Sale of two high yield Mid-Cap spin-offs (OGN and VTRS)


As I suspect many have limited exposure to small and mid cap stocks, we have updated our special report, Small business, big potential.

We also provide a reminder of the methodology we use for all our value-oriented equity strategies. I think you will find the report a valuable read.

The cautious speculatorGST SPECIAL REPORT: Small Business, Big Potential – An Update – The Cautious Speculator

And for those looking for specific mid-cap companies, I think their price is attractive today…


Spin-offs often fall within months of their parents separating, as people are surprised at the new name in their accounts or prefer to avoid additional due diligence to support continued ownership, when most lack institutional follow-up.

But such treatment has historically created an opportunity for savvy investors who can separate the wheat from the chaff. I think drug makers Viatris
& organon
do the trick as the pair spun off from their large-cap parents over the past two years, only to be ignored by investors in an otherwise very good 2022 for pharmaceutical stocks.

At first glance, both companies seem unattractive, offering little revenue growth and having been riddled with debt. However, I believe there is significant total return potential for those who share my long-term horizon, as strong cash generation reduces debt levels, single-digit P/E ratio may increase and dividends significant are paid.


Viatris is a spin-off of Pfizer’s
former Upjohn segment combined with Mylan
this happened in November 2020. The company markets well-known brand name prescription drugs like Lipitor, Celebrex and Viagra in addition to generics and biosimilars in 165 countries.

The duo are not resting on the laurels of previous successes as management pursues a pipeline of new product launches to offset the erosion of the core business. From 2024 – what the company sees as Phase II of Viatris’ progression as a stand-alone entity – management expects EBITDA growth in the range of 4% to 5% per year and growth of BPA in mid-adolescence.

An average maturity of its debt close to 10 years gives Viatris time to execute its strategy, with the longest maturity until 2050, and the weighted average coupon of 3.41% lower than the current Treasury yield at 10 year.

Still, management has reduced the debt burden, repaying $4.2 billion since the start of 2021, and the company is on track to repay at least $6.5 billion by the end of 2023. .

Additionally, VTRS is trading for just 4x estimated earnings for the next 12 months and yielding over 4%.


A similar opportunity exists at Organon, a Merck spin-off that houses legacy women’s health products (including Nuvaring and Nexplanon), biosimilars and other established brands (particularly for cardiovascular and respiratory therapies). Women’s Health segment revenue grew 23% in the third quarter of 2022, supported by record sales of Nexplanon, contributing $1.32 in earnings per share, well above the $1.10 expected by Wall analysts Street.

Management forecasts revenues of between $6.1 billion and $6.2 billion for all of 2022 and continues to forecast more than $1 billion in free cash flow per year going forward. If its free cash flow target is achieved, the dividend (the current yield is 4.6%) appears to be well supported, while enabling further progress in debt reduction.

Indeed, the average maturity of Organon’s debt is 6.1 years with an average coupon of 4.2%, while almost all of the bonds are not due until 2028. Moreover, the company does not faces only a modest loss of exclusivity going forward for its established brands, with the most significant occurring before the split.

While EPS growth will be tough over the next two years, the stock price is below 8x earnings expectations, making it a bargain in my book.


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