Merger Talk Boosts Pfizer

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About: Pfizer Inc. (PFE), MYL
by: MoneyShow
Summary

Pfizer shareholders will end up owning 57% of the combined entity formed by merging Pfizer’s Upjohn unit with Mylan.

Over the last number of quarters, we have expressed concerns about generic competition for some of Pfizer's older drugs and how the company could focus on the long-term growth drivers, while trying to squeeze the most out of the older products.

The Mylan/Upjohn merger addresses those concerns, and now it will come down to execution, financial structure, valuation and capital return plans for shareholders to drive our decision on what we will do with shares of the combo.

By Chris Quigley

Upjohn manufactures older brands like Lipitor and Viagra, while Mylan (MYL) is best know for making generic drugs and for its EpiPen. Pfizer (PFE) shareholders will end up owning 57% of the combined entity. After the spinoff, Upjohn will make a $12 billion payment to Pfizer.

Analysts offered mixed views on the go-forward PFE, with some saying it was a smart choice to further focus on growth drivers, while Mylan as a standalone company was very inexpensively valued, and others were concerned about the lost revenue, cash flow and profits.

No doubt, additional work and close monitoring on our end is going to have to be done as more information about the legacy Pfizer and the new company becomes available.

The disposal of products at Pfizer that are decelerating in sales, and often have low margins, is going to keenly put the focus on the growth profile of the firm, which, if executed well, should bring higher multiples to the valuation.

For the Mylan/Upjohn combo, we see some definite positives for Mylan's products, as Upjohn is already established in a number of global growth markets.

Concerning the Mylan and Upjohn union, Pfizer CEO Dr. Albert Bourla stated, "We are creating a new champion for global health - one poised to bring world-class medicines to patients across a wide range of therapeutic areas."

Over the last number of quarters, we have expressed concerns about generic competition for some of Pfizer's older drugs and how the company could focus on the long-term growth drivers, while trying to squeeze the most out of the older products. The Mylan/Upjohn merger addresses those concerns, and now it will come down to execution, financial structure, valuation and capital return plans for shareholders to drive our decision on what we will do with shares of the combo that we will eventually inherit.

As for Pfizer, we still believe that the market under-appreciates the company's emerging pipeline of products and management's increasing confidence in its organic growth potential, which will now be the focal point.

We continue to like the strong balance sheet and capital return programs, though we acknowledge that they both could change. Our initial belief is that the consumer healthcare joint venture with Glaxo (GSK), the spinoff of Upjohn and the focus on growth are going to unlock value for shareholders. Our target price for PFE is presently $46.

Originally published on MoneyShow.com

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.