Pfizer's big split is finally here, thanks to a giant generics merger with Mylan

Looks like consumer health isn’t the only franchise Pfizer is looking to shed. In a payoff for years of split-up talk, the pharma giant's got hive-off plans for its generics business, too.

And those plans could finally give Mylan investors what they want—or some of it, at least.

Pfizer has agreed to merge its off-patent drugs franchise, Upjohn, with Mylan, the companies said Monday. The deal would allow Pfizer and Mylan to combine two under-pressure businesses into a new giant with projected 2020 revenues of $19  billion to $20 billion. And with that heft, it may have a better chance at weathering growing pricing pressure in the U.S. generics market.

"By bringing Mylan’s growth assets to Upjohn’s growth markets, we will create a financially strong company with true global reach," Pfizer CEO Albert Bourla said in a statement.

It would also fulfill a long-held dream among some Pfizer analysts and investors who've been agitating for a generics split-off for years. Under former CEO Ian Read, the company weighed a spin-off or sale, abandoned the idea, and then restructured to give the unit more independence inside the company.

Mylan investors, for their part, would get some of the new leadership they've been craving. CEO Heather Bresch "will retire from Mylan upon the close of this transaction," which is expected mid-2020, the companies said. Ken Parks, Mylan's CFO for just three years, will also be leaving, and a search has begun for the new company's finance overseer. 

Mylan Chairman Robert Coury, however, will stick around as executive chairman. And Mylan President Rajiv Malik will continue under that title, though Bloomberg previously reported that he would eventually also leave the combined company. Michael Goettler, currently Pfizer's Upjohn chief, will take the helm as CEO. 

The two parties are looking at a stock transaction, in which Mylan investors will get 43% of the combined company and Pfizer investors the rest. Pfizer plans to issue $12 billion in new debt to wrap up the deal. Mylan and Pfizer already collaborate on EpiPen, though that partnership has lately suffered from manufacturing problems.

The company will have 51 manufacturing sites, including 25 solid dose, seven injectable, eight complex dosage forms and 11 API sites. In total they can produce more than 80 billion doses annually. 

Analysts at RBC Capital and Cantor Fitzgerald quickly praised the merger ahead of the official announcement. Calling the deal "a smart, strategic move" on Pfizer’s part, Cantor analyst Louise Chen said it could boost revenue growth past the mid-single-digit rate Pfizer has pegged for the five years from 2021 to 2025. In the first quarter, Upjohn revenues grew 1% at constant currencies, lagging the biopharma franchise’s 7%.

RBC’s Randall Stanicky, in a Sunday analysis, said the deal looks attractive for Mylan shareholders, too. The generics maker's shares have been trading at a notable discount to chief copycat drugs rival Teva "despite not having meaningful opioid exposure," but the new company could help close that valuation gap, he figured.

And a more geographically diversified portfolio—with U.S. generics accounting for less than 15% of the new firm’s operational earnings, per Stanicky’s calculation—could provide more stability amid U.S. pricing pressures, he said.

Besides, Mylan's nominal headquarters is in the Netherlands, though it’s operated out of Pittsburgh. If based in the U.S., the combined company could be more shareholder-friendly: It would shed an obscure Dutch legal provision known as "stichting" that Mylan installed in 2015 to fend off a hostile takeover from Teva.

Stichting can also be used to evade activist investors, and removing it has been one of the changes Mylan shareholders have been calling for, Chen noted.

Last August, amid shareholder criticism, Mylan initiated a strategic review that it said was "actively evaluating a wide range of alternatives." Just a month before that, Pfizer unveiled its own restructuring—which just took effect this year—that granted its established medicines business "substantial autonomy" within Pfizer.

The "autonomy" description at that time rekindled speculation that a selloff could be near. The Upjohn unit houses all Pfizer oral solid generics and off-patent branded medications, including some top-sellers such as erectile dysfunction drug Viagra and cholesterol controller Lipitor. Biosimilars and the legacy Hospira sterile injectables are not part of the deal because Pfizer grouped those products into the biopharma unit—not Upjohn—during the reorganization.

The New York Big Pharma is already in the process of offloading its consumer health products to a new joint venture with GlaxoSmithKline, which plans to spin the unit off into a standalone company within three years.

The deal marks the latest effort by Bourla to focus the company on higher-margin, innovative drugs. Toward that end, Pfizer last month agreed to buy oncology specialist Array BioPharma for $11.4 billion.

In the meantime, as RBC’s Stanicky noted, the Upjohn-Mylan merger could bring "questions around potential for similar deals" as more and more drugmakers move up the value chain toward innovative medicines and away from lower-cost generics.

One such company is Novartis, which is itself transforming its Sandoz generics business into an "autonomous unit." However, in an interview with the Sueddeutsche Zeitung newspaper, CEO Vas Narasimhan promised not to sell Sandoz, according to Reuters.