August 5, 2019

Pfizer's Mylan Deal Keeps Income Investors Whole But Will Likely Affect The Firm's Current Dividend


Pfizer (PFE) has taken steps in recent years to focus its business on higher-margin, faster-growing prescription drugs. For example, in 2013 the company spun off its animal health business, late last year Pfizer reached a deal with GlaxoSmithKline (GSK) to combine their consumer health businesses, and in June 2019 the firm agreed to buy cancer treatment firm Array BioPharma for $10.6 billion.

Pfizer's evolution took its biggest step forward this past weekend when management announced plans to combine its off-patent established medicines with generic drugmaker Mylan (MYL), creating a new global pharmaceutical company with nearly $20 billion in revenue. This deal has important implications for dividend investors.

Pfizer's established drugs business, which management calls Upjohn, was expected to account for about 18% of the company's EBITDA in the year ahead. Therefore, once the transaction closes in mid-2020, subject to approval by Mylan shareholders, Pfizer's cash flow will fall significantly. We estimate the firm's payout ratio will rise to between 65% and 80%.

While Pfizer's $8 billion annual dividend commitment would still be covered by the $10 billion or so of free cash flow the firm will likely generate, management probably desires to retain more cash flow to invest in drug development and acquisitions.





After all, Pfizer has taken these separation actions to improve its standalone growth profile. By spotlighting its faster-growing drugs that enjoy patent protection, management hopes Pfizer will achieve a higher valuation. Companies focused more on growth typically do not maintain a high payout ratio.



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