For Better or Worse, Bill Ackman Joins Big Pharma’s M&A Frenzy
Activist investor Bill Ackman, who has recently taken a major role in Valeant Pharmaceuticals Intl Inc.‘s (NYSE:VRX) potential takeover of Allergan Inc. (NYSE:AGN), first approached Botox-maker Allergan Inc. last week with an unsolicited offer for the company, which was promptly denied; Valeant and Ackman first teamed up last month.
Now, it seems, Ackman would like to give some advice. The investor, who runs Pershing Square Capital Management, sent Allergan a letter in which he cautioned the company against taking another offer if it didn’t provide a better value than Valeant Pharmaceutical’s $47 billion bid.
“Even if Allergan were able to identify a transaction that offers higher cash value than the estimated value of the Valeant proposal at the time of the transaction closure we do not believe such a cash transaction would be necessarily superior to Valeant’s stock and cash offer,” Ackman wrote, per Reuters on Tuesday. “Today Allergan is in a good position to negotiate with Valeant. This may not always be the case.”
Previous to Ackman and Valeant’s courting, Allergan had been preparing for talks with Shire plc, about a potential acquisition, though Shire has actually refused previous offers from Allergan, according to Reuters. For his part Ackman claims that a Shire acquisition deal by Allergan would lack “strategic rationale,” and wouldn’t be “superior to the Valeant transaction.”
But Ackman wrote the letter in part to encourage Allergan to begin talks with Valeant; his understanding when he wrote the letter, according to FiercePharma, was that the company was attempting to look for other suitors. Looking for a different suitor, Ackman says, makes more sense then a deal with Ireland’s Shire. Thus far, it seems that Allergan has contacted both France’s Sanofi and American Johnson & Johnson regarding a potential takeover.
But why does Allergan want out of the Valeant deal so badly? Rumor has it that Allergan’s board isn’t fond of Valeant. A report from FiercePharma suggests that Allergan’s board members dislike the way that CEO J. Michael Pearson runs the company; Pearson is known for pursuing merger and acquisition deals rather than investing in the company’s R&D, and frequently cuts jobs, FiercePharma says. If poorly executed, this could lead to the destruction of shareholder value and undermine the long-term viability of the company.
Ackman, for his part, argues that Pearson has genuine interest in the same kind of long-term value that Allergan’s board and shareholders want. Specifically, Pearson has a vested interest. According to Forbes, Ackman argued that Valeant’s equity-based executive compensation plan aligns Pearson’s decision making with the long-term interests of the company, and, by extension, any of its acquisitions.
“This is one of the more unusual and leveraged shareholder aligned compensation packages we have ever seen,” Ackman told the audience at Allergan.
The year 2014 has been full of big moves in the pharmaceutical industry, with Big Pharma companies engaging in seemingly rapid-fire merger and acquisition deals in an effort to reorder and reorganize their businesses. However, there is more going on than just the M&A frenzy. Investors and business leaders are both well aware that the game is changing, and they are moving quickly to capitalize on new and evolving trends. Specialty drugs are high on that list, with generics (and the drama it creates) also likely to play an important role throughout the rest of the year.
In a previous article, we looked at some of the most significant, non-M&A trends and developments in Big Pharma’s pipeline. Here’s the breakdown.
Biologic medicines differ from conventional, chemical medicines in that it is more complex — but also, and more importantly, in that it is made up of living matter (such as human cells, bacteria, and yeast.) In the past few years, these kinds of medicines have become more and more prevalent within the pharmaceutical industry. More than 300 biological medicines have been approved by the FDA in the last decade, and there are currently more than 900 in various stages of development in the U.S. alone, according to a report from phrma.org.
Biological medicines should be thought of as a kind of umbrella term for highly complex medicines which incorporate living material; but despite its diversity and relatively recent discovery (the first biological medicines were developed by Eli Lilly & Co. in the 1980s), it accounts for an ever-increasing percentage of new drug launches every year. Immunotherapies, for example, are often also biologics.
A 2014 report form EvaluatePharma notes that, “2014 could be one of the best years for launches of biological products … over the past 10 years, the value of biologic launches has been trending upwards. Launches of conventional pharma products, on the other hand, show bigger oscillations but reveal no trend towards greater sales.”
In a report late last month, The Guardian also notes that the companies at the center of the flurry of deals that occurred between Novartis AG (NYSE:NVS), GlaxoSmithKline plc (NYSE:GSK), and Eli Lilly & Co. all make vaccines and other biological drugs. Biological medicines, The Guardian says, are “hot properties.” In particular, the report adds, biological drugs treat cancer and auto-immune disorders such as psoriasis and rheumatoid arthritis.
2. Anti-Infectives (Hepatitis C, HIV/AIDS)
Gilead Sciences’ (NASDAQ:GILD) Hepatitis C cure, Sovaldi, has garnered a lot of media attention recently, sparking public debates over who should be granted access to the medicine, which costs an astonishing $1,000 a pill. Several other companies have developed their own cures, including Merck & Co. Inc. (NYSE:MRK), AbbVie Inc. (NYSE:ABBV), and Bristol-Myers Squibb Co. (NYSE:BMY). The drugs are all quite costly, and Sovaldi achieved a wildly successful launch, generating more than $2.2 billion in its first-quarter.
But the industry has been seeing success with other, more innovative new anti-infective drugs too, such as a treatment for hospital-acquired infections from Gram-negative bacteria currently being developed by Cubist Pharmaceuticals, or Merck’s recent success with an update of its blockbuster Gardasil vaccine for HPV (human papillomavirus.) The new version of the drug, called V503, will treat an additional five strains of the virus, according to EvaluatePharma, protecting women from 90 percent of the strains which cause cervical cancers — an impressive improvement from Gardasil’s 70 percent.
The impending doom of Big Pharma’s “patent cliff” means that generics are one of the next big things in pharma right now. While it’s true that patent cliffs are nothing new in the pharmaceutical industry, the sheer volume of drugs due to expire in the near future means that companies are likely to experiences waves of expirations, putting added pressure on those companies to perform in the R&D department. A Bloomberg report from earlier last year notes that the drugs expected to go off-patent in 2014 account for just under $50 billion in revenue for the pharmaceutical industry.
Another, more recent report from Bloomberg notes that Teva Pharmaceuticals (NYSE:TEVA), an Israel-based company with a large generics business, saw its Q1 profits rise $1 billion, or about 8 percent, due to the launch of new generic drugs. The numbers beat analysts previous estimates.
Meanwhile, Pfizer, Inc. (NYSE:PFE) is struggling with a handful of patent expirations, which it claims is the real reason behind the company’s recent dip. Forbes reported Monday that Pfizer’s recent patent expirations on its rheumatoid arthritis drug Embrel, its COPD drug Spiriva, and its bladder incontinence drug Detrol LA were responsible for its 9 percent drop in revenue compared with the prior year.
The patent cliff facing many Big Pharma companies this year is important for two reasons: For one, it seems to herald more squabbles like the one Teva is currently embroiled in with regards to Copaxone, with companies utilizing whatever tactics they can in order to delay the release of generic versions of formerly blockbuster drugs, and two, it puts pressure on companies to churn out new blockbusters. As a result, many companies are increasingly focusing on R&D, as evidenced by Pfizer’s seemingly endless pining over rival AstraZeneca Group Plc. (NYSE:AZN).
4. Oncology — Immunotherapies
Talk about buzzwords. Immunotherapies have been all over the news in recent weeks. Analysts even speculate that a good part of what makes AstraZeneca so alluring to its American rival Pfizer is the company’s cash cow of promising cancer immunotherapies. It’s true — oncology accounts for the vast majority of AstraZeneca’s current phase III investigational medicines, and a good deal of its phase II pipeline as well.
So what are immunotherapies? For the uninitiated, immunotherapies work differently than other kinds of medicine in that it actually stimulates the body’s immune system to fight off illness, rather than relying primarily on an active chemical component or components. In oncology in particular, immunotherapies are being heralded as an important step forward in that they treat cancer without the usual side effects associated with standard chemotherapy drugs, which are known for wrecking havoc on the body in their efforts to kill the errant cells.
Many immunotherapies developed within the oncology arena are meant to treat a very specific form of cancer. These are collectively known as “targeted therapies” and have made it possible to treat unusual or rare forms of cancer. According to the American Cancer Society, investors should expect that “many future advances in cancer treatment will probably come from this [emerging] field.” For this reason, immunotherapies are likely to account for several of this year’s blockbuster launches.
Further, physicians Sabrina Richards and Andrea Detter say that cancer immunotherapy is changing the outlook for cancer patients in a big way. The new medicines “have many in the field redefining their expectations of success for new treatments from incremental advances in patient response to complete regression of tumors,” wrote physicians Sabrina Richards and Andrea Detter of the Fred Hutchinson Cancer Research Center.
It seems like every major pharmaceutical company these days has at least one targeted cancer therapy in its pipeline, and many of them already have physicians and investors talking. We’ve covered a few of these in a previous post, “6 Drugs That Could Move the Pharma Market,” including Pfizer’s palbociclib, Bristol-Myers Squibb & Co.’s nivolumab, Gilead Sciences’ idelalisib, and Eli Lilly’s stomach cancer-fighting drug ramucirumab.