Pfizer's on-again, off-again breakup is back on again. Off-patent branded drugs like Lipitor, Lyrica and Viagra will now be in the hands of a new company formed from a merger of the big pharma's Upjohn unit with struggling generics manufacturer Mylan.
The transaction addresses immediate problems for both companies, with Mylan picking up sizable Upjohn cash flow to offset its own sliding sales and ease debt pressures. For its part, Pfizer offloads a division that was diluting its own growth prospects in branded pharmaceuticals.
But while executives from both companies described the deal as "transformational," the long-term promise is anything but certain as generics remain under pricing pressure in developed markets and Upjohn's business in emerging markets remains volatile.
The deal partially answers a question that has vexed Pfizer investors for some time — namely, would the biggest big pharma split itself up to achieve a higher overall valuation than the conglomerate now offers? Former CEO Ian Read posed the question nearly a decade ago before deciding against it, but a recent decision to have business units report financial data separately raised it as possibility again.
For the sector at large, as Pfizer goes, so go other pharma companies. Ridding themselves of sluggish generics business units might also benefit a company like Novartis, which sells off-patent drugs under the Sandoz name.
Meanwhile, the decision to merge with Upjohn brings to an end a strategic review that Mylan began nearly a year ago.
The transaction will launch a boardroom shuffle as Pfizer shareholders will take a 57% stake in the new company. As a result, Mylan CEO Heather Bresch will step down following the deal's close and be replaced by Upjohn's group president, Michael Goettler. Mylan chairman Robert Coury will become executive chairman.
Joining Coury and Goettler on the board of directors will be eight members designated by Mylan and three by Pfizer.
The deal will also see Mylan's legal domicile return to the U.S. following an "inversion" that took place in 2014 when it bought the Netherlands-headquartered generics division of Abbott Laboratories, at a time when such transactions were under serious scrutiny from U.S. regulators concerned of their use to escape tax obligations.
Mylan has been one of the hardest hit companies by generic pricing pressures, with its revenues declining 4% year over year from 2017 to 2018, to $11.4 billion. North American revenue, which constituted 35% of its sales, dropped even more severely, by 18%.
Upjohn, meanwhile, is a more globally diversified company, with 55% of its sales in the Asia-Pacific region and 15% in emerging markets. The new company will have 30% in Asia-Pacific and 15% in emerging markets.
The advantages of that global presence are potentially offset by the structure of Upjohn, however. As an operating unit within Pfizer, its sales outlook can be replenished by branded products that go off-patent but have a significant tail of revenue. This will not be something the new company can rely on.
Two-thirds of Upjohn's sales come from its top three products, Lyrica, Lipitor and Norvasc, which will be ripe targets for generic rivals.
"In other words, sales will shrink over time," Raymond James analyst Elliot Wilbur wrote in a note to clients. "[Mylan] is giving up 60% of everything management has built over 60 years for what in essence appears to be a medium duration rescue package."
It does give Mylan investors something to love, however. Executives promised to bring Mylan's debt, which stood at more than $13 billion at the end of 2018, down to two and a half times earnings, and begin paying a dividend of 25% of free cash flow, estimated at more than $4 billion, in the first quarter after the deal's close.
Those goals will be helped along by an estimated $1 billion in annual cost savings the executives targeted by 2024.
The deal is expected to close mid-2020, subject to vote by Mylan shareholders and regulatory review.
Mylan shares rose 8% to $19.96. Pfizer's were down 2% to $42.15.