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Pfizer Closes in on a Major Spinoff

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Big pharma titan Pfizer (NYSE: PFE) is on a roll. Since swapping out former CEO Ian Read for the more forward-thinking Albert Bourla earlier this year, the company has advanced a proposed joint venture with GlaxoSmithKline designed to dump its underperforming consumer healthcare unit, and acquired the promising oncology company Array BioPharma in a cost-effective $11.4 billion deal. Now, Pfizer is on the cusp of finally addressing its biggest overhang -- its vast portfolio of declining former star medicines.

Over the weekend, The Wall Street Journal reported that Pfizer is negotiating a deal to combine its off-patent drug business with generic drug giant Mylan (NASDAQ: MYL) in an all-stock transaction. Mylan shareholders will reportedly own approximately 43% of the new venture, and Pfizer's shareholders will own the other 57%. Pfizer will also walk away with a healthy $12 billion in proceeds from the sale of debt. The new company will be renamed and rebranded after the deal officially closes.

A yellow road sign that reads "Change Just Ahead" set against a blue cloudy sky.
A yellow road sign that reads "Change Just Ahead" set against a blue cloudy sky.

Should investors cheer -- or jeer -- this planned spin-off?

A win-win situation

This proposed transaction has all the ingredients to be a major win for both companies. Mylan's business has been faltering of late due to a variety of headwinds. This deal would give the company a slate of proven revenue generators like Lipitor and Viagra that should greatly beef up its free cash flows on a forward-looking basis.

Equally as critical, embattled CEO Heather Bresch would reportedly be replaced by Michael Goettler, who currently heads up Upjohn. Wall Street has long been clamoring for a change in leadership at Mylan, given that the company has thus far failed to get out ahead of any of its fundamental problems. Goettler's appointment as CEO should appease most of Mylan's biggest critics.

Pfizer, on the other hand, has been looking for a way to unload its legacy products business for what seems like forever. Even under former CEO Ian Read, it was searching for a strategy to divest itself of its off-brand drug segment so that it could spotlight its newer products like the breast cancer medicine Ibrance and the mega-blockbuster vaccine Prevnar 13. This transaction would certainly tick that all-important box, and transform Pfizer into a smaller, more nimble, growth-oriented company.

First a sale, and then...a purchase?

Assuming this spinoff goes off without a hitch, Pfizer will almost certainly follow it up by pursuing a bolt-on acquisition to shore up its innovative products business. While most analysts will likely point to oncology as the drugmaker's preferred hunting ground, it also might turn to orphan medicines. Pfizer, after all, already has a formidable oncology portfolio following the Array deal, and there are a number of extremely attractive takeover targets in the rare disease space right now.

Which rare disease companies might Pfizer target? BioMarin Pharmaceutical, Sarepta Therapeutics, and Vertex Pharmaceuticals (NASDAQ: VRTX) are three names to keep an eye on. Each sports at least one franchise-level medicine, as well as a variety of high-value clinical assets. Vertex, for instance, has a virtual monopoly in cystic fibrosis, and also aims to make inroads in the muscular dystrophy market via its recent gene-editing collaboration with Crispr Therapeutics. Those are two enormous markets that could lure a growth-hungry suitor like Pfizer.

Bottom line: This proposed Mylan transaction only sets the table for Pfizer to make additional business development moves in the near future. The drugmaker, after all, clearly needs at least one more big bolt-on acquisition like Vertex -- or perhaps a handful of smaller tuck-in deals -- to truly flesh out its innovative medicines business.

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George Budwell has no position in any of the stocks mentioned. The Motley Fool owns shares of CRISPR Therapeutics. The Motley Fool recommends BioMarin Pharmaceutical, Mylan, and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.