Allergan CEO: We'll cooperate with Teva on selling our stake

Brenton Saunders photo: Bloomberg

Talking to "Globes", Brent Saunders says Teva "will yet do great things" and that he's excited about the startup investment prospects in Israel.

In May 2015, while Teva was pursuing Mylan in an attempted hostile takeover, and Mylan was pursuing Perrigo in the same way, newly appointed Allergan (formerly Actavis) CEO Brent Saunders said in an interview with Bloomberg that the deal between Teva and Mylan was liable to lead to destruction of value simply because it was a hostile deal, and that there was too great an overlap between the two companies.

Saunders saw himself as an expert in this area: Actavis acted as a white knight for Allergan (which later gave its name to the merged company) as it tried to escape the hostile clutches of Valeant, a pharmaceuticals monster that at the time was buying just about anything that moved on the market, and after its acquisitions would implement a policy of cutting R&D and raising prices. Allergan preferred Actavis, in a friendly merger with a $70 billion price tag.

It may be that Saunders already knew at the time that he would intervene in the Mylan-Teva deal, and it may be that he had not yet made a decision about it, but two months later it was already a fact: Mylan activated a poison pill that made it hard for Teva to buy it, and Teva CEO Erez Vigodman, together with the Teva board, made a rapid decision to buy Allergan's generics division instead. The price was $33 billion cash and 100 million Teva shares - altogether some $45 billion.

Was Allergan a white knight for Mylan or for Teva? Perhaps both? And was the price exorbitant or reasonable? That is something that we shall be able to assess in another five-ten years. Meanwhile, a hostile takeover was replaced by another friendly merger, Teva reinforced its standing at the top of the global generic drug companies league, and Vigodman declared that in any case he had always preferred Allergan's generics division to Mylan, only up to then it had not been for sale.

Talking exclusively to "Globes", Saunders explains why Allergan decided to sell its generics business to Teva, and what its plans are for the 10% of Teva it now owns.

What led you to sell the generics activity on which your company had been based from its earliest days?

Saunders: "Allergan underwent a change, and the market also underwent change. We saw much consolidation among generics companies, and much consolidation also among innovative companies. We gradually became a much more innovative company, and we knew that if we had to decide where we would put our next dollar, we would prefer to buy innovative activity and not generic. We knew that if we were not planning to put together a large generics business under us, our advantage in that area would diminish, and so it was preferable to part from that business if we were offered a good price. Thus we stopped being a generics company. Teva, on the other hand, is built on its generics business, and it is suited to lead the consolidation in the industry, and so the sale was very appropriate. We very much believe in the asset we sold them and in the team that manages it. It was hard for us to part from them because they were certainly a significant part of the Allergan family."

What about the price? In general, prices in pharma deals have fallen since it was decided to execute the deal.

"I'm not so concerned about that. It's shortsighted to judge a deal like this according to specific market prices in this or that month. Teva has very great potential at the moment, and I believe that Teva will not only lead the generics industry but will beat the average numbers of the generics industry in growth, return and so on. You have to judge the deal over ten-twenty years."

As someone who has managed generic and innovative activity together, and as a large shareholder, how would you advise Teva to balance between these two areas?

"They need to find their point of equilibrium. They have a strategic vision that we are fine with and we are very happy to be their shareholders."

They chose a different path from yours, and have not grown their innovative activity to the same extent.

"They are simply at another stage in their development in comparison with us, and they will yet do great things."

Do you intend to hold shares in Teva for the long term?

"We have to hold the shares for at least a year from the date of the closing of the deal at the beginning of August 2016, but we are not an investment company. We'll sell the shares in cooperation with Teva and without harming the share price."

The gap between the market caps of the two companies is not enormous. Teva currently has a market cap of $47 billion, while Allergan's market cap is $97 billion. That gives it the label "big pharma", although Saunders prefers "growth pharma" to distinguish it from established companies that in the past few years gained a reputation for improving the bottom line mainly through cost-cutting and tax planning. Saunders stresses that Allergan will grow through innovation. That, he says, is one of the reasons that he is prepared to limit himself as far as raising product prices is concerned, which is the policy he recently announced, for, as he says, if the drug companies don't practice restraint, the US government is liable to impose it.

Are you planning another huge deal that will change you fundamentally?

"Not at the moment. Our aim at present is to carry out acquisitions of innovative products or of companies with R&D. A good example of that is the acquisition we made for $60 million of RetroSense, which is developing optic gene therapy for treating blindness. Now, for $639 million, we have acquired Vitea, where we obtained a drug for psoriasis that is a leader in the category, a drug for atopic dermatitis that is a leader in the category, and also a drug discovery platform, in which we hope to invest in order to upgrade our R&D.

'It's true that only now do we have drug discovery scientists, but even companies like Cellgene and Gilead, which are considered innovative biotech companies in every respect, do not specialize in discovering drugs. Even Google obtained most of its products through acquisitions.

"We recognize that the drug development ecosystem, which includes universities, hospitals, company incubators, young and mid-size companies, is so much bigger than any one company, and there is no sense in trying to reproduce it ourselves in a laboratory. That's why we are so open to collaboration."

In Israel as well?

"Certainly. Israel is a very exciting place for us to seek investments. It's important for us that you should know that we will invest in Israel and that we understand the power of the science and the technology here. We're very excited to be investing in the Startup Nation."

In the past year, Allergan has carried out a strategic change by opening its own marketing offices in many countries instead of the local distributors that sold its products up to now. In Israel, the company has opened an independent branch, but it continues to use the services of the distributor it employed before, Tradis Gat. The country manager of Allergan Israel is Alon Gat (35), who came from Tradis Gat.

Many managers of Israeli branches of big pharma companies aspire to be a bridge via which the business development people in the companies they represent will come to know the startup scene in Israel and to collaborate with local companies, even to the point of acquiring them. Gat has high aspirations and very well thought out methods in this respect. "We have built a special database that maps out all the relevant companies in Israel according to the ways they might interest Allergan. So, for example, if a senior manager in the company is only looking for companies at a certain clinical trial stage with which to collaborate, and another senior manager is looking to buy urology companies, and someone else is looking companies whose activity is synergetic with that of Allergan, and maybe one scientist is looking for another scientist in another company to cooperate on some basic research, each of them can carry out a different search in our database. So if an Israeli company doesn't stand out according to one criterion, perhaps it will stand out according to another. Our aim is gradually to bring to Allergan's notice as many Israeli companies as possible."

According to Gat, there are no similar databases in other companies. "During Saunders' current visit to Israel we held a day of introducing Israeli companies to him. Great interest was expressed, and we expect to be very busy on this in the next few years. Fortunately, Allergan is a company where there is a genuine opportunity to succeed in this respect. They have plenty of free cash, their debt level is low, and they are very interested in acquisitions."

Allergan's Israel branch currently has annual revenue of some $20 million, of which 40% comes from aesthetic medicine, 35-40% from ophthalmic medicine, and the rest from specialist drugs chiefly in neurology and non-aesthetic Botox treatments. The local company intends to add areas of activity from Allergan's range in the near future, chiefly in gynecology and gastroenterology. The company is growing at a rate of over 20% a year, and the goal is to reach 25% next year, Gat says.

Is there the same price problem in Israel as in the US?

"Prices in Israel are only moving downwards, because the Israeli state health basket sets a price through comparison with five European countries, and chooses the lowest of them. The weakness of the euro significantly depressed prices of drugs in Israel, even though our expenses are in shekels.

"Another reason for the decline in prices is consolidation among the buyers: main hospitals, Sarel, which is the buyer for the health funds, and the health funds themselves. Maccabi and Clalit account for 75% of the market. I think they are acting rightly in some ways - bringing down prices enables them to offer additional treatments to people insured with them without charging higher premiums. However, when prices are low, we are last in line when Allergan decides in which countries to launch new drugs. Our answer to that is to show them the strategic advantage of working with Israeli doctors, who are world leaders."

Where does Israel stand when it comes to aesthetic treatments, which is one of Allergan's specialties?

"Israel is a growing market for aesthetic medicine. People are not ashamed to acknowledge that they have been treated. We are also seeing preventative medicine, that is, people who turn to aesthetic treatments even before there is a problem. The aesthetic medicine practitioners in Israel are excellent, with good hands, and results that speak for themselves."

Published by Globes [online], Israel business news - www.globes-online.com - on September 20, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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Brenton Saunders photo: Bloomberg
Brenton Saunders photo: Bloomberg
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