Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Allergan's transformation this year was supposed to be into a tax-advantaged subsidiary of Pfizer. After that deal blew up, Allergan has pursued a different metamorphosis, from a specialty pharma company lumped (unfairly or not) with controversial firms like Valeant to a more conventional, research-focused pharma firm. 

Evidence of this long-heralded shift came Wednesday morning with the company's $639 million purchase of Vitae Pharmaceuticals, which has a pipeline of dermatology drug candidates. This is not a mega-deal, nor is it a purchase of already marketed drugs that are ripe for price hikes. It's a risky, research-focused deal for drugs that are still in development and face heavy competition. And Allergan is paying dearly for the pleasure -- a 159 percent premium to Vitae's share price on Tuesday.

It's a Deal!
Vitae's stock more than doubled on the news Allergan had agreed to buy it at a 159% premium.
Source: Bloomberg
Intraday times are displayed in ET.

Allergan CEO Brent Saunders hinted at Morgan Stanley's health-care conference on Tuesday that such a deal might be coming. He said M&A deal flow has never been stronger and that Allergan was looking for new R&D opportunities. He asserted (again!) that Allergan isn't a specialty pharma firm, referring to a once-popular model that has lately come to be known for focusing on older medicines, de-emphasizing research and hiking prices. 

Allergan's move away from that model started with its $40.5 billion sale of its generics business to Teva, completed in early August. It continued with the company's recent pledge to take only moderate price increases, putting it ahead of many respected pharma firms -- not just Valeant -- on the controversial issue of drug pricing. And on September 6 it paid $60 million up front for a company that hopes to use gene therapy to cure an eye disorder. 

Wednesday's deal is Allergan's latest conspicuous step away from the specialty pharma model. Its announcement touted Vitae's research team and drug-discovery platform. Vitae's two leading drugs, which are being tested to treat psoriasis and atopic dermatitis, are in Phase 2 of the development process. That means more time, research and spending will come before any FDA approval. Both have a substantial risk of failure. And both are aimed at markets crowded with other drugs.

Allergan's R&D spending is already rising, and it is now clearly a focus of the company's deal and investment strategy. It still differs from traditional pharma in that it de-emphasizes the earliest stages of drug discovery in favor of acquiring medicines where such early work has already been done. But its strategy is closer to that of its more-established peers, who in fact have lately shown a tendency to favor mid-stage acquisitions over in-house discovery.  

In terms of dollar amounts, its spending doesn't yet match that of some big pharma or biotech firms with similar market values. But its trailing 12-month R&D expense is 17.55 percent of net sales, crushing Valeant's 4.1 percent ratio. And that's roughly similar to Amgen's 17.73 percent and Merck's 18.02 percent. And even in dollar amounts, Allergan is catching up to companies it wants considered as peers. That gap will narrow more with more acquisitions like Vitae.  

Playing Catch-Up
Allergan's R&D spending is starting to look more like that of traditional pharma
Source: Bloomberg

Given the wholesale implosion of the specialty pharma model, Allergan is choosing its friends and strategies wisely.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Max Nisen in New York at

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