Last spring and summer Brenton (Brent) Saunders, the 44-year-old CEO of specialty pharmaceuticals maker Actavis, watched from the sidelines as rivals Valeant Pharmaceuticals International and Allergan engaged in a contentious takeover battle. Valeant, an $8 billion-in-revenue, Quebec-based company known for favoring acquisitions over research and development, teamed up with activist hedge fund manager William Ackman to launch in April a hostile bid to buy the Irvine, California–based maker of Botox. Allergan — whose CEO, David Pyott, rebuffed the offer, calling the company’s unwelcome suitor an asset stripper — sued Valeant and Pershing Square Capital Management, Ackman’s firm, in a U.S. district court, claiming they had broken insider trading rules. In late August, Valeant and Pershing Square responded with their own lawsuit, filed in a Delaware court, to force Allergan to call a special shareholders’ meeting at which they would try to take control of the company’s board.
It was at about this time that Saunders — who sat with Pyott on the advisory board of the Foundation of the American Academy of Ophthalmology — reached out to his industry colleague. “At one point, I said to him, ‘Look, if you need a friend at the end of the day, I don’t know if we would do it, but call me and maybe there’s a fit,’” Saunders recalls.
On November 17 — a month and a day before Allergan would have had its potentially tectonic shareholders’ meeting — Parsippany, New Jersey–based Actavis announced its acquisition of Allergan. At $65.7 billion, or $219 a share, the deal easily topped Valeant’s $53 billion bid in the fourth-largest pharmaceuticals merger in history. Once the deal closes, which is expected to happen this month, Actavis will operate under the Allergan name and be one of the world’s ten largest drugmakers, with projected combined revenue this year of more than $23 billion. Beyond that, though, the company needs to write its script for what comes next.
There are geographic disparities at play, to be sure. Actavis’s U.S. base of operations is in New Jersey; Allergan’s is on the West Coast; and the company has its global headquarters in tax-friendly Dublin, by way of Actavis’s 2013 takeover of Warner Chilcott. But the bigger issue will be integrating Allergan’s name-brand, R&D-driven business with Actavis’s legacy generic drug culture, says Aaron (Ronny) Gal, specialty pharmaceuticals analyst at Sanford C. Bernstein & Co. in New York. Saunders’ job is like “putting two planes together in the middle of the flight,” he explains. According to Gal, the combined company will need to build a pipeline of new products to sustain it for at least three or four more years as it faces a round of patent expirations.
Saunders, a Lehigh Valley, Pennsylvania, native, made his first foray into health care when he was working his way through law school at Temple University as a managed-care clerk at Thomas Jefferson University and Health System in Philadelphia. Saunders, who went on to earn an MBA as well as a JD from Temple, in 1999 landed a consulting position at PricewaterhouseCoopers, where he quickly rose through the ranks to head the firm’s life sciences group.
At PwC, Saunders caught the attention of Schering-Plough Corp. CEO Fred Hassan, who hired him away in 2003. At Schering, Saunders got his deal-making feet wet, eventually running the company’s global consumer health business and heading Schering’s integration with Merck & Co. after the two drugmakers merged in 2009. A year later Saunders took the helm as CEO at Bausch & Lomb. At the time, private equity firm Warburg Pincus owned the eye care giant.
“It was in pretty rough shape,” Saunders remembers. “The team really did a great job of turning it around, though.”
The turnaround did not go unnoticed. In May 2013, Valeant bought Bausch & Lomb for $8.5 billion in cash, leaving Saunders with a hefty deal on his résumé — but no job. That August he was recruited by an executive search firm to join Forest Laboratories’ board of directors as chairman of the compensation committee and a member of the compliance committee. Two months later he was CEO, following the retirement of Howard Solomon, who was pushed out by investor Carl Icahn.
Enter Actavis. Formerly known as Watson Pharmaceuticals, the company had been a solid player in generic drugs, but after a dinnertime chat between then-CEO Paul Bisaro and Saunders, Actavis grew interested in Forest Labs and its portfolio of name-brand drugs. Actavis acquired Forest for $25 billion over a snowy President’s Day weekend a year ago. Saunders was later named CEO of the merged company.
In January, Saunders spoke with Institutional Investor Content Editor Anne Szustek at Actavis’s offices in Parsippany to discuss the merged company’s new look.
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Institutional Investor: Is Actavis still a specialty pharmaceuticals company?
Saunders: I don’t think so. We coined a new phrase when we did the Allergan deal: growth pharma. Unlike other specialty pharma companies, we have a broad variety of therapeutic areas. We have a global footprint and all the capabilities to commercialize our brands and products around the world. Despite our size vis-à-vis our peers, we’ve got the best top-line growth, and when you’re in a high-margin business, that’s incredibly important. There’s a dynamic inside the company that’s very different from when you’re a slow grower.
What, exactly, is growth pharma?
It’s a couple of key things. One, it’s a commitment to managing for growth. That means having a long return orientation and making investments in long-duration assets. It’s also about creating a mind-set in your managers around the world that growth matters and that it’s not enough to just manage for the bottom-line profit. But we really want to make sure we’re making smart investments in our product portfolio.
Innovation is also key. R&D is the lifeblood of what we do, and if we want to sustain our growth, we need to continually refresh our product portfolio and make sure that we’re not just bringing new pharmaceuticals to help people live their lives better but also ones made in our generic business that allow people to have access to high-quality, reliably supplied, low-cost medicines.
Actavis will look a lot like Big Pharma.
Although Actavis will be a top ten pharmaceuticals company, we don’t think of ourselves as Big Pharma. That being said, we can’t ignore the fact that we are indeed a big pharmaceuticals company. There are attributes of being big that help. Some of that is economies of scale, which allow us to have probably the most efficient margin structure in our peer group. Size also grants us diversity and resiliency so that we can mitigate risk around our product portfolio.
Does size mean power?
There is a flip side, and that is sometimes size can bring bureaucracy and a lumbering, slow-moving organization. We’ve put in place some very important processes to make sure that doesn’t happen. Actavis plans on keeping the organization flat, with about seven layers from me to the front line of the organization. We’re going to make sure that we don’t really have committees and that we foster a culture of individual decision making and accountability.
Size does have its advantages. But we really want to focus on growth and driving all the attributes we need to be successful in growing a $23 billion-plus-sales company.
Allergan is known to be heavy on R&D, especially in comparison with the typical generics company, like Actavis. How are you going to gel the research cultures?
When you think about the cultures of Actavis and Allergan, specifically as it pertains to R&D, I think there is a very nice fit between the two. In absolute dollar terms Actavis actually spends more money on R&D than Allergan, which may surprise some people.
Something critical as we combine is maintaining our focus on innovation. We need to continue to bring new products to market and to try to fill the white space of unmet medical need, as well as innovate to provide high-quality, low-cost medicines around the world.
Where do you source your research?
We tend to do that by partnering with academics, by licensing from start-ups or smaller, venture-backed companies. What’s great about health care is there’s no shortage of those opportunities. Health care is such a large part of the GDP of not just the U.S. but also the world. There’s so much funding for research, both public and private, that we find it a really great way to source early innovation by building those networks and relationships.
We’re agnostic to where innovation comes from. If you’re a Big Pharma company with a big discovery group and you spend a billion dollars a year on discovery research, you’re going to prioritize the programs that come out of your own discovery versus those that come out of universities or venture-backed companies. Therefore you have to make decisions to prioritize your own programs over those of others. Actavis takes a very pragmatic view of funding and supporting what we believe to be the best opportunities. It allows us to have a really “not invented here” culture.
What is your strategy for expansion?
We’ll operate in about seven therapeutic areas around the globe. All of them have long-lived assets of patent protection and a strong pipeline. When we look at our current market and product portfolio, we have a very nice growth profile for the next several years. Even more exciting, though, is that we also have a very rich pipeline of products that are working their way through R&D and clinical development. Next year the combined company could launch anywhere between seven and ten new products. That will be fairly typical of what will happen every year going forward.
What products are in the works?
We had one approved the day before Christmas that will launch this year, called Namzaric, which is a fixed-dose combination of Alzheimer’s drugs Namenda and Aricept. We also have a novel antibiotic for serious hospital infections that we expect to get approved and launched this year.
Such as MRSA?
We have a drug that we just got accepted for filing called cariprazine for schizophrenia and bipolar mania. Allergan has a drug called Semprana for migraine that we expect to hopefully launch soon. They have an extended-release version of DARPin Abicipar Pegol for glaucoma that they expect to launch. Potentially, there will also be some additional fillers in their aesthetic line. Allergan is also launching a new breast implant, which is one of the first new advances in breast aesthetics in some time.
How is it different from silicone or saline implants?
The probably biggest point of difference is that the implant is more anatomically correct. It’s a teardrop. It’s silicone — but a newer type of silicone — so that gives it a different, more natural feel to it as well.
How do acquisitions fit into the strategy?
I think one of the biggest misconceptions that you sometimes hear about Actavis is that we’re a roll-up. We’re acquisitive, but we’re not a roll-up. We don’t actually strategically plan for any M&A. When we do our strategic plan and our guidance for Wall Street analysts, we use our cash in our model to just pay down debt, whereas a roll-up would use its cash to predict future deals at the same rate of return as its previous deals.
A roll-up is shortsighted. It puts pressure on them to actually have to do the deals, because if that’s what they’re forecasting and that’s what they’re telling people, they have to actually do it. We only forecast organic growth. Any deal we do is just completely additive.
What is the pharmaceuticals company of the future?
It’s going to be one that can service its customer in a changing, dynamic environment. If you think of what’s happened, let’s say in the U.S., which is still far and away the best pharmaceuticals market, we’ve seen tremendous consolidation of customers. We’ve seen doctors move into large group practices, those group practices being bought by the hospitals, the hospitals merging into large health systems, the retailers aligning with the wholesalers, the [pharmacy benefit managers] all merging and the larger insurers all merging.
Another thing that’s going to be incredibly important globally for the pharmaceuticals company of the future is innovation. I think we’ve seen that the days of me-too drugs and drug pricing have become incredibly more complex and difficult. And the ultimate way to solve for all of those types of issues is to bring to market drugs that meet unmet medical needs — or, as Actavis does, bring high-quality, reliably supplied, low-cost medicines to people around the world. If you can do both of those things and you can service your customers in a robust way with a full portfolio of products, I think those are the companies that are going to win. •
Follow Anne Szustek on Twitter at @the59thStBridge.
