We are initiating coverage of Viatris Inc. (NGS: VTRS) with a HOLD rating. Viatris is a newly listed company that combines the operations of the former Mylan N.V. and Upjohn, Pfizer’s off-patent branded and generic medicines business (including mature drugs such as Lipitor for high cholesterol, Lyrica and Celebrex for pain, and ED medication Viagra). The new Viatris is domiciled in the U.S., while Mylan had been domiciled in the Netherlands.
We have a favorable view of the Mylan-Upjohn merger. While it could take time for the combined company to realize expected synergies, we expect that it will provide greater economies of scale, an extended geographic reach, stronger negotiating power with payers, and the potential for greater shareholder returns. However, the pandemic is proving to be a challenge to near-term earnings growth. Viatris has not yet reported results, and management has not provided guidance, other than to say that 2021 will be a ‘trough year’ for earnings. The company appears focused on shareholder returns, and while it has not yet initiated a dividend, we expect one soon.The yield could be north of 4.0% (for this reason, our long-term rating is BUY). On valuation, compared to the peer group, VTRS shares are trading at discounts on metrics such as P/E, price/sales, and dividend yield. We think these discounts are reasonable given the uncertain growth outlook in 2020-2021. We may look to upgrade the shares if management is able to return the company to a growth trajectory in the next few quarters.
VTRS shares launched on November 16, 2020. Pfizer shareholders initially owned 57% of the combined company, while Mylan shareholders owned 43%. Upjohn’s president, Michael Goettler, is the CEO of the new company, while Heather Bresch, Mylan’s former CEO, has retired. Robert J. Courey, Mylan’s executive chairman, retains his role on the board of the combined company. Since the start of trading, VTRS shares have risen 13% while the S&P 500 has gained 3%.
EARNINGS & GROWTH ANALYSIS
We do not know too much about the company’s earnings or finances, as VTRS has not yet reported quarterly results or provided financial guidance for 2020-2021. Management has indicated that it would provide guidance for 2021 starting in the first full quarter after the closing, and has described 2021 a ‘trough year.’ Here are some things we do know about earnings. Total pro forma revenue for the combined Mylan and Upjohn in 2019 was $21.7 billion and pro forma net income was $3.8 billion, for a net margin of 17.4%. Adjusted EPS came to $3.13. In the first quarter of 2020, as the coronavirus was beginning to spread, pro forma revenue was $4.5 billion and pro forma net income was $520 million, for a net margin of 11.6%. Adjusted EPS totaled $0.43. In its final quarter as Mylan N.V., Mylan reported 3Q20 revenue of $2.97 billion and adjusted net earnings of $680 million. The Upjohn segment had revenue of $1.9 billion (down 18%), reflecting declining U.S. sales of mature drugs. In their guidance prior to the merger, Upjohn and Mylan had projected combined 2020 revenue of $20 billion and combined EBITDA of $7.5 billion. Turning to our estimates, and taking into account the deeply negative sales and margin trends in the first three quarters, we project 2020 EPS of $2.00, revenue of $20 billion, and a net margin of 12% on 1.2 billion shares outstanding. Our EPS estimate implies a 36% decline on a pro forma basis from 2019. We look for further weakness in 2021, which management thinks will be a ‘trough year.’ We currently project 2021 EPS of $1.75, revenue of $18.5 billion, and a net margin of 11.7%. We will refine our estimates as the company reports results and provides guidance. Our five-year earnings growth rate forecast is 5%.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating on VTRS is Medium. The company receives average marks on our key financial strength criteria of debt levels, fixed-cost coverage, profitability, and cash flow generation. The company has not yet published a balance sheet, but we estimate that Viatris is carrying approximately $24.5 billion of debt. We estimate cash flow coverage of approximately 5-times. The EBITDA margin is about 30%. Viatris plans to establish a dividend at the end of its first full quarter following the merger, and looks to pay out at least 25% of cash flow. We estimate that Viatris’ annual dividends in 2021-2022 will be $0.80 per share, implying a yield of about 4.5%. The company does not have a share buyback plan, but plans to launch one in a few years.
MANAGEMENT & RISKS
Michael Goettler, formerly Upjohn’s president, is the CEO of the new company. Sanjeev Narula is the CFO. Robert J. Coury is the executive chairman.
The company’s near-term plans include integrating the businesses and deleveraging; this is expected to take three years. In the medium term, the company plans to achieve cost synergies (of up to $1 billion) and revenue synergies, to grow via M&A, and to return capital to shareholders through dividends and share repurchases. Financial goals include modest, consistent and durable growth in revenue, adjusted EBITDA, and free cash flow.
Viatris Inc., based in Pennsylvania, is a specialty and generic drug company formed in 2020 through the combination of Pfizer’s Upjohn business and Mylan N.V. The shares are a component of the S&P 500. The company has 35,000 employees.
We think that VTRS shares are fairly valued at current prices near $18. To value the stock on a fundamental basis, we use peer comparisons, as historical multiples are not relevant given the short trading history.VTRS shares are trading at 10-times projected 2021 earnings. Compared to the Industry ETF IYH, the shares are trading at discounts on metrics such as P/E, price/sales, and dividend yield. We think these discounts are reasonable given the uncertain growth outlook in 2021. We may look to upgrade the shares if management is able to improve earnings at a quicker pace.
On January 4, HOLD-rated VTRS closed at $18.54, down $0.20.