Business Context and Reporting Period
Upjohn Inc., subsequently intended to be renamed Viatris Inc., filed this unaudited Form 10-Q for the quarter ended June 28, 2020. Upjohn was a newly formed, wholly owned Pfizer subsidiary with no material operating activities before the planned combination of Pfizer’s Upjohn Business with Mylan N.V. in an all-stock Reverse Morris Trust transaction.
The filing reports the three- and six-month periods ended June 28, 2020, compared with the three-month period ended June 30, 2019 and, for certain statements, the period from incorporation on February 14, 2019 through June 30, 2019. The financial statements therefore do not represent the operating results of the future Viatris business.
Key Financial Metrics
| Metric | Three months ended June 28, 2020 | Six months ended June 28, 2020 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $0 | $0 |
| Other income/(deductions), net | $1.2 million of deductions | $1.2 million of deductions |
| Loss before taxes | $1.2 million | $1.2 million |
| Income tax benefit | $0.3 million | $0.3 million |
| Net loss | $0.9 million | $0.9 million |
| Basic and diluted loss per share | $9,071 | $9,071 |
| Net cash provided by operating activities | Not separately presented | $0 |
The reported loss primarily reflected $5.3 million of interest expense, partly offset by $3.9 million of foreign-exchange gains and $0.2 million of interest income. The filing does not provide meaningful operating margins because revenue and operating expenses were zero.
Balance Sheet and Liquidity
- Total assets were $11.412 billion, consisting primarily of $11.412 billion of restricted short-term investments in money market funds invested mainly in U.S. Treasury and government securities.
- Long-term debt was $11.385 billion, consisting of $11.490 billion of principal less $104.3 million of unamortized discounts and issuance costs.
- Total liabilities were $11.413 billion and shareholder equity was a deficit of $1.2 million.
- Cash and cash equivalents were $0; the $11.4 billion of debt proceeds were classified as restricted short-term investments.
- Selected net financial assets were $26.2 million after offsetting restricted investments against carrying-value debt.
Debt and Financing
- Upjohn issued $7.45 billion of U.S.-dollar senior unsecured notes and Upjohn Finance B.V. issued €3.60 billion of euro-denominated senior unsecured notes in June 2020.
- Weighted-average effective interest rates at issuance were 2.95% for the dollar notes and 1.37% for the euro notes.
- The notes mature from 2022 through 2050. Contractual long-term debt principal was $11.385 billion and estimated future interest payments totaled $4.598 billion.
- The company also entered into a $600 million delayed-draw term loan agreement and a revolving credit facility of up to $4 billion, including $1.5 billion available for a draw at or near the combination closing.
- Debt proceeds, together with the additional financing facilities, were intended to fund a $12 billion cash payment to Pfizer and related transaction costs.
Material Changes Versus the Prior Comparable Period
- Compared with the 2019 periods, Upjohn incurred its first material financing activity: $11.4 billion of debt proceeds, $66.6 million of debt issuance costs paid, and related interest and foreign-exchange activity.
- Revenue and operating expenses remained zero, and the company continued to have no material operating activities.
- Total assets and liabilities increased from zero at December 31, 2019 to $11.412 billion and $11.413 billion, respectively, primarily because of the debt issuance and investment of proceeds.
- Shareholder equity declined to a $1.2 million deficit, reflecting the $0.9 million net loss and a $0.3 million net transfer from Pfizer.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The transaction was approved by Mylan shareholders in June 2020 and was expected to close in the fourth quarter of 2020, subject to customary closing conditions and remaining regulatory approvals.
- Pfizer stockholders were expected to own 57% of the combined company and former Mylan shareholders 43% on a fully diluted basis. The future company was expected to operate under the Viatris name and trade on Nasdaq under “VTRS.”
- If the transaction did not close by February 1, 2021, or was terminated or abandoned before then, the senior notes generally would be required to be redeemed at 101% of principal plus accrued interest.
- The Pfizer guarantees on the notes were scheduled to terminate automatically upon consummation of the distribution. Following the combination, certain Mylan entities were expected to become guarantors of the new notes and the company was expected to guarantee certain existing Mylan debt.
- The euro-denominated notes created foreign-exchange exposure, with no derivatives in place to mitigate that risk.
- COVID-19 risks included potential delays in regulatory approvals, manufacturing and supply-chain interruptions, reduced prescription demand, operational disruptions, cybersecurity incidents, and adverse macroeconomic conditions affecting the Upjohn Business.
- No legal proceedings, defaults, or material changes in internal control were reported. Management concluded that disclosure controls and procedures were effective.
Investor Verification Priorities
- Verify the actual closing date and final terms of the Pfizer-Mylan-Upjohn transaction, including the transition to Viatris and the Nasdaq listing.
- Confirm whether the $12 billion payment to Pfizer was completed and how the transaction was ultimately financed.
- Reconcile the assumed debt structure, including the $11.4 billion of Upjohn notes, the term loan, revolving facility, and any Mylan debt assumed or guaranteed after closing.
- Review post-combination operating results, leverage, cash flows, integration costs, and any purchase-accounting adjustments; the Upjohn standalone results in this filing are not representative of Viatris operations.
- Assess the effect of COVID-19 on product demand, manufacturing, supply chains, regulatory approvals, and the timing or economics of the combination.