Unveiling Viatris' Resilience

Large Caps 1 reply 0 votes 2072 views Tags:  debt reductionearnings reportnew product revenuepharmaceutical industrysales growthViatris

It's been an interesting journey tracking Viatris (NASDAQ: VTRS) since their recent earnings report on August 7th. This time around, the company showcased a promising turnaround, beating estimates on both top- and bottom-line figures. If I'm honest, I had initially my fair share of skepticism revolving around their debt situation, management approach, and the perceived value trap the stock seemed to be. However, despite the doubts, the stock has managed to deliver a 21% return to shareholders, dividends included, handily outperforming the S&P 500. While the year-to-date performance hasn't been spectacular, it's essential to consider the broader pharmaceutical industry's challenges. Nevertheless, the company's favorable aspects are on an upward trajectory, and all this while maintaining its position as the most affordable stock among its peers.

**Solid Second Quarter Performance**

In the latest quarter, Viatris, the company spun off from Pfizer (PFE), managed to surpass expectations on both revenue and earnings per share. The numbers speak for themselves: revenue hit $3.92 billion, surpassing estimates by a healthy $60 million, and earnings per share stood at $0.22, exceeding estimates by $0.02. The real standout here is the 1.5% growth in total net sales, once adjusted for the divestitures and factoring in constant FX rates. This quarter marked the first instance of operational sales growth since the spin-off, offering hope for the stabilization of their business. Sales growth was notably evident in developed markets, emerging markets, and greater China, though the JANZ (Japan, Australia, New Zealand) area experienced a dip.

**Looking Ahead to New Product Revenue**

Diving deeper, Viatris isn't simply relying on divestitures to maintain sales. The company's focus on restructuring needs to be supplemented with new product offerings. They've got three segments in the pipeline that could potentially hit $1 billion in peak annual sales by 2027-2028, accounting for a significant 75% of new product sales relative to the current numbers. These segments include complex injectables and sterile products, select novel and complex products, and an eye care portfolio. The momentum is real: two eye care products have secured necessary approvals, and four more products are in the pipeline. This translates to a projected $500 million of new product revenue in 2023.

**Tackling Debt and Future Outlook**

The company's strategy to trim debt levels and reduce the gross leverage ratio has been evident over the last few quarters. It's worth noting that the gross leverage ratio can be a bit tricky when divestitures and EBITDA loss come into play. The real game-changer will be when the new products start contributing profits to counter the EBITDA erosion.

The debt repayment plan is critical, especially keeping a close eye on long-term liabilities. In 2023, the repayment of $1.3 billion on senior notes is on track. It's a continuous effort, and upcoming years will require sustained debt repayments, impacting the amount available for shareholder returns. However, focusing on debt reduction is paramount to decrease interest payments. The toughest phase, the 2026 debt repayment, is on the horizon.

**A Focus on Shareholder Returns and Valuation**

Viatris' management has their eyes set on free cash flow, intending to allocate roughly 50% of it annually to shareholders via dividends and share repurchases. This amounts to approximately $1.25 billion, potentially leading to a dividend increase or significant share buybacks. Yet, a prudent approach would be to balance this allocation with debt repayments to avoid credit rating risks.

In terms of valuation, Viatris is trading at quite attractive prices, a result of the spin-off, debt load, and historical management perceptions. The price-to-earnings ratio stands at 7.2x, and forward PE at 3.7x, while price-to-free cash flow hovers around 6.6x and price-to-book value at 0.64x. These metrics highlight the stock's affordability.

Comparing Viatris with industry peers based on EV-to-EBITDA and EV-to-free cash flow, it's evident that the company is holding its own, with some peers trailing behind.

**Final Thoughts and Recommendation**

As I see it, Viatris is at a turning point. Signs of stabilization after strategic changes are becoming visible. The entry of new product revenue is gradually counteracting business erosion. The new CEO, Scott A. Smith, brings a fresh perspective, potentially boosting investor confidence. Debt reduction is on track, and the stock offers promising returns through dividends and buybacks.

Certainly, there are lingering risks tied to further business erosion and the debt burden, but these seem to be gradually improving and mostly priced in. All in all, I'd rate Viatris a 'BUY' at $11 per share, with a comfortable margin of safety, making it an appealing prospect for both value appreciation and dividend income. However, it's my hope that debt reduction remains the company's foremost priority.

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