Pfizer Signs All-Stock Agreement with Mylan to Create Global Pharma Champion

In the face of a rapidly shifting pharmaceutical market, to be successful, pharmaceutical companies need to innovate, work more efficiently and boost their product portfolios. Moreover, large pharma and biotech companies often engage in merging their businesses to realign their portfolios.

In addressing this reality, US-based multinational pharmaceutical corporation Pfizer Inc. and Mylan N.V., a global generic and specialty pharmaceuticals company, reached an all-stock definitive agreement, on 29 July 2019. Under the deal, Upjohn, which is the off-patent branded and generic established medicines business of Pfizer, will be combined with Mylan. The Reverse Morris Trust transaction, which would result in the formation of a new global pharmaceutical company, highlights how these major pharma players are trying to reshape themselves to stay relevant in the rapidly shifting global pharmaceutical market.

Pfizer had earlier considered strategies like a potential breakup or a megadeal; however, over the years, it shifted its focus towards becoming a sleek manufacturer of innovative therapies for diseases like cancer. Meanwhile, Mylan has been looking to restructure its business for some time, factoring in growing challenges due to low prices of generic drugs in the intensively competitive generic-drug industry.

As per the agreement terms, each share of Mylan will get converted into one share of the new company. Mylan investors would own 43 per cent of the new entity, while a larger slice of the equity (the remaining 57 per cent) would be held by the shareholders of Pfizer. The deal has secured unanimous approval from the board of directors of both the parties and is expected to close in the mid of 2020. However, it is subject to the receipt of regulatory approvals and other customary closing conditions, in addition to approval from the shareholders of Mylan.

What is the New Combined Business?

Mylan is a global pharmaceutical company, with a portfolio of more than 7,500 products and access to over 165 countries and territories. Some of the key therapeutic areas in which the company focuses are central nervous system, cardiovascular and infectious diseases. It holds excellence in high-quality manufacturing and supply chain, as well as holds a robust pipeline. Its growing product portfolio includes OTC remedies and branded generic, prescription generic, brand-name and biosimilar drugs.

Upjohn has a portfolio of the most iconic established biopharmaceutical brands of Pfizer, including cholesterol pill Lipitor (atorvastatin calcium), Celebrex (celecoxib) and male impotence drug Viagra (sildenafil). It also holds leading positions in emerging markets including China. The company is focused on cardiovascular, pain, psychiatry, urology and other therapeutic areas. With a network of nine dedicated manufacturing sites, it serves patients in more than 100 markets.

Under the new company, the sustainable, diverse and differentiated drug portfolio of Mylan will get combined with the iconic brands of Pfizer. The new company will have extensive global scale and geographic reach. The new publicly traded company, which is expected to reshape the brand-name and off-patent pharmaceutical industries, will transform as well as boost the ability of Mylan and Upjohn to serve the patient requirements. Additionally, the combined business will have access to over 165 markets, thereby boosting the geographical reach of the existing product portfolio as well as future pipeline of Mylan.

The new company will be incorporated in the US state of Delaware. Moreover, it will have global centres in the US city of Pittsburgh, Chinese municipality of Shanghai and Indian city of Hyderabad. The Group President of Upjohn, Michael Goettler, will be serving as its CEO. Meanwhile, Robert J. Coury, who is the Chairman of Mylan, will lead the new company, as Executive Chairman, which will get a new name and brand at the completion of the deal.

New Pharma Company Highlights

The combined business is anticipated to have pro forma revenues and adjusted EBITDA of $ 19-20 billion and $ 7.5-8.0 billion in 2020, respectively. The pro forma adjusted EBITDA would also include $ 1 billion in phased synergies, which would be realised annually by 2023. For 2020, the new global pharma company is likely to have a pro forma free cash flow of over $ 4 billion. In addition to maintaining a strong investment grade credit rating, the new company is expected to have a 2.5x ratio of debt to adjusted EBITDA by the end of 2021.

Focusing on shareholder capital returns, the company also plans to offer a dividend of ~25 per cent of free cash flow. The dividend is expected to start from the first full quarter after the completion of the deal and the potential for share repurchases after the sustenance of the debt to adjusted EBITDA target.

Pfizer’s June Quarter Financial Report

On 29 July 2019, the company also reported its financial results for the quarter ended June 2019. Its revenue stood at $ 13.26 billion in Q219, representing a decline of 2 per cent from $ 13.47 billion reported during the same period a year ago. Pfizer registered $ 4.52 billion in adjusted income in the second quarter of 2019, down 2 per cent year-on-year from $ 4.59 billion in the year-ago period.

Pfizer Q219 & H119 Financials (Source: Company’s Website)

Upjohn’s revenue fell by 11 per cent year-on-year to $ 2.81 billion in Q219 from $ 3.15 billion in the prior-year quarter. The fall in revenue was majorly driven by a 20 per cent operational decline in China and a 9 per cent decline in the United States. The decline in China was attributed to an expected unfavourable impact on the revenues of Lipitor and Norvasc due to the deployment of a volume-based procurement program by the company in some Chinese cities during the month of March 2019. Meanwhile, the company attributed the US market decline to lower Viagra revenues, which was driven by growing competition from generic drugs. The revenue fall in the US market was also attributed to lower Lyrica revenues.

Pfizer Q219 & H119 Revenue (Source: Company’s Report)

For 2019, the company also updated its financial guidance with revenues expected to come in the range of $ 50.5 billion to $ 52.5 billion. Earlier in April 2019, the company had provided financial guidance, expecting revenue to be $ 52.0 billion to $ 54.0 billion during 2019. The revised guidance for 2019 revenue was largely driven by the company’s anticipated formation of the consumer healthcare joint venture with GlaxoSmithKline plc in August 2019.

Mylan’s Q2 19 Financial Results

In the second quarter of 2019, Mylan reported a 2 per cent increase in revenue to $ 2.85 billion against $ 2.81 billion in the same period a year ago. Of the total net sales, North America segment accounted for $ 1.02 billion, while Europe segment and Rest of World segment contributed $ 989.6 million and $ 805.2 million, respectively, in the quarter ended June 2019. Its earnings before interest, tax, depreciation and amortization (EBITDA) stood at $ 596.7 million during Q219, down 13 per cent from the second quarter of 2018.

The company’s adjusted free cash flow reached $ 724 million in the second quarter of 2019, representing an increase of 9 per cent from the same period a year ago. For 2019, the company is expecting to register $ 11.5-12.5 billion in revenue and $ 1.9-2.3 billion in adjusted free cash flow.

The combination of Pfizer’s Upjohn and Mylan would result in a global champion in the pharmaceutical industry, with the new merged entity expecting to transform the lives of patients and deliver sustainable shareholder value.

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