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Pfizer: Downgrade Double-Whammy On Mylan Deal

Shares in pharma giant Pfizer Inc (PFE) are plunging right now. In the last three days the stock is down 9%. And to make matters worse, both Morgan Stanley and Merrill Lynch have just downgraded PFE from ‘Buy’ to ‘Hold.’ That’s on the back of similarly cautious Hold ratings from both JP Morgan and Credit Suisse.

Driving this wave of bearish sentiment is the company’s plan to spinoff its Upjohn unit. Upjohn will merge with rival Mylan NV (MYL), which makes EpiPens. The result: a new global pharma company with estimated annual revenue of around $20 billion.

Pfizer will lose its portfolio of drugs that are no longer patent-protected including Viagra, Lipitor and Celebrex. Indeed Pfizer revealed in its July 29 earnings report that Upjohn revenues were down 7% operationally in Q2. The company blamed a significant US decline on “continued Viagra generic competition and wholesaler destocking of Lyrica in anticipation of generic competition.”

On the news, announced July 29, shares in Pfizer took their largest hit in the last decade. UBS analyst Navin Jacob, who stuck to his Hold rating, asked if the spinoff was “2-3 years too late.” Overall we can see that PFE out of 8 analysts covering the stock, only 2 still rate PFE a ‘buy.’

In contrast Mylan surged 17%. According to Jefferies analyst Jared Holz, investors are relieved that Mylan’s current CEO will resign once the deal completes. Mylan has lost 40% in just one year after Teva’s (TEVA) generic competitor for the EpiPen received FDA approval in August 2018.

Merrill Lynch Slashes Pfizer PT to $41

Merrill Lynch's Jason Gerberry downgraded PFE following the Mylan announcement. He also slashed his price target on the stock from $49 to $41. “We are downgrading PFE to neutral based on our updated [sum of the parts] valuation, including expected dilution from Upjohn spin-merge...and valuation outlook for RemainCo” he wrote.

The analyst also cited a "disproportionate loss of profit" stemming from the Upjohn spinoff. Given the recent selloff, his $41 price target still suggests 6% upside potential from current levels.

“We ultimately believe PFE’s decision to spin-off its Upjohn unit makes strategic sense,” wrote Gerberry. That’s because it will allow Pfizer can concentrate on its “innovative” pharma segment. “However, for PFE stock to work, the RemainCo would need to trade above 18x forward multiple of EPS which we view as unlikely given current portfolio mix.”

JP Morgan’s Chris Schott echoes these valuation concerns, writing: “We see this multiple [of 18x forward multiple of EPS] as fairly expensive (especially relative to peers) and are maintaining our Neutral rating.”

Morgan Stanley: Steer Clear of Pfizer; Buy Mylan

Strategically speaking, Morgan Stanley analyst David Risinger also approves of the deal. But that doesn’t stop him from downgrading PFE, and cutting his price target $8 to just $40 on a 15% reduction in '20e EPS.

“Although we view the Upjohn exit to MYL as a strategically sound deal, new 2020 management disclosures revealed earnings power that is much weaker than we realized,” he wrote.

“Pfizer's planned exit of Upjohn exposes lower-than-expected earnings for both the RemainCo (Innovation) business and Upjohn (off patent business being spun to MYL)” Risinger continued. Factors include Prevnar and Xeljanz pressures due to recent negative regulatory action, lower Innovative margins (including possible dissynergies from Upjohn exit), and weaker Upjohn financials (including China price cut pressure).

However the analyst recommends investors snap up Mylan stock instead. Risinger reiterated his buy rating on Mylan on July 30, and ramped up his price target from $22 to $25. From current levels that translates into attractive upside potential of 17%. He expects MYL to benefit from multiple expansion due to key positives of the Upjohn deal.

Mylan and Upjohn bring together complementary franchises, geographies, and capabilities says Risinger, which should help lead to: 1) Greater global scale and strength; 2) Lower leverage; 3) An attractive dividend yield of ~4%; and 4) Improved corporate governance.

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