Viatris: Where Is The Cure? (NASDAQ:VTRS)

Shares of Viatris (NASDAQ:VTRS) have seen tough times for quite a while. My last take on the business goes back to the summer 2019 when Mylan and Pfizer (PFE) were merging their off-patented business, in what I called a tie-up between two challenged businesses.

A Quick Recap

In the summer of 2019, Mylan announced its intention to merge with Upjohn, the off-patented brand and generic business of Pfizer. Shares of Mylan jumped 10% on the announcement of the deal.

The combination was set to create a business which would generate $19-$20 billion in sales in 2020 with adjusted EBITDA seen between $7.5 and $8.0 billion, with synergies seen at a billion by 2023. With Pfizer allocating some debt to Upjohn ahead of deal closing, a pro forma net debt load of $24 billion looked quite steep.

The announcement made that the pro forma share count was seen at 1.20 billion shares, as shares of Mylan rose to the $21 mark on the back of the deal announcement, supporting a pro forma enterprise valuation of around $46 billion.

At the time, Viatris was still called NewCo when I concluded to proceed with caution. The valuation looks fairly cheap at roughly 6 times EBITDA, yet these numbers were quite distorted, leverage was high and growth was not really seen.

Downhill

Since looking at the perspective for Viatris in the summer of 2019, it has been all gradually downhill from here. Shares have mostly traded around the $15 range, fell to a low of $8 and change in October of last year, now exchanging hands at $11.50 per share. This means that investors who bought the merger announcement have seen poor returns in the three and half year which followed.

In February 2022, Viatris posted its 2021 results, a dreadful announcement with shares falling from $15 to $10 overnight on the back of the new announcement. The company posted full year sales at $17.8 billion and reported $6.4 billion in adjusted EBITDA, both metrics coming in way short compared to the pro forma results announced at the time of the deal announcement. The only promising news is that pro forma net debt of $20.9 billion has come down a bit, yet leverage ratios still came in far above 3 times, in fact at 3.3 times.

The company guided for stable results in 2022 with sales seen at a midpoint of $17.25 billion and EBITDA at $6.0 billion, actually marking small declines in the financial performance. The company furthermore announced the sale of its Biosimilars business in a $3.33 billion deal, a transaction which means that $200 million in EBITDA will leave the door. Viatris was set to obtain $2 billion in cash, a billion dollar investment in the buyer of the operations called Biocon Biologics, and some additional payments due in 2024.

First quarter sales fell to $4.19 billion, with net debt inching down a bit to $20.6 billion, as the company reiterated its full year guidance. Second quarter sales came in at $4.12 billion, as net debt fell further to $19.3 billion. In November, third quarter sales fell a bit further to $4.08 billion, despite an inflationary environment, with net debt down further to $18.8 billion, reducing leverage ratios closer to 3 times.

In November, the company finally closed on the deal to sell its Biosimilar activities, a deal to bolster cash by $2 billion immediately, reducing pro forma net debt to $16.8 billion (or $15.8 billion if we factor in the equity investment in Biocon). Pro forma EBITDA would fall to $5.8 billion, reducing leverage to 2.7-2.9 times, depending if the company would monetize its stake in Biocon.

Around the same time the company announced two deals, acquiring Oyster Point Pharma and Famy Life Sciences for a combined $700-$750 million cash component, expecting some long term growth from these acquired activities, and at least stabilization or mild growth for the entire business in the coming years.

Where Do We Stand Now?

With shares down to $11.50 per share, the equity value of the firm has fallen to $14 billion, and with pro forma net debt down to roughly $16 billion, the enterprise valuation comes in close to $30 billion.

This is a roughly a one third reduction in the value of the firm since the deal announcement. In the meantime, the business has seen some declines in the size of the operations with pro forma sales of $20 billion having fallen to levels closer around the $16 billion mark.

The company currently posts GAAP earning to the tune of around $1.20 per share, resulting in a low multiple of around 10 times earnings, as the company still guides for adjusted earnings of more than $4 billion, with most of the difference coming from amortization charges. Based on the latter metric, earnings multiples come in at just low single digit multiples.

The reality is that the performance of the business since the merger has been really soft and outright disappointing with sales and margins under pressure, but fortunately some deleveraging has been delivered upon as well. In this sense it is surprising and frankly disappointing to see the company announcing two substantial acquisitions in the meantime as well.

While there are few immediate green shoots, there is a $0.48 per share annual dividend which becomes safer and higher yielding here, while a reversal of dollar strength might provide some tailwinds to the business, at least halt the biggest revenue declines.

Stabilization of sales and lower leverage ratios are needed to let a very low (adjusted) net earnings multiple expand, as the multiple indeed is very low, yet some higher investments are needed to halt the revenue declines going further.

Amidst all this, Viatris looks probably fair to cheap, but I miss the trigger to buy shares here, or at least I fail to have conviction to buy them in size.