In a period of just a few years, Allergan chief executive Brenton L. Saunders, 45, has become one of the biggest deal makers in the history of the pharmaceutical industry. As described in my February cover story, Saunders sold eye care giant Bausch & Lomb to Valeant Pharmaceuticals’, then took over Forest Laboratories, which he then sold to generics giant Actavis, becoming chief executive in the process. After that, he engineered the $66 billion purchase of rival Allergan, right out of Valeant’s jaws. Today, he culminated that run by announcing the sale, for $40 billion, of Actavis’ generic drug assets to Teva. I spoke to him this morning about the deal. Below is an edited transcript.
Please credit any mistakes to two facts: Saunders is going on an hour of sleep, and I'm on vacation.
Forbes: How is it that you decided to sell your generics business? You had previously seemed to like it a lot.
Saunders: I still like it. This is not something we were contemplating. Obviously we've been watching industry events, particularly consolidation of insurers and buying groups in the generics industry and really spending a lot of time focusing on our branded business with tuck-in deals and pipeline expansion deals. So Teva approached me just a few weeks ago with a very attractive price and it caused Paul and I and our board to step back and look at the industry dynamics and look at the price and we came to the recognition that the generics industry was going to need to consolidate and we were not going to be a consolidator of generics. Rather we were going to be focused on building strength in brands and innovation so given the price and given the timing, we thought this was the right strategic move at the right time.
Forbes: Had Teva approached you before?
Saunders: They had approached us before they had announced any interaction with Mylan, and at that time we were not interested. Clearly it was a different set of circumstances and it was a different price than we were discussing, but when they came back a few weeks ago the price was compelling and the industry had changed. The consolidation of the purchasers and the buyers had really gotten momentum.
Forbes: So it was consolidation of the insurance industry that drove this?
Saunders: That is part of the dynamic - the bigger part of the dynamic, or the one that I watched more closely, is the consolidation of the purchasers. It was CVS Omnicare, it was CVS-Target, it was [Walgreens and Alliance Boots] signaling that they were going to participate in the consolidation just underscored the dynamism of this marketplace and what was going to happen, and the need for further consolidation in the generics business which sells its products very differently than the branded business. It's more of a B-to-B sales, whereas clearly on the innovative side of the business, it's also a B-to-B sales, but the influencers are driven more by medical need and not just price.
Forbes: This deal could eliminate almost all of the debt you built up doing these big deals, won’t it?
Saunders: By the time it closes, which we anticipate in the first quarter, we should be in a positive to neutral net debt position. cash on hand should be larger than debt on hand. Obviously how we deploy the capital will be the big question. We will deploy some of it for debt paydown, but we would like to invest the majority of it for future growth.
I think our history should be the guide for our future. You’re going to continue to see us do what I call our bread and butter. We’re going to continue to do tuck in deals and pipeline expansion deals like we recently have done with Kythera, ad Naurex and Furiex and Rhythm where we’re adding either R&D assets with strong proof of concept or market products that fit very neatly into our therapeutic categories and commercial infrastructure. So that will continue.
But what this does do is it accelerates our ability to think about the transformational deal. I think when you look at the past couple years in the transformational category, we’ve done three: Warner Chilcott, Forest, and Allergan. Each one has gotten bigger, and each one has moved up the innovation chain. So I think we’ll continue to think about how we continue that path.
Forbes: With valuations stretched, isn’t this a better time to be selling than buying?
Saunders: I agree with you and that’s why we sold. If you do the math it’s just shy of 17 times 2012 Ebitda. And as Teva stock goes up, that multiple will expand because we’re participating in the equity. This may be one of the best multiples in terms of an asset sale in our industry.
With respect to buying, we continue to look for ways to do that in a disciplined way. When you look at some of the things we’ve done, whether they be Forest or Kythera or Furiex, they were things that I think we got at the right price. We’ve always maintained strong financial discipline. If the timing isn’t right, then you move onto the next target. If the valuation is too high, you don’t take the deal. But there are always opportunities. And I think what makes us strongly positioned, is that we can move fast. If there is a value opportunity, we’re not going to take six months to evaluate it.
Forbes: Wasn’t this difficult for Allergan chairman Paul Bisaro, who built the company’s generics business?
Saunders: It was. The word he’s used, that I heard him use quite a bit, was bittersweet. On the one hand this was the part of the company he played an instrumental role in building, but he also understands the value that we’re getting and what that represents for all the hard work of the people in that business. And he’s very proud, as am I, in our generic colleagues around the world. And I think we both feel that this business will be better placed and strongly positioned in a new Teva. It will have strength, it will have scale, and it will be able to compete very effectively in a very dynamic generic industry. So it is a tough transaction, for Paul and for me because I do really like the generics business and even more, I really like our team in our generics business.
Forbes: But you said that you think Teva got a great deal here.
Saunders: In our industry, there are very few of these. And I think this truly is a win-win for both companies. They get to go back to what they’re best at, global generics. To get one of the greatest R&D pipelines in generics in the industry. They get global strength, and we get to focus on where think we can add the most value in driving long-term branded and innovative pharmaceuticals.
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