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CVS Health Just Created a New Problem For Viatris. Here's What You Need to Know

Motley Fool - Fri Sep 1, 2023

On Aug. 23, CVS Health(NYSE: CVS) announced that it's launching a new subsidiary focused on biosimilar drugs. That business, Cordavis, will start by seeking to commercialize a biosimilar to AbbVie's blockbuster Humira. That could mean trouble on the horizon for Viatris(NASDAQ: VTRS). As a generic medicine manufacturer, the last thing it needs is another powerful competitor looking to grab a share of the most lucrative markets.

Here's what you need to know about the situation and how it might affect your investing thesis for Viatris stock.

The danger isn't immediate, but it's real

Humira (adalimumab) is one of the most successful drugs of all time, bringing in more than $21 billion in revenue for AbbVie in 2022 even as multiple biosimilars of it hit the market in the E.U. and U.S.

It treats a bunch of conditions, including rheumatoid arthritis, ankylosing spondylitis, plaque psoriasis, and ulcerative colitis. That makes it a priority project to copy for makers of generic drugs like Viatris. There will eventually be plenty of competition in the Humira biosimilar market, as at least 10 different major biopharma businesses are working to commercialize their entries.

(Biosimilars are the equivalent to generics for large-molecule biologic drugs -- compounds that are produced not through chemical processes, but by engineered living cells. So unlike small-molecule drugs, they can’t be copied precisely by another manufacturer. However, competitors can biologically create extremely similar drugs that are functionally equivalent to the originals -- hence, the term biosimilar.)

CVS wants a slice of that pie, and it's partnering with Sandoz, a private pharmaceutical company, to make it happen. It could bring its version of Humira to market early next year if things go according to plan. But thankfully for Viatris' shareholders, that company is no longer directly exposed to that market.

Viatris sold its biosimilars portfolio to Biocon Biologics in late 2022 for $2 billion in cash and $1 billion in preferred convertible equity, which (if converted) would give it a roughly 13% stake in Biocon. But that equity stake means that if Biocon struggles with sales of its Humira biosimilar, it'll make Viatris' investment less valuable, so it's still a risk for shareholders.

The actual new problem for the long term is that CVS' biosimilar efforts are unlikely to stop with Humira. The company will doubtlessly move on to target other high-earning medicines that have lost their patent and exclusivity protections. There isn't much reason to think that the Cordavis subsidiary will limit itself to producing only biosimilars without touching the even larger market for non-biologic generics. And that's where it is likely to take a bite out of Viatris' market share in the future.

Appreciate the new risk factor

Viatris has a handful of generic candidates under regulatory review that CVS might also be interested in making. In particular, there are two therapies for type 2 diabetes, one of which is a generic version of Novo Nordisk's hit drug Ozempic. The active ingredient in Ozempic is semaglutide, which is also marketed in a different dosage as the popular weight loss drug Wegovy, and Viatris has submitted for regulatory approval in that indication as well.

There's also its generic version of Abilify, which treats both bipolar disorder and schizophrenia. And that's before even taking into account its efforts to make lower-cost versions of medicines for birth control and generalized anxiety disorder (GAD), which are in earlier stages of development.

Of course, Viatris will likely have other competitors in those markets too, and there is no guarantee that CVS Health will be willing or able to enter them in the next year or so. But other competitors are unlikely to be as massive or as well-resourced as CVS Health is, nor will they be vertically integrated into the healthcare chain.

After all, CVS is a major insurer, pharmacy, primary care provider, and more -- and that will give it an enormous edge in securing large market shares for whatever biosimilars or generics it chooses to produce. The threat is obvious on the basis of market capitalization alone: CVS' market cap is $86 billion, whereas Viatris and competitors like Teva Pharmaceuticals are only in the $13 billion range.

CVS Health's move into the biosimilars business does not portend doom for Viatris. Still, it indicates that hot generics markets are soon going to be even more crowded, and Viatris lacks the competitive advantages of CVS. That means its margins could be tighter in the future than they are today, and that could easily lead to lower returns for investors.

Keep an eye out for announcements from Cordavis over the next couple of years to see if it's becoming a direct competitor to Viatris. If it is, investors should consider that a major headwind for the company.

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

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