I was bullish on Viatris (NASDAQ: VTRS) stock in several previous notes for Seeking Alpha, including around the time the company – formed through a merger between Upjohn’s legacy brands division of Pfizer and generic drug giant Mylan – still had its biologics business division as part of the company.
As most investors know, in April Viatris opted to sell the biosimilars division to Indian Pharma Biocon in a $3.3 billion deal – a move that saw its share price plummet. >30% overnight, from $14.5 to $10. Biosimilars were arguably one of Viatris’ most progressive areas of business – one capable of growth, to offset the inevitable declines in sales of Pfizer’s legacy assets.
As disappointing as the decision was – and the deal is expected to close before the end of the year now that antitrust clearances have been negotiated in the US and India – Viatris retains a 13% stake in Biocon, after receiving 2 billion in cash, with an additional $335 million promised to be paid in 2024, and the remaining $1 billion in mandatory convertible preferred stock.
Viatris stock looks attractive based on several factors. The company forecasts FY22 revenue of $16.2 billion to $16.7 billion, adjusted EBITDA of $5.8 billion to $6.2 billion and free cash flow of 2 .5 to 2.9 billion dollars.
If we treat free cash flow as net income, we can estimate an earnings per share (“EPS”) figure of around $2.2 and a price-to-earnings (“PE”) ratio of around 4, 75x. suggests that a business is thriving and its valuation will increase.Currently, Viatris’ market cap valuation is $13 billion, which means that its futures price to sales ratio is
Viatris is also paying a dividend – $0.12 this quarter, offering a yield of around 4.5% at the current share price. The stated ambition of management is to ensure that the dividend remains above 25% of the free cash flow generated.
On the negative side, we know that Viatris revenue is likely to decline year over year as sales of legacy brands such as Lipitor, Lyrica, EpiPen and others decline in the face of generic competition and new drug launches. We also know that Viatris has a high level of debt – in the second quarter of 2022, the current share of long-term debt was $768 million and long-term debt itself was $19.2 billion. of dollars.
Since Q420, Viatris has reduced debt from $25.1 billion to $20.4 billion (according to its Q222 earnings presentation) and gross leverage from 3.7x to 3.3x. $1.5 billion of debt was repaid in H122, and management also committed to completing a $1 billion share buyback program, which is another boost for investors in addition to the dividend.
Even so, most companies are indebted because they have invested heavily in R&D and expect their revenues to grow accordingly, but Viatris does not have that luxury.
It didn’t invest $25 billion in new product development, it inherited $25 billion in debt. As good as Lipitor was – over the lifetime of cholesterol-lowering drugs, it generated over $125 billion in revenue, making it one of the most successful pharmaceuticals of all. time – his sales are not going to start climbing again.
Heavily in debt, its most promising division sold and with sales falling, Viatris may be undervalued compared to what it does today, but what worries the market is what it could achieve tomorrow. So how does management persuade the market otherwise?
It’s really simple. Management must restore confidence in its products and their sales potential, ensure that the company maintains or, ideally, increases its profitability, and create a pipeline that investors can be excited about.
The alternative scenario is that management just lets things slide, cashing in on the profits generated by inherited assets and using them to pay off debt – and pay themselves. Let’s take a closer look at each part of the product/profit/pipeline trifecta.
In Q222, Viatris generated net sales of $4.1 billion, down 10% year-over-year. Brands accounted for $2.48 billion or ~60% of revenue, Complex Gx and biosimilars $355 million or ~9%, and generics accounted for $1.27 billion or 31%. Worryingly, revenue for the generics division was down 17% year over year, while brands were down 8%.
Generics is a section of Mylan’s derivative business, and I expected it to grow, but it’s shrinking, and nowhere more so than in emerging markets, a potentially fertile market for generics – sales fell by 42% per year – however over one year in this market.
With the decline in sales of generics and brand names, and the sale of biosimilars, it seems clear that Viatris currently has no growth prospects. It behaves almost like a store holding a closing sale.
Decreasing revenue from turnover does not necessarily make a business a bad business. It mostly comes down to profitability, and Viatris generated free cash flow of $719m in Q222 – an impressive 18% net margin. FCF on H122 is even better – $1.79 billion – up 41% year-over-year – for a >21% margin.
In the context of debt, however, Viatris has generated $4.3 billion in free cash flow over the past 6 quarters, enough to pay down about 17% of its debt. It will be 5 long years before Viatris can say it is close to eradicating the level of debt it inherited, so investors shouldn’t expect too much of increased dividends and extensive buyout programs. equities, especially when each passing year translates into a declining blue-chip contribution.
Currency headwinds forced management to cut its FY22 revenue forecast from $17 billion to $17.5 billion to $16.2 billion to $16.7 billion. Viatris does most of its business overseas – but I would be more concerned about whether Viatris is really a company with global ambitions. That was the dream that was sold to investors in the March 2021 Investor Day in-depth presentation – there was talk of creating a “new kind of pharma company”, but the company appears to have seen its wings drastically reduced since these hopeful days.
The interesting question to answer is when declining revenue becomes an issue for a company like Viatris. $16.5 billion in revenue and a 25% profit margin is arguably better than $20 billion in revenue and a 15% margin, but when does a lack of growth become a problem? With a float of more than 1.25 billion shares, investors are almost certain to feel the pinch at some point, and large profit margins may not appease them when net income declines each year.
On the Q222 earnings call, management made it clear that it was planning another sale of part of the business – it’s unclear what yet, but investors may need to be prepared for another. merger and acquisition agreement that will have a negative impact on the share price.
In the short term, the Viatris pipeline does not encourage the belief that the decline in sales of traditional brands can be offset by the emergence of new drugs. A generic of levothyroxine has recently been approved, with a total addressable market of approximately $4-5 billion, of which it will likely claim only a very minor share.
As we can see above, however, the next approval isn’t expected until 2024, for a multiple sclerosis generic, a version of Teva Pharmaceuticals Copaxone, which itself faces fierce competition. Sales > $500 million would probably be miraculous. Things appear to be looking up in 2025 and 2026, but investors should be aware of the dual threat of the time value of money and the high failure rates associated with the drug trial process, even in the case of generics.
In short, Viatris has a pipeline, but whether that’s enough to convince investors is debatable. He looks a little thin, and a better question may be whether he even earns the leadership of Viatris?
Conclusion: what exactly are investors buying?
Viatris seems like a company that prays for me a Benjamin Button existence. It markets and sells a host of once-great but now aging assets, such as Viagra, Lyrica and Lipitor, whose good days will never return, but whose relatively meager earnings can be used to pay off debts accumulated by Pfizer and Mylan. before the 2 companies orchestrated this merger.
At first, management seemed dedicated to establishing Viatris as a globally significant manufacturer and distributor of generic and biosimilar medicines, but perhaps that all proved too much. Growing a
There must be a climax when investors stop admiring management’s ability to repay debt, arrange stock buybacks and offer a dividend, and start wondering how they will get their money back when revenues decline year after year – there must come a day when there is not enough income for everyone.
It’s not necessarily management’s problem, but investors who expected to see an exciting new player in biosimilars emerge from the ashes of blockbusters of yesteryear may end up being disappointed and paid out.
Any company that wants to be successful in the long term must have a plan for growth, but it is difficult to discern precisely what this plan is in the case of Viatris.
Mylan’s management team was known for prioritizing their own salaries over running a successful business. I haven’t quit Viatris yet, but I’m wondering how bad things have to get before they start to get better? It could be a bumpy ride, but it would be better than a gradual slide.