Mylan gets an injection, administered by Pfizer 

The combination of Upjohn and Mylan means that, for a change, Pfizer is getting smaller. But will the company’s new chief executive really be able to resist the urge to merge? 

A long-promised new strategic direction for Mylan was unveiled yesterday, in the shape of a merger with Upjohn, Pfizer’s established drugs business. The deal promises to establish the new company as a major player in the speciality pharma and generics world, and estimated revenues of $19-20bn next year easily surpass those of its closest rival, Teva.

The move also means that Pfizer loses its crown as the world’s biggest drug maker, knocking the company out of the top five, according to EvaluatePharma. Management teams are presumably concerned about more important metrics than this, but big acquisitions are in Pfizer’s blood. Will Albert Bourla, the company’s new chief executive, really be able to think differently? 

On a conference call yesterday he appeared to insist so, saying bolt-on acquisitions remained his favoured type of deal, with assets in the early to mid stages of development preferred. Still, on larger moves, he added: “Never say never.” And the table below shows that it would not take a huge purchase to push Pfizer back to the top again. 

That said, Mr Bourla appears to be hoping that pipeline wins will help close the gap on Pfizer’s big pharma peers. There is certainly not much between the top six players, and in fact it is quite remarkable how similar their top lines are.

This table, from EvaluatePharma, captures each company’s sales of prescription and OTC products – the figures are lower than these groups’ topline revenues because they exclude consumer health sales or alliance and co-promotion revenues. Thus this analysis allows the pharma divisions of more diversified companies like Johnson & Johnson to be put alongside more pure-play groups. 

It is notable that the soon-to-be-formed Abbvergan is set to become the world’s biggest seller of prescription and over-the-counter medicines, while Bristol-Myers Squibb, assuming that the Celgene takeover goes through, will enter the top 10 for the first time. 

Topping the tables – total Rx and OTC sales
  2020e ($bn) 2022e ($bn) 2024e ($bn) CAGR 
Pfizer (pre-Upjohn spin off) 45.9 49.9 55.9 4%
Abbvergan 47.3 52.3 50.9 1%
Johnson & Johnson 43.8 48.0 49.9 3%
Novartis 46.1 49.3 49.5 1%
Roche 45.9 46.6 48.7 1%
Bristol-Myers Squelgene 43.9 49.9 48.2 2%
Pfizer (minus Upjohn) 37.0 41.5 47.8 5%
Sanofi 41.4 44.7 46.1 2%
Merck & Co 40.6 44.2 45.2 2%
Glaxosmithkline 37.5 41.0 44.0 3%
Astrazeneca 25.4 30.2 33.3 6%
Source: EvaluatePharma.

While Pfizer is set to slim down, Mylan will fatten up considerably in the coming years as a result of this move. The Upjohn business will contribute around $7.5-8.0bn in revenues to the new company next year, adding to $12.0-12.5bn from Mylan, the companies said. 

As an aside, the projection for Upjohn seems to be lower than analysts covering Pfizer had forecast for the unit. Consensus for 2020 sits at around $8.9bn, according to three models that Vantage has seen. 

Either way, patent expiries are set to erode the business – by 8% over the next four years, according to those models. Those losses will be Mylan’s problem to deal with in the future, and indeed much of the criticism of this deal centres around the fact that the troubled speciality pharma company will simply become a much larger troubled specialty pharma company. 

The table below shows that the new business will be substantially bigger than any company that looks similar, although the new outfit will be fairly hard to pigeonhole. 

Topline revenue projections for selected speciality pharma groups
  Total revenues ($bn)
  2020e 2022e 2024e
Mylan + Upjohn 21.0 21.2 21.5
Mylan 12.1 12.8 13.4
Upjohn 8.9 8.5 8.0
Teva  17.4 17.9 18.1
Bausch Health  8.7 9.3 9.9
Sun Pharma 5.3 6.2 7.2
Perrigo  4.8 5.0 5.2
Endo  2.9 3.1 3.1
Source: EvaluatePharma. 

Of course long-suffering Mylan shareholders have no other option to consider here, and must hope that new management delivers on promises that include improved governance and a generous dividend. But there are good reasons why this deal might not yield a best-case scenario. 

Most significantly, Mylan was not negotiating from a position of strength. As Bernstein’s Ronny Gal put it, Pfizer initiated the transaction, restructured Upjohn for the merger and is helping Mylan out of tough spot. The odds that the pharma giant underpriced Upjohn are low. 

True, Pfizer’s shareholders will own 57% of the new entity, which should guarantee a certain amount of self-interest. But the big pharma’s executives also made it clear that this transaction was about shedding the growth brakes. 

While Pfizer can now focus on advancement, Mylan will be managing decline. If the new company really does pay out 25% of its free cash perhaps shareholders will not mind so much. 

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