Viatris: A Spinoff To Own

Summary

• Viatris is down 40% since the spin-off. Financial metrics are positively increasing as one-time costs of the merger are decreasing.
• Safe and high dividend yield combined with exceptional free cash flow yield offer a great margin of safety.
• The restructuring of the company offers a potential buyback program and more concentrated investments.

Maxiphoto

Viatris (NASDAQ:VTRS) started trading publicly via a spinoff-merger. Ever since, the stock has been underperforming due to selling pressure. While the herd is running away, opportunities arise for value investors. In addition, the stock is tremendously undervalued compared to peers. Investors that invest with a margin of safety should consider Viatris as it offers an attractive dividend yield of 4.8%. More so, the firm is considering a buyback program after the biosimilars asset sale. Free cash flow remains strong to support shareholder returns and reinvestments.

Spinoff - Merger

In November 2020, Viatris was formed through a merger of Mylan and Upjohn (a division of Pfizer (PFE)). Although Pfizer shareholders received shares of Viatris, a lot of them sold their shares as soon as they got them. As an example, institutional investors of large cap funds sold shares of Viatris, as they were obligated to sell their shares since Viatris is a mid cap stock. Consequently, the selling pressure started hammering down the stock once Viatris started trading on the Nasdaq. The stock is now down 40% from November 2020 as investors are still clueless about what to do.

Viatris stock performance (Seeking Alpha)

Value investors love to do the opposite of the herd. Therefore, Viatris might be a great example as there are many things to like. Chris Davis, a known value investor, has been growing his Viatris position towards a 3-3.5% weighting in the Davis New York Venture Fund. The fund has been slightly outperforming the S&P 500 in the last 40 years with a 12.16% annual return.

Strong free cash flow permits high dividend yield

In Q1 2022, Viatris reported $1.07 billion of free cash flow. This was primarily driven by strong operating activities and the timing of capital expenditures. For the full year 2022, the company expects free cash flow to be between $2.5-$2.9 billion. On the other hand, the dividend payment is estimated to be around $580.4 million for the year (excluding a possible dividend increase).

This results into a 23% payout ratio of free cash flow for the bear case, giving the firm plenty of room to payback debt and reinvest into the business. Accordingly, the 4.8% dividend yield is relatively safe and already gives investors a great return on their investment.

FCF estimates 2022 (Earnings Report Q1)

Attractive valuation compared to peers

In the graphs below, I have compared competitors and peers of Viatris in terms of EV to EBITDA and free cash flow yield. EV to EBITDA gives us a general insight of how healthy a stock is. The companies that stand out the most are Viatris and Novartis (NVS), as both trade well below the industry average.

Data by YCharts

Since EV to EBITDA does not include capital expenditures it is important to bring free cash flow to the table. Capital expenditures can bite in the total free cash flow of a company and can decrease the potential funds for R&D or acquisitions. Viatris has by far the most attractive free cash flow yield and it is not even close. In consequence, the firm has much more room to reinvest in the business, pay down debt, pay out dividends and do share buybacks.

Data by YCharts

Restructuring opens up enormous buyback potential

In the beginning of 2022, Viatris announced a sale of their biosimilars portfolio to Biocon Biologics. The sale grants Viatris $2 billion in upfront cash, $1 billion of convertible preferred equity representing a stake of at least 12.9% in Biocon Biologics and up to $335 million of additional payments. Although the assets were sold at 16,5 times EBITDA, investors took the news extremely negative as this could potentially destroy the growth for the company.

But let's not forget this company had a recent merger. Therefore, the most important factor must be synergy between the two companies, which can only be created when there is a convergent focus. Additionally, it frees up R&D, capital for reinvestments and share repurchases.

There are four criteria's Viatris is currently focusing on, as the CEO Rajiv Malik mentioned at the Goldman Sachs 43rd annual global healthcare conference:

Can we unlock a trap value? Can we free up the capital? Can we simplify the Company? And do we have assets which are perhaps better in the hands of another focus player than one of the assets in our hand?

To offset the decrease in growth by the biosimilar sale, the firm is also looking towards a gradual and diligent increase in R&D investments.

Further, buybacks are very likely as the CFO Sanjeev Narula mentioned at the conference:

The proceeds that we will get $4 billion net of tax and net of that pay down from these divested assets will provide us enough fire power for share buyback, additional BD -- develop BD and investing organically in the Company.

A $1 billion share buyback plan would create 8.5% shareholder value. Combine this with the dividend yield of almost 5% and the risk reward balance looks very favorable in these uncertain times.

Risks

The two risks that are important to keep an eye on are the high level of debt and a possible decrease in free cash flow.

Being leveraged can amplify returns on investments and increase buying power, but too much leverage can create risky environments. Currently, Viatris is highly leveraged compared to their free cash flow, nonetheless the firm is proactively decreasing debt. For 2022, Viatris is on track to pay down $2 billion of debt.

Data by YCharts

A decrease in free cash flow could sink Viatris's stock deeper down. Even so, one time costs from the merger are coming down, SG&A expense are decreasing and synergies between the two companies could perhaps increase free cash flow. The expected spending increase on R&D should also be favorable for the company as the CEO mentioned at the conference:

If you have tracked us for the last four or five years or six years, that’s what we have been spending, $600 million, $700 million in R&D and we have been getting $600 million, $700 million in annual launches. So, it’s a pretty good 1:1 payback if you spend over there.

Takeaway

I rate Viatris a Strong Buy below $10 per share. The risk reward balance is favorable for long-term investors. The dividend yield and the undervaluation are too attractive to ignore. Looking at the high free cash flow yield and EV to EBTIDA ratio, few peers are even close to Viatris. Additionally, The management team is aware of the risks and is proactively keeping them at bay. Finally, a buyback program can boost the stock price into a positive momentum environment.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of VTRS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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

Comments

[Sleepless@FED]

At 8.69$/share, Price/Cash Flow Ratio of 2.65, FCF of 3.08B$, GPM of 61.84%, Debt to Capital ratio of 48.67%, Revenue growth of 9.54% and Dividend yield of 5.52% - this is a screaming value stock.

planning to buy VTRS for the dividend.

[LPeter]

All this optimism is nothing but RIDING DOWN A SLOPE OF HOPE.. and my toboggan is now at the bottom of the hill ! I am now become a long term investor in VTRS. I hope your verdict pans out: " The risk reward balance is favorable for long-term investors."

[Oracle]

@LPeter nobody knows anything anymore.we all thought a year ago that $20 a share was a foregone conclusion but here we are a year later .

[Chris Lau]

@LPeter The bags one carries is heaviest at the bottom of the slope that gets lower daily. VTRS new 52-week low today. Are you adding more?

[ghrelin]

@Chris Lau greatest thought process a foolish investor has is..."it's already sank xyz% how much lower can it get?" the answer is always zero. LOL

[Gladiator321]

Nice to see some positives in their quarterly ER. I´m glad to receive their dividend to fund my adventures and travels to parts of the world like Macaronesia, South Africa, Switzerland, Qatar, UAE, among others.

[Jggouzd]

Better Be Most astute with your investment. Coury and Malik making phony magic at the cost of investors. Did some of you not say that by December, 2022 this would be a 22-25 dollar per share stock? I've been telling you all that you're getting "duked" by Coury and Malik. Where's the stock value?

[ronald61239]

Anything less than $0.80 reported for the Qt. will be a disaster.

[Oracle]

@ronald61239 judging by the options activity expectations are high that it’ll surpass the $11 mark after the ER .I hope it follows in TEVA footsteps which has pretty much the same metrics as VTRS and trades higher although it doesn’t pay dividend.

[ronald61239]

@Oracle ----I'm not into options, so will see & soon. I don't understand why people trade in options in low price shares.

[alexalekhine]

@ronald61239 There are many reasons. They are simply a tool to manage risk.

[Oracle]

Let’s see what happens on Monday.unfortunately the naysayers have been right so far ,at least about predicting underperforming SP .This stock keeps on trading like the BK is imminent.

[alexalekhine]

@Oracle VTRS has investment grade ratings from the rating agencies. Bankruptcy is not imminent or even likely unless AOC somehow wins the Presidency and somehow nationalizes the entire healthcare sector.

[Oracle]

@alexalekhine I’m aware of the strong financials that’s why it’s baffling to see it trading like let’s say drillers when the oil price crashed .

[alexalekhine]

@Oracle Thanks, then we agree.

Perhaps I was channeling a few statements in the writeup such as:

" EV to EBITDA gives us a general insight of how healthy a stock is."

and

"The two risks that are important to keep an eye on are the high level of debt and a possible decrease in free cash flow.

Being leveraged can amplify returns on investments and increase buying power, but too much leverage can create risky environments. Currently, Viatris is highly leveraged compared to their free cash flow, nonetheless the firm is proactively decreasing debt. For 2022, Viatris is on track to pay down $2 billion of debt."

I find those statements to represent a misunderstanding of leverage.

[ghrelin]

If your sure that the management and the company itself is very non-competitive and most likely going to be under water, then why would you be SO sure their huge dividend would hold up? Companies like this always look like steals, when really that's hope speaking and not fundamentals. You just have to ask yourself would you rather pray for a quick "cigar-butt" play or would you rather buy some of these companies with massive moats in growing markets that have been selling off hard this year...it's pretty simple.

[Friso Alenus]

@Chris Forza Investing is indeed simple. Where some leave, others profit. And as a matter of fact, a bull market is ordinarily most generous towards a secondary low-priced issue than to the still fairly priced industry leader (as written in the intelligent investor).

[Friso Alenus]

@Chris Forza a 23% pay out ratio of free cash flow does not look very huge to me. So why would you think it could not hold up?

[ghrelin]

@Friso Alenus *current free cash flow. I work for the leader in the generics space (not viatris). If you understood the generics business you'd know direct to manufacturer generics in the hospital/injectable space is dying off. Everyone is going to cardinal, mckesson, and amerisource. The margins are getting squeezed, and manufacturers make more money selling to distributors. as such the manufacturers are losing market share to smaller manufacturers that can make the same products mainly in india. Increased dilution of competition and no pricing power. Viatris (pfizer injectables) will not have the same kind of FCF it had previously. That payout ratio will skyrocket and the dividends will get cut.

[alexalekhine]

Under $10 this is a steal.

[Harry Sack]

Garbage company with bad management and tremendous debt.

Hard pass

[ndardick]

@Harry Sack Garbage generic comment with bad underlying research and tremendous doubt if not fully fatuous.

[Jggouzd]

@Harry Sack You could not have written a more accurate evaluation. I worked for Mylan. Coury, Bresch, Malik and McCormick stole the value of the company and their checks cashed. Now, the sale to Biocon, good luck on investor holdings while Coury and Malik play havoc with Big Pharma that they know nor knew anything about.

[ndardick]

@Jggouzd And yet VTRS price is so incredibly cheap at less than 3x earnings with 5% yield that it is up over 7% now on earnings reported this morning. The phenomenal cash flows justify owning VTRS.

[1504661]

I was under the impression VTRS was going to be
the world leader/ king of biosimilars. but I guess not.

[ndardick]

@1504661 If VTRS sells every asset class for the 16x EBITDA price they got from the biosimilars, the price of VTRS would more than double. In the interim, I plan to hold the company trading at less than 3x forward earnings with a dividend yield of 5% and asset sales that will reduce the debt level to less than half the equity value.

[alexalekhine]

@1504661 I don;t think anybody thought that.

[Jggouzd]

@1504661 Yes, the was the initial smoke screen to obtain new investment monies but....Coury and Malik had a plan to "duke" anyone with future growth hopes and sold to Biocon. Now, the investors are sitting on Oral Solid Doses and some injectables with little to no hope of any return on their investments.

[ndardick]

I have no inside info but actively buying August $10.50 and $11 calls as we approach the earnings report prior to the open on Monday.

[Epicontact2]

@ndardick Hope you don't get burned once again. I have no respect for this management team.

[alexalekhine]

@Epicontact2 I'm selling $9.5 puts.
I 9.15 entry including premium earned with a 5.25% yield seems quite attractive to me. That's the Aug 19s.

[Jggouzd]

@Epicontact2 Well Noted and Well Said. Management of Viatris is toxic.

[emscar]

In at $9. Thanks for the article.

[AndreP]

I may double down at $9.

[eeeW]

The picture of this article is of electrical batteries. WHY?

[Friso Alenus]

@eeeW The picture of my article is not of electrical batteries. The picture resembles a pharmaceutical production line...

[User 25188403]

@eeeW Not batteries. 12-gauge shotgun shells.

[Z Dougie Dub]

Price in a recession and I'll be a buyer when the dividend yield gets even higher and i can average down. Otherwise this thing has been a wet dogggg since the spinoff of the biosimilar.

[Naysay Analysis]

@Z Dougie Dub generic drugs seem very recession resistant.

[alexalekhine]

@Z Dougie Dub recessions hurt generic drug producers?

[jonesy78]

Too much debt and they sold their growth portfolio

[Jggouzd]

@jonesy78 EXACTLY !! All growth potential has been sold off.

[ronald61239]

Vtrs may turn out to be a decent investment. I believe it's going to take at least a couple of years to do so. It has many large problems to deal with.

[alexalekhine]

@ronald61239 I doubt you can name any.

[ronald61239]

@alexalekhine ---What i can name is not important. What you think I love to know.
Smart replies are of little value.

[alexalekhine]

@ronald61239 I guess I was right. You didn't name any of the "large problems."

[Abullman]

Without the biosimilar business Viatris is just another generic drug company dealing with razor thin margins and minimal growth prospects. The dividend is nice if it can be supported but there is little or no catalyst to achieve stock price appreciation.

[jainsh]

The article does not reflect the core concerns of the market. Lower growth and sale of the biosimilar business to Biocon. There are questions around the overall growth, R&D pipeline and continuity of dividend. There are other concerns around underestimation of inflation and currency risk that may put pressure on the bottom line. On the overall side - management needs to establish trust, markets punished them for the sale of biosimilar business (which was their growth strategy at the time of spin off).

[Friso Alenus]

@jainsh I think this article does cover most of it. As a value investor I'm not really interested in the market sentiment, and as a result not covering it too much in my article. Even without revenue growth this is still a solid investment as the strong free cash flow compared to the price offer steady and safe dividend together with potential buybacks. The currency risk is for short term investors, so this not bother me. The management team is trying to put two companies together, which should not be easy. Strategies change and should be changed if it is for the better of the investor or the synergy of the two companies.

[wheelz]

@Friso Alenus Have you bothered to look at the quality of management? They pay themselves at exorbitant rates - even when the performance of the company is way below market averages.
Until they get rid of Coury, Malik, Mauro, etc...the company will never ever even have a chance of realizing it's full potential.
BTW - The board of directors, is complicit in this mismanagement.

[Friso Alenus]

@wheelz so far, I like what the management team is doing. Time will tell how the management will perform.

[Term Limits For Parasites]

Good article.

Congratulations for starting your investment path while still in college. Awesome and I wish the powers that be in the U.S. were as responsible with money.

Good luck to you!

[Friso Alenus]

@Term Limits For Parasites thank you very much for your comment!

[Feel-Smart-Investor]

@Term Limits For Parasites May I add on to it - great to see someone being so thoughtful so early in their investing life! Kudos!!