Viatris Inc - Quarter Report: 2020 September (Form 10-Q)

FORM

(212)

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Large Accelerated filer ☐                Accelerated filer ☐  ☒                Smaller reporting company ☐    

Indicate by check mark whether the registrant is a shell company (as defined in Rule of the Exchange Act).

(millions of dollars, except common share and per common share data)		Three Months Ended September 27, 2020				Three Months Ended September 29, 2019				Nine Months Ended September 27, 2020				Period From February 14, 2019 (Date of Incorporation) to September 29, 2019
Revenues		$	—			$	—			$	—			$	—
Operating expenses			—				—				—				—
Other (income)/deductions––net			221				—				222				—
Loss before benefit for taxes on income			(221	)			—				(222	)			—
Benefit for taxes on income			(52	)			—				(52	)			—
Net loss		$	(169	)		$	—			$	(170	)		$	—
Loss per common share––basic and diluted (a)		$	(1,689,743	)		$	—			$	(1,698,814	)		$	—
Weighted-average common shares––basic and diluted (a)			100				100				100				100

(millions of dollars)		Three Months Ended September 27, 2020				Three Months Ended September 29, 2019				Nine Months Ended September 27, 2020				Period From February 14, 2019 (Date of Incorporation) to September 29, 2019
Net loss		$	(169	)		$	—			$	(170	)		$	—
Other comprehensive income/(loss) before tax			—				—				—				—
Tax provision/(benefit) on other comprehensive income/(loss)			—				—				—				—
Other comprehensive income/(loss)			—				—				—				—
Comprehensive loss attributable to Upjohn Inc.		$	(169	)		$	—			$	(170	)		$	—

(millions of dollars, except common share and per common share data)				As of September 27, 2020						As of December 31, 2019
				(Unaudited)
Assets
Restricted short-term investments (a)				$	11,413					$	—
Other current assets					—						—
Total current assets					11,413						—
Total assets				$	11,413					$	—
Liabilities and Equity
Other current liabilities				$	79					$	—
Total current liabilities					79						—
Long-term debt					11,535						—
Total liabilities					11,614						—
Commitments and Contingencies
Common stock, $0.01 par value; 1,000 shares authorized; issued: 2020—100 shares; 2019—100 shares					—						—
Additional paid-in capital					(31	)					—
Due from shareholder					—						—
Retained earnings/ (deficit)					(170	)					—
Accumulated other comprehensive income/(loss)					—						—
Total Upjohn Inc. shareholder’s equity/(deficit)					(201	)					—
Total liabilities and equity				$	11,413					$	—

(a)	Represents proceeds from the Upjohn and Upjohn Finance B.V. debt issuances. For additional information, see Note 5B. Financial Instruments: Long-Term Debt .

		Common Stock
(millions of dollars, except common shares)		Shares				Par Value				Add’l Paid-In Capital				Due from Share- holder				Retained Earnings/ (Deficit)				Accum. Other Comp. Income/ (Loss)				Upjohn Inc. Shareholder’s Equity/ (Deficit)
Balance, June 28, 2020			100			$	—			$	—			$	—			$	(1	)		$	—			$	(1	)
Net loss																			(169	)							(169	)
Other comprehensive income/(loss), net of tax																							—				—
Net transfers –– Pfizer (a)											(31	)															(31	)
Balance, September 27, 2020			100			$	—			$	(31	)		$	—			$	(170	)		$	—			$	(201	)

		Common Stock
(millions of dollars, except common shares)		Shares				Par Value				Add’l Paid-In Capital				Due from Share- holder				Retained Earnings/ (Deficit)				Accum. Other Comp. Income/ (Loss)				Upjohn Inc. Shareholder’s Equity/ (Deficit)
Balance, June 30, 2019			100			$	—			$	—			$	—			$	—			$	—			$	—
Net loss																			—								—
Other comprehensive income/(loss), net of tax																							—				—
Net transfers––Pfizer											—																—
Balance, September 29, 2019			100			$	—			$	—			$	—			$	—			$	—			$	—

		Common Stock
(millions of dollars, except common shares)		Shares				Par Value				Add’l Paid-In Capital				Due from Share- holder				Retained Earnings/ (Deficit)				Accum. Other Comp. Income/ (Loss)				Upjohn Inc. Shareholder’s Equity/ (Deficit)
Balance, January 1, 2020			100			$	—			$	—			$	—			$	—			$	—			$	—
Net loss																			(170	)							(170	)
Other comprehensive income/(loss), net of tax																							—				—
Net transfers––Pfizer (a)											(31	)															(31	)
Balance, September 27, 2020			100			$	—			$	(31	)		$	—			$	(170	)		$	—			$	(201	)

		Common Stock
(millions of dollars, except common shares)		Shares				Par Value				Add’l Paid-In Capital				Due from Share- holder				Retained Earnings/ (Deficit)				Accum. Other Comp. Income/ (Loss)				Upjohn Inc. Shareholder’s Equity/ (Deficit)
Initial capitalization, February 14, 2019 (date of incorporation)			100			$	—			$	—			$	—			$	—			$	—			$	—
Net loss																			—								—
Other comprehensive income/(loss), net of tax																							—				—
Net transfers––Pfizer											—																—
Balance, September 29, 2019			100			$	—			$	—			$	—			$	—			$	—			$	—

(a)	See Note 4. Tax Matters and Note 8. Related Party Transactions.

(millions of dollars)		Nine Months Ended September 27, 2020				Period From February 14, 2019 (Date of Incorporation) to September 29, 2019
Operating Activities
Net loss		$	(170	)		$	—
Adjustments to reconcile net loss to net cash provided by operating activities:							—
Amortization of bond discount and issuance costs			3				—
Currency remeasurement loss on euro notes			144
Benefit for taxes on income (a)			(52	)			—
Other changes in assets and liabilities			77				—
Net cash provided by operating activities (b)			1				—
Investing Activities
Net (purchases of)/proceeds from redemptions/sales of short-term investments (c)			(11,413	)			—
Net cash used in investing activities			(11,413	)			—
Financing Activities
Proceeds from issuance of long-term debt (c)			11,478				—
Long-term debt issuance costs paid (c)			(88	)			—
Financing activities with Pfizer (d)			21
Net cash provided by financing activities			11,412				—
Effect of exchange-rate changes on cash and cash equivalents			—				—
Net increase/(decrease) in cash and cash equivalents			—				—
Cash and cash equivalents, beginning			—				—
Cash and cash equivalents, end		$	—			$	—
Supplemental Cash Flow Information
Cash paid during the period for:
Income taxes		$	—			$	—
Interest			—				—

•

Income approach, which is based on the present value of a future stream of net cash flows.

•

Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.

•

Cost approach, which is based on the cost to acquire or construct comparable assets, less an allowance for functional and/or economic obsolescence.

•

Quoted prices for identical assets or liabilities in active markets (Level 1 inputs).

•

Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (Level 2 inputs).

•

Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).

The following table provides the components of Other (income)/deductions––net :
(millions of dollars)		Three Months Ended September 27, 2020				Three Months Ended September 29, 2019				Nine Months Ended September 27, 2020				Period From February 14, 2019 (Date of Incorporation) to September 29, 2019
Interest income (a)		$	(1	)		$	—			$	(2	)		$	—
Interest expense (b)			71				—				76				—
Net interest expense			70				—				75				—
Foreign exchange (gain)/loss, net (c)			148				—				144				—
Other, net (d)			3								3
Other (income)/deductions––net		$	221			$	—			$	222			$	—

(a)	Represents interest income earned on $11.4 billion of proceeds from the debt issuances completed in June 2020 (see Note 5B ) that are invested in money market funds and included in Restricted short-term investments (see Note 5A ) in the condensed consolidated balance sheet as of September 27, 2020.

(b)	Represents interest expense associated with the $11.4 billion of senior unsecured notes issued in June 2020, which includes the stated interest expense on the notes and amortization of bond discount and issuance costs (see Note 5B ).

(c)	Represents net currency exchange losses related to the remeasurement of Euro denominated senior unsecured notes issued in June 2020 (see Note 5B) .

(d)	Primarily represents fees associated with financing arrangements (see Note 5B ).

		September 27, 2020								December 31, 2019
(millions of dollars)		Total				Level 2				Total				Level 2
Financial assets measured at fair value on a recurring basis:
Short-term investments
Classified as equity securities with readily determinable fair values:
Money market funds (a)		$	11,413			$	11,413			$	—			$	—
Total short-term investments		$	11,413			$	11,413			$	—			$	—

(a)

As of September 27, 2020, $11.4  billion of proceeds from the debt issuances completed in June 2020 (see Note 5B ) are invested in money market funds and are included in Restricted short-term investments in the condensed consolidated balance sheet, pursuant to the terms of the transaction agreements. The money market funds are primarily invested in U.S. Treasury and government debt with readily determinable fair values (see Note 3 and Note 6 ).

The following table presents the financial liabilities not measured at fair value on a recurring basis, including the carrying values and estimated fair values using a market approach:
		September 27, 2020												December 31, 2019
		Carrying Value				Estimated Fair Value								Carrying Value				Estimated Fair Value
(millions of dollars)						Total				Level 2								Total				Level 2
Financial Liabilities:
Long-term debt		$	11,535			$	13,244			$	13,244			$	—			$	—			$	—

						Principal
(millions of dollars/euros)		Maturity Date		Issue Currency		As of September 27, 2020
Upjohn Inc. (Upjohn) (a) 1.125% U.S. dollar notes		June 22, 2022		U.S. dollar		$	1,000
1.650% U.S. dollar notes		June 22, 2025		U.S. dollar			750
2.300% U.S. dollar notes		June 22, 2027		U.S. dollar			750
2.700% U.S. dollar notes		June 22, 2030		U.S. dollar			1,450
3.850% U.S. dollar notes		June 22, 2040		U.S. dollar			1,500
4.000% U.S. dollar notes		June 22, 2050		U.S. dollar			2,000
Total U.S. dollar notes issued in the second quarter of 2020						$	7,450
Upjohn Finance B.V. (Finco) (a)
0.816% Euro notes		June 23, 2022		Euro		€	750
1.023% Euro notes		June 23, 2024		Euro			750
1.362% Euro notes		June 23, 2027		Euro			850
1.908% Euro notes		June 23, 2032		Euro			1,250
Total Euro notes issued in the second quarter of 2020						€	3,600

(a)

The notes may be redeemed by the Company at any time, in whole, or in part, at varying redemption prices plus accrued and unpaid interest. The weighted-average effective interest rates at issuance were 2.95% for the $ 7.45   billion notes and 1.37% for the € 3.60   billion notes. If the Transaction does not close on or prior to February 1, 2021, or if, prior to such date, Upjohn Inc. and Mylan notify the trustee for the U.S. dollar notes or Euro notes, as applicable, that (i) the business combination agreement entered into by Pfizer, the Company, Mylan and certain of their affiliates to combine the Upjohn Business with Mylan is terminated, or (ii) the Transaction will not otherwise be pursued, the notes must be redeemed at redemption prices equal to 101% of their respective principal amounts, plus accrued and unpaid interest.

The following table provides the components of the Company’s senior unsecured long-term debt, including the weighted-average annual stated interest rate by maturity:
(millions of dollars)		As of September 27, 2020
Notes due 2022 (0.981%)		$	1,872
Notes due 2024 (1.023%)			872
Notes due 2025 (1.650%)			750
Notes due 2027  (1.767%)			1,739
Notes due 2030 (2.700%)			1,450
Notes due 2032 (1.908%)			1,454
Notes due 2040 (3.850%)			1,500
Notes due 2050 (4.000%)			2,000
Total long-term debt, principal amount			11,638
Net unamortized discounts and debt issuance costs			(103	)
Total long-term debt, carried at historical proceeds, as adjusted		$	11,535

Upjohn Inc. (the “Company” or “Upjohn”), a Delaware corporation, was formed on February 14, 2019, and is currently a wholly-owned subsidiary of Pfizer Inc. (“Pfizer”). On February 13, 2020, the United States Securities and Exchange Commission (the “SEC”) declared effective the Registration Statement on Form as amended (the Registration Statement”) of the Company to register shares of its common stock, par value $0.01 per share, that will be issued and distributed in connection with a series of agreements entered into by Pfizer, the Company, Mylan N.V. (“Mylan”) and certain of their affiliates to combine Pfizer’s global, primarily branded and generic established medicines business (the “Upjohn Business”) with Mylan in an Reverse Morris Trust transaction (the “Transaction”), creating a new global pharmaceutical company. On June 30, 2020, the SEC declared effective the Registration Statement on Form 10, which includes an information statement (the “Form 10 Registration Statement” and, together with the Registration Statement, the “Registration Statements”), relating to the planned Distribution (as defined below). On August 6, 2020, the Company filed the final information statement, dated August 6, 2020 (the “Information Statement”), which is attached as Exhibit 99.1 to the Company’s Current Report on Form filed on August 6, 2020.

On July 29, 2019, Pfizer, Upjohn, Mylan and certain of their affiliates entered into a series of agreements to combine the Upjohn Business with Mylan in an Reverse Morris Trust transaction, creating a new global pharmaceutical company. Under the terms of the Transaction, Pfizer will contribute the Upjohn Business to the Company and distribute its ownership interest in Upjohn to Pfizer stockholders via either a or a (the “Distribution”) and, immediately thereafter, Upjohn will be combined with Mylan (the “Combination”). Pfizer intends to effect the Distribution by way of a Pfizer stockholders would own 57% of the combined company and former Mylan shareholders would own 43% of the combined company on a fully diluted basis. The Transaction is generally expected to be tax free to Pfizer and Pfizer stockholders. The Company will make a cash payment to Pfizer equal to $12 billion as partial consideration for the contribution of the Upjohn Business from Pfizer to the Company (the “Cash Distribution”). The Transaction was approved by Mylan shareholders in June 2020. In connection with the Transaction, in June 2020, Upjohn and Upjohn Finance B.V. (“Finco”) completed privately placed debt offerings of $7.45 billion and €3.60 billion aggregate principal amount of senior unsecured notes, respectively (the “Upjohn Debt Transactions”), and entered into other financing arrangements. See the “Analysis of Financial Condition, Liquidity and Capital Resources” section below for more information about the completed financing activities. For more information regarding the Transaction, see the Registration Statements. In October 2020, Pfizer and Mylan announced that the U.S. Federal Trade Commission (the “FTC”) accepted a proposed consent order, which concluded the FTC’s review of the proposed combination of Mylan and the Upjohn Business, and that the parties have now obtained all required antitrust clearances for the proposed Transaction. Also, in October 2020, Pfizer announced that it had set the close of business on November 13, 2020 as the record date for the proposed spin-off and that the Transaction is expected to close on November 16, 2020, subject to customary closing conditions.

to fund in full the Cash Distribution and related transaction fees and expenses. The Company intends to use any remaining balance of net proceeds from these financing transactions after the Cash Distribution for general corporate purposes. In the interim, the $11.4 billion of proceeds of the Upjohn Debt Transactions are classified as in the condensed consolidated balance sheet as of September 27, 2020, pursuant to the terms of the transaction agreements. The euro notes are exposed to changes in foreign exchange rates and there are no derivatives in place to mitigate that risk. The proceeds of the euro notes were converted to U.S. dollars at the time of issuance.

For additional information regarding the Upjohn Debt Transactions and other financing arrangements of the Company, see Notes to Condensed Consolidated Financial Statements––.

This report and other written or oral statements that the Company makes from time to time contain forward-looking statements. Such forward-looking statements involve substantial risks and uncertainties. The Company has tried, wherever possible, to identify such statements by using words such as “will,” “may,” “could,” “should,” “would,” “likely,” “ongoing,” “anticipate,” “estimate,” “expect,” “project,” “potential,” “intend,” “continue,” “plan,” “believe,” “assume,” “target,” “forecast,” “guidance,” “goal,” “objective,” “aim,” “seek” and other words and terms of similar meaning or by using future dates in connection with any discussion of, among other things, the Company’s anticipated operating and financial performance, business plans and prospects, expectations for its products, sales efforts, expenses, interest rates, foreign exchange rates, the outcome of contingencies, such as legal proceedings, government regulation, the ability to successfully capitalize on growth opportunities or prospects, manufacturing and product supply and the Company’s expectations regarding the impact of a novel disease caused by a strain of coronavirus on its business and operations. In particular, these include statements relating to future actions, including, among others, the expected timing, benefits, charges and/or costs in connection with the pending combination of the Upjohn Business with Mylan to create a new global pharmaceutical company, Viatris, and the Company’s anticipated liquidity position, the anticipated costs and savings from certain initiatives, and the expected payments to the unfunded pension and postretirement plans and expected funding obligations.

You should read and consider the risk factors associated with the Upjohn Business because these risk factors may affect the operations and financial results of the new combined company and the Company’s common stock following the closing of the Transaction. A description of the risks and uncertainties for the Upjohn Business, Mylan and the combined company may be found in the “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” sections of the Form Registration Statement, which was declared effective on February 13, 2020, the Form 10 Registration Statement, which was declared effective on June 30, 2020, and the Information Statement, all of which are on file with the SEC. Additional discussion regarding certain risks and uncertainties described above is included under the heading entitled “Risk Factors” in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form The Company notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

During the period covered by this report, the Company did not conduct any material operating activities and therefore did not incur any significant interest rate risk, foreign currency exchange rate risk, commodity price risk or other relevant market risks except that the Company’s senior unsecured euro-denominated notes are exposed to changes in foreign exchange rates and there are currently no derivatives in place to mitigate that risk. Borrowings under the Upjohn Debt Transactions are on a long-term, fixed-rate basis. The Company’s restricted short-term investments consist of high-quality, highly liquid money market funds primarily invested in U.S. Treasury and government debt. For information about the financing arrangements undertaken in connection with the definitive agreement to combine the Company with Mylan, see “Analysis of Financial Condition, Liquidity and Capital Resources” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules and under the Exchange Act). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in alerting them in a timely manner to material information required to be disclosed in the Company’s periodic reports filed with the SEC.

During the Company’s most recent fiscal quarter, there has not been any change in its internal control over financial reporting (as such term is defined in Rules and under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

During the period covered by this report, the Company did not conduct any material activities other than those related to its formation and the matters contemplated by the Transaction. You should also read and consider the risk factors associated with the Upjohn Business because these risk factors may affect the operations and financial results of the new combined company and the Company’s common stock following the closing of the Transaction. The Company refers to the “Forward-Looking Information and Factors That May Affect Future Results” section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form and to the description of the risks and uncertainties for the Upjohn Business, Mylan and the combined company that may be found in the “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” sections of the Registration Statement, which was declared effective on February 13, 2020, the Form 10 Registration Statement, which was declared effective on June 30, 2020, and the Information Statement, all of which are on file with the SEC.

In December 2019, illnesses associated with a novel disease caused by a strain of coronavirus were reported and the virus has since caused widespread and significant disruptions to daily life and economies across geographies. The World Health Organization has classified the outbreak as a pandemic.

The pandemic presents a number of risks and challenges for the Company and the Upjohn Business, including, among others, potential challenges in connection with the anticipated combination of the Upjohn Business with Mylan. For the Upjohn Business that is to be contributed to the Company under the terms of the Transaction, its business, operations, financial condition and results have been and may continue to be impacted by the pandemic to varying degrees. The pandemic’s impact on the Upjohn Business and its operations and financial condition and results was less severe at its peak than originally anticipated, but is recovering at a somewhat slower pace than originally expected. The pandemic continues to present a number of risks and challenges for the Upjohn Business, including, among others, impacts due to travel limitations, social distancing and government-mandated work-from-home or orders; potential manufacturing disruptions and delays and supply chain interruptions, including challenges related to reliance on third-party suppliers; decreased product demand, including due to reduced numbers of meetings with prescribers and patient visits with physicians, resulting in fewer new prescriptions or refills of existing prescriptions; further reduced product demand as a result of increased unemployment; challenges presented by reallocating human capital, manufacturing and other resources to assist in responding to the pandemic without disruption to the Upjohn Business’s operations; costs associated with the pandemic, including protocols intended to reduce the risk of transmission; potential interruptions or delays in the operations of certain regulatory authorities; potential increased cyber incidents such as phishing, social engineering and malware attacks; and other challenges presented by disruptions to our normal operations in response to the pandemic, as well as uncertainties regarding the duration and severity of the pandemic and its impacts and government or regulatory actions to contain the virus or control the supply of medicines. Further, the pandemic, and the volatile global economic conditions stemming from the pandemic, could precipitate or amplify the other risks that are identified in the “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” sections of the Company’s Registration Statement, Form 10 Registration Statement and Information Statement.

The Company is continuing to monitor the latest developments regarding the pandemic on the Upjohn Business and its operations, financial condition and results, and the Upjohn Business has made certain assumptions regarding the pandemic for purposes of its operational planning and financial projections, including assumptions regarding the duration and severity of the pandemic and the global macroeconomic impact of the pandemic.

Despite careful tracking and planning, however, the Company is unable to accurately predict the extent of the impact of the pandemic on the Upjohn Business and its operations, financial condition and results due to the uncertainty of future developments. In particular, the Company believes the ultimate impact on the Upjohn Business’s business, operations and financial condition and results will be affected by the speed and extent of the continued spread of the coronavirus globally, the duration of the pandemic, new information that may emerge concerning the severity and incidence of the safety, efficacy and availability of a vaccine and treatments for the global macroeconomic impact of the pandemic and governmental or regulatory actions to contain the virus or control supply of medicines. The pandemic may also affect the Upjohn Business’s business, operations or financial condition and results in a manner that is not presently known to the Upjohn Business or that the Upjohn Business currently does not consider to present significant risks.