A merger and a spin-off for this drug company looks attractive.
Mylan N.V. (MYL)
From The Stock Spin-off Investing Newsletter
On July 29, 2019, Pfizer Inc. (PFE) and Mylan N.V. (MYL) jointly announced that Pfizer’s Upjohn division would be combined with Mylan in a Reverse Morris Trust transaction. The transaction is expected to be tax-free for Pfizer shareholders, who will receive 57% of the shares of the new company, and taxable to Mylan shareholders, who will own 43% of the shares of the new company.
For Pfizer, spinning off its off-brand and generics business in Upjohn should allow the company to focus on its innovative core business, which is projected to grow faster than Upjohn, per analyst estimates. For Mylan, the key aspect of this deal was geographic revenue diversification. While Mylan has a strong foothold in the U.S. and Europe, Upjohn has a considerable presence in Asia and other emerging markets, allowing Mylan to reach an area of considerable growth without having to organically work to develop new markets on their own. This also diversifies Mylan revenues away from the U.S., which, considering the political climate surrounding drug pricing in America, should result in far lower volatility.
The new entity between Mylan and Upjohn will create substantial pure-play pharmaceutical company with revenue streams around the world. Mylan, as a stand-alone company, is a global generic and specialty pharmaceuticals company. For FY18, Mylan’s revenues included sales from drugs relating to Central Nervous System and Anesthesia, Infectious Diseases, Respiratory and Allergy, Gastroenterology, Diabetes and Metabolism, Dermatology, Oncology, Women’s Healthcare, Other, and Other Third party diseases.
Upjohn brings trusted, iconic brands, such as Lipitor (atorvastatin calcium), Celebrex (celecoxib) and Viagra (sildenafil), and proven commercialization capabilities, including leadership positions in China and other emerging markets.
Currently, the pipeline for the combined entity contains ~10 newly approved drugs, with dozens more in various stages of the pipeline process. Management expected to recognize ~$3bn in revenues from these new drugs by 2023.
The pro-forma entity is expected to have EBITDA margins in the ~40% range, and cost synergies that accelerate from $250mm in the first year to $1bn in year four of the merger. On a pro forma basis adjusting for shares that will be issued to Pfizer shareholders, Mylan looks interesting, trading at 6.6x free cash flow and 6.5x EBITDA.
Mylan also plans to pay a dividend of at least 25% of free cash flow, implying a minimum dividend of $1BN and dividend yield of 3.8%. We like the set up for Mylan. Shortly after the merger was announced, Mylan rallied but then fell as low as $17. If Mylan were to pull back to the mid to high teens, it would be an attractive buy. At that price, the implied yield on the stock would be close to 5%. Further, there would be significant additional free cash flow to de-lever and buy back stock.
This looks quite cheap.
Richard Howe, CFA, The Stock Spin-off Investing Newsletter, www.stockspinoffinvesting.com, 617-750-7454, January 31, 2020