Viatris ($VTRS) — FY21 Update

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Price: $10 Market Cap: $12bn Valuation: 4.5x FCF / 5.6x EBITDA Category: General

FY21 Review

For starters, the stock sold off from ~$14 per share to ~$10 on the announcement of Q4 results and 2022 guidance. It was an ugly 2-day stretch...

  1. Q4 results were so-so
  2. 2022 guidance was disappointing
  3. Viatris announced some “change in direction” for the business

Q4 Results

Revenue was ~$4.3bn and adjusted EBITDA was $1.4bn (my figures below remove all adjustments other than intangible amortization).

Viatris finished the year with $17.9bn in revenue, $6.4bn in EBITDA (adj), and $2.6bn in FCF — they hit all their guidance targets for the year.

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Results for the quarter and year weren’t necessarily bad... investors were just hoping that it would represent a new baseline from which the company would build on.

Weak Guidance

2022 guidance — $17-17.5bn sales / $5.8-6.2bn EBITDA / $2.5-2.9bn FCF
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Comparing the 2021 & 2022 FCF guidance higlights the headwinds on the core business... competition and margin pressure leading to lower overall EBITDA
2022
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2021
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The step down in guidance consequently raised leverage by a decent amount! With $400-600m EBITDA going away, leverage is jumping from ~3.3x if measured on 2021 results to 3.7x using the low-end of 2022 EBITDA guide!

There is a pretty significant offset to this...

Asset Sales + Change in Direction

Biocon / Biosimilars

  • Viatris announced they’d sell the faster growing biosimilars business to Biocon in exchange for cash and a convertible debt instrument in Biocon.
  • Viatris would get $2bn in upfront cash at closing + another $1bn convertible preferred shares for a 12.9% stake in Biocon — this is expected to close 2H22

Other Asset Sales

  • Referred to as “other select assets” — expected to generate $9bn pre-tax / $4-5bn after-tax proceeds along with the Biocon deal.
  • There wasn’t a lot of detail around what would be sold and when.
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On the surface, the divestitures look like a positive... $9bn pre-tax proceeds while giving up $0.5-0.7bn EBITDA (13-15x EBITDA multiple vs. VTRS currently trading at ~5.8x EBITDA). This would also drop a nice slug of cash to the balance sheet.

But what will/would management do with that cash??

Outlook & Thoughts

Midpoint FCF is ~$2.7bn on a now $12bn market cap = 4.5x P/FCF. Certainly a cheap multiple but it’s always been that case (and less cheap on an EV/FCF basis).

What initially got me excited with this business was the changing guard within management, a commitment to returning cash to shareholders via dividends + buybacks, and the immediate delevering from the Upjohn merger.

In hindsight, what’s been most irritating is the overpromising/under-delivering and constant changing of goalposts... We initially started with a $4bn FCF and $1bn dividend bogey and those have walked down to <$3bn and ~$580m respectively. Leverage was touted at ~2.5x and now we’re aiming for 3x by end of 2023...

So the question is whether to hang on or move on...

The analyst community would sure have you believing that it’s a “busted thesis”

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But I’m not sure that’s the case (I’m hugely biased and have been completely wrong on this stock so take with a grain of salt) — Management is telling us they think they can sell $9bn worth of assets at double-digit EBITDA multiples (>2x current trading multiple) which would leave them with ~$5bn in pro-forma EBITDA (ignore the upper bound with these guys), $17.7bn in gross debt, and $4-5bn in cash on hand by year-end 2022, if the asset sales happened that quickly, perhaps more likely in mid-2023...

That’s a pretty significant balance sheet transformation for Viatris (again). That could be the event that allows them to return $2bn+ annually to shareholders. Management was very unclear what they’d do with that cash. A token $1bn share repurchase authorization was mentioned but it sounds like business development (i.e. acquisitions) would be a priority and there’s a mixed track record there.

The investment community has tossed generics into the garbage bin as a low quality business. I believe it to be a cyclical and competitive industry but not one that is secularly challenged.

This is a large position and obviously very painful. I think shares are worth $16.50 by yearend 2022 vs. $10 today. Looks like good upside at today’s price but clearly would be pretty unattractive if shares were back at pre-Q4 prices of $14-15.