it looked like he was being groomed by Hassan to potentially take over Schering-Plough before that company ran into problems and got bought by Merck. Unlike Pearson, he’s not looking so much to dismantle the big pharma model as to re-create it.
So, despite protestations so far that basic research doesn’t return its investment, one could imagine him getting into the business of inventing drugs again if he thought he could buy the right lab. That might include Biogen, which, in fairness, got its top-sellers through licensing, not in-house invention. And Biogen just got a huge haircut thanks to disappointments from both its research (on an Alzheimer’s drug) and its marketing (with the best-seller Tecfidera). But price could prove a hurdle.
“If the timing isn’t right, then you move onto the next target,” says Saunders. “If the valuation is too high, you don’t take the deal. But there are always opportunities.”
What about the other option? Would Saunders put all this sweat into creating a new company and step aside so it could be sold? Like most executives his age, he’s a huge believer in the concept of shareholder value, which means he’ll always sell at the right price.
So place your bets. Here we go again.
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