Merck (MRK -1.16%) announced today its intention to spin off its businesses in women's health, legacy brands, and biosimilars to an independent, publicly traded company in order to focus on higher-growth businesses. The remaining parts of Merck will focus on its pillars in oncology, vaccines, hospital products, and animal health.
The transaction is planned as a tax-free distribution of newly issues shares in the yet-to-be-named spinoff company. Merck expects to receive a tax-free payment of $8 billion to $9 billion from the new company ("NewCo") when the deal closes in the first half of 2021.
Image source: Getty Images.
Merck believes that spinning off the slower-growing businesses will allow it to increase investments in its core growth areas while also achieving a significant expansion of its operating margin, targeting non-GAAP operating margin of 40% by 2024, compared with mid-thirties today. NewCo will have strong cash flows and future growth opportunities in biosimilars, contraceptives and fertility, and development of sales in emerging markets.
The pharmaceutical giant plans to maintain its current dividend of $2.44 per share after the spinoff, saying that NewCo is expected to pay a meaningful dividend that will be incremental to Merck's payout.
Investors may be concerned that the move makes Merck even more dependent on growth from mega-blockbuster Keytruda. The market gave the announcement, which came along with an announcement of mixed results from fourth quarter earnings, a cool reception, with shares falling over 3%.
