Pfizer to merge its unit making older blockbuster drugs with Mylan

Pfizer Inc. plans to combine its business that sells older blockbuster medicines such as Lipitor and Viagra with generic drug maker Mylan in a deal that would 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 would 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 would let Pfizer focus its considerable muscle on making new medicines, while Mylan would get a financial lifeline after a rocky stretch.

Pfizer, which had $54 billion in sales in 2018, had previously pondered both industry-shaking mega-deals and a potential breakup. But in recent years it has been slimming itself into a sleek maker of innovative therapies for cancer and other diseases.

Mylan, with $11.4 billion in sales last year, has been looking for ways to realign its business in an intensely competitive generic-drug industry that has punished the company’s profits and stock price.

Mylan investors embraced the deal, driving up the stock 12.6% to $20.78 on Monday. Still, that’s 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 would have a richer income stream to draw on to pay its obligations.

Pfizer shares fell 3.8% to $41.45.

“I’ve listened very, very carefully to shareholders,” Mylan Chairman Robert J. Coury said in a conference call Monday. “This transaction checks every single box that they have discussed with me.”

The deal, a “reverse Morris Trust” transaction, would spin out Pfizer’s Upjohn unit then combine it with Mylan. The new company would 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.

For New York-based Pfizer, the combination would provide a pocket where it can place profitable yet off-patent products such as 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, would become chief executive of the combined company; Coury would be executive chairman. Current Mylan CEO Heather Bresch would depart after the deal closes. Mylan Chief Financial Officer Ken Parks would 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 deal-making 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.

Although Pfizer shareholders would end up with a larger slice of the new company’s equity, Mylan would have tighter control of its board. With Coury as executive chairman, Mylan would also get to name eight other board members. Pfizer would name three. Goettler would also get a seat, for a total of 13 members.

The venture would also be less reliant on the generic pills that have been a mainstay of Mylan’s business but that have also become a drag as prices fall and competition grows. It would only get about a third of its sales from traditional generic pills, executives said on the conference call, while the rest would come from injected or infused solutions and versions of complex biotechnology drugs called biosimilars.

Cash flows would 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,” Parks, the Mylan CFO, said on the conference call.

Earlier, Mylan reported second-quarter adjusted earnings of $1.03 a share, topping the 95-cent 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.

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, down 2% from the same quarter last year. 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.