Valeant/Allergen: IP value of the Russian doll

From 1989 to 1993 I worked in a laboratory that handled some of the deadliest toxins known to mankind. We purified and experimented with ricin (made from castor beans and made famous by its use in the assassination of Georgi Markov); apamin (which comes from bee venom and can enter the central nervous system); dendrotoxin (black mamba venom); bungarotoxin (Formosan krait venom); and botulinum neurotoxin – a bacterial poison so deadly that as little as 100 nanograms can kill the average human.

At that time, the effects of these toxins on nerve function were primarily of scientific (and military) interest, but increasingly neurotoxins have clinical and commercial significance, finding applications in pain management, oncology and cosmetic procedures.

Given my background, I have been following Valeant Pharmaceuticals' $52.7 billion bid for Allergen – and the intellectual property that underpins its value – closely.

Valeant is an aggressive and astute acquirer of cash-generating intellectual property, with a market capitalisation of close to $44 billion. Its business strategy reflects the McKinsey credentials of its CEO – namely, to acquire companies or assets with strong brands in niche markets (eg, Zovirax, Restylane or Bausch and Lomb), pump sales and slash operating and R&D costs. This approach sidesteps the industry-wide problem of mediocre R&D productivity (by eliminating it) and concomitant regulatory risk, providing investors with clarity in terms of forward valuation. 

Valeant is not simply an aggregator but also, as evidenced by its North American rights deal for dermatological fillers with Nestlé in May 2014, an IP management company. It has been rewarded for its deft execution of this innovative and relatively low-risk IP strategy with a soaring stock price. Ironically, it is the value of this stock that allows it to power further acquisitions, including the current cash and stock offer for Allergen.

Allergen manufactures Botox, the now ubiquitous wrinkle-buster or 'face lift in a bottle' which is almost singlehandedly responsible for the mass market in non-surgical cosmetic procedures. Botox is a $1 billion blockbuster with incredible IP attributes, vividly described by Allergen’s CEO as a “Russian doll”. In effect, the patent life of Botox is limited only by the imagination of its owners, which have already re-filed and gained Food and Drug Administration approval for its use for migraines (where it promises to be a second blockbuster), overactive bladders and certain neurological disorders. Little value for this current pipeline or future diverse applications is priced into the Valeant bid.

Allergen has an interesting IP niche that it has exploited nimbly, ramping up R&D spend tenfold over the past decade, resulting in a diverse portfolio of specialty drugs such as Latisse – originally developed for glaucoma and now a $500 million product which encourages eyelash growth, addressing a medical condition that no one knew existed before the drug came along.

Allergen has one other thing going for it – the difficulty that generic companies have in manufacturing biologic medicines, particularly those containing lethal neurotoxins. This makes the revenue stream for Allergen much more futureproof than for a traditional pharma company.

In a pharmaceutical industry that is struggling to find a business model that works, both Valeant and Allergen have found that IP strategy including nimble brand management and patent life extension/diversification (combined with astute tax management) is a more attractive option for investors than the scientific prospecting of classical R&D. 

These companies have also reaped the benefits of a smaller size combined with organisational simplification and focus. The strategic, financial, operational, cultural and organisational challenges of running big pharma businesses that employ vast numbers of scientists in an uneasy truce with bean counters are often underestimated. For both Valeant and Allergen, the challenge is much simpler.

Joint bid partner and corporate activist Pershing Square’s decision to accept an all-stock offer is a strong indication that the smart money sees this potential merger/acquisition as a transaction where 1+1>2. If it is, the IP strategy of both companies deserves to be highlighted as being at the heart of shareholder value creation.