- Pfizer's revenue growth will improve once the Upjohn-Mylan merger wraps up.
- The big drugmaker will receive a nice $12 billion cash windfall from the deal.
- Pfizer shareholders will still receive a combined dividend (including a dividend from the new entity formed by the merger) that's close to what they receive now.
A long-awaited deal will soon be done. Pfizer (NYSE: PFE) and Mylan (NASDAQ: MYL) announced last week that the U.S. Federal Trade Commission has approved the planned merger of Pfizer's Upjohn unit with Mylan to form a new entity, Viatris. Pfizer's spinoff of Upjohn will happen at the close of business on Nov. 13, 2020, with the merger of Upjohn and Mylan closing three days later.
How will current Pfizer shareholders be impacted? It's positive from nearly every angle. Here are three reasons why the imminent Upjohn-Mylan merger is great news for investors.
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1. Paving the way for faster growth
Let's start with the most important benefit for Pfizer out of the pending transaction -- faster growth. Quite frankly, Upjohn has been like an anchor dragging behind the big drugmaker's ship for a while now.
Just look at Pfizer's third-quarter results. The company's total revenue slipped 4% year over year. However, this decline stemmed entirely from the Upjohn business. Sales for Upjohn plunged 18% year over year, in large part due to sinking sales for Lyrica as it faces generic competition. On the other hand, Pfizer's biopharma revenue grew 4%, even with some headwinds from the COVID-19 pandemic.
Pfizer expects to deliver a revenue compounded annual growth rate (CAGR) of at least 6% over the next five years following the spin-off of Upjohn. That's a lot better than what the company has generated in recent years. The projection is also a risk-adjusted figure, which means that Pfizer isn't banking on all of its pipeline candidates being as successful as it hopes they'll be.
2. A big cash windfall for Pfizer
Pfizer won't hand over Upjohn for nothing. Viatris will pay Pfizer $12 billion as part of the transaction.
What will Pfizer do with this big cash windfall? CFO Frank D'Amelio said in the company's Q3 conference call that Pfizer's plans are to pay down debt. As of the end of the second quarter, the company's long-term debt stood at $50.5 billion.
Reduction of debt is good for investors because it lowers the interest payments that Pfizer has to make. It also gives the company more financial flexibility to pursue its other capital deployment priorities, which include investing in its pipeline and making further acquisitions.
3. An attractive dividend regardless of what you do
The capital deployment priority that many Pfizer shareholders will be most interested in is the drugmaker's dividend. Look for Pfizer to reduce its dividend with the Upjohn-Mylan transaction. However, there's nothing to worry about.
Even though Upjohn hurts Pfizer's revenue growth, the business still generates significant cash flow that helps the company fund its dividend program. With that cash flow going away, it makes sense that Pfizer would lower its dividend once the deal is done.
Here's the important thing to note, though: Viatris will initiate its own dividend in the near future. Pfizer shareholders who hang onto the Viatris stock they'll get should receive a combined dividend (from Viatris and Pfizer) that's in the ballpark of the current Pfizer dividend.
Pfizer should remain one of the more attractive dividend stocks on the market in its own right, as well. The company's dividend yield will still likely top 3%, even after the Upjohn-Mylan deal wraps up.
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