What are Allergan’s Next Steps?
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The near merger between Pfizer and Allergan clearly was financially motivated. But the deal promised to bring Pfizer’s firepower to ophthalmology. What does the annulment of the deal mean for our sector?
Dr. Gil Kliman leads the medical device investment team at InterWest Partners and invests in a broad array of healthcare opportunities, with a special interest in ophthalmology and digital health. He is a board member of Doximity, Glaukos, Gobiquity, Restoration Robotics, and ReVision Optics, and a prior board member of IntraLase and LenSx.
Mark S. Blumenkranz, MD
Mark S. Blumenkranz, MD, MMS, is HJ Smead Professor in the Department of Ophthalmology at Stanford University. He received his undergraduate, graduate degree in biochemical pharmacology, and medical education at Brown University. In 2004 he completed the Executive Program at the Graduate School of Business at Stanford.
Tom Salemi: Hey, everybody, welcome back to the OIS Podcast. This is Tom Salemi, your host. We spent a podcast or two back in the fall analyzing the Pfizer-Allergan deal, but never mind. Whatever we said was going to happen is probably true, but we’ll never know that for 100% because of course the deal is off, as we reported last week in the Eye on Innovation Newsletter. So kind of basic question: what does this mean for ophthalmology? Because that obviously is why we’re here, to talk about ophthalmology. Allergan prior to the deal was an 800-pound gorilla. It was really doing some interesting deals in ophthalmology. It bought Oculeve, it bought AqueSys. It was a real acquirer of new, exciting technologies, and we were looking forward to that continuing until the Pfizer deal came along and potentially distracted, or could have distracted Allergan. But now, again, the deal is off, thanks to the Department of Treasury, which probably should win some sort of influencer award at an upcoming OIS event. But so what’s this mean for Allergan going forward, and what’s it mean for ophthalmology? We talked to a few Wall Street analysts, VCs, entrepreneurs, and of course we’ll hear from Brent Saunders himself to get a sense of what the post-Pfizergan Allergan might look like. We talked with Ronnie Gall. He’s an analyst at Sanford Bernstein, and I asked him the question, what is Allergan now, now that the Pfizer deal is done, is Allergan still the same force that we saw in ophthalmology prior to the Pfizer deal being announced? Or has it been diminished in some way?
Ronald Gall: It’s roughly the same company. The fundamentals have not changed that much. Two things have happened. The first one is they delayed some of the restructuring they were going to do; they wouldn’t be standalone until – because expecting the Pfizer close. So that is probably delayed by 6 months to a year, just given the timeline of the deal. And second, the company presumably will lose a few people, will reorganize the people, reorganize a little bit now that the deal is not happening. And to some extent it is fair to say that there is an open question of if the future of Allergan is so great, why did the CEO choose to sell. So those are all kind of minor issues, but the core of the company is the same.
TS: So the fundamentals are still strong.
RG: Fundamentals are still strong.
TS: Yeah. Does Allergan need to make a deal? It wasn’t twelve hours after the end of the deal was announced they were already talking about Bausch and Lomb. I mean do they need to do something big?
RG: Yeah. Well, maybe not talk about Bausch and Lomb. They were asked about Bausch and Lomb, to be fair.
TS: Good point.
RG: But you probably want to mention the Ophthiris deal, which is within twelve hours of the deal not happening, they licensed a group of selective M1, M4 antagonists for cognitive diseases. The question is – the answer is Allergan does not a deal or a deal as one would think about it, a large company acquisition. Allergan, almost inherently by its model of not doing its own drug research, needs to continue to license in interesting leads to allow itself to have a good development pipeline. On certain areas they actually have pretty quality deal, if you kind of look at the GI [patch?] it looks pretty good. If you look at their CNS franchise, it looks pretty good. Their ophthalmic pipeline could use some sprucing up, as does dermatology pipeline.
TS: Well, let’s go right to the source. The day after – the morning after the Pfizer Allergan deal was announced as being over, Brent Saunders, CEO of Allergan of course, held an analyst call. And in that he addressed what was next. Obviously Allergan will have some money to spend when Teva acquires its generics line. And the analysts of course asked how that money would be put to use. Saunders said growth is through acquisition, clearly is a possibility that Allergan will be looking for products that would grow more quickly in the hands of Allergan as opposed to their current owners. Could be a big deal; could be a string of pearls, as Saunders put it. But it didn’t take long for the conversation to steer to ophthalmology, and one property in particular.
Brent Saunders: So just to be clear on the Bausch and Lomb comment, obviously I have a fondness for Bausch and Lomb that goes beyond my time at Allergan. And to be fair, Bausch and Lomb is a premiere brand in eye care. Very different than Allergan in that most of its focus is in consumer eye care and then surgical. Their pharmaceutical business really is one that supports the surgical business with regimens that that support cataract surgery. They have great people. They work – most of the people there used to work for me. They’re a great team. But that being said, first of all Bausch and Lomb is not for sale. Second, as I said on TV, Valeant may be for sale, or maybe it is and I don’t know. But we only buy growth assets. So you’d have to understand the growth profile to see if it would even make our screen or be interesting to us. And I think Bausch and Lomb is interesting at the right price, given that we’re in eye care and it’s a complimentary business to us. But you know, it was sold for $8.7 billion in what, 3, 4 years ago, with late stage pipeline of 30-some programs, and a strong organic growth profile. I can’t tell today that any of those things are still true. And so based on public information, it’s impossible to tell that it’s worth more than what it was sold for back 4 years ago.
TS: Brent Saunders then handed the mike over to Bill Muery, who heads up Branded Pharma at Allergan. And Mr. Muery gave this overview of new releases coming out in ophthalmology.
Bill Muery: In the United States, launches that will hit in the second half of the year and early 2017, of course following FDA approval, will be two dry eye products, Restasis MDPF, and then the neurostimulator from Oculeve, which will be marketed right alongside Restasis. Then we have a glaucoma medication, a minimally invasive glaucoma procedure, Zen 45. And then [Byvalsin?], which is a combination of Bystolic and Valsartan. And so all four of those can create a great deal of value over the next several years.
TS: Despite those exciting additions to the ophthalmology pipeline, there will be some gaps for Allergan to fill. We talked again with Ronnie Gall at Sanford, and he gave this overview of Allergan’s pipeline.
RG: Yeah. I mean there’s no doubt that they will – they’re looking for additional products to bring in. So I think their statements around Bausch and Lomb was we will obviously be bidders for Bausch and Lomb if it become available, and so far, as far as they know, it’s not available. And second, if you kind of look at their portfolio and look at their glaucoma product, they clearly could use additional help with glaucoma. They’ll be looking at anything available and dry eye, and generally any [?] front of the eye drug. And even back of the eye, given that they have the [?] molecule, the long-acting VEGF. Presumably, if that one works, they’ll be looking for additional drugs in the back of the eye. They also have a couple of things for dry MD for regional atrophy that they are working on, and presumably very interesting leads in that direction that will be interesting as well. So I would basically say that in ophthalmology they’ll be looking at any interesting new mechanism of action.
TS: So we talked with Dr. Ali Behbahani. He’s a partner at NEA, and he’s an investor in Oculeve, which of course Allergan bought for a nice price, given the state of the stimulator that’s used to treat dry eye. So we talked to Dr. Behbahani about what this development in the Allergan Pfizer deal means. And not too surprising, he isn’t exactly disappointed that the deal fell through.
Ali Behbahani: When I first heard of the Allergan Pfizer merger, I – and it’s been interesting to watch Allergan really getting active in the space. They did the Oculeve acquisition and AqueSys, and they’ve been pretty acquisitive on the ophthalmology side, as well as in other spaces they’re in, like the derm side. You know, I actually kind of had a sinking feeling in my stomach when I heard that they were merging, primarily because they’d become an active player. And so I was worried that, because of that merger and the Pfizer Allergan combination would be a huge entity. And so then the first question I had was well, whether ophthalmology would be an area focus because of course Pfizer had been in ophthalmology a long time ago and gotten out of it. So that was a big question mark. Now I think after the announcement of the acquisition, there was a lot of talk from Brent Saunders and other folks that ophthalmology was going to be continue to be a core area of focus for them. And certainly, we never saw them waver in terms of their commitment to Oculeve post acquisition, and allowing the team to execute. And so I think all of that was good sign. But from my perspective, it kind of – not that you ever want to see these things not work out, but my standpoint, you know, Allergan’s a big player in the ophthalmology space, and so Allergan as a separate entity to me will continue to be a big player in the ophthalmology space. And there isn’t any ambiguity as to whether they’re committed or not, because now they’re back to kind of being on their own and with ophthalmology as a core area of focus. I hope that they’re going to continue to not only innovate internally with their R&D, but also look to acquire other companies in the space to grow their business. So from my standpoint, I think it’s a great positive for the ophthalmology space in general, and for the medical device space in general as well.
TS: So Dr. Behbahani wasn’t exactly disappointed of the news that Pfizer and Allergan would not become one. What about on the entrepreneur front? We spoke with Mark Blumenkranz who has started many biotechs and medtechs in the ophthalmology field. And I asked him what he first thought about the news that Pfizer and Allergan were joining, and what does he think now that that deal is done?
Mark Blumenkranz: Yeah, my sense is that the system is a little more efficient where there are more players that can exercise economist decision making. And so I think it works. From the entrepreneur’s perspective, I would view this as probably being not a huge thing either way, but on the net side of it, positive because it provides sort of a broader range of options for entrepreneurs and young companies to go talk to people and see about partnerships, acquisitions, so forth and so on, funding, you know. So I see it as probably facilitating that process, the dialog and the interactions as opposed to having it so highly concentrated that the options are somewhat limited.
TS: But do you have Pfizer as one of those options? I guess the hope was that Pfizer would be moving some of its fire power into ophthalmology. Are they doing that in any way?
MB: Well, it’s an interesting question. You know, I don’t think they’ve really disclosed, to the best of my knowledge, at least publicly what their strategy for ophthalmology is going to be in light of this not coming together. My sense is that they’ve been a major player in ophthalmology before, and they certainly have the reach, the experience and the capital to be another major player. They have a few products that are coming towards the end of their patent lifetime. And so I think they’ll have to make that decision. But yeah, I think overall they certainly could re-enter the space themselves now that they won’t be doing it jointly with Allergan. So we’ll see how that plays out. I’m not sure I could handicap that at this point. It’s a little early for me to say.
TS: If we zoom away from ophthalmology and really take a look at the broader M&A market, what does this new Treasury rule mean? I mean it was obviously targeted at Pfizer, Allergan and inversion deals. But what will the lasting impact be? What are the unintended consequences? I talked to Liev Abraham. She is co-head of Citi’s Equity Research team, and of course she’s a favorite here at the Podcast and has appeared at the OIS Conference. And I asked her what were the broad implications of this new Treasury rule.
Liev Abraham: There are certainly concerns that this could affect M&A in the space going forward, particularly M&A between a foreign company – Allergan is Irish domiciled – and a US company. As the exact repercussions are not quite clear yet – there are several of them and they’re quite complicated – there are also potential repercussions on the tax rates of those companies that have already inverted, so their effective tax rates going forward. So absolutely there are repercussions, which is why this rule that was created is not trivial.
TS: Mr. Gall at Sanford had similar feelings. He suggested that the real beneficiaries of this new rule will be tax lawyers. They’ll be called upon to analyze deals until they can’t be analyzed anymore, to make sure that the tax implications of any acquisition, any merger are completely understood. We’ll leave the final world for Brent Saunders, CEO of Allergan, of course. He was asked on the analyst call what the implications, what the broad ramifications of these new tax laws would be. And he did not mince any words.
BS: One of the problems with these rules is – you know, I said this in TV – that everybody’s talking about walls. The Treasury is building a wall around the US to keep people in. And global companies, inverted or just foreign domiciled are going to be advantaged in buying US companies as long as this is the tax code and scheme that the US government wants to have. And I’m patriotic; I don’t want to get on a soapbox, but I think it’s incredibly misguided and unproductive policy for the United States. But flip side, Greg, is I guess we’ll take the advantage for Allergan and Allergan’s shareholders.
TS: There you have it, folks. Brent Saunders has the final word. And thank you to everyone who participated in this Podcast: Ronnie Gall, Liev Abraham, Mark Blumenkranz, and Ali Behbahani. Great insights from all around, and of course it was nice to hear from Brent Saunders. Thank you to our listeners for joining us for this breakdown of the breakdown of Pfizer-Allergan. And don’t forget to go to ois.net and register to attend OIS@ASCRS. It’s going to be May 5. Sign up at ois.net and we will see you in New Orleans.