When Pfizer’s Upjohn (PFE) merged with Mylan, there was Viatris (NASDAQ:VTRS). Viatris is a relatively low-end multiple stock with a decent dividend that plays into the generic space. He has had pressure from China in the bidding process and substantial downside risk to the appreciation of the dollar. China is also a problem on the retail side with lockdowns. However, on an operational basis, they’re not that bad. They make profits with pretty phenomenal margins and their dividend has increased almost 10% since they started, paying a 4.5% yield on a compressed price. From a valuation point of view, we point to a potentially positive argument due to Biocon’s acquisition of the biosimilars portfolio, which is not really the best part of Viatris’s business. There is a case for Viatris, but not one that we’re jumping into.
Q2 Note and Segue
Viatris makes a lot of money outside of the US, which means monumental increases in the value of the dollar have been a problem. This has fueled overall declines in company revenue both on a 3 months and 6 months base.
The operational changes that explain the negative foreign exchange impacts show that the business remained fairly stable. There was some pressure on the supply chain in general, but also with retail sales in China, which continue to experience quite severe intermittent lockdowns from COVID-19. Hospital sales partially offset the negatives here, but not completely.
The decreases in EBITDA end up being mainly driven by increases in R&D expenses, which remain a naturally low part of the cost base due to VTRS being a generic company. However, an increasing focus on more complex biologics to position themselves at a more valuable spot in the generic world puts the only real pressure on EBITDA other than lost sales primarily due to currency effects.
The company continues to make progress in obtaining regulatory approval primarily on antitrust matters regarding the sale of the biosimilar business almost entirely to Biocon Biologics, which is a pharmaceutical company trading in the Indian markets. They worked in collaboration with VTRS on many of the biosimilars in their portfolio with marketing agreementsbut also manufacturing and supply agreements in the developed markets in which VTRS operates. Now they are buying the whole portfolio.
The sale of Biocon
The acquisition ends up painting a pretty favorable picture with respect to the possible overall value of the VTRS portfolio. The terms of the agreement to sell the portfolio of biosimilars are as follows. About $2.3 billion in cash paymentspart of which is deferred and part of which is a contingent option to purchase a biological from VTRS, in addition to leaving a 12.5% economic interest in Biocon through preferred shares that grant some additional special liquidation rights in the event of change of control situations for the “new Biocon”.
It’s hard to value preferred stock exactly, but par value ends being $1 billion according to Biocon, where Biocon is worth $4 billion in market cap. An economic interest of 12.5% would be equivalent to about 400 million dollars, less than the 1,000 million dollars given, and perhaps it is a better way of valuing them since they are obligatorily convertible. The portfolio that Biocon is buying produces $250 million in projected annual EBITDA in 2023 and the valuation is effectively 13.2x to the EV/EBITDA of the business.
The biosimilars portfolio is a strong part of VTRS, but investors have put a lot of value in the portfolio’s brands, such as Viagra and Lipitor, which have been able to produce recurring revenue and maintain some price and value despite losing exclusivity in some cases decades ago. These are massive brands. Currently biosimilars are where the growth is coming from, because new developments go into that portfolio, but the brand portfolio is the source of revenue and it has that brand moat which is unusual in the pharmaceutical industry.
Thus, one might think that if companies value the biosimilar portfolio at 13x, the brand portfolio may deserve something similar. We should point out that the assets sold are only around 5-7% of VTRS’ current business both in EBITDA and revenue. Still, VTRS is currently trading at 5x EV/EBITDA which could be low given this precedent. Perhaps the deal that was done in February 2022 precedes the period when the capital market multiple started to fail completely in the spin-off and spin-off markets. We’re relatively optimistic that those multiples will return sometime in the next couple of years, but still times have changed for now.
The dividend has increased 9% since it began last year, and the company continues to maintain the dividend and its current yield is 4.5%. Here too there is a revenue proposition in addition to the value proposition. would we bite? No. In addition to the China retail risk, we are still concerned about how sustainable, even ethically sustainable, VTRS’ margins might be. China is making it more difficult in the bidding processes and such attitudes could spread to other governments. Still, VTRS doesn’t seem expensive at the moment.