Viatris Inc. (VTRS, Financial) was formed by the combination of generic pharmaceutical company Mylan and Upjohn, Pfizer Inc.'s (PFE, Financial) off-patent segment. Though the Mylan part of the combination is the surviving the new entity, it is largely led by legacy Pfizer executives or newly hired talent. Viatris is anticipated to leverage the former Mylan infrastructure, consisting of about 55 manufacturing and research and development facilities that were recently acquired, including Matrix Laboratories and the generics business of Germany-based Merck KGaA (XTER:MRK, Financial).
The combined portfolio will consist of the mature Pfizer branded drugs (i.e., Lipitor, Celebrex, Viagra etc.) and Mylan's portfolio of generic, specialty and over-the-counter active ingredients and medicines. Unlike its generic peers, the company has made the most progress on the biosimilar front and has deep expertise in developing generic copies of complex drugs and dosage forms. The company has a global footprint and supply chain, with the ability to leverage innovation and scale in multiple regions.
The company took on a lot of debt in its formation last year (November 2020) as it doubled the size of its balance sheet. Deleveraging has already started well with long-term debt coming down materially in the second quarter report. The company expects to pay down $6.5 billion in debt by 2023, when it hopes to reach its steady-state capital structure. In the second quarter, the company reported $1.15 billion in debt repayments year to date.
The following chart illustrates Viatris operating cash flow before the combination (when it was Mylan in 2019 and most of 2020) as well as after. The large depreciation and amortization expense has totally obscured any net income. However, operating cash flow and free cash flow remain healthy. Core FCF (which is FCF without changes in working capital) is also quite good. The company reports being on track to achieve around $500 million in synergies in 2021 and expects to achieve approximately $1 billion in synergies by 2023.
The company has started paying out dividends and is currently yielding 3.3%.
Valuation of between $23 to $35 shown below is based on 10-year median price-sales, price-book, and price-operating cash flow ratios, confirming a significant margin of safety.
A discounted cash flow analysis using the trailing 12-month free cash flow per share indicated a good margin of safety.
Insider data since the formation of Viatris in late 2020 is mostly positive, with several directors acquiring modest holdings. There have been no sales.
I believe Viatris is cheap when looked at from an operating and free cash flow perspective. It is trading at a price-to-free cash flow ratio of about seven. The company is currently weighed down by debt, but management is making a concerted effort to reduce that burden. Earnings are overshadowed by large amortization and depreciation charges, but cash flow is strong. This way, it is like a private equity leveraged buyout. The company's global footprint and deep pharmaceutical manufacturing expertise is underappreciated. The brands of its off-patent drugs are quite valuable in some markets and make for interesting opportunities. For example, it is working to switch Viagra to over-the-counter status in some markets.
The only company which comes close to its scale is Teva Pharmaceutical Industries Ltd. (TEVA, Financial), which has even bigger challenges. I can easily see a Viatris in the mid-$20s in 2023 as it continues to deleverage and improve its balance sheet. The company is currently trading at single-digit normalized price-earnings ratio and is expected to grow in the low single-digit range. As such, Viatris is recession resistant and deeply undervalued.