Here's what the head of Botox-maker Allergan has to say about drug prices, inversions, and why Carl Icahn is not a threat to his long-term plans

You could say it comes with the territory: As CEO of Allergan, Brent Saunders once received Botox injections onstage. But at just 46, he already has fewer wrinkles than most leaders of pharmaceutical companies. His fast rise has been driven by dealmaking, and it was a deal by his previous company Actavis to buy Allergan, the maker of Botox and other drugs, that many say saved the company from falling into the hands of the troubled pharmaceutical firm Valeant. For our series, The Price of Profits, we sat down with Saunders at the Business Insider office.

This interview has been edited for length and clarity.

Dan Bobkoff: Allergan has grown a lot in the last few years through a number of mergers and acquisitions. You're not calling Allergan "Big Pharma." You have a different term for it?

Brent Saunders: We like to think of ourselves as "Growth Pharma," and we've defined "Growth Pharma" as companies that invest in innovation but also have a strong top-line sales growth profile. And the reason that's important is that innovation is the lifeblood of our industry, and I think to really have sustained leadership in any therapeutic area you have to continue to innovate. That's what we do; that's the core of our business. Growth, on the other hand, goes to culture, and while many in our industry are focused on cost-cutting and downsizing, we want to be a growth-oriented company where we look to really drive leadership therapeutically, leadership globally, and invest in our brands, whether that be in science or sales and marketing.

Bobkoff: If you were to compare your company to, say, Merck - a big, old-line company - how are you different?

Saunders: I think that we're alike in many regards in that we have a deep respect for innovation and the role of R&D. I think we differ in how we approach it. And we tend to be a little bit more streamlined and a little bit more scrappy. We tend to be a little bit more action-oriented, not operating with lots of committees or bureaucracy but more individual accountability with a bias to action.

Bobkoff: And you do more acquisition than in-house development.

Saunders: Well, I don't think that's really the best way to think about it. We acquire intellectual property, or R&D assets, and then develop them in-house. We have about 2,000 people in R&D, we spend about a billion and a half dollars a year on R&D. What we don't have are discovery labs. What I would tell you is the vast majority of the late-stage pipeline of Big Pharma, as we call it, comes from external innovation; they are sourcing most of those innovations from academia, from startups, from venture-backed companies and the like. We do the same thing; we just do it with the absence of being held to the capital structure of discovery laboratories. But nonetheless, innovation is the lifeblood of what we do.

Bobkoff: Typically, at what point do you acquire the intellectual property? How far along is it in the development?

Saunders: We tend to look at it across the entire continuum. We tend to try to structure for risk, so if it's earlier-stage development, let's say, preclinical, we may do it in a partnership with a discovery-based company. If it's got proof of concept or early clinical results, let's say, from human testing, we may structure it as an option agreement, and allow the smaller, more focused company to bring it to a later stage of development. Phase 2 or 3, where we really have strong conviction around the science and the program, we will buy it outright and finish it ourselves.

The anti-Valeant

Bobkoff: Before you arrived, Valeant wanted to acquire Allergan. And they famously said that they wanted to slash all R&D. Is it fair to say that the merger you were part of was in response to that?

Saunders: It was. We (at Actavis) were what was called by many a white knight. We were a friendly solution for the old Allergan management team in large part I guess because of the hostile attack from Valeant and Pershing Square's Bill Ackman. And so when we stepped in, we looked at how we could actually support and grow the company, and a good example is old Allergan spent about $900 million in R&D, and we spent about a billion and a half ... so we've actually increased R&D expenditure.

Stakeholders versus shareholders

Bobkoff: When you make decisions, what are your priorities? How do you decide which stakeholders to take into account and where to prioritize them?

Saunders: I really think about two or three constituents as the most important. And I think they all kind of work in harmony. One, we have our shareholders, and they have invested their capital in our company and we have to provide a return for them and hopefully above market, above industry average returns. We have patients, where we invest to improve their lives either through treatments for their disease or cure for their illness, and then we have our employees and communities that benefit when we do well by the other two constituents.

Bobkoff: So would you call yourself a more of a stakeholder-view person, versus the sort of shareholder-focused view?

Saunders: Well, I think they're actually very consistent. When we do well for patients, when we come up with innovation for an unmet need, when we can improve a patient's life by one of our treatments, our shareholders benefit. So I don't really view any disconnect between the two. If we do right by one, the other will do well.

Bobkoff: In 1952, George Merck - then the head of Merck & Co. - had this famous statement: "Medicine is for the patient, not for the profits. The profits follow." Do you also abide by that?

Saunders: I think that's fair. I think I would caveat that, though, and I'd say that doesn't mean you can spend money recklessly, right? and I think it's -

Bobkoff: What's recklessly?

Saunders: Well, I think that you have to make sure that you're investing the corporate resources in a significant way to support that goal for patients. You can get distracted and build a big skyscraper-type headquarters. A company I came from, Bausch & Lomb, did that in Rochester, and so I think that you have to always make sure that you think about the patient and the shareholder in the same context and if you do that, and you stay tight and focused, then they live in harmony, but they could easily diverge under the name of "we're doing right by patients."

Bobkoff: I get the sense that there's almost nostalgia from some people for the days of the big old companies with massive research labs that would discover drugs, and then one organization would bring it all the way to market through the FDA. Are those days over?

Saunders: I do think they're over, but I think that's, frankly, a good thing given the time we're in. The science of human health has exploded, in part because of the human genome, in part because of biology and chemistry and how they play together, and it is too expensive and too complicated for any one company to corner all the great ideas that lead to drug discovery.

And so the ecosystem, if you will, of inventors, of scientists, of academia, and the like, is far larger than one company could ever recreate. We'd rather support that ecosystem, and encourage that ecosystem to take on the higher-risk, early, tough science and let us step in where we can really bring expertise as a pharmaceutical company. And that can be in clinical development, that could be in pharmaceutical science, that could be in regulatory affairs, and certainly commercial capabilities, and really have a specialization of best interest, to really make sure that those investments pay off so that more people want to go into science and invest in taking on those high-risk projects.

Botox

Bobkoff: Now, before the mergers, there was this idea that Botox is your pipeline in a vial. There are so many uses, and more in development. Is that still the case?

Saunders: Well, yeah, I do think Botox is still a pipeline in a product, is what I like to call it, and if you think about it, Botox has been around for about 10 years - we have 11 approved indications. We sell more Botox for therapeutic indications like migraine or spasticity or OAB [overactive bladder] than we do for wrinkles, and we're studying it for many other potential therapeutic benefits ... potentially depression, AFIB, and a whole host of other ones. And so we're probably not even halfway through understanding the role that Botox can play in therapeutic health as well as aesthetic medicine.

Bobkoff: How do you prepare for the day when at some point you will run out of uses for it?

Saunders: I'm not worried about it until we probably get to somewhere closer to 2030, so we have plenty of time and I don't spend a ton of time worrying about that risk. Many other risks, but not that one.

Icahn's influence?

Bobkoff: I was a little bit surprised to hear that you view your role as more of a stakeholder CEO. You have the shareholders, you have the workers, you have the community. Now you have Carl Icahn as a big investor, and if you look at what happened with Apple, he really pushed buybacks and then got out pretty quickly. So how can you maintain that strategy, that view, when you have any kind of activist investor on board like that?

Saunders: Yeah, look, I view Carl as just one of many important shareholders at Allergan. We listen to all of our shareholders, activist and passive and long-term and short-term shareholders, because again we don't have a monopoly on all the best thinking. It's always good to hear different points of view. I think Carl's intention here is constructive. He is an investor. He is not looking to be an activist at Allergan, and so I welcome him and obviously he saw something I also saw, which is that our stock was undervalued, and that's why we have committed to a $10 billion share buyback at the close of our Teva transaction, because our stock is an overwhelmingly great investment, in my humble opinion, and Carl, I guess, agrees.

Bobkoff: What is your relationship with Icahn?

Saunders: Well, you know, I met Carl by being in a slate of directors at first that were in opposition to his slate. We met in a bit of a professional conflict, but ultimately I became CEO of that company. I worked very closely with him. I think he was very constructive in advocating for succession planning and a few issues at Forest Labs, and I think it worked out well for all stakeholders.

Shareholders certainly did well - we were able to fund our pipeline. In fact today we got one of the drugs approved from back in those days, so I think patients ultimately won, and employees are in a much stronger, more vibrant company today than they've ever been. So I welcome Carl, and I think he'll be a good long-term investor.

Bobkoff: Icahn's being friendly now, things are good, the stock is supposedly undervalued, but if anything goes wrong, can't you imagine a day when he becomes an activist? Isn't that who he is?

Saunders: Well, I think that's always something you worry about, and certainly at the flip of a switch he could change his mind and become an activist - and so could many other shareholders. Or he could just enter or any other activist could enter the stock if something went wrong, so I don't spend a lot of time worrying about that. Rather I stay focused on executing our strategy and making sure we operate our business to the best of our ability and from there, you know, good things generally do happen.

Bobkoff: So if in six months or a year Carl Icahn or somebody else comes to you and says, you know what, you're spending too much on R&D, give more to shareholders, do a huge buyback, will you say no?

Saunders: Well, I'd have to understand the facts. The one thing I'll say is that I would listen to them, and I'll listen to any shareholder, not just Carl, but it's unlikely that we would do that, given where we sit today. But if the circumstances were different, I'd want to understand why they think that, and I'd be open-minded about it, but we're going to continue to invest in R&D, we're going to continue to invest for innovation, unless the system changes dramatically, then we'll react to that.

Bobkoff: One of the refrains I hear is that investors have become increasingly short-term focused. Pharma, biotech are by their very nature a long-term play. It takes roughly 12 years to develop a drug from start to finish. So how do you as CEO balance those two things?

Saunders: Yeah, it's an excellent point. I think that one of the biggest changes in business since I started in this industry 20 years ago has been a change in view from shareholders around shorter-term performance. And I think the way I reconciled it is you really can't focus on one versus the other; you have to provide a little bit of something for everybody. So you need to have good short-term performance, you have to have sound mid-term strategy and performance, and ultimately, because of the product cycle and the way we innovate over the long term, really have conviction around your long-term strategy.

And so I try to do it all. It sounds complicated, but it's quite simple: You need to execute against your business today and maximize all the opportunities that are available to you and your company, you need to invest appropriately for the midterm, and again really have a strong strategic vision where do you want to take your company long term so you can execute against that, and if you do that, you know frankly, then you don't worry about the activism.

Bobkoff: Have you made any decisions lately where you've had to make a tough call between something that might hurt the share price short term but you know might pay off in, say, 2018?

Saunders: Yeah, absolutely. We made a huge decision. We decided to divest our global generics business to Teva for $40.5 billion, a highly dilutive transaction. We really cut our earnings per share, in a time when everyone was doing accretive transactions, and I knew that that would create short-term pain for our shareholders, but I also realized that it was the right deal, incredibly sound strategic and industrial logic, and would allow Allergan mid and long term to flourish. So we did the deal, I led the deal, and we're close to closing it, and it should be a win-win. Teva should get a very strong strategic asset, and we'll become a very strong strategic branded innovative pharmaceutical company.

Why buybacks?

Bobkoff: Stock buybacks are fascinating to me. They're very different than dividends, but those are often lumped in together. I believe you said that you are not a buyback CEO. Is that still what you believe?

Saunders: Yeah, it's a little unnatural for me. I think a lot of companies use buybacks to manage their earnings per share to essentially make the denominator smaller, to thereby grow earnings.

We are a growth-oriented company; that's how we started the conversation. We tend to really focus on driving sales growth, which leads to earnings growth, but in this case, I think there are special circumstances where buybacks are appropriate, and in this instance where there's, in my belief, a fundamental disconnect between our share price and our performance, where we can take advantage of that and return some capital to our shareholders.

Now, we get roughly $40 billion (from the Teva deal). We're spending 10 of it on share repurchases. I would not have been comfortable spending all 40, as a way of example. So I think we did it in a balanced and smart and prudent way, but it's not a natural move for me to make.

Bobkoff: Why not put that $10 billion into R&D, into paying more staff or hiring more people?

Saunders: Well, we will. We're going to take about $20 billion of, or half of the proceeds and invest for growth. It's not easy finding quality investments to deploy capital against. We happen to be quite good at it, I believe. We'll do it very carefully and thoughtfully, but we have plenty of firepower to invest for innovation and growth.

Bobkoff: Now, the criticism I hear of buybacks in general is that, as you said, they are, in some sense, a sort of financial engineering. A company is measured on earnings per share [EPS], and if you can make the number of S go down, then EPS goes up. And when you actually think about that at a very basic level, it just seems like, how is that a thing? How is that something investors put up with?

Saunders: Yeah, I think that's right. I don't think it should be a matter-of-fact move that just becomes part of the normal capital deployment of the company. I think it has to be a special situation or a special event where you deploy a share buyback, and that's what we're doing here at Allergan, and that's what got me comfortable with doing something that frankly was a little uncomfortable for me. But I think deploying it as just a de facto way of returning capital to shareholders I do think can damage long-term strategy.

How to price a drug

Bobkoff: There are many companies that say: We have to price drugs a certain amount to recoup R&D and regulatory expenses, and then they pay more than that to do a buyback. So is that a little disingenuous, do you think?

Saunders: Well, I don't know if it's disingenuous. You have to look at each situation and understand exactly what's happening and why, but look, I do think that drug discovery and drug development is an incredibly risky endeavor, and I think what gets lost sometimes is that we look at the cost of developing a particular drug and try to then understand how it was priced rather than looking at all the drug development and trying to figure out if the company itself get a return for its investment. Remember, as awful as it sounds to say, the winners pay for the losers in drug development, and there are more losers than winners. And we want to, as a society, I think, encourage companies to look for true opportunities to help people live their lives better, whether that be a treatment or a cure, and I think, to be fair we should be incentivizing our industry to do more to find cures and not just treatments, and really have a profound impact on people's lives.

Bobkoff: If you have a drug that went all the way through the process, went through regulatory, it's approved, how then do you decide what to charge?

Saunders: Well, you tend to look at a variety of different factors, and to be fair, we don't just pick a price to set a drug; we look at the impact it has on patients and the value of that impact to society. We then go out and talk to customers, namely managed-care and pharmacy benefit managers, and try to understand what they believe that value equation is and how much would they be willing to spend on a drug for their members, and we survey doctors and patient groups as well. And when you look at all those inputs you then decide how to price a drug where you feel like you can earn a return for the investment you've made in R&D but also honor the societal contract we have, which is to price our drugs in-line with the value they provide to society. ....

Ultimately at the end of the day we as a society should be figuring out ways to incentivize industry to come up with more cures for unmet need and really help patients.

Bobkoff: Do we have those incentives?

Saunders: Well, I think they are questionable. I think a lot of the incentives in the industry today are, through no fault of anyone, they are the way the system was designed, is to really incentivize (treating) chronic treatment. And so, I think we're going to have to wrestle with this issue as the science has really started to advance and we can start talking about cures.

We're at the cusp of a lot of gene therapy, moving into cures or potential cures. How do we price those things? And if we do it wrong, we will disincentivize future scientists and investors from supporting early high-risk research to get the next one. And so we have to be very sensitive to that.

Bobkoff: On average, how much would you say your drug prices go up each year?

Saunders: I would say ... mid to high single digits. That's the gross price, not the net price so, you know, it's very complicated.

We tend to be very cautious about raising drug prices, but people should also remember that we continue to invest in the drugs after their approval. For example, we have a new drug for schizophrenia and bipolar mania that was just approved. We are now studying it for bipolar depression or major depressive disorder and negative symptoms, which is the holy grail of unmet need in the condition. Those studies are hundreds and hundreds of millions of dollars each, so if successful, we will need to raise the price of the drug to accommodate or pay for the cost of continuing to study it and invest in it.

Bobkoff: Now, I'm pretty sure it was 1992, Bill Clinton was just elected, and Merck made this decision that they were only going to increase their drug prices as much as the consumer price index. And then, I believe, most of the other major pharma companies followed suit a few years later. We have the prospect of another Clinton in the White House, and while there are a lot of reasons why Merck did that, one of them was, I presume, to avoid a crackdown on prices, and I wonder, what do you think about that strategy and whether it makes sense now?

Saunders: I understand why you would do it. To be fair, not all drugs are created equal. Some of these great immuno-oncology drugs that were just approved that are really changing the way cancer is treated - Jimmy Carter for example is alive in large part because of these developments. When they were launched, they were launched for very narrow indications because they were studied very narrowly. Should we not want them to continue investing to study those drugs in different cancers and in different combinations and therapies against different cancers? That's an incredibly expensive thing to do, so my fear would be we would agree to not increase price and therefore potentially chill the study of these drugs after they were priced. And that could be a mistake. So I think we need to be always mindful of how we price drugs and make sure that we make them available for all patients with means or without, with insurance or without, but I think just taking a blanket approach like they did in the old days could stifle innovation and therefore potentially be dangerous.

Bobkoff: When the news about Martin Shkreli and Turing came out, what was your first reaction?

Saunders: I didn't have much of a reaction, other than, you know, it was an egregious behavior, and for me I think if there's a silver lining of this whole debacle, it's that the PBNs and the insurance industry have closed perhaps a loophole where some of these smaller drugs could be priced without review. And I think today it's almost impossible for that to repeat itself, not because of legislation or regulation but because the private market was so embarrassed by it, and rightfully so, basically clamped down on the ability for anybody to do that type of thing.

Inversion

Bobkoff: I want to talk about inversions. For people who hear all the rhetoric about this, for the company, what are the advantages of being an Irish company for tax purposes?

Saunders: I think the perverse nature of one of the issues with inversions is we can more freely invest in the United States as a foreign company than we can as a US company. And what most people don't realize when they hear the sound bites that we're "avoiding paying taxes" is it's true: We're avoiding one particular tax, which no one pays, and that is repatriation and foreign earnings into the United States. That's the tax that's being avoided. However, no one repatriates cash into the United States, so that's why there's almost $3 trillion in US company cash sitting offshore. Why would you repatriate your cash at a 35% tax rate when you can borrow against it at 2 to 3%? And so that's what's happening, whether it be Apple or it be Pfizer or the like - that's the way the system moves because capital will always move efficiently. And so the tax that's being avoided has not been paid and never will be paid.

That being said, as a foreign-domiciled company, we can use the profits we generate outside the US to invest in the US without borrowing, which gives us much greater freedom and flexibility to invest wherever we see fit, and the United States happens to be one of the best places to invest that capital, so my sense is that if we ever as a country could solve that issue and do true corporate tax reform, that $3 trillion would far and away come screaming back to invest in the United States, and that would be a great thing for the economy.

Bobkoff: You actually had a little spat with your father about this?

Saunders: Well, it wasn't a spat. He was arguing that, much like the administration says, inversions could be unpatriotic or, I think the president called us unpatriotic capitalists, and I was arguing that taxes aren't a question of patriotism, that even the most American companies have tax departments that do everything they possibly can to minimize their tax burden, that most individuals will look and try to lower their tax burden to the lowest amount legally possible. And it's basically, you pay what you're legally required to pay: no more, no less.

If you're patriotic, why weren't people just doubling their taxes and sending them in? You can pay more. The IRS would be happy to have more than you owe. But he kept insisting, and ultimately I said he had moved to Florida because it had zero state income tax and zero estate tax, and I said, look, you did a personal inversion, essentially left the Northeast for Florida as people have left California for Texas or Nevada to lower their tax burden, and the unfortunate part of all this is that people will always move to minimize their tax burden.

However, the more resourced, wealthier an individual or company can do it better, because some people can't afford to move, and some companies can't accomplish an inversion. And so it really is a system that's screaming for reform, and I think corporate tax reform would be a huge boom to the US economy.

Bobkoff: For a company like yours, what does it actually mean to be based in Ireland? Do you visit often? Is there a big office there?

Saunders: Yeah, we do. We actually have a meaningful presence there. We have a few thousand employees in Ireland. We make many of our drugs in Ireland, I visit Ireland quite regularly, we hold every board of directors meeting in Ireland, we make all of our strategic decision in Ireland, so it's not just a P.O. Box or a mailbox but a meaningful presence for Allergan in Ireland.

A moral obligation?

Bobkoff: Do you think that pharma companies and biotech companies are different than those in other industries? Is there a moral obligation that's not there for companies that make, say, cellphones?

Saunders: I do think that there is. When you really look at the essence of our mission, it's to create a return for shareholders and to improve patients' lives, and both of those are important, but what other industry can you work in where you come to work every day trying to solve really big, important questions that have such a profound and meaningful impact on the people you're solving them for?

Bobkoff: What attracted you to healthcare? Because you don't have a background in it.

Saunders: No, my first job while I was working through law school and in business school was in a hospital in Philadelphia, and the point I was just making about this correlation between being able to do interesting work and make a good living and, you know, in a leadership position return capital to shareholders or return to shareholders and doing really good things in the world, I thought was just compelling. And that's what attracted me to healthcare and kept me in healthcare.

Bobkoff: Our series, The Price of Profits, chronicles a 40-plus-year shift. Decades ago, IBM and Merck executives would talk about taking care of their communities and the workers. Then there was this shift where the only stakeholders who mattered were shareholders. It was especially true in the 1980s and '90s. And I wonder, what do you think about that, and do you think things are changing?

Saunders: Frankly, things are changing. I think they change for the better, which is you can't worry about patients and the communities and employees unless you've done well by shareholders. And so, you know, doing well by shareholders is kind of a ticket to play the game, to do all the other great things you want to do. And so that has caused us to operate our businesses sharper, to make sure that we're staying on our toes and being competitive and understanding the environment and making sure we make great decisions, but it also then allows us to do the other things with greater confidence, so you know, I think there is no nirvana, there is no perfect situation, but overall we sit in a very enviable position in the business community to be able to do the things we do and still do great things.

Bobkoff: I would argue, actually, that the CEOs of the '50s and '60s would have had it the other way around. They would say that by taking care of your employees and treating them well and making great products, having great customer service, the profits come from that. Do you agree?

Saunders: Well I think in part it does - they're all connected in some way - but I do think we live in a different time where information flows so readily and so rapidly and all decisions are evaluated and second- and triple-guessed and the like, and so shareholders then react differently, and there's money in hedge funds and shorter-term funds, and that's just the reality, so you have to manage your business given the reality that exists today, and it's not good or bad, it just is what it is, and I think it's completely manageable. You just have to have the right mindset and attitude to get through it.

Deals and surprises

Bobkoff: It's a tough deal environment right now. Obviously the Pfizer deal fell through. What is your focus going forward? Are you going to do smaller deals and maybe skip some of the cross-border ones?

Saunders: We're not focused on transformational M&A; we're focused on investing for growth to really support our current business, and that's both R&D and intellectual property assets as well as growth concerns. The one caveat is that whatever it is we buy has to support our agenda for growth and therapeutic area leadership, and if they satisfy that strategically, then it's interesting.

Bobkoff: On a personal level, what was the biggest surprise in your business career?

Saunders: The fact that we [Actavis] could actually buy Allergan. I mean, the old Allergan was such a well-run company with some best-in-class programs, great R&D capabilities, and great people and expertise. The fact that that would become available because of a hostile attack [from Valeant] and we could step in as a white knight - I pinch myself, and saying I can't believe that actually happened to such a great company, but we are where we are, and I think we've made it stronger and we're very excited about our future.