Pfizer to combine its off-patent drug unit with Mylan
Pfizer — Mylan’s manufacturing partner for its flagship EpiPen — is combining its off-patent drug business with the generic drugmaker, in a haircut designed to focus on the healthier parts of its business.
The transaction is expected to come in the form of a stock deal in which Mylan $MYL shareholders would own a little more than 40% of the new entity and Pfizer $PFE shareholders the remainder. Pfizer is also slated to receive about $12 billion in proceeds from a new sale of debt.
The business, called Upjohn, is based in Shanghai (to focus on emerging markets), and includes products that once generated blockbuster sales such as the cholesterol drug Lipitor, the erectile dysfunction drug Viagra and the painkiller Lyrica.
The US generics industry has suffered in recent years due to pricing pressure and competition from manufacturers based in low-and-middle-income countries such as India. Generic drug makers have been consolidating in the hope that economies of scale will steady the ship and allow them to invest further into biosimilars, which bring richer profits versus their garden variety generic medicine counterparts.
Last year, India’s Aurobindo Pharma inked a deal to purchase parts of Novartis’ $NVS generic medicine business for up to $1 billion. Teva $TEVA — the world’s largest generic maker — bought Allergan’s vast generic business in a $40.5 billion deal in 2015.
Will the deal fix Mylan’s woes? No, said Cowen’s Ken Cacciatore in a note. For 2019, management is anticipating adjusted free cash flow to reach $1.9 billion to $2.3 billion — dramatically lower versus 2018 — and essentially the same as the 2015 levels, he pointed out.
“(W)e have long felt that standalone Mylan was absolutely broken…this deterioration of adjusted free cash flow over the last few years has been despite a tremendous investment ($15B+) toward both company and product acquisitions,” he wrote.
“(E)ven with the launches of Copaxone, Neulasta, Advair and others that should add $1B+ in 2019, these approvals are only providing some relief, but are not altering the systemic problems inherent with the generic model. Very rarely do we see such a systemic and wealth destroying mess,” he added.
The combined entity is expected to generate pro forma revenue of $19 to $20 billion next year, the companies said.
The Upjohn/Mylan guidance is actually modestly lower than what Cacciatore had first predicted. “This only adds conviction to our original thesis that this merger will solve nothing, and that the pressure and negative view of the combination will likely only increase into the eventual close,” he wrote.
Mylan chief Heather Bresch is set to depart to make room for Pfizer’s Michael Goettler, the current group president of Upjohn, who will take over as the combined company’s CEO. Bresch invited a storm of criticism in 2016 after pricing a pair of EpiPen’s for more than $600, up from the from $100 in 2007, when Mylan acquired the product. Under siege, the company eventually started selling its own generic version at a 50% discount.
However, other members of the senior Mylan team will also stick around. Chairman Robert Coury, will serve as executive chairman of the new company and Rajiv Malik, current Mylan President, will remain as president of the combined entity.
“Many are arguing that this new entity will find itself better positioned than standalone Mylan. We are not sure that is the right question, and we are now even more unsure whether that statement is even accurate given…that the senior Mylan management still appears that they are firmly in control,” Cacciatore said.
Pfizer, in recent months, has been trying to reinvent itself. Albert Bourla took over the reins of the company, after his predecessor Ian Read spent some time away from M&A to focus on the company’s internal pipeline — after some of his bets went sour (remember Medivation?) and generic competition took a bite out of the company’s once-biggest sellers. Bourla has since reverted to Pfizer’s aggressive deal-making roots to revive growth by sharpening focus on cancer, heart and rare diseases.
In late December, Pfizer announced plans to create a consumer health powerhouse with GSK $GSK in the form of a joint venture, and then spin it out. In May, the company agreed to pay up to $810 million to buy private Swiss biotechnology company Therachon for its experimental therapy to treat dwarfism. Last month, Pfizer agreed to shell out $11.4 billion for oncology company Array Biopharma.
“We do not assume that taking this action now foretells the success of PFE’s new products, but we also cannot discount that thought entirely. It is unlikely that this deal was a competitive situation, since few companies could have undertaken a similar move, so it probably could have been executed in 1-2 years just as easily,” Cowen’s Steve Scala analysts wrote in a note.
“Whether PFE shareholders wish to hold MYL stock is another question, as they are unlikely to own PFE shares for Upjohn. What exposure PFE Biopharma has to emerging markets is unclear, but it clearly will no longer have an industry-leading position.”
Social image: Pfizer, AP Images