Upjohn Inc. Form 10-Q Summary — Third Quarter 2020
Business context and reporting period
This filing covers the three and nine months ended September 27, 2020, with comparative periods ended September 29, 2019. Upjohn Inc. was a newly formed, wholly owned Pfizer subsidiary established to facilitate the combination of Pfizer’s Upjohn Business with Mylan N.V. in a Reverse Morris Trust transaction. Upjohn had not commenced operations and had no significant operating assets or liabilities before the planned transaction. Following completion, the combined company was expected to be renamed Viatris Inc. and trade on Nasdaq under the symbol VTRS.
Financial performance and position
| Metric | Three months ended September 27, 2020 | Nine months ended September 27, 2020 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $0 | $0 |
| Other deductions, net | $221 million | $222 million |
| Net loss | $169 million | $170 million |
| Income tax benefit | $52 million | $52 million |
| Net cash from operating activities | Not separately reported for the quarter | $1 million |
- Other deductions principally comprised foreign-exchange losses on euro-denominated debt, interest expense and financing-related fees. Third-quarter amounts included $148 million of foreign-exchange loss and $70 million of net interest expense.
- As of September 27, 2020, total assets were $11.413 billion, consisting almost entirely of restricted short-term investments in money market funds primarily invested in U.S. Treasury and government debt.
- Long-term debt was $11.535 billion, against $11.413 billion of restricted short-term investments, producing selected net financial liabilities of $122 million.
- Debt principal totaled $11.638 billion, net of $103 million of unamortized discounts and issuance costs. The debt comprised $7.45 billion of U.S. dollar notes and €3.60 billion of euro notes issued in June 2020.
- Total liabilities were $11.614 billion, while shareholder deficit was $201 million. There were 100 shares outstanding, all held by Pfizer.
- Cash flow included $11.413 billion used for purchases of restricted short-term investments and $11.412 billion of net financing cash inflows. Ending cash and cash equivalents were $0.
Material changes versus the prior comparable period
- The prior-year periods showed no revenue, expenses, or net loss because Upjohn had not yet undertaken material activities. The 2020 loss arose primarily from transaction-related financing and currency remeasurement.
- Debt and restricted investments increased from $0 at December 31, 2019 to $11.535 billion and $11.413 billion, respectively, following the June 2020 debt offerings.
- Shareholder deficit increased to $201 million, reflecting the $170 million net loss and $31 million of net transfers involving Pfizer.
- The filing does not provide meaningful operating margin or year-over-year business performance comparisons because the Upjohn Business had not yet been contributed to the company.
Outlook, contingencies, risks, and unusual items
- Pfizer and Mylan announced in October 2020 that the FTC had accepted a proposed consent order and that required antitrust clearances had been obtained. The record date for the planned spin-off was November 13, 2020, with closing expected on November 16, 2020, subject to customary conditions.
- Upjohn expected to pay Pfizer $12 billion as partial consideration for the contribution of the Upjohn Business. The debt proceeds, a $600 million delayed-draw term loan, and a revolving credit facility of up to $4 billion were intended to fund this payment and related transaction expenses.
- If the transaction did not close by February 1, 2021, or was terminated or abandoned before then, the senior notes generally would have been required to be redeemed at 101% of principal plus accrued interest.
- The euro-denominated notes were exposed to foreign-exchange movements, with no derivatives in place to mitigate that exposure. The filing recognized a $144 million cumulative foreign-exchange loss through September 27, 2020.
- Pfizer’s guarantees of the notes were expected to terminate automatically upon completion of the distribution. Following the combination, certain Mylan entities were expected to become guarantors of the Upjohn notes, while Upjohn would become a guarantor of existing Mylan notes.
- COVID-19 risks identified for the future Upjohn Business included supply-chain and manufacturing disruptions, reduced prescription demand, regulatory delays, cybersecurity threats, and uncertain macroeconomic effects. The filing states that the pandemic’s impact was recovering more slowly than originally expected, but does not quantify its effect on Upjohn’s standalone financial results.
- The company reported no legal proceedings, defaults upon senior securities, or material changes in internal control over financial reporting. The interim financial statements received a review, not an audit, from KPMG LLP.
Important facts for investors to verify
- Completion date and final terms of the Pfizer spin-off and Mylan combination that created Viatris.
- Whether the $12 billion payment to Pfizer and related financing arrangements were completed as planned.
- Post-closing debt balances, interest costs, refinancing requirements, and the treatment of the euro-denominated debt exposure.
- The actual operating results, revenue mix, margins, cash flow, and integration costs of the combined Viatris business, which are not presented in this filing.
- Any changes to the planned credit facilities, note guarantees, redemption provisions, or ownership percentages.
- The ultimate effects of COVID-19, regulatory actions, supply-chain conditions, product demand, and other risks disclosed in the transaction registration statements.