Here's how Pfizer's reorg and Mylan's identity crisis yielded a giant generics merger

Merger
Pfizer and Mylan penned their generics merger deal in less than three months. (daizuoxin/iStock/Getty Images Plus/Getty Images)

It took Pfizer and Mylan less than three months to finalize a deal that combines Pfizer's established medicines business, Upjohn, with the Pittsburgh-based generics giant. And it all started with one well-timed phone call.

Last July, Pfizer decided to reorganize itself and lumped off-patent drugs into an autonomous unit. A month later, dogged by restive shareholders, Mylan started looking at ways to jump-start growth, namely potential deals. It wouldn't be long before the two found common ground.

Mylan’s review included finding ways to expand its geographic footprint away from the under-pressure U.S. generics market, especially in the Asia-Pacific region and emerging markets. That review popped up on Pfizer's dealmaking radar and then surfaced at an April 25 board meeting. 

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A week later, on May 2, Pfizer CEO Albert Bourla rang up Mylan Chairman Robert Coury to gauge his interest in buying the Upjohn established medicines franchise—and it happened to be right after that unit moved its global operations to Shanghai, a securities filing shows.

It was obvious that their stars were aligned. The two quickly signed a confidentiality agreement and exchanged due diligence information.

Some six weeks after that, on June 14, Coury and Mylan CEO Heather Bresch met up with Bourla and his CFO, Frank D’Amelio, in New York. There, in Pfizer's home city, they ironed out a prototype for a potential merger between Mylan and the Upjohn business.

At that point, the pair was eyeing shared ownership of the combined company, split 59%-41% between Pfizer and Mylan shareholders. Under that framework, Pfizer would get $12 billion from the new company’s newly issued debt.

The terms would later change to Pfizer stockholders owning 57% of the combined company—which Coury, Bresch, Bourla and D’Amelio agreed on July 15.

RELATED: Is Pfizer's established drugs' decline in China the ‘canary in the coalmine?’

Pfizer apparently had sought other partners, but during the month between those two deal talks, “there had not been any new developments with other potential strategic parties,” the SEC filing shows.

Pfizer also considered spinning Upjohn into a standalone business—without Mylan—as it had several years ago under then-CEO Ian Read. But after evaluating the opportunities for Upjohn growth, particularly in emerging markets, as well as Mylan’s own offerings and product pipeline, Pfizer and its advisers decided a Mylan deal would be the better option.

On July 26, each company's board sanctioned the deal. They went public July 29, less than three months after Bourla made that first phone call.

For Mylan, the transaction offers an expanded geographic reach, especially in emerging markets such as China. It also gives the company a multinational drug giant's market access and commercial expertise.

RELATED: Sanofi, AZ, Lilly and more win business in China's expanded cut-price purchase program

But the generics maker is also taking a risk. For one, Pfizer’s blockbuster nerve pain drug Lyrica has just lost exclusivity in the U.S. And in China, where Upjohn touts a strong presence and where 11% of the combined firm will reside, a bulk procurement scheme that slashed prices of 25 off-patent drugs is now set for a national rollout. That scheme is set to steal away a huge chunk of the company’s Lipitor business as it lost that particular tender to local generic players.

In the second quarter, when the program was only under testing in 11 major Chinese cities, Upjohn sales plummeted 20%. During a conference call with investors in July, Upjohn chief and future Mylan CEO Michael Goettler stressed that Upjohn’s footprint in China, built by Pfizer over 30 years, could help bring Mylan’s drugs to market faster, offering new growth opportunities there.

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