Morgan Stanley Downgrades Pfizer In Wake Of Upjohn-Mylan Merger

Morgan Stanley downgraded Pfizer Inc PFE Tuesday after the drug company announced the spinoff of its Upjohn division on Monday, sending its stock downward.

Shares of Mylan NV MYL, which merged with Upjohn, were moving in the other direction.

The Analyst

David Risinger downgraded Pfizer from Overweight to Equal-weight and lowered the price target from $48 to $40.

Risinger reiterated an Overweight rating on Mylan and raised the price target from $22 to $25.

The Thesis

Risinger lowered the 2020 revenue estimate for Pfizer by 9%, from $54 billion to $48 billion, and lowered the 2020 EPS estimate from $3.02 to $2.56. (See his track record here.) 

An earnings reset has occurred on both sides of the business, the analyst said. 

"Pfizer announced it is exiting its Upjohn business, but the real news was weaker underlying earnings for both RemainCo (Innovative) and NewCo than anticipated." 

The Upjohn-Mylan merger is "strategically sound," but the earnings power of both Pfizer and the company being spun off is weaker than expected, Risinger said. 

“Factors include Prevnar and Xeljanz pressures due to recent negative regulatory action, lower Innovative margins (including possible dis-synergies from Upjohn exit), and weaker Upjohn financials (including China price cut pressure).”

Mylan

Once the deal is complete, Mylan shares will comprise both Upjohn and Mylan.

Risinger said he expects Mylan to benefit from several positives from the deal, including greater global reach, lower financial leverage an attractive dividend yield of about 4% and improved corporate governance.

The deal is expected to close in 2020.

Price Action

Pfizer shares were down 5.53% at $39.14 at the time of publication Tuesday, while Mylan shares were trading higher by 1.42% at $21.08. 

Related Links:

Mylan, Pfizer's Upjohn To Merge And Create New Company

Mylan Reports Q2 Earnings Beat

Photo by Dustin Blitchok.