Summary
- Pfizer recently announced the spin-off of Upjohn, which manufactures Pfizer's off-patent drugs. The deal will bring in $12 billion.
- Pfizer also recently acquired Array for its biotech pipeline in a deal valued at about $11.4 billion.
- Pfizer is transitioning into a leaner company that will be more focused on the development of new blockbusters and which might be rewarded with a higher market multiple.
- Pfizer's dividend is likely to be reduced due to the spin-off, where the shareholders will receive shares of a NewCo that is likely to distribute the difference.
- Confusion over what Pfizer's actual dividend will be is creating uncertainty that is likely to be an investment opportunity.
Pfizer (PFE) is a widely held mega-cap drug company that recently announcedplans to merge its generic drug business, Upjohn, with Mylan (MYL). This move is partially being forced upon Pfizer due to the significant potential liabilities generic drug companies have to opioid-based litigation. While this spin-off should leave Pfizer with a compelling portfolio of patented drugs and a respectable pipeline, this move is a possible harbinger of a dividend reduction.
Spin-off at the low or perhaps before the fall
Upjohn is Pfizer's generic or off-patent division, which manufactures various generic drugs and some well-known Pfizer medications that are now off-patent, such as Celebrex, Lipitor, and Viagra. Pfizer is essentially selling Upjohn for $12 billion, which the new Upjohn-Mylan company will take on as debt. Also, Pfizer shareholders will receive 57% of the new company in the form of 0.12 shares of it for each Pfizer share they own.
The remaining Pfizer will be focused on the success of recent drugs and its pipeline, with the hopes that manufacturing patented drugs will be more profitable or at least higher margin. An example of this higher risk/reward strategy would include Pfizer's recent acquisition Array BioPharma (ARRY).
Pfizer announced that $11.4 deal billion deal for Array in June, where it expanded its oncological pipeline to include colorectal therapies and also expanded its research facilities within the growing industry of targeted cancer treatments. Pfizer completed the deal on July 29 or at basically the same time it announced the spin-off of Upjohn.
The new Pfizer will have a significant pipeline, including a sizable oncology department and should also have a higher profit margin. The business and its profit margin will also be more sensitive to the performance of the pipeline. Moreover, it is likely that the market would bestow upon the new Pfizer, with greater relative potential, a higher earnings multiple.
