Merck & Co. is riding high on the success of its cancer drug Keytruda, post-surgery drug Bridion and portfolio of vaccines. But certain parts of the business may be distracting from that growth story.
That's why on Wednesday, along with a full-year earnings report, Merck announced it is spinning out biosimilar, women's health and legacy drugs into a new, yet-to-be-named publicly traded company. Merck estimates the spinout products will fetch about $6.5 billion in revenue this year.
Also among the products spun off into the new company are contraceptives like NuvaRing and Nexplanon franchise, which took in $879 million and $787 million in 2019 sales, respectively. Other products in the mix include the off-patent cholesterol pill Zetia.
"By spinning off NewCo as a distinct business, we can better prioritize and support a set of products that no longer fit in Merck's strategic framework, but which remain important to public health and the patients who rely on them — and which, if managed and resourced appropriately, present real opportunities for growth," Merck CEO Ken Frazier said on a call with investors.
As for the new company, it will be led by Kevin Ali, a Merck veteran who was most recently in charge of the drugmaker's enterprise portfolio strategy initiative. Carrie Cox, former chairman of the Pfizer-acquired Array BioPharma, has been named chairman of the new company's board of directors.
The new company will be headquartered in New Jersey, with an employee count of about 10,000 to 11,000. It will also take on $8.5 billion to $9.5 billion of Merck's debt. Merck expects that in 2021, when the spinoff is expected to complete, the new company will start with low single-digit revenue growth but have "substantial growth potential" in the women's health and biosimilars markets.
Merck has hinted in previous years that a restructuring was on the table. Yet Wednesday's announcement did seem to catch Wall Street off-guard.
"I can't come up with a good explanation as to why this transaction came out of left field," Evercore ISI analyst Umer Raffat wrote in a Feb. 5 note to investors.
On the call earnings call, the first question Merck executives received was about their rationale for doing the spinoff now.
"So from our standpoint, this is the right time. A few years ago when we were looking at this, we saw the opportunity but, for example, the cash flow generation of our legacy products was being employed at that time in standing up our oncology business, which we grew from the ground up and, as you know, has been extremely successful."
While Wednesday's announcement may have been a surprise to some investors, the move isn't unprecedented. Pfizer recently offloaded its Upjohn unit, which housed off-patent brands such as Lipitor, Lyrica and Viagra, through a merger with Mylan. A year earlier, before it was bought by AbbVie, Allergan had plans to sell off its women's health and infectious disease units.