Viatris Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Viatris Inc. is a global healthcare company that manufactures and markets generic and branded pharmaceuticals and biosimilars.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Viatris operates in a highly competitive and regulated industry.

Business Overview

Viatris is a global healthcare company, formed through the merger of Mylan and Pfizer’s Upjohn business in 2020. The company focuses on generic and branded pharmaceuticals, as well as biosimilars and other complex injectables. Its business is broadly categorized into three segments: Developed Markets, Greater China, and Emerging Markets. Viatris operates in a highly competitive and regulated industry.

Developed Markets: This segment includes sales in North America and Europe, where Viatris markets a portfolio of branded and generic drugs, as well as biosimilars. The focus here is on maintaining profitability, managing price erosion and promoting its higher-margin products. The company also faces strong competition from generics in these regions.
- North America: Net sales in this region declined 5% YoY due to decreased sales volume and unfavorable currency impacts, partially offset by increased pricing.
- Europe: Net sales in this region also decreased YoY, mainly due to lower volume, unfavorable pricing, and the effect of divested products (primarily the biosimilars business sold in the previous year). The situation with currency had a negative impact.
Greater China: Primarily a generics business, Greater China is a growth market for Viatris. Viatris faces competition from local players and is growing with significant investment in that region. The company’s revenue increased sharply in this region because of price increases and increased volumes with more demand for Covid products.
Emerging Markets: The emerging markets business is a diversified group of countries and regions, including India, South America, and Southeast Asia. Viatris operates in this region with low-cost generics and branded generics for key therapeutic areas. This is a growth area for Viatris, with the company’s revenue showing a decent growth mainly due to increases in volume across its markets and is focused on access and affordability. The negative effect of currency is also there in this region.

Viatris has had some recent controversies and problems. These include a significant decline in the business’s legacy drug portfolio, declining stock price, high-interest expense, and concerns about goodwill and asset impairments.

Financials In-Depth

Viatris has faced some financial headwinds that have led to some concern around its profitability and cash flow stability:

Revenue: Viatris reported a decline in net sales by 6% YoY in the second quarter of 2023 to $3.9 billion. In the first half of 2023, it decreased by around 4.8%. These decreases were driven mostly due to decrease in net sales from the Developed Markets segment and the impact of foreign currency exchange rates, but were somewhat offset by increased volumes and better prices for COVID products in the emerging markets segment.
Margins: The operating profit margin of Viatris in Q2 2023 was 13.7%. But this margin varies significantly between different segments. In its emerging markets segment, due to local competition from lower-cost producers, its operating margins have stayed lower, while it is doing much better in other segments like the brand-intensive Europe and North America, where the products typically sell at a higher margin.
Profitability: Viatris posted a net loss attributable to the company in Q2 2023. The decline in net income is caused by increased research and development, higher taxes, and interest expenses. For the past years, Viatris has reported a lot of losses. Despite the losses, it has managed a positive cash flow from its core operations.
Cash Flow: Viatris has been able to generate healthy free cash flow, which was $613 million in the first half of 2023, down from 2022. Much of the cash was used to pay down its significant amount of debt. The Company has a high debt load that causes a lot of interest expense.

Management stated during recent earnings calls that they have taken on steps like cutting costs, managing their debt, streamlining their portfolio, and focusing on high-margin products to improve profitability.

Debt: Viatris is a company that has significant debt. The company had a total debt of $17.1 billion at the end of 2022. Viatris has been trying to improve its balance sheet, by paying down its debt, which they plan on achieving through free cash flow.
Goodwill and Assets: Viatris had goodwill of $9.3 billion at the end of 2022. During its merger with Mylan, the assets were largely overvalued, so the company has written off most of those assets and goodwill. This practice may continue as the company continues to reduce its overall portfolio.
Capital Structure: Viatris is largely funded by debt and equity with debt being its major source of funding. Viatris also has minority interests that are not usually reflected in its financial statements.

Moat Rating: 2/5

Viatris has a narrow moat. Here’s why:

Brand Recognition: Viatris does have name recognition when it comes to selling pharmaceutical products, but because most of their offerings are generic, brand loyalty isn’t strong in the markets it operates in.
Regulatory Approvals: This offers a short-term moat, due to regulatory hurdles for competing generics, but as the patents for the name-brand products expire, many other companies tend to come in and produce similar generics. This makes competition strong and reduces profitability for the producer.
Distribution Networks: Viatris has an extensive distribution network that is built up over the years. As many companies are trying to replicate or create a better network, this offers only a moderate advantage, not enough for a wide moat.

These advantages aren’t strong enough to warrant a wide economic moat, which indicates a lack of a significant competitive edge that is sustainable over long periods of time.

Risks to the Moat & Business Resilience

Several risks could challenge Viatris’s long-term financial health and its ability to defend its competitive position:

Competition: The pharmaceutical industry is fiercely competitive, with constant price erosion from generic manufacturers. Viatris faces a lot of competition from new entrants and existing players, which can hurt their pricing power.
Price Erosion: Due to the generic nature of many products, Viatris may face declining prices. This is very apparent in their European and North American segments. They need new products to sustain profitability.
Regulatory Changes: Changes in regulatory requirements can impact the way Viatris manufactures, distributes and prices its drugs, potentially hurting its cash flows.
Debt burden: Viatris has a very high debt load which has increased its interest expenses and has had a negative impact on overall profitability. A sudden change in interest rates could make this even worse. They must reduce debt and manage maturities.
Product Pipeline: Viatris faces challenges in replacing some of its important products that are losing their patent exclusivities. A failure in its product pipeline can negatively affect Viatris’s business performance.
Management issues: There have been concerns about mismanagement and potential restructuring efforts. If there are no significant changes in its managerial strategy, its profits would be negatively affected.
Currency Fluctuations: As an international company, Viatris’ earnings are significantly impacted by exchange rate fluctuations, due to the fact that its income is coming from several different countries. A sudden change in currency prices will affect revenues.
Geopolitical risks Viatris has sales all around the world, and as such, are vulnerable to global risk factors like regional instability, government actions, trade wars, and other geopolitical risks which could materially affect revenues and profitabilities.
Other business specific risk Loss of exclusivity for blockbuster drugs, high exposure to some product portfolios that are rapidly being commoditized and increased costs and prices for raw materials and finished products can all affect profitability of the business.

Despite these challenges, Viatris has exhibited some resilience:

Global Reach: Viatris sells its products around the globe, in many different countries, giving it an advantage over other manufacturers operating in just one or two specific countries. This reduces its dependence on one or two markets for profits and revenues.
Cost Management Initiatives: Management has announced aggressive cost-cutting measures that should help the bottom line. These include the cutting down of various expenditures and personnel.
Strategic Portfolio Revamp: Management is aiming to streamline its portfolio to focus on more profitable product lines. They want to push for better products with higher ROI to improve earnings. This can have an impact on the long-term profitability of the business.

Understandability Rating: 3 / 5

Viatris’s business model is moderately complex and takes some research and understanding to evaluate:

Industry Complexity: Pharmaceutical operations are highly regulated. There are a lot of nuances and terms that need to be understood to correctly make judgments.
Global Operations: They operate across many different countries and geographies, which adds a layer of complexity to the analysis.
Financial Complexity: Analyzing a company with high levels of debt, goodwill and a history of write-offs can be complicated, especially since the company is restructuring its operations.

Balance Sheet Health: 3 / 5

Viatris’ balance sheet can be considered only moderately healthy.

Debt: The company has a high level of debt, $17.1 billion at the end of 2022. Although they are paying down debt, they need to drastically reduce it for their interest expenses to not hurt their profitability.
Negative Equity: Viatris has a net negative equity due to write-offs and losses accumulated through the years, thus implying a potentially large restructuring may be needed.
Cash Flow: Despite the other concerns, the company manages a positive free cash flow. However, the management needs to focus on optimizing operations and reducing costs.

Note The company’s long-term debts are due over a period of multiple years and they are using their cash flow to manage them and the near-term maturities. However, if there is any kind of unforeseen event, it can cause great trouble for the company.

In Conclusion Viatris is a global healthcare company with some competitive advantages due to its size and geographical reach, but its exposure to several industry challenges including price erosion, competition, and high debt levels make it difficult for the company to achieve a wide moat. While the fundamentals are there, there are also challenges that need to be addressed in order for long term success.