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Pfizer to Merge Its Off-Patent Drug Unit With Mylan

Under the terms of a deal announced Monday, Pfizer will spin off its Upjohn unit and combine it with Mylan in an all-stock transaction.Credit...Justin Lane/EPA, via Shutterstock

Pfizer agreed on Monday to combine its off-patent drugs division, which sells treatments like the cholesterol drug Lipitor, with the pharmaceutical company Mylan, creating a potential powerhouse in the increasingly challenging business of producing generic medicines.

The deal follows years of consolidation in the generic-drug industry and could spur more acquisitions, as companies struggle to maintain sales amid falling prices for their products. It’s a development that has been largely overlooked as consumers grapple with the escalating cost of branded treatments.

Pfizer’s decision to combine the off-patent unit, Upjohn, with Mylan in an all-stock deal coincides with the pharmaceutical giant’s narrowing of its focus on more profitable, branded drugs. Though Mylan mainly produces generic drugs, it is best known for its EpiPen emergency allergy treatment.

The shift has led Pfizer to acquire promising new drugs through big deals like its $10.6 billion takeover bid last month for Array BioPharma, which makes specialized cancer treatments. Along the way, Pfizer has unloaded lower-margin businesses, as it did last year by agreeing to combine its consumer health care division with a similar unit owned by GlaxoSmithKline.

Pfizer used Upjohn to package older products like Lipitor and the erectile dysfunction drug Viagra — whose patents have expired or are about to — with its generics business. Sales of those drugs have plummeted in the United States, but Pfizer hoped Upjohn would be able to capitalize on the growing market for so-called branded generics in countries like China, where low-quality and even fraudulent generic drugs proliferate and consumers seek out brands like Pfizer as a guarantee of quality. Pfizer even moved Upjohn’s headquarters to Shanghai this year.

But the creation of Upjohn as a stand-alone unit also prompted questions about whether Pfizer’s ultimate plan was to spin it off. In April, Albert Bourla, the company’s chief executive, told analysts that he might make such a move one day, “but this is not what is in my mind right now.”

The combined business, which will eventually be renamed, is expected to have about $19 billion to $20 billion in annual sales. The companies anticipate annual savings of $1 billion by 2023 as a result of the deal.

“We are creating a new champion for global health — one poised to bring world-class medicines to patients across a wide range of therapeutic areas,” Mr. Bourla said in a statement.

Mylan, whose stock price is down about 30 percent this year, has faced a series of controversies in recent years, including the skyrocketing price of the EpiPen and a continuing federal inquiry into price-fixing in the generic drug industry.

Heather Bresch, Mylan’s chief executive, will relinquish that role. Ms. Bresch, whose father is Senator Joe Manchin III, Democrat of West Virginia, spent nearly her entire career at Mylan and became chief executive in 2012. She drew public outrage in 2016 when it emerged that her compensation had increased even as the price of the EpiPen soared.

She was among the first in the industry to try to pin the blame for rising drug prices on rebates paid to pharmacy-benefit managers. In 2014, she and other executives angered many shareholders by moving their headquarters to the Netherlands from Pennsylvania to reap tax savings and to block a takeover by Teva that many investors favored.

Ms. Bresch, who declined to comment on Monday, will be succeeded by the head of Upjohn, Michael Goettler.

The generic industry’s struggles extend well beyond Mylan. Fewer blockbuster drugs are losing their patent protection, depriving makers of generics the chance to capitalize on the lucrative period immediately after a patent expires. Pharmacies and wholesalers are making things more difficult by teaming up to increase their ability to bargain for lower prices. That has forced makers of generic drugs to consider mergers as a way of regaining leverage.

Last fall, Novartis sold portions of its generic unit, Sandoz, to Aurobindo Pharma, and in 2016, the generics maker Teva acquired Allergan’s Actavis generics business. The Actavis acquisition has not solved Teva’s challenges, and the company has continued to struggle.

David Maris, an analyst at Wells Fargo, cited the Teva deal in a note on Monday that signaled caution about the prospects for the combination of Upjohn and Mylan. “The combined company is bigger, but we are not sure it is better, and integration risks are not minimal, in our view,” he wrote.

The transaction is expected to close by the middle of next year, pending the approval of regulators and Mylan shareholders.

Pfizer shares were down nearly 3 percent on Monday, closing at $41.45. Mylan shares were up more than 12 percent, at $20.78.

Follow Michael J. de la Merced and Katie Thomas on Twitter: @m_delamerced and @katie_thomas.

A version of this article appears in print on  , Section B, Page 5 of the New York edition with the headline: Pfizer to Merge Off-Patent Drug Unit With Mylan. Order Reprints | Today’s Paper | Subscribe

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