Mylan (MYL) shares shot higher on "Merger Monday" on word of a deal in which Pfizer Inc. (PFE) will combine its off-patent drug business with Mylan to form a new company.
"MYL shares could potentially benefit dramatically," Morgan Stanley analyst David Risinger had said in anticipation of such a deal. "Since MYL trades at an EV/2020e EBITDA multiple of only 6.5x, we believe shares could benefit from stronger earnings prospects."
In line with Risinger's assumption, Mylan shares were up about 15% before Monday's opening bell thanks to the planned combination and better-than-expected earnings at Mylan.
Mylan CEO and President Heather Bresch had been quiet on the company's prospects during a strategic review of options in May. The new deal brings that review, as well as Bresch's tenure, to a close.
Bresch had served as CEO of the company since 2012 and was popular fodder for healthcare-focused politicians.
If Mylan thinks health care should be a right, it might want to reconsider some of its practices like quadrupling the price of EpiPen while giving its CEO a 671% raise. https://t.co/EHRlemt64k
— Bernie Sanders (@SenSanders) May 2, 2018
The new company, which is yet to be named, will be led by Mylan Chairman Robert Coury, who will serve as executive chairman of the new company, and Michael Goettler, currently Group President of Pfizer's Upjohn unit, who will serve as CEO.
"Over the past year and a half, I have spent a lot of time speaking with and listening attentively to our shareholders. Today's announcement builds upon many of those meaningful conversations and represents a transformative move for Mylan," Coury said. "The new company, which combines the unique assets of Mylan with the iconic brands of Pfizer's Upjohn business, will not only accelerate our mission to serve the world's changing health needs, but also further unlock the true value of our platform while delivering attractive returns to shareholders for many years to come."
Minding the Merger Details
Per an announcement early Monday morning, Mylan will combine with Upjohn, Pfizer's off-patent branded and generic medicines business, in an all-stock transaction, with each Mylan share to be converted into one share of the new company.
Under terms of the deal, Pfizer shareholders will own 57% of the combined new company and Mylan shareholders will own 43%, greater than initially anticipated.
The deal will combine household names such as Pfizer's Lipitor, Celebrex, Zoloft and Viagra with a slate of drugs that includes Mylan's EpiPen while expanding the Mylan business beyond its heavy weighting toward U.S. generics.
"The transaction will allow the new company to meaningfully expand the geographic reach of Mylan's existing broad product portfolio and future pipeline -- including significant investments that have been made across complex generics and biosimilars -- into new growth markets where Upjohn has existing sales infrastructure and local market expertise," a Mylan statement reads.
Pfizer's expertise in China was specifically called out as a key driver for the newly combined company.
The new company is expected to have pro forma 2020 revenue of $19 billion to $20 billion, according to a company statement, with pro forma 2020 adjusted EBITDA expected to range from $7.5 billion to $8.0 billion, including phased synergies of about $1 billion annually to be realized by 2023.
"Merger creates a sizable NewCo focused on providing low cost drugs that is much more geographically diversified than Mylan's current business (we est. ~70% outside US sales mix of NewCo), thereby reducing exposure to US generics," Leerink Partners analyst Ami Fadia said. "[The deal] should position the NewCo to explore both internal and external growth opportunities in the future."
Fadia added that fresh management to examine the offerings at Mylan could provide more positive benefits in the long term, leading him to an "Outperform" rating on the shares.
Earnings Adds Accelerant
While not top of investors' minds, Mylan also reported better-than-expected second-quarter earnings on Monday morning.
The company reported non-GAAP earnings per share of $1.03 and revenue of $2.85 billion, both marking year-over-year gains and coming in above the Wall Street consensus.
"Mylan's second-quarter performance was strong as we delivered or exceeded on expectations across all financial metrics," departing CEO Heather Bresch said. "In addition, based upon our strong execution against our plan, we remain on track to deliver on our 2019 guidance."
Pfizer Falling
The footing for Pfizer shares has been decidedly less firm as its merger-and-acquisition (M&A) strategy picks up steam.
Pfizer shares were down nearly 3% in pre-market trading as details of the deal with Mylan emerged.
Earlier this year, Pfizer agreed to acquire Array Biopharma (ARRY) in an all-cash deal that values the cancer drug specialist at around $11.4 billion as Pfizer moves toward innovative medicines under new CEO Albert Bourla, who previously led Pfizer's Innovative Health Business, amid plans to reorganize its business into three separate units.
Yet another M&A splash adds complexity to Pfizer's overall business.
"The success of Pfizer's acquisitions (Hospira, Anacor, Medivation and AstraZeneca's (AZN) small molecule anti-infectives business) will depend, in large part, on the company's ability to realize anticipated benefits from combining these businesses with existing Pfizer segments," Cantor Fitzgerald analyst Louise Chen wrote. "For example, Pfizer may fail to achieve anticipated cost savings from the acquisition of Hospira, or such cost savings within the expected time frame; or the accretive impact anticipated from the acquisitions of Hospira, Anacor and Medivation may not be realized or may be delayed."
Nonetheless, Chen remained positive on Pfizer's overall prospects.
"We think this is a smart, strategic move by PFE and reflects well on new, CEO, Albert Bourla, who investors think has big shoes to fill with the retirement of former CEO Ian Read," she said. "PFE has talked about mid-single-digit operational revenue growth in the period post-2020 through 2025. If this deal goes through, we think the growth rate could be even higher, and this should drive multiple expansion."
A conference call to run through full results for Mylan's quarter and the implications for each company is expected to kick off at 8:30 a.m. here.
