Pfizer to combine Upjohn off-patent drug business with Mylan into new company

Pfizer plans to combine its Upjohn off-patent branded and generic established medicines business with Mylan into a new company, the drugmakers announced Monday, confirming a recent report on the matter. Under the all-stock transaction, which has been unanimously approved by the boards of both companies, Pfizer shareholders would own 57% of the combined new drugmaker, and Mylan shareholders would own 43%.

Commenting on the agreement, Pfizer CEO Albert Bourla said "for Pfizer, this transaction represents our sharpened focus on innovative medicines," adding "at the same time, we'll maintain the financial flexibility to advance our strong pipeline, invest for growth and continue to return capital to our shareholders." The deal comes after Pfizer and GlaxoSmithKline agreed last year to combine their consumer health businesses as both parties look to focus on innovative drugs.

Meanwhile, Mylan chairman Robert Coury said "I have spent a lot of time speaking with and listening attentively to our shareholders. Today's announcement builds upon many of those meaningful conversations and represents a transformative move for Mylan." Shares in Mylan, which announced plans last year to review its business, jumped as much as 20% on the news.

The deal is the "best-case outcome" for Mylan, suggested Jefferies analyst Jared Holz, but cautioned that "the issues for [the new company] hinge on a still-tenuous generics market." David Maris of Wells Fargo said "we think it is clear Mylan needed to do something to change direction," adding that the merger is recognition that Pfizer wanted to pull out of generics, while RBC Capital Markets analyst Randall Stanicky remarked that "we like the concept of this deal for Mylan holders and...see potential for upside."

However, analyst Ken Cacciatore of Cowen & Co. views the transaction negatively, citing "systemic problems in [the generics] business and our lack of conviction in Mylan." The analyst said "slamming bad things together [is] unlikely to solve the systemic issues...we believe that there are simply less controversial and more predictable value plays, and we would encourage investors to find them."

The combined company, which will be renamed and rebranded at close, is expected to have revenues next year of between $19 billion and $20 billion, with adjusted earnings in the range of $7.5 billion to $8 billion. Its combined portfolio will include products such as Upjohn's Lipitor, Celebrex and Viagra, along with Mylan's EpiPen auto-injector, of which there is a shortage in the US due to ongoing manufacturing issues at Pfizer's Meridian Medical Technologies unit, the contract manufacturer that produces all EpiPens sold globally at a single plant near St. Louis, Missouri. A Pfizer spokesperson indicated that the drugmaker is in talks to merge Meridian into the new generics business in a bid to help it cope with the EpiPen shortages. Pfizer said negotiations on such an arrangement are ongoing and there is no guarantee that a deal to merge Meridian into the spun-off business will happen, but the parties are aiming to reach a final decision before the close of the larger Upjohn-Mylan deal in mid-2020.

News of the combined company came as Pfizer reported financial results for the second quarter, with sales at its Upjohn unit down 11% year-over-year to $2.8 billion, while Mylan revenue in the same period rose 2% to $2.9 billion.

Maris noted that Pfizer's generic business has a much higher operating margin than Mylan's, while Holz said the deal could be "dilutive to earnings over the near term because of how profitable Upjohn is to Pfizer." Further, SVB Leerink analyst Ami Fadia suggested that the transaction "reduces exposure to the US generics market (and) it brings access to sales and marketing talent from the Upjohn side that Mylan can leverage to market products both in the US and outside." The new company will be based in the US and incorporated in Delaware, something that Fadia indicated "will go a long way" in getting investors more comfortable with investing.

Pfizer and Mylan noted that Coury will serve as chairman of the new drugmaker, while Michael Goettler, who is currently president of Upjohn, will serve as CEO and Rajiv Malik, the current Mylan president, will assume the same role at the new company. However, Mylan said that current CEO Heather Bresch will retire from the drugmaker upon the close of the transaction. "Nearly eight years after becoming CEO, I'm proud to say that this milestone represents the culmination of the goals I set for myself when I challenged Mylan…to set new standards in healthcare," Bresch commented. Holz called the management shuffle a positive, adding that Mylan has had "one of the most out-of-favour management teams in all of healthcare."

Pfizer indicated that Upjohn will issue $12 billion of debt at or prior to separation, and after the deal closes, the new company will have about $24.5 billion of total debt outstanding. The drugmakers said that the new firm is expected to realise phased synergies of approximately $1 billion annually by 2023.

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