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Viatris Inc(VTRS-Q)

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Viatris Stock: Bear vs. Bull

Motley Fool - Thu Aug 31, 2023

If you're wondering whether to buy Viatris (NASDAQ: VTRS) stock this fall, it's important to know the arguments for why it might gain value as well as why it's not the best option.

Generic drug manufacturers can, in theory, be a reliable source of dividend income, not to mention potentially being safer than your average stock thanks to their steady sales of popular medications at low prices. But they can also suffer from slower-than-average growth due to high overhead costs and large debt loads.

Viatris is in the process of demonstrating its merits to investors, and it's approaching a critical period that may see its fortunes improve significantly -- or perhaps struggle to keep up with competitors. So without further ado, let's first learn why the bulls think this stock is going to be a good one to hold over the long term.

The bull case is appealing, but unproven

The bull case for Viatris is that in the long run it should be able to reliably commercialize new generic medicines, providing steady returns to shareholders in the form of dividends and, to a lesser extent, share price appreciation.

In particular, Viatris' copies of Novo Nordisk's highly popular weight loss and diabetes medicines, Ozempic and Wegovy, should be lucrative to make, and regulators are already reviewing its applications for commercialization. It's also anticipating a launch of its generic version of Botox by 2026.

Over the next five years or so, those programs -- along with others -- should add a few billion to its top line, which was more than $16 billion in 2022. In the meantime, Viatris will still be making its current selection of in-demand generics like Lipitor, the best-selling drug of all time.

In terms of financial performance, management believe Viatris can produce $2.5 billion in free cash flow (FCF) for 2023, which is practically the same as it made in 2021 and 2022. That speaks to the stability of its line of business although it does leave something to be desired in terms of growth. But growth could accelerate between now and 2027 thanks to the commercialization of the previously mentioned big-earning generics.

The bulls also point to the stock's low valuation as evidence that it's worth buying in the near term. With a price-to-earnings (P/E) ratio of 7, this stock certainly looks like a cheap buy at the moment. If its strategic growth plans succeed, bulls expect its valuation multiple to expand -- a boon for investors.

The bear case isn't without merit

The bear case against Viatris is that it's unlikely to consistently outperform the market due to its inherently low-growth business model and emphasis on returning capital to shareholders. In their view, the company's long-term factors probably won't be much better than they are today because of the nature of its business model and industry.

Generic medicines are inherently low-margin to produce as manufacturers compete in a race to the bottom on their selling prices. Viatris' profit margin is around 12%, which isn't half bad, but it's hard to imagine it going any higher.

After all, there's no way for these companies to win a larger market share except by offering a lower price than the competition as their products must all conform to the same properties and performance. It's also difficult to develop any competitive advantages that drive manufacturing or distribution costs lower though economies of scale are typically in play.

Furthermore, the bears contend that paying out dividends and buying back shares sap the capital on hand for investing in growth or paying down debt. Given that the company has around $17 billion in debt, the latter concern is significant. While Viatris has indeed made a good bit of progress in de-leveraging its balance sheet, as it had more than $25 billion in debt as of Q4 in 2020, it will still take a long while for true financial flexibility to develop. And bears rightfully see this as time that will be spent without a full-steam-ahead commitment to expansion.

It's hard to find serious faults with the bear thesis. Over the last three years, the bears have been correct; the stock lost 25% of its value while the market grew by 33%. For what it's worth, the bears probably also point to the stock's low valuation as another piece of evidence that there isn't much in the way of growth coming.

There isn't any rush to decide

If you're looking for a stock that's likely to become a reliable source of dividend income over time, buying Viatris in the near term is advisable as its dividend yield is high at 4.4%, and it will likely be able to continue to pay. Ongoing increases to its dividend should help to shore up shareholder returns, which are unlikely to be spectacular no matter what happens.

But for investors looking for a growth stock that can gain in value faster than most others on the market, the bear case is more compelling. The low valuation can't trigger the stock to rise in and of itself. And even with new generics that are in demand, there's little chance of fast top- or bottom-line growth.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends Novo Nordisk and Viatris. The Motley Fool has a disclosure policy.

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