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3 Key Things to Know About How the Mylan-Upjohn Merger Affects Pfizer Shareholders

Keith Speights, The Motley Fool

Those rumors that floated over the weekend that Pfizer (NYSE: PFE) was about to make a big deal with Mylan (NASDAQ: MYL) proved to be true. On Monday, Pfizer and Mylan announced that they plan to merge Pfizer's Upjohn unit with Mylan. 

While Mylan's shares jumped on the news, Pfizer stock slipped a little on Monday. What does the Mylan-Upjohn merger mean for Pfizer shareholders? It's complicated, but there are three important things to know. 

Man with hands on hips looking at complicated diagram on a wall

Image source: Getty Images.

1. A smaller Pfizer

Pfizer will be a smaller company assuming the Mylan-Upjohn transaction closes. Upjohn generated 22% of Pfizer's total revenue in the drugmaker's second quarter. Pfizer hasn't reported how much of its total earnings in the quarter came from Upjohn. But based on the company's Q1 results, it's likely close to 28%.

Does this mean that Pfizer's share price will drop as a result of the Mylan-Upjohn merger? It does. But Pfizer shareholders will also own 57% of the new company (which hasn't been named yet) emerging from the deal. This new company is expected to have annual revenue starting at close to $20 billion.  

The immediate net impact on your overall portfolio probably won't be very much. Your Pfizer shares will decline in value, but you'll own shares of the new company that should make up the difference.

2. Stronger earnings growth

Perhaps the best news for Pfizer shareholders is that the drugmaker will almost certainly be able to generate stronger earnings growth after Upjohn is spun off and combined with Mylan. This faster earnings growth is likely to translate to better performance for Pfizer stock.

Pfizer CEO Albert Bourla said that he expects that the company "will be positioned to deliver revenue and adjusted diluted EPS growth through the mid-2020s that is among the industry leaders" after the deal with Mylan closes. I suspect that he's right. 

The reality is that Upjohn is a big drag on Pfizer's overall earnings growth. This situation is about to get even worse with the negative impact of the loss of exclusivity for Lyrica. Without the slowing sales for Lyrica, Viagra, and other older drugs holding it back, Pfizer will be like a runner who has been racing with ankle weights but then removes them.

3. A lower Pfizer dividend -- but don't worry

You're probably wondering how all of this will affect Pfizer's dividend. The company currently offers one of the strongest dividends in the healthcare sector. And the dividend is a major reason many investors are attracted to Pfizer.

I've got good news and bad news for you about Pfizer's dividend. First the bad news: The dividend will be smaller than it is now. That only makes sense with the company relying on cash flow contributed from Upjohn to the current dividend program.

Now the good news. The new company resulting from the Mylan-Upjohn merger will initiate what Mylan chairman Robert Koury called a "meaningful dividend" beginning in the first full quarter after the transaction closes. Pfizer expects that the combined dividend dollar amount that its shareholders receive will remain essentially the same with this dividend thrown into the mix. Bourla said that following the close of the transaction, Pfizer will continue to "allocate significant capital directly to shareholders, primarily through dividends." 

Is it a smart move?

Some investors might be a little apprehensive about Pfizer's decision to merge Upjohn with Mylan. My view, though, is that it's actually a smart move.

There were some initial concerns about Pfizer's spinning off its animal health business back in 2013 into a new entity, Zoetis. But that's turned out to be really good for Pfizer shareholders. Granted, Upjohn and Zoetis are very different from each other. However, I think the primary reason behind the Zoetis spinoff and the Mylan-Upjohn deal is the same: Pfizer gets to focus more on its core business.

Bourla touched on this idea in his comments about the Upjohn-Mylan merger when he said, "For Pfizer, this transaction represents our sharpened focus on innovative medicines and is a testament to our purpose: breakthroughs that change patients' lives."

I think that this is important for Pfizer shareholders to know. You'll own shares in a leaner and meaner Pfizer that should be able to deliver stronger earnings growth in the near term and have a laser-focus on developing new drugs to fuel more growth over the longer term. And you'll own shares in a new company that keeps dividends flowing as you expect.

This is definitely a complex deal, and complexity doesn't always work out well for shareholders. In this case, though, I think it will.

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Keith Speights owns shares of Pfizer. The Motley Fool recommends Mylan. The Motley Fool has a disclosure policy.