Pfizer became the world’s biggest drug maker by revenue through acquisitions that diversified its portfolio. Now it’s spinning out its off-patent drug division and charting a different course for the remaining company as a smaller business focused on developing innovative new drugs.
On Monday, Pfizer (NYSE: PFE) announced that its Upjohn division, which sells drugs such as Viagra and Lipitor, would be combined with Mylan (NASDAQ: MYL), the generic drug company perhaps best known for selling the EpiPen. Under the terms of the all-stock transaction, each Mylan share will convert into one share of the new company. Pfizer shareholders would own 57 percent of the combined company, and Mylan shareholders would own 43 percent. The boards of directors of both Mylan and Pfizer have unanimously approved the transaction, which still needs approval from Mylan shareholders, but not Pfizer’s.
The deal is New York-based Pfizer’s third major transaction announced in the past eight months. Last December, Pfizer and GlaxoSmithKline (NYSE: GSK) announced an agreement to combine their consumer health businesses and spin them off into a joint venture. That move would leave both Pfizer and GSK more reliant on commercializing new drugs that can be sold at higher prices than consumer products. In June, Pfizer struck a deal to add some of those innovative products to its pipeline. The company agreed to pay $11.4 billion to acquire Array BioPharma (NASDAQ: ARRY), a cancer drug maker that has two FDA-approved drugs and a pipeline of additional experimental cancer treatments. The GSK and Array deals are expected to close in early August.
Speaking on a conference call with analysts, Pfizer CEO Albert Bourla said spinning off Upjohn would help his company avoid the “patent cliff,” the expiration of the drug patents that keep generic competition at bay. He added that as a smaller company more focused on developing innovative new medicines, Pfizer expects revenue will be higher in five years than it would have been had the company not done the Upjohn deal.
“These are deliberate steps we are taking to make Pfizer a very different company,” Bourla said.
Michael Goettler, currently president of Upjohn, will become CEO of the new company. Mylan’s president, Rajiv Malik, will take on the same role at the combined company. When the deal closes, Mylan CEO Heather Bresch will retire.
Goettler said on the conference call that Mylan and Upjohn have complementary geographic territories. While most of Mylan’s revenue comes from North America, Upjohn sells most of its products in Asia. But Mylan had already eyed the Asia-Pacific region as a target for expansion, said Mylan’s executive chairman Robert Coury. There are limits to how much more Mylan could grow in the US, which is a developed market, he said.
“When you’re working in a developing market, you have a tremendous amount of opportunity,” said Coury, who will become executive chairman of the new company.
For Mylan, the proposed combination with Upjohn is the culmination of a strategic review begun nearly a year ago. At that time, shares of Mylan traded at around $37 each, down from a five-year high of more than $76. In the past year, Mylan’s stock price has dipped as low as $16.63. Shares rose nearly 13 percent following the announcement of the merger with Upjohn. Pfizer’s stock price dipped nearly 2.5 percent.
The projected 2020 revenue of the new company is expected to be between $19 billion and $20 billion, with pre-tax earnings between $7.5 billion and $8 billion, according to the deal announcement. The company will be incorporated in Delaware and maintain operations in Shanghai, China, which is where Upjohn is currently based, as well as in Hyderabad, India, and Pittsburgh. The company will be renamed upon the closing of the transaction, though the Upjohn name will continue to be used in China and certain emerging markets.
Pfizer and Mylan expect to close the transaction in the middle of next year. If the merger is terminated, the deal terms call for Mylan to pay Pfizer a $322 million termination fee.