TEVA - Viatris Emerges As Challenger In Lucrative Anti-Obesity Drugs Market

2023-08-18 13:09:45 ET

Summary

• On August 7, Viatris released its financial results for the 2nd quarter of 2023, which, after a long time, finally managed to beat analysts' expectations.
• Viatris' revenue for the second quarter of 2023 was $3.92 billion, up 5.1% from the previous quarter but down 4.9% from the second quarter of 2022.
• Viatris' R&D spending was $207.9 million in Q2 2023, up 28.3% year-over-year due to increased investment in developing product candidates such as MR-148 and MR-141.
• On a larger scale, several of the company's experimental medicines are under regulatory review, including generic versions of Ozempic and Wegovy.
• We continue our analytics coverage of Viatris by upgrading to Outperform from Hold for the next 12 months.

On August 7 , Viatris ( VTRS ) released its financial results for the 2nd quarter of 2023, which, after a long time, finally managed to beat analysts' expectations. This success is primarily due to the growth in sales of generic versions of medicines compared to the previous year. Moreover, I believe the results for the second quarter of 2023 demonstrated to financial market participants CEO Scott Smith's ability to implement innovative business strategies to maintain Viatris' competitiveness despite increased competition from Chinese and Indian pharmaceutical companies. On the other hand, sales of former mega-blockbusters such as Lipitor, Norvasc, and Lyrica continue to decline due to the introduction of new-generation medicines on the market, ultimately negatively affecting the company's margins.

Viatris' revenue was about $3.92 billion, exceeding our expectations by $30 million. In comparison, the second-quarter Non-GAAP EPS stood at $0.75 , which exceeded our earlier prediction by $0.03. This was mainly due to higher sales of branded medicines in emerging markets and the launch of new products, including the generic version of Bristol Myers Squibb's Revlimid ( BMY ). As a result, Mr. Market favorably assessed Viatris' financial report, which was reflected in the increase in its share price by 8.5% over the past two weeks.

We continue our analytics coverage of Viatris by upgrading to Outperform from Hold for the next 12 months.

Viatris' Q2 2023 financial results and outlook for the 2H 2023

Viatris' revenue for the second quarter of 2023 was $3.92 billion, up 5.1% from the previous quarter but down 4.9% from the second quarter of 2022.

The company's QoQ revenue growth was driven primarily by higher sales of generic drugs and a stabilization in demand for its branded drugs. Thus, sales of generic versions of medicines in the Developed Markets amounted to $920.9 million in Q2 2023, an increase of 13.9% QoQ due to the commercialization of new products. On the other hand, the Japanese government's reduced drug prices negatively impacted the growth rate of the JANZ segment's revenue.

Cumulative sales of Viatris' dozens of branded drugs totaled about $2.45 billion in the three months ended June 30, 2023, continuing growth from Q4 2022 despite the introduction of more effective medicines developed by Merck ( MRK ), AbbVie ( ABBV ), and Johnson & Johnson ( JNJ ).

At the same time, Viatris' gross margin was 43.93% for the second quarter of 2023, increasing quarter-on-quarter due to lower prices for raw materials used to manufacture medicines and increased sales of Xanax and Dymista. At the same time, this financial indicator remains lower than that of the healthcare sector and that of major competitors such as Teva Pharmaceutical ( TEVA ) and Dr. Reddy's Laboratories ( RDY ).

With Scott Smith taking over as CEO on April 1, 2023 , we are seeing positive changes in many parts of the company's business, and he will have to do a tremendous job of fixing the situation and getting Viatris back on the growth path. On the earnings call , he made it clear to Wall Street that he has complete confidence in the company's prospects and intends to make every effort to realize Viatris' potential.

While I'm proud of our strong performance, the foundation the company has built and the stability and predictability that we believe have clearly been achieved. My focus is on the future and on the trajectory of the company moving forward.

We forecast that Viatris' gross margin will reach 44.5% by 2023 and continue to improve to 46.5% by 2024, driven by lower inflation and an expanding portfolio of approved drugs.

One of the key factors that will help accelerate the pace of the company's revenue growth is the intensification of its R&D policy in recent quarters. Although Viatris continues to be one of the leading players in the global generic drugs market, it is beginning to develop next-generation medicines to fight eye diseases that affect tens of millions of people worldwide.

Viatris' R&D spending was $207.9 million in Q2 2023, up 28.3% year-over-year due to increased investment in developing product candidates such as MR-148 and MR-141.

On a larger scale, several of the company's experimental drugs are under regulatory review. Among them are also generic versions of Novo Nordisk's (NVO) blockbusters, such as Ozempic and Wegovy.

At the Q2 2023 earnings call, President Rajiv Malik, answering questions from analysts, expressed confidence in the possibility of launching these medicines in the coming years.

To your point, question about complex injectables, every program and it's not that every product is going to come in 2027, in fact, we should be looking into launching these products. Later if we are optimistic later this year or early next year. And then from there onwards, I think every year you're going to see two to three key products getting launched.

However, that's, I would say 2024, 2025, and 2026, leading to 2027 and 2028, a $1 billion franchise, we said. We have about eight first-to-file first-to-market opportunities, which we have already secured, we are about 37 products in this pipeline and we are adding more.

Sales of Ozempic (semaglutide), a medicine for treating adults with type 2 diabetes, were around DKK 22.1 billion in Q2 2023, up 54% year-on-year. Moreover, sales of Wegovy show more impressive dynamics due to high efficiency in weight loss and active interest from patients and doctors.

At the end of January 2023 , Novo Nordisk filed a lawsuit against Viatris to prevent generic Wegovy from being launched on the US market, alleging that it infringes on several patents. We anticipate that as the legal battle between the two companies unfolds, there will be a heightened focus on Viatris since it may become the first manufacturer of a generic version of Novo Nordisk's anti-obesity drug.

Furthermore, Viatris' product portfolio contains a generic version of Victoza (liraglutide), which may start selling after June 2024 under the terms of a settlement agreement concluded in 2021 . Victoza is a GLP-1 receptor agonist for treating type 2 diabetes with sales of DKK 1.84 billion in the three months ended 30 June 2023.

According to Seeking Alpha , Viatris' revenue for Q3 2023 is expected to be $3.98-$4.06 billion, up 4.1% from analysts' expectations for Q2 2023. At the same time, following our model, Viatris' total revenue will be slightly below the median value of this range and will amount to $4 billion. When forecasting the company's revenue, we considered the negative dynamics from sales of Lipitor, Zoloft, and Lyrica, which persist due to increased competition.

Viatris' earnings per share for the second quarter of 2023 was $0.75, down 14.8% from the previous year. Despite the year-on-year decline in the financial measure, it beat analysts' consensus estimates in nine of the last ten quarters. This is one sign of Wall Street's conservative assessment of the company's drug and product candidates.

According to Seeking Alpha , Viatris' Q3 EPS is expected to be $0.67-$0.79, up 4.2% from the consensus estimate for Q2 2023. While we believe this is slightly underestimated, our model puts Viatris' EPS at $0.77.

The company's Non-GAAP P/E [TTM] is 3.69x, 80.07% less than the sector average. On the other hand, the Non-GAAP P/E [FWD] is 3.84x, which is one of the factors indicating that Viatris is significantly undervalued in the current period of the start of a new wave of COVID-19 and the spread of other viral respiratory diseases.

Conclusion

On August 7, Viatris released its financial results for the 2nd quarter of 2023, which not only managed to beat analysts' expectations but showed that only three months after Scott Smith took over as CEO, positive changes are taking place in many parts of the company.

Despite declining demand for former mega-blockbusters like Lipitor, Norvasc, and Lyrica, Viatris' management has left its guidelines unchanged for 2023. The company's total revenue is expected to be $15.5-$16 billion, and adjusted EBITDA will be $5-$5.4 billion.

On a larger scale, several of the company's experimental drugs are under regulatory review. Among them are also generic versions of Novo Nordisk's blockbusters, such as Ozempic and Wegovy. Legal battles are currently occurring between Viatris and Novo Nordisk, which is trying to block the launch of a generic version of Wegovy on the market, claiming that it violates several patents.

We believe that as this case progresses between the two companies, it will increase interest in Viatris, which could become the first manufacturer of a generic version of this weight-loss medication. It should be noted that sales of Wegovy for the second quarter of 2023 increased by more than 530% compared to the previous year.

In addition to improving sales of generics and stabilizing demand for some of Viatris' branded medicines, there has been an acceleration in Tyrvaya sales. We estimate that this drug, approved for treating signs and symptoms of dry eye disease, will be one of the company's key cash flow sources from 2026.

Thanks to the continuation of the trend to improve the company's margins, the expansion of the portfolio of experimental drugs, and the completion of the share price correction, we are upgrading our previous rating from Hold to Outperform for the next 12 months.

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