VTRS - Viatris: Currently Appealing Only To Income-Focused Investors

2023-07-18 10:47:52 ET

Summary

• Viatris is a global healthcare company focused on improving access to high-quality healthcare worldwide.
• Q1 2023 earnings showed a 2% decrease in net sales, with notable performers and exceeded expectations in generics.
• Viatris stock presents mixed indicators, with a potentially undervalued valuation, but concerns over growth and high total debt. Recommendation: "Hold."

Introduction

Viatris (VTRS), a global healthcare company established in November 2020, aims to empower individuals to live healthier lives irrespective of their geography or circumstances. As part of its mission, the company seeks to enhance patients' access to high-quality healthcare. With approximately 37,000 employees and over 40 manufacturing sites globally, Viatris is geared to provide a portfolio of over 1,400 approved molecules in key therapeutic areas to patients in more than 165 countries. It has a substantial presence with centers in the U.S., China, and India. Viatris was created from the merger of Upjohn, Mylan, and Pfizer businesses, with Mylan being the accounting acquirer.

Recent developments: Barclays downgraded Viatris from Equal Weight to Underweight due to uncertainty on its future strategy and upcoming divestments, with analyst Balaji Prasad maintaining an $11 price target.

The following article provides a broad and brief overview of Viatris' prospects.

Q1 2023 Earnings

In Q1 2023, Viatris reported total net sales of $3.7 billion, a 2% decrease on an adjusted basis compared to Q1 2022. Notable performers included brands such as Dymista, Celebrex, and Norvasc, while complex generics underperformed. Generics exceeded expectations, contributing to around $85 million in new product revenues. Viatris achieved a free cash flow of $923 million, allowing it to repay $546 million in debt. The company reaffirmed its 2023 financial guidance, expecting total revenues between $15.5 billion to $16.0 billion, adjusted EBITDA of $5.0 to $5.4 billion, and free cash flow of $2.3 to $2.7 billion.

VTRS Stock Assessment

Per Seeking Alpha data, Viatris stock presents a mixed bag of indicators. The company's projected earnings per share [EPS] for 2023 is $2.95, a 12.02% YoY decrease, with further slight decreases expected until 2025. However, future estimates show a modest growth of 5.22% in EPS by 2025.

The company's valuation metrics are relatively strong with a forward Price/Earnings (P/E) ratio of 3.45 and an Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) ratio of 5.72, indicating a potentially undervalued stock.

Growth metrics are a concern, with revenue showing a decrease of 10.47% YoY, although there is an impressive Compound Annual Growth Rate [CAGR] of 10.77% over three years for the revenue. Profitability looks positive with a Gross Profit Margin of 43%, and a Return on Equity of 9.2%.

Momentum is somewhat neutral with a 3-month increase of 2.94% but a 6-month decrease of 11.96%. Over one year, the stock's performance is slightly positive at 3.15%, underperforming compared to the S&P 500.

The capital structure reveals a high total debt of $19.03B compared to its market cap of $12.18B, which could be a risk factor. The company's dividend yield is strong at 4.72% with an annual payout of $0.48, suggesting it might be a good choice for income-oriented investors.

Earnings Call Review

Viatris has made notable advancements in its drug pipeline. The company has secured the advantageous position of being the first to file for the weight loss treatment Wegovy and for the 8-milligram strength of Ozempic, a drug used to improve blood sugar in adults with type 2 diabetes. Being "first-to-file" means that Viatris has submitted an Abbreviated New Drug Application (ANDA) to the FDA, potentially being the first generic version to hit the market and enjoying a 180-day period of marketing exclusivity, providing a competitive edge. The company also shares a first-to-file position for other strengths of Ozempic.

In addition, Viatris has submitted a New Drug Application (NDA) for Abraxane, used in breast cancer treatment, and advanced its anticoagulant product, MR-151, into clinical development. An ANDA for the chronic dry eye disease treatment, MR-204, has also been filed.

Their pipeline for novel and complex products is also progressing, with an NDA filed for a once-monthly treatment of Glatiramer Acetate, a drug used for multiple sclerosis.

In the case of Meloxicam, an NSAID used to relieve pain, they've completed a successful end-of-Phase II meeting with the FDA, with Phase III clinical trials scheduled for the latter half of this year. Moreover, IND-enabling studies for a Botox program are on track.

Progress is also noted in the Eye Care pipeline, with positive top-line results received for Tyrvaya in China and IND submission and readiness for Phase III for MR-148 for Dry Eye Disease. The company is also initiating a Phase III study for a Blepharitis program and conducting an IND-enabling study for Neurotrophic Keratitis treatment, MR-146.

My Analysis & Recommendation

In my assessment, Viatris embodies a paradox of potentials and pitfalls. On the positive side, its global footprint, robust product portfolio, and strong commitment to improving healthcare access are commendable. The company's efforts in its drug pipeline are noteworthy, securing advantageous first-to-file positions, advancing its complex products, and making significant progress in its Eye Care pipeline. Furthermore, its impressive debt repayment and strong dividend yield, coupled with seemingly undervalued stock, can make it an attractive option for value and income-oriented investors.

However, the downside cannot be ignored. A projected decrease in EPS for 2023 and uncertainties around its future strategies, as noted by Barclays' downgrade, are concerning. While the company did manage to exceed expectations in generics, it underperformed in complex generics, and a 2% YoY decrease in Q1 2023 net sales is worrisome. The high total debt compared to its market cap also flags potential risk.

Viatris has shown mixed growth prospects. While there's a decrease in revenue YoY, the three-year CAGR for revenue is promising. Its profitability looks positive, but momentum remains somewhat neutral, underperforming the S&P 500.

Taking these factors into account, my recommendation for Viatris would be a "Hold." The company is making strides in several areas, but the existing uncertainties and mixed growth projections call for a cautious approach. As the company navigates through its future strategies and pipeline developments, it may be prudent to watch its progress closely before making further investment decisions.

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