Health

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.

Brent Saunders's rise has been swift. He's risen so far, so fast, and in such an unusual way that the whole pharma industry is watching to see whether he'll fail -- or should be imitated. 

About seven years ago, Saunders led the consumer health division at Schering-Plough. Now he's in the captain's chair at Allergan plc, the $66 billion pharma giant he helped build from what was once a smallish New Jersey generics company called Watson Pharmaceuticals. 

If Treasury Secretary Jack Lew hadn’t killed Pfizer Inc.’s attempt to buy Allergan earlier this year, then Saunders would be CEO-in-waiting at the largest pharma company in the world.

Running Allergan is not a bad consolation prize. But it has not been an easy year for Saunders or his company. Allergan's market cap has lost more than $50 billion this year with the Pfizer deal's collapse and as Saunders has tried to break Allergan free of the "specialty pharma" model of buying old drugs and jacking up their prices. 

2017 will be a test of whether Saunders's new formula will work -- whether Allergan will be a new model for pharma to emulate or a failed experiment.

Foul Weather Fans
Analysts still think Allergan is majorly undervalued despite a share-price dip
Source: Bloomberg

In August, Allergan sold its legacy Actavis generics business to Teva Pharmaceutical Industries Inc. for $40 billion. The company has started buying up risky, early-stage drug prospects with the proceeds. 

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. 

Allergan also made a pioneering public pledge in September to keep price hikes on its drugs to less than 10 percent a year, and to moderate pricing generally, even as many rivals still depend on large, regular increases on old drugs and exorbitant prices for new drugs.  

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 Inc.

It's a smart shift. Price hikes are increasingly stigmatized and limited by payer scrutiny. A recent bipartisan Senate report suggested policy remedies designed to curb pricing abuses, and the attention has not been flattering to formerly sky-high specialty-pharma valuations. 

Crater
Specialty pharma valuations have cratered due to deteriorating financials and/or drug pricing scrutiny
Source: Bloomberg

Of course, Allergan's shift isn't just ideological, but pragmatic -- the company's older products are seeing sales decline more rapidly than expected. Sales of an extended-release version of the Alzheimer's drug Namenda fell by 31.5 percent in the third quarter, helping to lead to two guidance cuts and pressuring shares. The dry-eye drug Restasis -- which accounted for more than 10 percent of sales in the third quarter -- faces competition from a recently approved Shire PLC drug and may lose patent protection earlier than expected. 

Saunders's term for Allergan's new model is "growth pharma." This is defined, in a buzzword-filled pentagon in a company slide deck, as a mix of "category leadership," "operational excellence," "customer intimacy," and open sourcing of R&D projects with, well, growing a lot.

Allergan certainly is a company of unusual breadth, focusing on everything from its best-seller Botox to breast implants and Alzheimer's treatments. 

It has targeted double-digit annual sales growth through 2019. Analysts are less optimistic, expecting 6.7 percent average annual growth over that period. 

Growth Pharma
Analysts expect healthy growth from Allergan over the next few years, but the company's expectations are even higher
Source: Bloomberg

Either expectation puts pressure on Allergan's pipeline to deliver.

The company says it has 70 mid-to-late-stage R&D projects and is adding more through acquisition. Picking the right early-stage drugs is always difficult. And its $1.5 billion in pipeline-focused acquisitions after closing the Teva sale come with plenty of risks. 

Risky Roster
Allergan's recent pipeline-focused buyout spree comes with some caveats
Source: Bloomberg

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.

But Allergan needs at least some of these bets to work out, in order to keep up its strong revenue growth. It also needs to protect its margins -- its 45.8 percent adjusted operating margin in the third quarter was one of the industry's highest -- as it curbs price hikes and spends more on R&D and drug launches. 

Allergan's still-substantial cash pile helps. It gives the company breathing room and the ability to do more immediately accretive deals to supplement its longer-term bets. Its $2.9 billion purchase of LifeCell, announced on December 20, will add revenue and a new growth avenue for its plastic-surgery business.

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. 

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

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net