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Viatris Inc(VTRS-Q)

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Where Will Viatris Be in 5 Years?

Motley Fool - Fri Aug 18, 2023

Viatris (NASDAQ: VTRS) hasn't made for a particularly great investment since it formed nearly three years ago, through a merger of Mylan and Pfizer's Upjohn business. Down 29% since then, it has been an underwhelming healthcare stock, to say the least. But where could the company be five years from now, and is this an underrated investment to add to your portfolio today?

Its debt load will continue to come down

A big reason investors aren't overly thrilled with Viatris is that the business has a lot of debt on its books; that's not a good look as interest rates are rising. As of June 30, the company's long-term debt was over $17.2 billion. That's a concerning number when the company's current assets total less than $10 billion.

Viatris has prioritized paying down its debt, and says that over the past 10 quarters its debt repayments have totaled $6.1 billion. The company is targeting a gross leverage ratio of 3.0. Gross leverage compares gross to debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Currently, the ratio is at 3.4. To get it down to 3.0, based on its current adjusted EBITDA, Viatris would need to pay down another $2 billion in debt.

The business will get leaner

Last year, Viatris sold its biosimilar business for $3.3 billion to Biocon Biologics. But the company doesn't appear to be done with divestitures. On Viatris' second-quarter earnings presentation, it indicated that there could be multiple significant divestitures coming as early as next quarter.

One way for a business to bring down its debt load and to also improve its growth rate is by shedding parts of its operations that aren't doing well. Viatris appears focused on trimming its operations so that it can be a leaner business moving forward, and that could attract growth-oriented investors and potentially help rally the stock.

The company previously stated that it planned to complete its divestitures before the end of 2023, so investors won't have to wait too long to see what further changes may be coming for Viatris' business.

Investors should expect more new products

By offloading some assets, Viatris would have some money to inject in its operations. In its most recent earnings report, the company's net sales of $3.9 billion for the period ended June 30 were down 5% year over year. Even after stripping out divestitures and foreign exchange, the company's adjusted organic growth rate was still a modest 1%.

Viatris doesn't have multi-billion dollar products generating revenue growth for its business. Instead, its strength is its diversification. The company makes products for many therapeutic areas, including dermatology, immunology, oncology, eye care, gastroenterology, and others. Its medicines reach patients in over 165 countries, and Viatris has a portfolio that includes more than 1,400 approved molecules. This year, the company expects to generate approximately $500 million worth of revenue from new product launches.

One area it sees as a key growth opportunity is eye care. In January, the company acquired two companies -- Oyster Point Pharma and Famy Life Sciences -- to help launch a new eye care division. The company plans to add more than $1 billion in net sales through this segment by 2028. That would make it a significant part of Viatris' business, especially as the company divests of other assets. Investors should expect this to be a focus for the company over the next five years.

Viatris' dividend probably won't grow

One of the main reasons to invest in Viatris stock right now is for the dividend, which yields 4.3% -- far higher than the S&P 500 average of 1.5%. The company raised its dividend by $0.01 last year although there haven't been any hikes since then.

Part of Viatris' long-term plan involves buying back shares along with paying dividends. In that scenario, investors shouldn't expect many, if any, increases. That's because between paying down debt, investing in growth, and buying back shares, there may not be a whole lot of cash left over for Viatris to feel as though it can afford to raise its dividend. The company is budgeting for half of its free cash flow to go toward dividends and buybacks.

At most, the company may make minor increases to the dividend, but I wouldn't expect Viatris to transform into a top dividend growth stock anytime soon.

Should you invest in Viatris' stock?

Viatris does appear to have a solid plan for becoming leaner and focusing on more growth in the future. And even if its dividend doesn't increase, the payout is already attractive as it is. At seven times earnings, this is a heavily discounted stock and investors don't appear to be confident in Viatris' path forward. That's justifiable as there's some risk with the company and its high debt load.

This is not a stock I would invest in, because with so many moving pieces for this relatively young company, it's difficult to predict how it will perform and if its strategy will pay off. As of now, there just isn't a big growth catalyst to make me bullish on the company's future. However, for risk-averse investors who want a good dividend and a diverse business, Viatris could make for a potential healthcare investment to consider.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Viatris. The Motley Fool has a disclosure policy.

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