Pfizer-Mylan Generic Giant Solves Two Problems With One Deal
(Bloomberg Opinion) -- The merger of Pfizer Inc.'s off-patent drug business with struggling specialty drugmaker Mylan Inc., announced early Monday morning, should come as a relief for investors on both sides of the transaction.
Analysts have been clamoring for Pfizer to split off its Upjohn division focused on legacy drugs from its core prescription-drug operations so the drug giant could sharpen its focus on the higher-margin innovative business. This deal is a chance for CEO Albert Bourla to finally make the separation. And while Mylan holders may look back wistfully at Teva Pharmaceuticals Industry Ltd.’s $40 billion buyout offer in 2015 – this merger doesn’t offer the same type of immediate return – the deal with Pfizer gives them a 43% stake in a stronger company and will free Mylan’s assets from a management team that has had a calamitous recent run.
Pfizer’s slim-down started with the highly successful spinoff of its animal health unit in 2013 and continued in December when it formed a consumer joint venture with GlaxoSmithKline PLC. The company should reap benefits from completing its journey. In its pre-deal form, Pfizer risked years of sluggish growth from declining sales of older drugs. Separating those products will flatter the revenue growth of the company’s newer medicines, and could have the same effect on its valuation. Pfizer is raising $12 billion in debt that the new company will carry, and keeping the cash. The deal will strengthen Pfizer’s balance sheet and help the company further bolster its roster of novel treatments.
The Mylan combination is an excellent way to help Upjohn succeed on its own, and could boost the return on a split Pfizer would likely have pursued anyway. The specialty and generic drug business is brutally competitive, and pricing pressure in the U.S. has squashed profitability for the entire sector. That’s one reason Mylan comes so cheap: The company was worth $25 billion just last year but had a market cap below $10 billion before Monday's announcement. Scale will help the new business push back on pricing, and its broad lineup of products and geographic reach will also help it stand out. The combined company will be less levered than stand-alone Mylan and is expected to generate more than $4 billion in annual free cash flow.
All of that makes a strong case in favor of this deal for Mylan investors. The most significant point in its favor, however, might be the planned departure of CEO Heather Bresch, who will retire when the deal closes. She has played a starring role alongside pricing pressure in shrinking the company’s valuation, to the point where Mylan felt compelled to consider its strategic options.
Her tenure has brought price-fixing investigations, congressional inquiries into price increases for life-saving EpiPens, delays for crucial products, and repeated earnings misses. She further tarnished Mylan's reputation by investing in coal to lower its tax bill while simultaneously developing asthma medication, collecting rich paychecks as its share price plunged, and enacting shareholder-unfriendly corporate governance.
A leadership change should help the market refocus on the good parts of the company, including a valuable international business. Pfizer veteran Michael Goettler will pilot the new company. It would be hard for him to be anything but an improvement.
The deal removes a strategic cloud over Pfizer and a management miasma from Mylan. Investors are likely to enjoy the better weather.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.
©2019 Bloomberg L.P.