The rotation from growth stocks to value stocks appears to have started, as evidenced by the 4.5% price decline of the Invesco QQQ (QQQ) ETF since the start of the year, while many stocks of Value in the energy and pharmaceutical segments recovered.
This brings me to Viatris (VTRS), whose price has risen 12% since the start of the year, and is perhaps supported by the dividend hike last week. In this article, I highlight why Viatris remains a great deal for revenue and growth, so let’s get started.
Viatris: Prepare for take off
Viatris was formed after the merger between Pfizer’s Upjohn Activity (PFE) and Mylan. Its pharmaceutical portfolio includes Pfizer’s off-patent drugs including Viagra, Lyrica, Lipitor and Norvasc, as well as Mylan’s portfolio of 7.5K + products marketed globally. This includes EpiPen, the commonly used epinephrine auto-injector, and antiretroviral therapy, on which 40% of people living with HIV / AIDS worldwide depend.
Viatris’ business is doing well, with adjusted LOE (loss of exclusivity) revenue down just 1% year-on-year at constant exchange rates in the third quarter. It was better than expected, as Viatris performed better than expected on its legacy drugs Lipitor, Viagra and EpiPen. Meanwhile, the biosimilars segment is growing rapidly, with sales growth of 14% year-on-year.
Viatris also maintains strong profitability through its higher margin drugs. As shown below, it has an A profitability rating with an EBITDA margin of 39%, well above the industry median of 6%.
I am also encouraged by the expected annual synergies within the company at $ 500 million this year, with management expecting to achieve at least $ 1 billion in synergies by the end of 2023. In addition, the Free cash flow generation is expected to be a solid $ 2.5 billion for 2021, up from the previous forecast of $ 2.3 billion.
This could go a long way to further deleveraging the balance sheet. Management has repaid $ 1.9 billion of debt in the first nine months of 2021. Viatris has a net debt to EBITDA TTM of 3.4x, and I would expect the leverage ratio Towards management’s target level of 2.5x with new debt repayments. Once this is achieved, management could generate shareholder value simply by repurchasing shares, if the price remained at the current discounted level.
In particular, Viatris has just raised its dividend by 9%. Right now it is returning a good 3.2% with a very low payout ratio of just 12.9%, leaving plenty of room for dividend increases down the line.
Going forward, Viatris maintains a strong pipeline with many drugs at different stages. This includes a Botox biosimilar currently in the preclinical stage and an Eylea biosimilar in the submission stage. Management also sees sourcing opportunities in China, which could drive margin growth, as management reflected at the Evercore healthcare conference last month:
“We are very proud of the performance we have in China in 2021. I think we would expect further development of their business driven by drug delivery technology and Europe in 2022 and beyond. China has many opportunities ahead. So given our presence there and our knowledge of that market, I think China will be a key market from a supply point of view, where we can seek out such opportunities and exploit them in other markets, markets. emerging markets and European markets. “- CEO of Viatris
Risks for Viatris include the risk of integration with respect to the Upjohn and Mylan businesses. In addition, competitive pressures in generics may result in low prices and management may not be able to significantly increase shareholder returns until debt is reduced.
Nonetheless, Viatris is trading rather cheaply at the current price of $ 15.25 with a futures PE of 4.1x. Analysts expect EPS growth of 22% over the next year and have a consensus buy rating, with an average price target of $ 18.50. This implies a potential total return of 25% over one year, including dividends.
Seeking Alpha’s Quant has very bullish odds. As shown below, VTRS achieves A ratings for valuation, growth, profitability, and momentum.
The valuation also compares favorably with that of Organon (OGN), another pharmaceutical company recently spun off from parent company Merck (MRK). As shown below, VTRS has an EV / EBITDA ratio of 6.16x, well below the 7.7x of the OGN.
Takeaway for investors
Viatris is currently trading in windfall territory despite strong performance as an independent company. Its biosimilars segment is growing at a respectable rate and the pipeline includes a biosimilar for the popular cosmetic drug, Botox. Meanwhile, management is deleveraging the balance sheet towards its target leverage ratio and recently increased the dividend by 9%. Viatris appears to be trading at a steep discount right now.