Actavis CEO Brenton Saunders, left, and Allergan CEO David Pyotton.
Photograph by Brendan McDermid — Reuters

What might seem like a victory for Allergan might not be as big a win as it seems.

By Stephen Gandel
November 17, 2014

Allergan, the maker of Botox, has a deal, but it’s not the one we’ve all been anticipating, at least not in name.

On Monday, Allergan agreed to be acquired by Actavis, another big drug company, for $66 billion. The deal appears to have trumped another potential deal that Allergan CEO David Pyott has been fighting for months, a hostile takeover bid from rival pharma company Valeant and hedge fund manager Bill Ackman. Valeant and Ackman’s latest offer was for $53 billion, and they hinted that they might be willing to go up to $60 billion. But Valeant on Monday indicated its interest in Allergan had waned, saying at $66 billion, the deal didn’t make sense.

But what might seem like a victory for Pyott might not be as big a win as it seems. First of all, Pyott appears to be out of a job, like he would have been in the Valeant deal. There is no mention of him in the newly formed management team that Actavis announced with the deal.

More importantly, Pyott may not have gotten a partner that is all that different from the one it said it didn’t want. Pyott has said that he didn’t want to do a deal with Valeant because he said Valeant was an unsound company built on rapid acquisitions with a history of spending very little on R&D. So instead, Pyott is doing a deal with Actavis, which is, generally, a company built on rapid acquisitions that doesn’t spent a lot on R&D, at least not compared to Allergan. Valeant is run by a former management consultant. Actavis, until recently, was run by a lawyer.

Allergan will be Actavis’ second big deal this year. In July, it spent $28 billion to acquire Forest Laboratories, a rival generic drug company. That followed a pair of deals, $5 billion each, including one in early 2013 that resulted in a name change from Watson Pharmaceuticals to Actavis. Yet, when a Fortune reporter visited Actavis’ then-CEO Paul Bisaro in May 2013 at its Parsippany, New Jersey, headquarters, the building still said Watson out front. The company’s signage couldn’t even keep up with the firm’s dealmaking. Actavis was even rumored to be in talks with Valeant in mid-2013, before rejecting the deal.

Actavis, like Valeant, has ties to activist hedge funds. Carl Icahn was a motivating force behind Actavis’ acquisition of Forest Labs. After the Actavis-Allergan deal, the new company will be run by Brenton Saunders, who is the former CEO of Forest Labs, a job that he was recruited for at the urging of Icahn. Before joining Forest, Saunders was at the helm of Bausch + Lomb, where, after being CEO for just four months, he engineered the sale of the company. The buyer: Valeant.

How will Allergan’s drug pipeline do under Actavis? It’s not clear. So far this year, Actavis has spent 7% of its revenue on research and development. That’s a far higher percentage than Valeant’s 3% spend on R&D, but it’s still less than what Allergan spends, which is 17%. Saunders, in the past, has said that he is open to spending money on research and development. But he’s said that he would like to target his spending on ailments that have a large market and that drug companies so far have not had much success with, like Alzheimer’s and autism. Some of Allergan’s most promising drugs in development including a treatment for glaucoma and dry eyes. Will that clear Saunders’ bar for worthy R&D spending?

Allergan also took issue Valeant’s use of aggressive accounting. But Actavis, too, uses accounting gimmicks that may make the company’s performance look better than it actually is. In early November, Actavis told shareholders that by, its own measurements, the company earned $3.19 a share in the third quarter, up 53% from a year ago. That sounds a lot better than the company’s actual bottom line, which, by standard accounting rules, was of a loss of $3.50, down from a gain of $0.49 a share a year earlier.

And, like Valeant, Actavis is no longer a U.S.-based company, having done a tax inversion deal with an Irish company back in 2013. At least some of the benefit, perhaps a lot, that will come from Allergan shacking up with Actavis is due to the fact that Actavis, like Valeant, pays very little U.S. taxes.

That being said Allergan is not exactly a model citizen on any of these fronts. Its main drug, after all, is Botox, not a cancer treatment. Allergan has also done a string of deals in the past few years to boost its growth. And it, too, used accounting tricks to make the earnings from those deals look better than they were, at least so far.

So it’s not exactly clear the Allergan-Valeant fight was really a battle for the soul of pharma, pitting a CEO focused on medical breakthroughs against another that was only focused on the bottom line, as it was at times billed out to be. But if that’s what it was, it’s clear the soul of pharma didn’t win.

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