Pfizer to Braid Old Blockbusters Into Mylan, Reshaping Industry
Under the all-stock deal, a “Reverse Morris Trust” transaction, Mylan investors would get 43% of the new entity.
(Bloomberg) -- Pfizer Inc. plans to combine its business that sells older blockbuster medicines such as Lipitor and Viagra with generic drugmaker Mylan NV, in a deal that will reshape the brand-name and off-patent pharmaceutical industries.
Under the terms of the all-stock transaction, Mylan investors would get 43% of the new entity and Pfizer investors the rest. The new publicly traded company will have sales of about $19 billion to $20 billion in 2020, the drugmakers said in a statement.
Both Pfizer and Mylan have been trying to reshape themselves in the face of a rapidly shifting pharmaceutical market. The deal will let Pfizer focus its considerable muscle on making new medicines, while Mylan gets a financial lifeline after a rocky stretch.
Pfizer, which had $54 billion in sales in 2018, had previously pondered both industry-shaking megadeals and a potential breakup. But it recent years it has been slimming itself into a sleek maker of innovative therapies for cancer and other diseases. At the same time, Mylan, with $11.4 billion in sales last year, has been looking for ways to realign its business in an intensively competitive generic-drug industry that’s punished its profits and its shares.
Mylan investors embraced the deal, sending shares up as much as 19% to $21.88, the highest level since November. Still, the stock is well below the all-time peak of more than $67 reached in 2015. Mylan’s bond spreads meanwhile tightened to record lows; as part of the deal, the new company expects to refinance its debt, and it will have a richer income stream to draw on to pay its obligations.
Pfizer shares declined as much as 2.1%, and were trading at $42.91 at 9:36 a.m. in New York.
“I’ve listened very, very carefully to shareholders,” Mylan Chairman Robert J. Coury said on a conference call on Monday. “This transaction checks every single box that they have discussed with me.”
The deal, a “Reverse Morris Trust” transaction, will spin out Pfizer’s Upjohn unit and then combine it with Mylan. The new company will have about $24.5 billion in debt and an investment-grade credit rating, the companies said. The transaction is expected to close in mid-2020. The company will be renamed.
What Bloomberg Intelligence Says
A tie-up with Pfizer’s Upjohn may be the best option for Mylan. A combination would create the largest specialty-generic drug company. For Mylan, it provides a management shakeup and significant cash generation. For Upjohn, it provides diversification and a pipeline. Cost synergies and swift debt reduction may create a more agile company, making it a win-win.
--Curt Wanek, pharmaceuticals analyst
Click here for the research
For New York-based Pfizer, the combination will provide a pocket where it can place profitable-yet-off-patent products like cholesterol pill Lipitor and erectile dysfunction drug Viagra, which still fetch hundreds of millions of dollars in global sales but aren’t key to the company’s growth.
Mylan has struggled in the face of declining prices for generic drugs, manufacturing issues at a key plant and legal questions about the company’s alleged involvement in a price-fixing conspiracy with other drugmakers.
Michael Goettler, who runs Pfizer’s off-patent drug unit, will become chief executive officer of the combined company; Coury will be executive chairman. Current Mylan CEO Heather Bresch will depart after the deal closes, while Mylan Chief Financial Officer Ken Parks will also leave.
Coury indicated he planned to keep a tight grip on the reins.
“This executive chairman role is a real role, quite frankly,” he said on the conference call, saying he would be focused on dealmaking and strategy.
The business would be based in the U.S., removing a Dutch governance structure that has frustrated some Mylan investors and is essentially a takeover defense.
However, while Pfizer shareholders will end up with a larger slice of the equity, Mylan will have tighter control of the new company’s board. With Coury as executive chairman, Mylan will also get to name eight other board members. Pfizer will name three. Goettler will also get a seat, for a total of 13 members.
The venture will also be less reliant on the generic pills that have been a mainstay of Mylan’s business but that have also become a drag amid falling prices and increasing competition. It will only get about a third of its sales from traditional generic pills, executives said on the conference call, while the rest will come from injected or infused solutions and versions of complex biotechnology drug called biosimilars.
Cash flows will be directed at repaying debt that matures in 2020 and 2021.
“Once our targeted leverage ratio is sustained, we will potentially consider share repurchases and dividend increases over time,” said Parks, the Mylan CFO, on the conference call.
Earlier, Mylan reported second-quarter adjusted earnings of $1.03 a share, topping the 95 cents average of Wall Street estimates compiled by Bloomberg. The company reaffirmed its 2019 forecast for adjusted earnings of $3.80 to $4.80 a share and revenue of $11.5 billion to $12.5 billion.
Read More: Mylan’s Pfizer Deal Brings a Needed Positive to Bloodied Sector
Pfizer posted second-quarter adjusted earnings per share of 80 cents, beating the average estimate of 75 cents. But it also lowered guidance for the year. Sales in the second quarter totaled $13.2 billion, a 2% decline from a year prior. The drugmaker’s off-patent business Upjohn saw sales fall 11% year-over-year, to $2.8 billion from $3.1 billion.
Some analysts were skeptical that joining Upjohn with Mylan would solve either side’s sales challenges.
“The combined company is bigger, but we are not sure it is better and integration risks are not minimal,” Wells Fargo & Co. analyst David Maris wrote in a note to clients.
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