Could This Stock Be The Next Viagra For Your Portfolio? | Viatris Analysis

What is Viatris?

Viatris $VTRS is an American global healthcare company. It was formed through the merger of Mylan and Upjohn and got spun off from Pfizer. Viatris stands for “Three paths” in Latin, together with the logo it captures the company’s commitment for: healthcare access, leadership and partnership.

Spinoff

First thing to notice is that spinoffs tend to beat the market. A study revealed that spinoff shares achieved an excess return of more than 10% per year above the US stock market return over 36 years. A spin off is a dividend distribution in terms of shares of the new company to shareholders of the parent company.

One of the primary reasons for undervaluation of spin offs is because shareholders of the parent company are not interested and sell the shares of the new company immediately. Some institutional investors are also obligated to sell shares of the new company. Since they might have a large cap fund, they can’t hold mid cap or small cap stocks and need to sell out as soon as possible.

So since the spin off, we can see a clear sell off. Viatris went down 35% from all time high and still needs to recover more than 20% to reach all time high again. By only knowing this so far, the company looks interesting for sure. Of course not all spin off’s outperform the market. But if we can find the right one, we can profit a lot in the long term.

Q3

Last quarter Viatris had another great performance and raising full year 2021 guidance again after a raise in last quarter. Next to this Viatris is trying to pay down debt as soon as possible. Year to date Viatris repaid 1.9 billion dollars in debt. While remaining on track to repay 6.5 billion by 2023.

Viatris has 3 different segments of sales. Brand medicines, Complex generics and Biosimilars and lastly generics. Brand medicines are the medicines the company made itself. This includes the research and development of the medicine. That’s why they are more expensive. Generic medicines are created when patents of the original drug expires. This allows other companies to copy the ingredients of the original drug. Drug patents are granted for 20 years. Biosimilars are much harder to create and differ in structure of the generic medicines. Biosimilars are also more protected from competition because of the difficulty in development.

For the sales in 2021 compared to 2020 we see a small decrease. This was mainly due to competition in the generics space. Biosimilars had a 14% growth in sales. But the company is on track for 690 million dollars from new product launches in 2021 so this is pretty solid. If they can keep the pipeline strong they might be able to grow their sales in the next quarters and years to follow.

When looking at the financial highlights you need to be careful comparing 2021 with 2020. The numbers in 2020 were only the ones of Mylan. What I find interesting are the high gross margins. We want to keep an eye on these as we go into the next quarters. The higher the gross margins the more money Viatris makes for each sale.

What makes Viatris so attractive are the free cash flows. Year to date Viatris has made 2,2 billion dollars in free cash flows. The company is worth 18 billion dollars in market cap. This means the company is only trading at around 8 times free cash flows, which is pretty low. With free cash flow the company can pay back debt and pay out dividends. So this is very good news.

When we take a look at the balance sheet, we can see that Viatris has 750 million in cash and 4 billion in accounts receivable. With total assets of 56 billion dollars. Next to the assets, Viatris has 20 billion dollar in long term debt. This is quite a lot but since December 2020, they already paid off more than 2 billion dollars. Current portion of long term debt is 1,9 billion dollar, so they have enough money to pay off current liabilities. Overall not a super balance sheet and they will have to pay down more debt. Given the good cash flows this should not be a big concern. Most healthcare companies have a lot of debt, so it is not really unusual either.

Dividend Increase

On January 6, Viatris announced a dividend increase of 9%. The company is pleased with their strong underlying business performance and operational momentum. They remain committed to returning capital to shareholders. Obviously this is very exciting news for investors!

Valuation

Let’s now compare the valuations of this spin off compared to the health care sector. Viatris has a p/e NON GAAP of 4.36 compared to the sector median of 21. A p/e of 4 is very low so we can definitely see there is some mispricing here. But be a little bit careful with Non GAAP measures cause these do not follow standards and formats in accounting. I guess that there is not yet enough information for the GAAP measures since the recent spin off.

Other measures like price to sales, price to book and price to cash flow also look way undervalued compared to the median sector.

Conclusion

In my opinion Viatris might be a good stock to pick up, given the current valuation, the outperformance of spinoff’s and the fact that the healthcare sector most of the times performs decent in an inflationary environment.

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DISCLAIMER: I am not a financial advisor. Investing is your own responsibilty. I am not accountable for any of your losses.

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Another great analysis, thank you so much for sharing your knowledge :pray:t4:

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Good read, I’ve built a full position in both Viatris and Organon, both are in a similar boat at the moment as spin-offs being oversold due to sentiment and funds dumping shares.

They generate a ton of money and will have no real issues paying off debt, but they still have to be classified as risky due to their debt load.

Plan to hold this for 3-4 years minimum (currently already up 12% on VTRS and 5% on OGN) until it’s paid off a large chunk of the debt and the metrics have normalised.
That being said, by that time my yield-on-cost might be so good that I’ll keep it indefinitely.

Bought this as a dividend growth investment as I saw a lot of potential.

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That’s a really great analysis @Frisoke
Thank you for sharing your review on the bux community forum :muscle:t3:

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@BenedettaBUX Did you know he has a youtube channel with this kind of stuff

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I have found out yesterday reading the review and I think is really cool!! Since today I have to take the flight for coming back to NL I think I will download some of his videos to watch during my flight :wink:

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Awesome! :star_struck: Thanks you very much!

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Nice analyse. What do you think about their high debt. And the decrease in equity in 2021. The company looks great only those points concern me a bit but their was already some nice debt decrease.

What do you think of generic meds? Novartis is looking to sell that business (sandoz) because it is low margin business.

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The decrease in equity is mainly because they are lowering debt and the loss of some intangible assets. An intangible asset is an asset that lacks physical substance. An example is a patent of a drug. So for sure need to keep an eye on that. On a side note Viatris has a lot of new drugs in the pipeline, once these get approved the assest class will grow again.

Generic drugs are pretty good, since it takes away the long time to develop and research the drug. But I would favor more complex generics or biosimilars since it has less competition and as a result higher margins.

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https://www.bloomberg.com/news/articles/2022-02-27/biocon-to-buy-viatris-biosimilars-assets-for-up-to-3-335b#:~:text=Biocon%20Biologics%20said%20it%20will,company%20said%20in%20the%20statement

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Also, earnings today before the market opens :slight_smile:

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I must say the dip Today, even though it is expected, provides a very nice entry point for building a position.

I’ve added a bit to mine because Viatris is a multi-year play for me, not a “next quarter” one like it seems it is for investors selling Today.

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Yes, seems like an opportunity. Still not sure why they sold the biosimilars segment though. Need to read the earnings report tonight.

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I genuinely am curious what those short play investors are thinking…. Ofcourse when you start you make some errors ofcourse… but some people never learn apparently but on the other hand some nice chances for us ofcourse

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Well, even though it was making them quite a bit of cash, it was a declining cash flow, so I guess management saw an opportunity to apply the proceeds to a better cause.

As far as I understood they are not selling the complex generics, just the “standard” ones. They are also getting a ~13% stake in the company they are selling the generics to (so I imagine also getting money from that over time) AND they will use 1B of the proceeds to buy back stock, which would be good at these depressed prices.

Will also have to read up a bit further.

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Very interesting analyse from both of you @JPeters and @Frisoke very interesting POV’s

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