Pharma Merger Botox Just Got Bigger

Allergan is the newest major player in the global pharmaceutical industry. After a merger with Actavis, the new man at the helm and the former chief executive who pushed through the deal, spoke to Handelsblatt.
Smooth move.

Once a year, Monte Carlo in Monaco becomes the center of the fight against aging when 9,000 experts gather for a global conference on aesthetic and anti-ageing medicines. Pharmaceutical firms are also present, including the new and improved Allergan.

The maker of Botox was recently acquired by rival Actavis for more than $70 billion, a deal announced in November, making it one of the most expensive mergers of the last few years. While Actavis led the takeover, the combined company will take the name Allergan and become one of the largest pharmaceutical companies in the world with more than $23 billion in sales. In addition to the anti-wrinkle cream Botox, Actavis is among the world’s largest producers of generic drugs.

In an exclusive interview with Handelsblatt, the two managers explained their thinking behind the deal: David Pyott, who headed Allergan for 17 years and will leave the management board, and Brent Saunders, the new executive leading the merged company.

Gentlemen, would you recommend university graduates join the pharmaceuticals business?

Saunders: Yes, I would – however only to those who are open to change. The market is undergoing a metamorphosis. Dynamic companies are defeating established ones. Pharma is currently like the technology sector, which is taking big steps forward and is open for new ideas.

So the business model is outdated?

Saunders: Partially. The model of developing multi-billion dollar blockbusters in long, expensive, self-driven research cycles will be replaced. The new pharma companies are more oriented on partnership. They cooperate with universities and start-ups. In my opinion, regional providers won’t be as successful as global ones. This is the reason why Actavis joined with Allergan. We are now a very dynamic company which is growing and has a strong global footprint.

Allergan is a market leader with Botox. That’s what made it the target of an aggressive takeover battle last year. Rival Valeant was also making a bid for the company. In the end it led to the most expensive deal of the year at $70 billion. Mr. Pyott, are you proud on this record?

Pyott: I didn’t negotiate with them. I only negotiate if there is a chance for agreement. The offer by Valeant didn’t reflect the worth of Allergan. And, to be honest, I loathe the way this party behaved. On the morning of the same day in November when Brent and I communicated our plans regarding the takeover of Allergan by Actavis, Valeant’s management published a paper on how they would lead Allergan. Their plans were to cut down the operative costs by 64 percent – by 90 percent in research and development alone. The lemon is squeezed until no juice is left and then you move on to the next company.

Lucky for you, there was an alternative.

Pyott: We had several options. Brent called and asked if we should meet. We know each other from our time in ophthalmology when he led Bausch & Lomb. The irony is that Bausch & Lomb has since been taken over by Valeant.

Mr. Pyott, it is said you checked in at hotels under false names so that nobody would become aware of your meetings with Mr. Saunders.

Pyott: I used different names at several meetings – names of investment bankers for example, but also Indian names, because I grew up in India.

And you knew quickly that Actavis was the “white knight” for you?

Pyott: I knew quickly that this was a possibility. I only knew Brent to start and then met his leadership team. We realized at our first meeting that we do things in a similar way.

Actavis offering a few dollars more per share might have finally convinced you.

Pyott: Not at first sight, but of course you do have to look at the shareholders’ interests if you want to accept a takeover offer. It’s also about the interests of the stakeholders – the patients, the physicians, the employees, and so on.

From the outside, it seems like the two companies are from totally different worlds. Actavis has its roots in making affordable, generic drugs. Allergan’s top product stands for luxury in the world of the bold and beautiful. How do these two cultures fit together?

Pyott: That might seem to be the case at first glance. But if you take a closer look, Actavis does two thirds of their business with brand products and innovative products. The combined company is active in seven business areas; Allergan alone was only active in five. By the way, this was the running gag on Brent’s and my roadshow: I would present a chart with the five business areas of Allergan and Brent one with the seven of the combined company. And then he used to say: “Oh, my charts look so similar to yours.” I’d answer: “You can have mine – for $71 billion.”

That’s a few billion got on top of the price that was originally communicated of $66 billion.

Saunders: The reason is that Allergan’s shareholders got 60 percent of the price paid in shares. And because Actavis’ shares clearly rose through the process, which is a good thing, the overall price rose too.

Mr. Pyott, after 17 years as CEO, you will now become chairman of the Allergan foundation. Will you still consult for the new company?

Pyott: No, I'm going to quit and become a philanthropist. I’ll finance clinics in Africa, for example. Stepping back doesn’t come naturally to me, but I’ve been preparing myself for months. The aim is not to make money. For me it is important to know that the company is in good hands. Spending on research and development will stay at a high level, which reassures me. Brent will do a good job.

And you, Mr. Saunders, you are no longer just a deal maker, but have built up a company which is supposed to grow extremely quickly. “Growth pharma” is your catchphrase. How do you hope to achieve this?

Saunders: The formula sounds easy, but implementing it is demanding. We want to have the best employees in the right positions; we want to offer the best products and the best product pipeline.

Aren’t you too broadly positioned, with seven therapeutic areas and the generics business coming on top of that? Many other pharma companies concentrate on only a few businesses.

Saunders: I don’t think so. For example, we sold our medicine for respiratory diseases to Astra-Zeneca, because we accepted that we cannot play along in a leading position. But in the seven branches we're keeping, we're number one or two, or at least very competitive in lots of markets. And we have new products in development in all these areas.

Nothing more will be sold?

Saunders: No, we've examined our portfolio carefully. Of course, we will examine from time to time if we are still leading or remaining very competitive in the therapeutic areas.

Integration processes often fail after mergers, because the cultures just don’t fit together.

Saunders: I already have some experience in this area. It fails if you try to integrate by using a sledgehammer. While we may have taken over Allergan, we treated it as a merger of equals from the beginning. We are very open to learning from each other.

The takeover has raised the company’s combined debt to $45 billion. You will be hard-pressed to afford any more acquisitions.

Saunders: It is crucial for us to keep our investment grade rating and thus our flexibility. As a measure of that we have the ratio of debt to Ebitda, to our operating profit. Our debts are four times as high today. But in the next year we want to achieve a ratio of three to one. We expect to have an operative cash flow of more than $8 billion by then.

So you’re open to more acquisitions?

Saunders: At least we won’t be looking for another $70-billion acquisition. If we do make any more acquisitions then they will be smaller, additional takeovers – technologies for example or single products.

The new company is called Allergan. Why?

Saunders: To be honest, I made this decision and sold it to our board as a “name inversion” instead of a “tax inversion.” As you know, the new Allergan corporation will be located in Dublin, like Actavis before it. But in the end our shareholders will have to agree to the new name at the shareholders’ meeting. I simply think that Allergan is better known among physicians and doctors than the name Actavis.

You plan operative synergies and savings of $1.3 billion in total. How many jobs will this cost?

Saunders: We have more than 30,000 employees and will, of course, will aim to make as few job cuts as possible, and ensure when we cut jobs, we do so in a socially responsible way. We have not yet given numbers. It will most likely primarily affect the administrative areas.

Mr. Pyott, you once described Botox as a Russian doll that always reveals new contents underneath. Will Botox be the most important growth driver of the new Allergan?

Pyott: At least an important one. The market for aesthetic facial treatments alone will double in Europe by the year 2020. And there is even more potential on the therapeutic site: The use of Botox against chronic migraines and an overactive bladder are only at the beginning. And as a medicine against depression, Botox is currently in phase 2 of a clinical study program.

Saunders: We have growth drivers in all other therapeutic areas, too, and also with our generics.

Mr. Saunders, you were injected with Botox in front of 1,000 sellers – to show that you are not only the CEO but also a user.

Saunders: Yes. In the meantime I have learned that it's best to begin in your 40s, not at 60 or 70.

Is it too late then?

Saunders: Not too late, but the treatment becomes more complicated.

Pyott: And it definitely becomes more expensive.


Hans-Jürgen Jakobs is editor in chief of Handelsblatt; Maike Telgheder covers health, pharma and chemicals. To contact the authors: [email protected], [email protected]