11 February 2020 - - US-based biopharmaceutical company Merck (NYSE: MRK) plans to spin-off products from its Women's Health, trusted Legacy Brands, and Biosimilars businesses into a new, yet-to-be-named, independent, publicly traded company, the company said.

The spinoff will allow both management teams to drive increased responsiveness to the particular needs of their patients and customers and achieve faster growth through focused and fit-for-purpose operating models.

Merck will continue to benefit from strong growth across its current key pillars of Oncology, Vaccines, Hospital and Animal Health, while remaining fully committed to investing in research and development in pursuit of breakthrough innovations across all areas of science and to driving value from its deep late-stage pipeline.

As a research-intensive biopharmaceutical company, Merck will continue its pursuit to advance the prevention and treatment of diseases that threaten people and communities around the world.

Merck believes the spinoff will deliver significant benefits for both Merck and NewCo and create value for Merck shareholders.

The spinoff of NewCo will reduce Merck's Human Health manufacturing footprint by approximately 25% and the number of Human Health products it manufactures and markets by approximately 50%.

This will allow for a more focused operating model in support of its growth products.

As a result, Merck expects to optimize its resources, grow faster and achieve meaningful operating margin expansion over time through increased productivity and efficiency.

NewCo to be Comprised of Products from Merck's Women's Health, Trusted and Medically Important

NewCo will pursue leadership and focused, sustainable growth in Women's Health led by the growing and patent-protected Nexplanon (etonogestrel implant) franchise and fueled by its leading contraceptive and fertility businesses.

NewCo expects to establish a leading position in Biosimilars along with its partner, Samsung Bioepis Co., Ltd., focusing on its current portfolio including Renflexis (infliximab-abda) and Brenzys (etanercept) in immunology and Ontruzant (trastuzumab-dttb) in oncology, and is well-positioned to be a partner in the commercialization of biosimilars worldwide.

NewCo will have a large portfolio of highly profitable and trusted brands consisting of dermatology, pain, respiratory, select cardiovascular products including Zetia (ezetimibe) and Vytorin (ezetimibe/simvastatin), as well as the rest of Merck's Diversified Brands, with strong cash flows that will support investments in future growth opportunities.

In addition, NewCo will pursue opportunities to partner with biopharmaceutical innovators looking to commercialise their products by leveraging NewCo's scale and presence in fast growing international markets.

NewCo will have a global footprint with approximately 75% of sales generated from ex-US markets, significant scale and geographic reach, world-class commercial capabilities, and approximately 10,000 to 11,000 employees. NewCo is expected to be headquartered in New Jersey.

Merck expects strong revenue growth each year through 2024, which will accelerate as a result of the spinoff.

Merck continues to expect meaningful operating margin expansion over time. The spinoff of NewCo The company enable Merck to achieve incremental operating efficiencies in excess of USD 1.5bn by 2024, while continuing to increase investment in key growth drivers and pipeline assets.

Merck is therefore targeting Non-GAAP operating margins greater than 40% in 2024, higher than what Merck expected to achieve pre-spinoff.

Merck expects to receive USD 8bn to USD 9bn through a special tax-free dividend from NewCo. Merck expects that these funds will be allocated to business development or share repurchases and will provide more details about the planned usage of these funds closer to the spinoff date.

Merck will retain its current 2020 dividend of USD 2.44 per share and anticipates future increases with the goal of achieving a 47% to 50% payout ratio over time.

Shareholders holding both Merck and NewCo post spinoff are expected to benefit from increased combined non-GAAP (generally accepted accounting principles) earnings per share assuming dilution over time, as well as higher combined dividends.

The products to be spun off into NewCo are expected to generate 2020 revenue of approximately USD 6.5bn within Merck, with a non-GAAP operating margin of approximately 45%.

As an independent company from a 2021 base-year of approximately USD 6bn to USD 6.5bn in revenue, NewCo is expected to achieve low-single-digit revenue growth. Inclusive of costs necessary in standing up NewCo as an independent company, non-GAAP operating margins are expected to be in the mid-30% range in the first year post separation and increase over time.

NewCo's earnings before interest, taxes, depreciation, and amortization (EBITDA) margins are expected to be in the low-to-mid 40% range in the first year post separation and increase over time.

NewCo is expected to have USD 8.5bn to USD 9.5bn in initial debt, with substantial cash flow that will provide ample financial flexibility for potential business development, debt paydown and a meaningful dividend. This expected dividend will be entirely incremental to Merck's dividend.

Kevin Ali, who brings three decades of pharmaceutical commercial experience from within Merck, will be named chief executive officer of NewCo.

Ali has led Merck's enterprise portfolio strategy initiative, reporting to Frazier, for the past year. Prior to this, Ali served in many leadership roles within Merck, including president, MSD International; president, Emerging Markets; senior vice president in charge of the Bone, Respiratory, Immunology and Dermatology franchise; managing director of Germany and managing director of Turkey.

Carrie Cox will be named NewCo's chairman of the board of directors. Cox has extensive experience in the pharmaceutical industry and deep expertise in women's health, formerly serving as chairman of Array BioPharma Inc., CEO and chairman of Humacyte Inc., president of Global Pharmaceuticals at Schering-Plough Corp. (acquired by Merck in 2009), executive vice president of Pharmacia Corp. and vice president of Women's Health Care at Wyeth-Ayerst Laboratories, Inc.

The transaction is intended to take the form of a tax-free distribution to Merck shareholders of a new publicly traded stock in NewCo. The spinoff is expected to be completed in the first half of 2021, subject to market and certain other conditions.