Allergan (AGN) sounded like Merck (MRK) and Pfizer (PFE) . No not this Merck or Pfizer, but the ones from the old days, when you barely wanted to hear about the old drugs -- you knew they were making good money. You wanted to hear about the new drugs, the ones that would conquer heart disease or nerve damage or cholesterol. You wanted to hear about innovation, not price increases.
Action Alerts PLUS charity portfolio holding Allergan is the reincarnation of those companies. Sure, it is true that Allergan's labs, while productive, aren't the source of the big drugs that CEO Brent Saunders is talking about. That comes from acquisitions of little companies that Brent understands to have something special. He might get criticized for paying too much for a small-cap company, but then again, what did Gilead (GILD) do to get into the Hepatitis C segment? It spent $11 billion, an 89% premium, to acquire Pharmasset, which had a promising potential cure for the often fatal disease.
It's more important now than ever to return to the old model of growth because, for example, if you have the real breakthrough drug for depression, one that can impact the level, say, of suicides, then you have something that you can charge a lot more for rather than trying to ratchet up prices for old drugs, which had become the habit for the marketing machine pharmas that used to be the places of great invention.
Brent says he has a drug with that kind of potential. He also thinks he has something for macular degeneration that would make it so you only need to be shot in the eye every 12 weeks, instead of once in a month which is the current standard of care that Regeneron's (REGN) Eylea provides. Finally, he has a drug for NASH, non-alcoholic liver disease, which is a very big market but a tough one to date to figure out.
If you want to know why Allergan was up so much yesterday, just go look at why Gilead was down so much. Gilead owned the hepatitis C cure business, but ended up with some competitors that have brought the price down, while at the same time the drug is not a maintenance drug -- it is a cure. So it sows the seeds of its own destruction. All the way down from the hundreds, most investors thought that Gilead would do what Brent did, find companies that have a compelling pipeline -- big or small -- to give us a future reason to stay long the stock.
Gilead didn't; 18 months ago this stock was at $117, now it is as $66. It could have easily gone the way of Allergan, which has now moved from $180 to $241 and I think is headed a lot higher, because it is cheaper than all major pharma companies but has a faster growth rate.
It chose to be static.
Static doesn't work in this industry. Pipelines do. Allergan's got one, and that's the real reason for this remarkable run after being in the drug dust bin for more than a year.
