Pfizer is bulking up its Mylan-Upjohn spinoff but investors may not reap rewards: analysts

Mylan's EpiPen
Pfizer unit Meridian, which makes EpiPen and other auto-injectable products, will be folded into the Viatris spinoff, the company said. (Greg Friese/Flickr)

During Pfizer’s fourth-quarter earnings call on Tuesday, its executives made an easy-to-miss revelation about their plan to spin off the company’s Upjohn division and merge it with Mylan to form the new company Viatris.

A few analysts picked up on Pfizer’s new strategy for the spinoff—but they’re not sure the outlook for the redesigned Upjohn is so rosy.

Pfizer said it now plans to sell two assets to the Mylan-Upjohn spinoff, which will be named Viatris. They are Meridian, the manufacturer of EpiPen and other auto-injectable products, and Mylan-Japan, which is the generics collaboration Pfizer formed with Mylan in 2012. Revenues from both units totaled $598 million last year and were flat from the previous year, Pfizer said (PDF).

As a result, Pfizer upped its 2020 revenue guidance for Upjohn to $8 billion to $8.5 billion, from $7.5 billion to $8 billion. But the company isn't expecting much of a bottom-line boost for the bulked-up unit: It nudged up the high end of its forecast for earnings before interest, taxes, depreciation and amortization from $4.1 billion to $4.2 billion, but kept the low end at $3.8 billion. The company is expecting to close the Viatris spinoff in mid-2020.

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But even the low end of 2020 expectations for Upjohn could be hard to achieve, some analysts fear. It’s “a high bar,” warned SVB Leerink analyst Ami Fadia in a note to clients after Pfizer’s earnings announcement Tuesday.

Why? One problem is that during the fourth quarter three major Upjohn products missed SVB Leerink’s expectations: Lyrica in the U.S., and Norvasc and Lipitor in emerging markets. That “reinforces our thesis that there could be more downside to these products in 2020 and beyond,” Fadia wrote.

Lyrica, in particular, is struggling against generic competitors. It’s been a challenge ever since the product lost its patent protection last summer and its share of U.S. prescriptions plummeted to 43% within weeks as a wave of generic rivals hit the market.

During the fourth quarter, U.S. sales of Lyrica came in at $88 million, a whopping 91% fall over the same period a year ago and 34% below SVB Leerink’s expectations.

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Evercore ISI analyst Umer Raffat also has low expectations for Upjohn in the short term, but much of his concern centers on China. The country has been rolling out a volume-based procurement (VBP) program designed to save money on off-patent drugs. Revenues from Lipitor and Norvasc took a hit in the provinces where the program was pilot-tested, and Pfizer executives told Raffat they expect a broad rollout to all Chinese provinces in 2020.

The sales declines on Lipitor and Norvasc in China seemed to be slowing down in the last half of 2020, Raffat noted. But with VBP set to expand, “that implies more [sales] erosion yet to come in 2020,” he warned in a note to investors.

Assuming Pfizer consummates the plan to fold Meridian and Mylan-Japan into Viatris, that in and of itself will place another challenge on the spinoff’s shoulders. Meridian has been suffering from manufacturing issues, resulting in an EpiPen supply shortfall that has opened the door for competitors. Novartis’ Sandoz unit, for one, took advantage of the situation last July, launching an aggressive rollout of its EpiPen rival Symjepi.

“It remains unclear whether the supply issue of EpiPen could get remedied once [Viatris] has the full control of Meridian,” Fadia said.

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