Merck to spin off new $6.5 billion firm focused on women’s health, older drugs

Merck said Wednesday that it will create a new drug company to sell many of its older, slower-growth products, creating a new pharmaceutical company with $6.5 billion in annual sales focused largely on women’s health drugs like Nexplanon, a long-acting contraceptive implant. It will also sell Merck’s off-patent medicines, including the cholesterol drugs Zetia and Vytorin.

Merck joins rivals including Pfizer and GlaxoSmithKline, which have made similar moves.

Carving off 14% of Merck’s sales into what it is still calling “NewCo” should allow the core company to grow faster, attracting investors who want to bet on the rising sales of the company’s cancer drug, Keytruda, which by itself generates $11 billion in annual sales and grew at a 55% clip in 2018, as well as its businesses in vaccines and hospital drugs.

“You remember just a few years ago, no one would have said Merck was an oncology company, much less a leader in oncology,” Kenneth Frazier, Merck’s chairman and CEO, told STAT. Keytruda’s success, he said, has come from telling Merck employees that building a cancer drug franchise was their “overriding” priority.

“That’s all well and good,” Frazier said, “but you get to a point where the focus on your peak growth drivers raises the question of how you can make the best use, get the greatest impact from the standpoint of public health, from the standpoint of individual patient health and from the standpoint of shareholder value with the rest of the portfolio.”

Shares of Merck slid almost 4% to $83.93 in morning trading. Part of the reason is that sales of Keytruda, only met expectations, instead of beating them. Merck offered cautious earnings guidance for the year. Many investors were unsure about details of the spinoff, and some are disappointed that Merck won’t spin off its animal health division, which could have become a hot stock in its own right. Umer Raffat, an analyst at Evercore, said he is “definitely hearing” confusion about animal health from investors.

With sales only half those of Keytruda alone, the new company will still have annual sales on a par with computing firm NetApp, personal products firm Clorox, or animal health firm Zoetis. Much of those sales will come from drugs that have lost patent protection in the U.S. In other countries, generic drugs are less trusted and less popular. Merck says that 75% of the new company’s sales will be outside the U.S.

In addition to women’s health medicines and older, off-patent brands, the new business will include the less expensive versions of branded biotech drugs, called biosimilars, that Merck makes with partner Samsung Bio. While once expected to be a high-growth area, biosimilars have so far stalled in the U.S.; Merck said in its statement that the new company would be a leader in this field.

Merck said that the dividend it pays investors will remain the same, and that the removal of manufacturing and sales responsibilities will allow it to cut $1.5 billion in costs. The new company will grow sales at a single-digit rate, Frazier said, and will pay its own dividend above and beyond what investors will get from Merck. He emphasized that the new company would have a healthy balance sheet and its own board of directors.

“It’s a different kind of investment,” Frazier said.

Pfizer spent years flirting with breaking up its company, eventually spinning off Zoetis, the animal health firm, selling its baby formula business to Nestle, and partnering its consumer health business with that of GlaxoSmithKline. Last summer, it announced that it would spin out its own business of aging, off-patent drugs and join it with Mylan, the generic drug company. Meanwhile, GlaxoSmithKline is spinning off the combination of its consumer health arm and Pfizer’s to allow it to focus on new drugs in cancer and immunology.

The idea of spinning off dead weight while keeping highly profitable (and expensive) new drugs aimed at cancer or other diseases has been popular with investors for more than a decade, so much so that Frazier has answered questions about the notion multiple times over the past decade.

“I have been in this business long enough, and we have in this conversation too, I’ve watched the fads, if I can use that term, come and go,” Frazier told the audience at a Goldman Sachs conference in 2013. “I remember people saying you want to be a diversified health care company. And then there was a period of time when everybody was saying, no, no, you need to be a pure play company.”

Frazier has always put off questions on a spinoff to the side by saying that he would do whatever is best for Merck. The new move notably keeps Merck’s animal health division, which has been a frequent source of spinoff speculation over the years. More broadly, the key to making investors happy will be to make them want to own NewCo.

The new company will be run by Kevin Ali, who has run Merck’s emerging market’s business and reported directly by Frazier. Carrie Cox, who was one of the top executives at Schering-Plough when Merck bought in in 2009, will serve as chairman. “I think she’s from central casting in many ways to be the chairman of this company that has the strategic intent to be a leader in women’s health,” Frazier said.

Frazier said that splitting up the company won’t have any impact on Merck’s ambitions in China, where he said success has come as much from focusing on innovative new medicines as old ones. The split should have a minimal impact on the company’s research and development efforts.

“This sharpens our focus on what we do best, which is innovation,” Frazier said.