Pfizer (NYSE:PFE) is spinning-off its off-patent drugs business, Upjohn, into a new venture with Mylan N.V. (NYSE:MYL), maker of the EpiPen. The PFE stock price dropped and MYL shares popped on the news of the all-stock pharma mega-deal.
Under the deal, Mylan shareholders get 1 share of the new company for each of their shares, and 43% of the resulting stock. Pfizer shareholders will get new shares representing the balance. Mylan shares initially jumped 20% on the news but quickly lost half that gain by July 30, opening at $20.66, offering a market cap of $10.7 billion. Pfizer stock was down 6.43% yesterday.
In the process, Mylan CEO Heather Bresch gets to retire ahead of her father. Bresch is the genius behind the 500% EpiPen price hike that followed her taking over the role in 2011. Her father is West Virginia Sen. Joe Manchin.
Mylan chairman Robert Coury, who will be executive chairman of the new company under Pfizer executive Michael Goettler, threw Bresch under the bus during a conference call. He promised a “180-degree turn” in the company’s direction.
Remember Teva
Mylan would have done better had the company taken a $40 billion merger offer from Teva Pharmaceuticals (NYSE:TEVA) in 2015, but it refused to go along. Teva later spent that money on the generics business of Allergan (NYSE:AGN) but has since fallen hard and is worth just $8.6 billion under the lead of Kare Schultz, the would-be savior who was id’d last week as the second-highest paid CEO in pharma.
Something like that may be in store for the new company. Generic drugs are a low-profit, commodity business. Such drugs, lacking patent protection, are subject to global competition. Among the products that will go into the new business from Pfizer are former blockbusters like Lipitor, Viagra and Celebrex.
Total revenue from the new company is estimated at $20 billion. Mylan had 2018 sales of $11.4 billion and net income of $352 million.
Pack Up Your Troubles
Mylan stock had fallen almost 40% in 2019 prior to the news. A big revenue miss in its first quarter report, announced in May, initially sent the stock down over 20%. Analysts then told investors to sell amid an EpiPen shortage.
The deal is classified as a “reverse Morris trust” to avoid taxes, with Pfizer divesting the Upjohn business, then merging it with Mylan. Upjohn production is based in China, and first quarter sales were estimated at $3 billion. Pfizer had first quarter sales of $13.1 billion.
The EpiPen scandal has proven embarrassing to the whole industry. After becoming Mylan CEO Bresch put TV ads and extensive lobbying behind the EpiPen. She pushed it as a must-have for schools and parents. She also pushed wholesale prices from $103 for a two-pack of plungers in 2010 to $608 in 2016. The drug administered by the EpiPen, epinephrine, costs just 33 cents per dose, and the EpiPen itself was said to cost $5 to make.
The deal also buries a Q2 revenue miss for Pfizer, which earned $5.05 billion, 80 cents per share fully adjusted, on revenue of $13.26 billion. The revenue number fell $70 million short of analyst estimates, and the company cut revenue guidance for the full year by $1.5 billion. Pfizer is shedding low-margin businesses and buying higher margin ones like Array BioPharma (NASDAQ:ARRY) as it tries to get its stock price higher.
Bottom Line on Pfizer Stock
The Pfizer-Mylan deal is a way to bury the EpiPen scandal. A lot of lobbyists and marketing people are likely to lose jobs as the companies consolidate. Mylan shares that were worth nearly $80 each are now worth barely $20. Pfizer stock is off more than 11% in the past month.
On the other hand, Pfizer has a chance to increase its margins, as it won’t have low-margin generics in its portfolio. Investors buy Pfizer for its 35-cents per share dividend, which yields 3.37% at the company’s July 30 price and is well-supported by earnings. That remains the play.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
