Summary
- Viatris recently closed out 2022 having largely met management's prior guidance.
- It's aggressively paying down debt and recent acquisitions may drive meaningful growth down the road.
- It pays a healthy and well-covered starting yield, and share buybacks combined with a low valuation are highly accretive to shareholders.
In life, it's good to have high expectations for yourself, because even if you don't hit your high mark, at least you'll have achieved something in between or close to it.
The same, however, may not necessarily be a good strategy for stocks, as the market "rewards" high expectations for a company with a high share price.
We all know what happens when those expectations are not met, with shareholders who bought at higher prices holding the bag with underwater assets, as in the case with many overhyped speculative tech stocks, SPACS, and crypto currencies in the most recent bubble.
That's why a better strategy may be to have a realistic expectation, and in some cases, low expectations on a stock, so that the underlying company doesn’t have to produce mouth-watering results in order to deliver decent returns.
This brings me to Viatris ( VTRS ), which continues to trade cheaply despite coming off its 52-week lows in early October. Let’s explore why VTRS may be a good value pick at present for a total return portfolio.
Why VTRS?
Viatris was formed after the merger between Pfizer's ( PFE ) Upjohn business and Mylan. Its pharmaceutical portfolio includes off-patent drugs from Pfizer, including Viagra, Lyrica, Lipitor and Norvasc, along with Mylan's global portfolio of over 7,500 marketed products. This includes EpiPen, the commonly-used epinephrine auto injector, and antiretroviral therapies, on which 40% of people living with HIV/AIDS depend worldwide.
Importantly, VTRS’s portfolio of drugs generate healthy profitability. While VTRS doesn’t realize high gross margins due to lack of truly blockbuster drugs with premium pricing power, its “big pharma” roots give it efficient scale with strong EBITDA and Net Income margins that sit well ahead of the sector median, as shown below.
Notably, VTRS recently reported full year 2022 results that were in line with management guidance ranges, with revenue landing at $16.3 billion, adjusted EBITDA at $5.8 billion, and free cash flow of $2.5 billion.
Also encouraging, VTRS has paid down a significant $5.4 billion worth of debt since 2021, including $3.3 billion in debt paydown last year alone. This helps to bring the net debt to TTM EBITDA ratio down to 3.3x, and over time, I see potential for the leverage ratio to get down to below 3.0x, a level that’s generally considered to be safe by ratings agencies. For reference, VTRS already carries a BBB- investment grade credit rating.
Looking forward, VTRS could see meaningful growth from recent acquisitions to bolster its biologics segment and enter the eye care segments. Management expects these segments to hit the $1 billion mark in sales over the next several years, as noted during the recent conference call :
In November, we completed our transaction with Biocon Biologics to create what we expect to be a unique, fully integrated global biosimilars leader. And as we provide transitional services to Biocon, we're deeply committed to doing our power to help Biocon Biologics succeed.
In January, we completed the acquisitions of Oyster Point Pharma and Famy Life Sciences to establish our new Viatris Eye Care division. And as we said, we anticipate the combined assets of these acquisitions to add to the top line immediately and growing strong double-digits from there, reaching at least $1 billion in sales by 2028.
Meanwhile, VTRS currently yields a respectable 4.2% and the dividend is well-covered by a low 14% payout ratio. Management is also actively returning capital to shareholders through buybacks, having executed $250 million of the $1 billion share repurchase authorization in the first two months of this year alone.
Management expects to generate at least $2.3 billion in free cash flow this year, and plans to return 50% of that to shareholders in the form of dividends and share buybacks.
Buybacks at the current price of $11.40 with a forward PE of just 3.8x should be highly accretive to shareholders. While analysts expect for EPS to decline by 12% this year, that’s already baked into the aforementioned forward PE. From 2024 to 2026, analysts expect for VTRS to deliver between 1.7% to 6.5% annual EPS growth.
While that may not sound too impressive, EPS growth doesn’t have to be high, considering the very low expectations that the market has assigned VTRS with its low PE valuation. Analysts have an average price target of $13.37, which equates to a potential 21% total return over the next 12 months.
Investor Takeaway
VTRS’s wide-ranging portfolio of branded product offerings is an overlooked strength that helps to generate healthy profitability and strong cash flows despite a lack of blockbuster drugs with premium pricing power.
With solid debt paydown, aggressive capital return initiatives, and new acquisitions in biosimilars and eyecare, VTRS could generate solid returns for patient long-term investors from current levels, all while paying out a healthy starting dividend yield.
For further details see:
Viatris: Too Cheap To Ignore