Brent Saunders, Allergan chief executive

When Brent Saunders, chief executive of Allergan, agreed to sell the drugmaker to Pfizer for $160bn in November last year, some investors feared he was offloading the group on the cheap. But when a slide in the shares of pharmaceutical companies turned into a complete rout, Allergan’s stock price was insulated from the sell-off, and Mr Saunders was soon being applauded for good timing.

The reprieve did not last for long.

The Obama administration torpedoed the deal at the start of April, and with it Pfizer’s attempt to use the transaction to save billions in US taxes by relocating to Ireland. Shares in Dublin-based Allergan have since tumbled 23 per cent.

The decline in the stock price has been exacerbated by some hedge fund investors, who bought Allergan shares in anticipation of the deal and quickly sold them when it collapsed. A political outcry in the US over the high price of drugs has also hurt the whole sector, amid investor fears that a crackdown on the cost of medicines could dent future profits.

However, there are also growing doubts about the “specialty pharma” model that Allergan helped pioneer, which championed perpetual dealmaking ahead of in-house research. The blow-up of Valeant, a Canadian drugmaker that was perhaps the purest example of this model, has prompted questions about whether the approach is sustainable.

Mr Saunders says any comparisons with Valeant are unfair. Whereas the Canadian group is known for buying older medicines and increasing the price, Allergan’s drugs are newer and the company relies on higher sales volumes to fuel its growth.

“In terms of our top products, we’ve been historically disciplined on taking price rises,” he says, pointing out that Allergan typically increases its prices by less than 10 per cent a year, compared with the tripling or quadrupling that Valeant has become known for.

Mr Saunders also says Allergan has a strong “pipeline” of drugs that it hopes to bring to market, with more than 70 in mid- or late-stage trials, including a treatment for depression and several medicines for illnesses that affect women.

He does not deny that Allergan has grown chiefly through dealmaking rather than in-house research, but points out that many of the large biotech groups have done much the same. This “open science” approach means the company can scour the industry for promising drugs, he says, and buy medicines that have a high chance of being approved by regulators.

Many long-term shareholders are supportive of Allergan. But other large life sciences investors can be dismissive of the company, in part because it has avoided the areas of medicine that have typically generated the most excitement, such as cancer. Some of these investors contend that those drugs that can save or extend the lives of people with deadly illnesses will best withstand a crackdown on prices.

But Mr Saunders says that focusing on the medical conditions that traditional pharma companies have ignored in recent years is good for business.

“What really drives pricing pressure is competition,” he says, pointing to the cut-throat race to develop a new generation of cancer medicines known as immunotherapies, which have been shown to add years to the lives of patients who previously had very poor prognoses.

“The science in immunotherapy is incredibly profound and the impact nothing short of amazing,” he says. “But with all the research dollars flowing into that area, there’s going to be a tremendous amount of competition in the years to come.”

The collapse of the Pfizer deal coincided with a “quiet period” for Allergan, which reports first-quarter earnings on Tuesday, preventing Mr Saunders and his team from fleshing out their vision for the company as an independent drugmaker. Analysts expect the group to report $3.02 in adjusted earnings per share on revenues of $3.96bn.

One of the most pressing questions is what Allergan will do with the roughly $36bn in cash it will receive upon completing the sale of its generics business to Teva, the Israeli pharma group. According to one investor, there are “lingering concerns” that the deal could be blocked by regulators, although Mr Saunders says he is confident it will go through, perhaps within weeks.

He expects to use some of the proceeds to pay down debt, and also says he will look for ways to return capital to shareholders, perhaps through a buyback — but a large chunk of the cash will probably be spent on acquiring new drugs.

Some investors and analysts say the ultimate test of whether Allergan can really differentiate itself from other speciality pharma groups will depend on what the company ends up buying.

“While Allergan’s pipeline is larger and more diverse than its specialty pharma peers, it nonetheless lacks the depth and breadth of larger-cap [drug] companies,” says Andrew Baum, an analyst at Citi.

Investors are split on the best way to deploy the war chest, however. Some advocate a string of smaller deals, pointing to Allergan’s purchase of Kybella, a cosmetic treatment for double chins, and licensing agreement with Heptares, a group focused on Alzheimer’s disease.

Others want something bolder, arguing that a succession of deals will take too long to integrate. “We would much rather they did a large transaction, and we believe that is their preference,” says one of the company’s large shareholders.

They hope Mr Saunders can propel the group to a different tier, as he did in 2014, when he bought Botox maker Allergan for $66bn and adopted the company’s name. That transaction transformed the company, then known as Actavis, from a manufacturer of generic copycat medicines into a branded drugmaker.

“Brent is a bold guy,” says one investor. “He has a lot of cash and he is not shy about spending it.”

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