Skepticism is healthy, but when it comes to master business plans, outright deception is rarely viable. Unless there is strong evidence to the contrary, I will take General Managers at their word when they articulate an acquisition business plan (but I'll be quite skeptical about their numbers, claims, and assumptions!). They need to sell their plan to a very wide variety of constituencies (seller shareholders and board, buyer shareholders and board, financiers, regulators, bondholders, and even non-financial participants such as customers, vendors, and employees). They can't sell different stories to different constituencies. In the case of serial acquirers (which includes Valeant and presumably Actavis), the constituencies of their future acquisitions are also, indirectly, in the audience.
I'll rephrase the skepticism rather than a question of what they are planning to do, but rather what will they do the first time (after an acquisition) that things aren't going according to plans. If they have a quarter (or year) when earning targets are going to be seriously missed, are they going to stand firm, explain what happened and take the (share price) hit, or are they going to knock out some R&D that they are only committed to in fair weather? No one knows. This is really when we will find out if, as you put it, "they got religion."
Valeant's business philosophy is that R&D is a money loser. They point to studies showing that the number of pharma patents per billion dollars have been halving every nine years or so -- a perverse opposite of the famous Moore's law that is a bedrock of the computing industry (Moore's law, which has reliably predicted the development of computer hardware technology since proposed in 1965, states that the amount of computing power per unit cost doubles every 2 years). Therefore it is financially foresighted to just stop all R&D, except very low-risk near-term R&D, and just make money selling products. If others, such as government funded universities, biotech, and other companies continue to do R&D, great; we (Valeant) will buy the ones that produce profitable products without having to throw money away on the many failed efforts and dead leads. Essentially the entire Pharma industry and media (to include the authors of the studies their philosophy is based on) disagree, pointing out that the costs of the failed R&D efforts is baked into the price of the products created by the successful ones. Valeant is not avoiding the cost of failed R&D, they are just paying it upfront with their acquisition costs (and "one time" charges).
As for Actavis, I have to agree. I don't think they'll cut R&D wholesale. Why pay $60B in cash (as opposed to Valeant who is offering $20B in cash and $30B in questionable shares) for a company making just $3B/year, unless you believe that there a lot of value in the pipeline that will allow for extended and sustainable growth.
Just to be clear, I'm not looking at Actavis with naive enthusiasm. They will cut that which they don't believe in, that which is duplicate with their own capacities (although that cutting is as likely to hit their own employees as Allergan's -- in that respect they have no differential allegiance -- they'll do whatever they think is best for the shareholders), and they will certainly remove a lot of duplicate G&A (General and Administrative) costs (such as accounting and HR). But, unlike Valeant, this will all be done for the purpose of creating real value; not just to feed a financial engineering machine (aka "house of cards") to keep it running a little longer before it runs out companies it can feed ion.
Dan.
