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A Look At Actavis

This profile of Actavis CEO Brent Saunders (by Matthew Herper) makes interesting reading, if your definition of “interesting” is roomy enough to take in various shades of “unnerving” and “enraging”. They’re the company that saved Allergan from the clammy embrace of Valeant, but reading this, you’ll wonder how big a difference it makes.
Saunders is being completely up front about some of the issues that many of us in the industry have been worrying about, but it’s strange to hear these things out in the open:

Saunders insists that Actavis-Allergan is more than just a short-term trade. It’s the springboard for a revolutionary new kind of drug company: “growth pharma,” he calls it. Actavis-Allergan will have the scale in marketing and clinical trials of a global powerhouse like Eli Lilly or Bristol-Myers Squibb, but it will eschew the core mission of most drug companies–inventing drugs–preferring to buy them from universities or biotechs all the time. The new company will be the first big pharma that doesn’t even pretend to invent medicines.
“ The idea that to play in the big leagues you have to do drug discovery is really a fallacy,” says Saunders. “You have to do research, you have to be committed to innovation. I strongly believe that, but discovery has not returned its cost of capital.”

We have Fred Hassan to thank for Brent Saunders, and depending on your dealings with Hassan, this could give you a strong opinion about him pretty quickly. After coming up through Hassan during his time at Schering-Plough, Saunders became CEO at Bausch and Lomb, and ended up selling them to. . .Valeant. And Michael Pearson of Valeant did what he does: siphon out the gas from the tank, rummage through the glove compartment for loose change, and sell the rest for scrap. We also have Carl Icahn to thank for Saunders, since he next installed him as head of Forest Labs, shortly thereafter sold to Actavis. (And if the idea of a Hassan/Icahn hybrid doesn’t give you pause, perhaps it should).
Within two weeks of becoming the CEO at Actavis, Saunders was involved in the Valeant/Allergan deal:

On July 30 Saunders called (Allergan CEO David) Pyott and offered to be a white knight. Over months of phone calls, he portrayed himself as the anti-Pearson, despite the fact that he agreed with much of Pearson’s thesis on the drug business. No, Saunders told Pyott, he would not strip the company like Pearson. Allergan would continue to do crucial research on things like dry-eye drugs and successors to Botox. Yes, the business could stay largely intact. . .

For some values of “intact”, that is. As Herper’s article makes clear, so far in his career, Brent Saunders has been a deal-making guy. And if he were to turn around and sell the combined Actavis/Allergan to, say, Pfizer, that would not be out of character in the slightest. It’s worth noting that the company’s tax domicile is Irish, in case that sort of thing interests Pfizer (or some other large US-based company) at all.
My own hope is that the rest of the industry can prove that the “research is a waste of cash” idea is a delusion. The numbers over the last ten or fifteen years, unfortunately, make a case that it isn’t a delusion prima facie, but that attitude doesn’t have to be correct, either. Even if the largest drug companies have been having trouble with their own return on investment for R&D (and not all of them have), many of the smaller ones have been able to make it work. (On the other hand, it’s worth keeping in mind that at that end of the market, the less unsuccessful examples just disappear, so you have to keep survivor bias in mind). But overall, we keep trying to get better at drug discovery, and there’s no reason that we shouldn’t be able to make it work if we can keep doing that. (If we don’t get better, on the other hand, we are in fact doomed).
So my own take is what I would call “hard-headed optimism”. There’s nothing that says that we have to fail, but there’s nothing that guarantees our success, either. The future is unwritten. If that future leaves the likes of Valeant and Actavis falling behind the R&D-driven companies, though, I will be quite happy.

33 comments on “A Look At Actavis”

  1. watcher says:

    I used to have similar belief as you in the (eventual) value of internal R&D. However, now it’s clear that there’s room for many options for the models of drug companies. There are three main objectives of drug companies, small or large: to make new medicines and help sick people, to maximize value of drug assets, and to make money for stockholders and the CEO (oops) employees. Depending on the vision and leadership capability of company leaders and/or individuals, the goals are more or less in different oraganizations.

  2. kjk says:

    Much/most academic research is crap (as per your “a call for better mouse studies” post). If academia can hope to sell to industry, they need to get their act together. Going a step further and funding academic research instead of merely buying the IP would really boost it’s quantity and quality.
    However, what happens to the innovator personalities in industry? There must be room for them somewhere, and standard R&D companies can fill that niche.

  3. Mike says:

    The small pharmaceuticals and biotechs don’t have the capacity to do late stage clinical development on their own, or to do the worldwide marketing and sales necessary to make a drug a successful product. And it is increasingly clear that big pharmaceutical companies are not very good anymore at innovative drug discovery.
    So I can easily see a future in which discovery and development become completely separate endeavors performed in different sectors of the industry. All the largest pharmaceutical companies will be focused only on late stage development and marketing/sales of inlicensed drugs. Those drugs will come from the small pharmaceuticals and biotechs who focus only on the drug discovery end of the pipeline.

  4. PorkPieHat says:

    Get used to it, Derek. The fact is that Big Pharma and Biotech companies are increasingly moving to obtaining ideas and inventions from academia. This has always happened at some level, where innovation has been a blend of internal and external origin, but we are seeing a major pendulum shift in this concept, to the extreme of the vast majority of new ideas and inventions are coming from universities and academic medical centers. And academia is not unaware of this shift in industry…many historical passive tech transfer organizations are reorganizing themselves now to resemble what a company might look like, with product investment and development capabilities, as well as active business development and marketing capabilities. I’m not saying I like it, but this is the new reality now. And it presents enormous challenges for all, but there is also potential upsides for all.

  5. Anonymous says:

    Brilliant idea–have the NIH spend hundreds of millions in biomedical research through tax payer dollars, swoop in with a deal for unis, and sell the drug right back to the taxpayer for 1000x the cost.

  6. biotechtoreador says:

    “Allergan would continue to do crucial research on things like dry-eye drugs and successors to Botox.”
    Phew, at least they’re still working on some of the worst scourges afflicting mankind—I don’t know how we’d survive with dry eyes and droopy eyelids. Move over Jonas Salk!
    Saunders’ approach, I don’t think, demeans discovery. It seems as though he just doesn’t want to do. If ACT ends up buying assets from a biotech, he’s still funding R&D but at a, potentially, derisked valuation. If it’s a good deal the biotech investors will get a nice return, as will ACT investors (the biotech employees are likely hosed job-wise, but will hopefully do OK with options).

  7. CMCguy says:

    One might argue many big Pharmas have been adopting this same model for years where they mostly “pretend to invent medicines” and now focus to acquire molecules and programs in later stages where they can contribute clinical and then marketing expertise. Although generally viewed as means to get new drugs such fragmentation of R, D, and other areas is much messier and more costly I believe, even with (or because of) outsourcing, with lack of experienced guidance to projects plus the burden of transitions. Disconnected organizations are going to be less innovative in the long run as groups that are isolated may spend time working on issues that do not fit subsequent area requirements because lack of feedback loops. Big Pharma has largely lost its way however a full switch to overly specialized organizations probably will collapse in the long run in sustaining intro of innovative drugs.

  8. entropyGain says:

    The rise of mammals required the fall of the dinosaurs.
    Although sad to see, we shouldn’t worry too much about this kind of thrashing about in death throes, but rather find ways to help the next generation grow to fill the empty niches.

  9. Shanedorf says:

    Given the immense failure rates at every stage of drug discovery & development – no single company can “own” all that failure any more.

  10. Ann O Mouse says:

    “The idea that to play in the big leagues you have to do drug discovery is really a fallacy,” says Saunders. “You have to do research, you have to be committed to innovation. I strongly believe that, but discovery has not returned its cost of capital.”
    This remarkable statement seems to violate the laws of economics and the laws of thermodynamics, and I don’t think Saunders believes it any more than I do. Saunders may speak about a commitment to research and innovation, but what he really is talking about is risk avoidance. He will pass the risk of discovery and innovation to small companies and universities. Some will succeed and some fail, and he will reward the winners with a return of capital and, if he has made wise choices, still turn a profit after his cost of development. Sadly, that may be a viable model in the near term, but he and his stock holders should take a lesson from history. Those who eschew risk never do as well in the long run. The entrepreneurs and risk talkers always end up controlling the game, but it requires a special talent and vision to achieve the delicate balance of innovation and entrepreneurship. Saunders is a good businessman and he personally will succeed. But he is no innovator and he is no entrepreneur.
    Now back into my hole

  11. DrSnowboard says:

    Isn’t this just about using other peoples money to fund the failures, so you can swoop in and invest in the winners? However, it will drive / has driven up prices for early biotechs so the move to align / fund / nurture / grease up to academics who may have an inside early track on a niche that could pan out… Just depends where you want to spend your money, buying unknown seed or bread that may be mouldy on the inside.

  12. MTK says:

    @3, I agree.
    @10, you write as if all the risk and innovation is in discovery.
    While Saunder’s sentiment may be avoiding discovery risk, it’s assuming development risk which is larger in terms of dollars. There’s also quite a bit of innovation and creativity required in development. It’s not turnkey.

  13. Lyle Langley says:

    @#6, biotechtoreador…
    “Phew, at least they’re still working on some of the worst scourges afflicting mankind—I don’t know how we’d survive with dry eyes and droopy eyelids. Move over Jonas Salk!”
    Yep, just like have restless legs and a droopy penis, huh? Those scourges the Big Pharma tackled.
    The attitude that only internal R&D is worth anything is so 2000’s Dr. Lowe. You’re better than that and you know it. To actively want a company to fail because they don’t follow the traditional path is beneath you. There are going to be many ways to skin the proverbial Pharma cat going forward and if Actavis makes this work, great. Because of the downturn of the all-mightly big Pharma there are many scientists that landed either in Biotech or Academia and this model helps keep those people working and discovering. If we were to only “allow” internal R&D, the landscape would be worse than it is now.
    Dr. Lowe, you can do better than this article.

  14. ex-KC-er says:

    Hell, they can call the resulting company Marion Labs. “Search and Development” was the story back in ’90 and we all see how well that worked out. Guess it’s time to start hoping that VC funding will cover the “researchers”, hoping that the remaining Pharma will buy the IP.

  15. 3Anon says:

    I have two thoughts on this.
    1. I feel smaller companies are more capable at performing R&D because most of the individuals there are of a research background and the hiring isn’t done by science illiterate HR folks. I am not saying that MBAs, JDs or HR folks are of no use, however in big pharma these people will be working for corporate offices of Home Depot or Microsoft and then wander over to pharma, pull 200-400k salaries and make decisions that ultimately cause problems. I believe that if any one of the large cap pharmas left would intentionally only hire the MBAs and JDs with EXTENSIVE biotech/pharma background they would do much better.
    2.An issue I see with Saunders is he is already ignoring the very basic and commonly understood concept in science that the whole is greater than the sum of its parts. He doesn’t just have bolt on syndrome, he believes you can build a car out of bolts and bolts alone. You really do need the original R&D guys and gals around if you want better the chances of a successful product.
    If I bought together a CRO, CMO, IP to drug, smooth talking Goldman Sachs guys, and a couple of my old chums for good measure….do you think I could get a drug approved? This is obviously a very cheap way to be successful. Why wouldn’t it work? About a million reasons. Maybe the CMC guy needs to talk with the crystallographer to learn an incipient he wants to use isn’t a good idea. When you think about all of the reasons this model wouldn’t work you are thinking of all the reasons Valeant and Actavis aren’t going to go anywhere, aren’t good investments, and are indentured to next quarter’s earning call.

  16. Anonymous says:

    My favorite line in the story is the Icahn quote:
    On Feb. 18, 2014 Actavis bought Forest for $28 billion, a 25% premium to the stock’s previous close. Icahn’s take approached $2 billion on the deal. “He came in and he got it done in five months,” says Icahn. “If you look at that result that’s pretty damn good. I just thought he did a great job.”
    Anyone who nets me $2 billion is OK in my book as well… Icahn has been making money hand over fist by forcing these kinds of deals in both Pharma & elsewhere. It’s unclear if anything else other than “increasing shareholder value” results, and of course Carl is almost always the biggest shareholder with increased value. Carl’s motto is: “Whoever has the most money when he dies, wins”. And he aims to win.

  17. John Wayne says:

    There is something about this that I don’t understand. I think we can agree that the probability of success in moving a ‘clinical candidate’ from discovery to profitability is a high risk process. So … how does outsourcing your early research minimize risk? Seems like there are at least two answers:
    1. Don’t buy early development candidates, buy things that are already drugs (or about to be)
    2. There is an absolutely unholy amount of biotech investment going on right now; this could transfer the risk from a specific company to unwary investors (baby boomers). Some will succeed, others will fail on somebody else’s dime.
    Another big question all companies who play in acquisitions have to deal with is … what is a good buy and what isn’t? How much is too much money for an asset? Do you have the right people to make that decision? This shift of risk assumes that you can pick winners from losers. I imagine that it is more challenging (but not impossible) to have that internal expertise without your own basic researchers invested and involved in acquiring external science.

  18. Ann O Mouse says:

    @12 I apologize if I gave the impression that development was risk free. I have been on both sides of this equation, so I am certainly not taking sides. More accurately, one might say that you are trading one set of risks for another ( at significant cost, as you point out), moving a bit closer to the target and narrowing one’s focus. Clearly that is a move that Saunders thinks is worthwhile. My point is that this is short sighted and unsustainable for the industry as a whole, even if some like Saunders and his mentor can make a career out of it.

  19. biotechtoreador says:

    ‘ “He came in and he got it done in five months,” says Icahn. “If you look at that result that’s pretty damn good. I just thought he did a great job.”’
    Indeed impressive, though this seems pretty clearly a case of literally taking credit for someone else’s work. BS may well have sailed on and sold the company, but what he sold was the culmination of years of work by thousands of people. BS did a good job of straightening the curtains and mowing the lawn.

  20. Not Agilist says:

    This approach, of course, relies on someone in big pharma actually being able to spot the correct companies to buy.
    Sirtris anyone??

  21. Farmhand says:

    “hard-headed optimism” is a prerequisite for success at research. I’m sure you have been called worse. I know I have.

  22. Eric says:

    @20. How is that any different than expecting someone at big Pharma to decide which is the best internal R&D project to fund?
    Whether internal or from an acquisition, success ultimately comes down to picking the right horse. Some people prefer internal R&D with all of the associated overhead. Other people prefer acquiring more advanced projects which will usually have a hefty price tag. Either seems like a viable strategy as long as you are good at handicapping the horse race (not an easy task!).
    I think #3 is probably right about the future of the industry. I think it is a path we are already moving down.

  23. Hap says:

    You should have more information about your internal projects than you will about almost any external project, both in terms of how much they cost and in how much potential they have. In theory, your internal people have a duty to the company to do the right thing (insofar at it is not illegal, or immoral). On the other hand, people looking to have their compounds purchased don’t have a duty to your company, and aren’t likely to disclose uncomfortable information if they can get away with it. In addition, purchasing other candidates implies transaction costs of some sort, while internal decisions don’t necessarily involve such costs (above and beyond normal functioning).
    In general I think this approach presumes a large set of people willing to work for cheap who can’t do anything else (to keep outsourced discovery costs down). That will probably work for a while, but eventually the sheep are going to find something else that keeps more of their skin intact. Once that goes away, the cost benefits of outsourcing early research won’t be so impressive, and while you remove some risk by outsourcing research, you take on added risks where it’s most expensive to do so – in (later stage) clinical trials.
    I still don’t see how this can succeed, but I probably have limited foresight.

  24. gippgig says:

    “the less unsuccessful examples just disappear”?

  25. Anonymous BMS Researcher says:

    An under-appreciated aspect of in-licensing is that an organization with experience getting its own molecules all the way from discovery to market can use that experience when doing due diligence for compounds discovered by others. Also a track record of getting molecules on the market can make them a more desirable partner for development deals.

  26. alig says:

    @25 In-house experience is only useful if the people making the deals listen to the people with experience. As this is often not the case, having that experience is just an added expense.

  27. Anonymous says:

    How does buying late-stage de-risked assets at fair market value, create value? How does buying *any* asset create value, for that matter? Isn’t buying an asset just a swap of existing assets (cash in return for something that already exists)? It’s a zero-sum game, and that’s why buying assets is a dead business model. Face it, Pharma is dying.

  28. 3Anon says:

    I agree with @26 and @27
    I have been involved in deals where buy-side due diligence teams rely on experts that are not of great relevance to the products (both internal and external experts). It is frustrating when someone flashes you with a big offer yet you know they won’t be able to take it anywhere. No joke, I actually had a big pharma MD (epidemiologist) try to criticize some PK work. -Shaking my f*cking head-
    @27, this is true. It just turns out the buying companies aren’t creating value, merely there are just certain companies that can get more out of the product that others. The easiest example of this is a company that has a sales force in your indication area vs. one that does not.
    They are not really creating value, just getting the most out of your product…this is why if you are on the sale-side and believe someone is a good fit you push for royalties, while if you don’t believe it is a good fit you just ask for non sales related milestones.

  29. CMCguy says:

    #26 alig you make an excellent point which probably explains why reductions and elimination of in house R&D is so very popular these days

  30. Oliver says:

    Hi Derek, that last sentence was a nice and true BURN. 😉

  31. Willis Ekbom says:

    @13 Lyle Langley
    RLS is a movement disorder that, among other debilitating symptoms, prevents sleep. Pramipexole was developed for Parkinson’s disease and is now labelled for RLS and is under study for unipolar and bipolar depression. I know…freakin’ hilarious, those folks.
    Many prostate cancer patients suffer the erectile dysfunction your so lightly call “droopy penis.” Same goes for combat vets with PTSD and batel injuries. Erectile dysfunction can lead to serious psychiatric consequences including suicide. Hilarious, no?
    “More than 80 percent of people with RLS also experience a more common condition known as periodic limb movement of sleep (PLMS). PLMS is characterized by involuntary leg twitching or jerking movements during sleep that typically occur every 15 to 40 seconds, sometimes throughout the night. The symptoms cause repeated awakening and severely disrupted sleep. Although many individuals with RLS also develop PLMS, most people with PLMS do not experience RLS. People who have PLMS and do not have RLS or another cause for the PLMS may be diagnosed with periodic limb movement disorder (PLMD). PLMD may be a variant of RLS and thus respond to similar treatments.”

  32. Lyle Langley says:

    @#31, Willis…
    Oh, good lord, Willis. I like the over-exaggeration you put out there. Combat vets have PTSD and other psychiatric disorders, but it’s the ED that leads them to commit suicide, huh? If that’s the case, then Viagra/Cialis/etc should have significantly reduced the number of suicides, yet, somehow they are at an all time high? How about Pharma going after those issues? No, most have run scared from any pyschiatric disorders, even though there are no good drugs for this, because why? It’s hard (no pun intended), and they cannot make billions off of them. ED drugs are vanity drugs and have been marketed that way for the Pharma industry to make billions. Please don’t get on your high-horse about these diseases while not having the same strong reaction when dry eyes and botox were denigrated earlier. And really, RLS…

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