Pfizer Is Spinning Off Upjohn. What's Left Will Be No Bargain, Analyst Says

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What’s Left Will Be No Bargain, Analyst Says Pfizer Is Spinning Off Upjohn. What’s Left Will Be No Bargain, Analyst Says Pfizer Stock Will Be No Bargain After Spinoff, Analyst Says

J.P. Morgan’s Chris Schott told a look at what he calls New Pfizer, the biopharma business that will be left after the spinoff of the unit that makes drugs such as Viagra and Lipitor.

Pfizer Is Spinning Off Upjohn. What’s Left Will Be No Bargain, Analyst Says

J.P. Morgan’s Chris Schott told a look at what he calls New Pfizer, the biopharma business that will be left after the spinoff of the unit that makes drugs such as Viagra and Lipitor.

https://www.barrons.com/articles/investors-dont-like-mylans-deal-with-pfizer-51565028592 https://www.barrons.com/articles/why-pfizer-stock-is-down-despite-the-deal-with-mylan-51564427975?mod=article_inline&mod=article_inline mailto:josh.nathan-kazis@barrons.com Pfizer Is Spinning Off Upjohn. What’s Left Will Be No Bargain, Analyst Says By Josh Nathan-Kazis Photograph by Don Emmert/AFP/Getty Images The Pfizer company logo

After Pfizer spins out its old-drugs subsidiary, will the remaining business be worth the price? In a note out Thursday morning, a J.P. Morgan analyst suggested it may not be.

J.P. Morgan’s Chris Schott took a close look at what he calls New Pfizer—the company that will be left over after the spinoff of its Upjohn division, which is set to merge with the generic drugmaker Mylan (ticker: MYL).

“While the Mylan / Upjohn transaction creates a smaller, innovation-driven biopharma business and increases the company’s near-term growth prospects, we feel the company’s multiple is ahead of itself with Pfizer RemainCo trading near the top end of the Major Pharma valuation range,” Schott wrote.

Schott says that the stock is now trading at 15.6 times the projected 2020 earnings per share of the post-split company. The S&P 500 Pharmaceuticals sub-industry index is trading at 14.3 times projected earnings for the next 12 months.

Schott rates the stock Neutral. He cut his price target to $37, from $46. The shares closed Wednesday at $36.38.

Pfizer had no comment. In a late July conference call, CEO Albert Bourla argued that the deal will bring growth. “We believe we will be in a position where our pipeline will be able to move the needle even more dramatically in terms of our long-term growth prospects,” he said.

“We expect our five-year revenue CAGR to be higher than it otherwise would have been,” he said, referring to the compound average growth rate. “And given our smaller size, we believe that growth will be more sustainable.”

The back story. Shares of Pfizer (PFE) are down 15.6% since the company announced in late July that it would spin off Upjohn, the division that sells off-patent drugs like Viagra and Lipitor. Upjohn will merge with Mylan to create a new company, while Pfizer will be left as a dedicated biopharma company. The S&P 500 is down 0.6% over the same period.

What’s new. In his note, Schott wrote that the company’s growth is sure to improve, but warned that Pfizer will begin to see a wave of patent expirations after 2025. He said that while Pfizer’s growth will be above the industry average, the company’s current valuation was too high.

“Factoring in longer-term patent expirations, New Pfizer’s valuation remains stretched in our view despite the selloff post Mylan/Upjohn,” he wrote.

If the post-split company traded at 15.6 times Schott’s estimate for its 2020 earnings, it would mean that it was valued higher than Merck (MRK), and slightly lower than Eli Lilly (LLY).

“However, those companies offer above average industry growth over an extended patent exclusivity window into the late 2020s,” Schott wrote.

Looking ahead. Shares of Pfizer were down 0.1% in premarket trading. The merger of Upjohn and Mylan is expected to close in mid-2020.

Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.