Merck is corralling products representing $6.5 billion in sales and spinning them off into a separate company, a strategic bet that focusing the remaining business on developing innovative new medicines will drive future growth.
The new company will take Merck’s women’s health business, older medicines that have lost patent protection, and biosimilars—drugs that are close copies of biological drugs. The Merck (NYSE: MRK) that’s left will focus on cancer drugs, vaccines, hospital products, and animal health. Speaking on a conference call Wednesday, CEO Ken Frazier said that spinning off the new company will allow Merck to focus on marketing those products as well as developing new ones that will shape the Kenilworth, NJ, company’s portfolio in years to come.
“This is about taking action today that will ensure the long-term viability of Merck, as well as allowing the products that no longer fit to thrive in a new operational structure,” Frazier said.
The new company’s portfolio will include contraceptive products that generated more than $1.6 billion in global sales in 2018, and biosimilars in immunology and cancer that are marketed under a partnership with Samsung Bioepis. The older Merck drugs moving to the new company span dermatology, pain, respiratory, and cardiovascular health. Of the $6.5 billion in total revenue that the new company’s products represent, Merck says that more than 75 percent of it comes from sales outside of the US.
The spinoff will leave Merck more reliant on its cancer drug portfolio, particularly pembrolizumab (Keytruda). That cancer immunotherapy accounted for $11.1 billion in revenue in 2019, up 55 percent compared to last year. It is by far Merck’s top-selling product, and some analysts on the call questioned whether the company is too dependent on revenue from that drug. Frazier responded that Merck is mindful of that risk, but the company believes it will also see revenue growth in other therapeutic areas. For example, Frazier said that diabetes drugs continue to be important to the company. The spinoff did not include type 2 diabetes drug sitagliptin (Januvia), a product that produced $3.4 billion in 2019 sales but faces patent expiration in 2022.
Merck’s spinoff plans come as other large pharmaceutical companies make similar moves. Last year, Pfizer (NYSE: PFE) announced its Upjohn division, which markets off-patent medicines, would merge with generic drug maker Mylan (NASDAQ: MYL). That announcement followed a deal in which Pfizer and GlaxoSmithKline (NYSE: GSK) merged their respective consumer health businesses in a joint venture.
GSK is going even further. On Wednesday, the company announced plans to break consumer health off completely into a separate company. Speaking on a conference call, CEO Emma Walmsley said that the separation of consumer health would happen over the next two years, leaving the “New GSK” focused on science related to the immune system, genetics, and the use of new technologies. Walmsley added that GSK continues to review the potential sale of other assets, including the company’s dermatology business.
Likewise, Frazier left the door open for more deals. But he tamped down talk of selling or spinning out the animal health business, as many other pharmaceutical companies have done. While the pharmaceuticals business has its ups and downs, Frazier said animal health offers a steady counterbalance that provides “long term stability to pursue our R&D mission.” Sales from Merck’s animal health business were $4.4 billion in 2019, up 4 percent compared to 2018.
Merck expects to complete the spinoff of the new company in the first half of 2021. That new, publicly traded company will be led by Kevin Ali, a 30-year Merck veteran. Ali said that in addition to marketing the products it inherits from Merck, the new company will also eventually build research capabilities to develop new products, starting in women’s health. The new company is expected to be based in New Jersey, and will employ between 10,000 and 11,000 people.
Merck says spinning off the new company will lead to more than $1.5 billion in operating efficiencies by 2024. The pharmaceutical giant expects it will receive an $8 billion to $9 billion tax-free dividend from the new company, which will be used for business development or for buying back shares.