Shares of Pfizer (PFE) are under pressure after both Morgan Stanley and Bank of America Merrill Lynch downgraded the stock to Neutral-equivalent ratings. Morgan Stanley analyst David Risinger argued that Pfizer's planned exit of Upjohn "exposes" the lower than expected earnings for both the remaining business and Upjohn, while his peer at Bank of America Merrill Lynch cited valuation, including expected dilution from the Upjohn spin-merger and the outlook for the remaining company.

RESULTS: On Monday, Pfizer reported second quarter adjusted earnings per share of 80c, better than the expected 75c, and revenue of $13.3B, with consensus at $13.4B. Additionally, the company lowered its fiscal year 2019 adjusted earnings per share view to $2.76-$2.86 from $2.83-$2.93, and its fiscal year 2019 revenue view to $50.5B-$52.5B from $52B-$54B.

MYLAN/UPJOHN MERGER: The company also reported a deal to combine Mylan with Upjohn, Pfizer's off-patent branded and generic established medicines business, creating a new global pharmaceutical company. Under the terms of the agreement, which is structured as an all-stock, Reverse Morris Trust transaction, each Mylan share would be converted into one share of the new company. Pfizer shareholders would own 57% of the combined new company, and Mylan shareholders would own 43%. The new company is expected to have pro forma 2020 revenues of $19B-$20B. Pro forma 2020 adjusted EBITDA is anticipated to be in the range of $7.5B-$8B, including phased synergies of approximately $1B annually to be realized by 2023. The new company, which will be renamed and rebranded at close, will be led by Mylan's current Chairman Robert Coury, who will serve as Executive Chairman of the new company; by Michael Goettler, current Group President of Upjohn, who will serve as CEO; and by Rajiv Malik, current Mylan President, who will serve as President. 

DEAL 'EXPOSES' WEAK EARNINGS: In a research note to investors, Morgan Stanley's Risinger downgraded Pfizer to Equal Weight from Overweight and lowered his price target on the shares to $40 from $48. Pfizer's planned exit of Upjohn "exposes" the lower than expected earnings for both the remaining business and Upjohn, the analyst argued. Risinger also noted that his thesis that Pfizer would outperform due to improving prospects was "invalidated" by a reset of earnings on both sides of the business. The company's 2020 disclosures revealed earnings power that is much weaker than he realized, Risinger added, while reducing his 2020 adjusted earnings per share estimate for Pfizer by 15% to $2.56 from $3.02.

DILUTION FROM UPJOHN SPIN-MERGER: Meanwhile, Bank of America Merrill Lynch analyst Jason Gerberry downgraded Pfizer to Neutral from Buy and lowered his price target on shares to $41 from $49. His concerns include valuation for Pfizer's Upjohn that comes with "disproportionate loss of profit," and rebasing of Pfizer remaining company sales at a lower contribution margin. While the analyst sees the remaining company as offering a more attractive growth profile, he is skeptical Pfizer’s shares can command above 18-times forward earnings.

PRICE ACTION: In morning trading, shares of Pfizer have dropped almost 6% to $28.99.