Merck & Co. To Spin Off Women’s Health Biosimilars, Legacy Products to Form New Company

By Emily Forster -

February 6, 2020

Merck & Co. plans to spin off products from its Women’s Health, Legacy Brands, and Biosimilars businesses to form a new, yet-to-be-named, independent, publicly traded company (NewCo) while retaining higher growth products in Merck. The spinoff of NewCo will reduce Merck’s Human Health manufacturing footprint by approximately 25% and the number of Human Health products it manufactures and markets by approximately 50%. The move would represent projected revenues of $6.5 billion for Merck in 2020 and enable Merck to achieve in excess of $1.5 billion in operating efficiencies by 2024.

Two companies: Merck and NewCo

The transaction will create two companies, Merck and NewCo. Merck will retain its current growth pillars of oncology, vaccines, hospital products and animal health and will continue to invest in research and development across all areas of science. Merck’s key  products include: Keytruda (pembrolizumab),an immune-oncology drug; Lynparza (olaparib),an anticancer drug;  Lenvima (lenvatinib mesylate), an anticancer drug; Gardasil (human papillomavirus vaccine, recombinant), a vaccine against cervical and other cancers; and Bridion (sugammadex), a relaxant binding agent; Zerbaxa (ceftolozane and tazobactam), an antibiotic; Bravecto (fluralaner), an animal health product; as well as its diabetes business and other key products.

NewCo will focus on the area of women’s health, led by the company’s Nexplanon (etonogestrel implant) franchise and its contraceptive and fertility businesses. NewCo also expects to establish a leading position in biosimilars along with its partner, Samsung Bioepis, and focus on its current portfolio. This includes two immunology drugs, Renflexis (infliximab-abda), a biosimilar of Johnson & Johnson’s Remicade, an anti-inflammatory drug in multiple indications, and Brenzys (etanercept), a biosimilar of Amgen’s Enbrel, an anti-inflammatory drug, and an oncology drug,  Ontruzant (trastuzumab-dttb), a biosimilar of Roche’s Herceptin. NewCo will also have a large portfolio of established brands consisting of dermatology, pain, respiratory, select cardiovascular products including its anti-cholesterol drugs, Zetia (ezetimibe) and Vytorin (ezetimibe/simvastatin) as well as the rest of Merck’s Diversified Brands. In addition, NewCo will partner with biopharmaceutical innovators looking to commercialize their products by leveraging NewCo’s scale and presence in international markets.

NewCo will have a global footprint with approximately 75% of sales generated from ex-US markets with scale and geographic reach, commercial capabilities, and approximately 10,000 to 11,000 employees. NewCo is expected to be headquartered in New Jersey.

Key financials

The products to be spun off into NewCo are expected to generate 2020 revenue of approximately $6.5 billion within Merck, with a non-GAAP operating margin of approximately 45%. As an independent company from a 2021 base-year of approximately $6.0 billion to $6.5 billion in revenue, NewCo is expected to achieve low-single-digit revenue growth. Inclusive of costs necessary in standing up NewCo as an independent company, non-GAAP operating margins are expected to be in the mid-30% range in the first year post separation and increase over time. NewCo’s earnings before interest, taxes, depreciation, and amortization (EBITDA) margins are expected to be in the low-to-mid 40% range in the first year post separation and increase over time.

Merck expects the spin-off of NewCo to achieve incremental operating efficiencies in excess of $1.5 billion by 2024 while continuing to increase investment in key growth drivers and pipeline assets. Merck is targeting non-GAAP operating margins greater than 40% in 2024, higher than what Merck expected to achieve pre-spinoff. Merck expects to receive $8 billion to $9 billion through a special tax-free dividend from NewCo. Merck expects that these funds will be allocated to business development or share repurchases and says it will provide more details about the planned usage of these funds closer to the spinoff date. NewCo is expected to have $8.5 billion to $9.5 billion in initial debt, with substantial cash flow that Merck says will provide ample financial flexibility for potential business development, debt paydown and a meaningful dividend.

NewCo executive leadership named

Merck has appointed Kevin Ali, who brings three decades of pharmaceutical commercial experience from within Merck, as Chief Executive Officer of NewCo. Ali has led Merck’s enterprise portfolio strategy initiative, reporting to Merck Chairman and CEO Kenneth Frazier, for the past year. Prior to this, Ali served in many leadership roles within Merck, including President, MSD International; President, Emerging Markets; Senior Vice President in charge of the Bone, Respiratory, Immunology and Dermatology franchise; Managing Director of Germany; and Managing Director of Turkey.

Carrie Cox has been named NewCo’s Chairman of the Board of Directors. Cox has extensive experience in the pharmaceutical industry and expertise in women’s health, formerly serving as Chairman of Array BioPharma, CEO and Chairman of Humacyte, President of Global Pharmaceuticals at Schering-Plough Corporation (acquired by Merck in 2009), Executive Vice President of Pharmacia, and Vice President of Women’s Health Care at Wyeth-Ayerst Laboratories.

The transaction is intended to take the form of a tax-free distribution to Merck shareholders of a new publicly traded stock in NewCo. The spinoff is expected to be completed in the first half of 2021, subject to market and certain other conditions.

Source: Merck & Co.