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Better Buy: Viatris vs. AbbVie

By Alex Carchidi – Dec 21, 2021 at 2:45AM

Key Points

  • AbbVie's base of revenue could start to contract soon.
  • Viatris still hasn't proven to investors that it can operate profitably.
  • Both companies are likely to solve their problems, but it'll take time.

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Both face headwinds -- and future opportunities.

With a market cap of nearly $16 billion, the generic drugmaker Viatris (VTRS 0.32%) is minuscule in comparison to the profitable pharma titan AbbVie's (ABBV -0.05%) $228 billion. But, with Viatris' revenue growth starting to take off just as AbbVie's is decelerating, the fact that the smaller company is currently unprofitable may not deter investors. 

And, since each company is in the midst of transitionary periods that are unprecedented, the risks of investing in either are higher than they'd normally be. Let's consider the merits of these stocks to weigh the chances of success moving forward. 

Pharmacist with tablet standing among shelves of medications.

Image source: Getty Images.

Viatris could become a generic drug juggernaut

Viatris owns the rights to manufacture money-printing drugs like Lipitor, Lyrica, Xanax, Viagra, and Zoloft, all of which are available as generics. Because the demand for generic drugs is largely predictable, it hopes to pay out an ever-increasing dividend to its shareholders using stable cash flows. 

So far, things look like they're on the right track to accomplish that goal. In the third quarter, its earnings grew by 67.7% year over year. By 2024, management expects to realize around $1 billion in cost synergies stemming from the company's recent merger with Mylan. That'll help to grow its bottom line even faster, which should (eventually) support other shareholder rewards like stock buybacks. 

Then there's Viatris' choice to focus its future expansion efforts on China, which currently only accounts for $1.8 billion in revenue and works out to be around 10% of its global revenue. If demand for generic drugs in China matches management's expectations, it'll pave the way for the company to reduce its $23.7 billion in debt and increase its top line even further. In the meantime, that debt will be weighing down Viatris' ability to reinvest its accumulated capital from operations. 

Still, that won't stop it from adding more complex generic drugs to its repertoire over time. Whereas the Viatris of today "only" produces 17 complex biosimilars, the company plans to break into manufacturing 13 additional biosimilar therapies, which have a combined global market value in excess of $57 billion. Capturing even a small portion of that market would be enough to supercharge Viatris' recurring revenue, and that's one of the key ways in which it could be a great investment over the next decade.

AbbVie aims to regroup amid Humira's falloff

AbbVie's powerhouse drug for psoriatic arthritis, Humira, is approaching the end of its lifetime as a moneymaker. Though revenue from the drug's sales in the U.S. increased by 10.1% to reach $4.6 billion in the third quarter compared to the prior year, in international markets it's 16.7% on an operational basis.

The reason for this is that biosimilars for Humira are now widely available outside the U.S. That's a growing problem for shareholders, but the good news is that management has seen this moment coming for quite some time. To replace the revenues that are expected to be eroded by biosimilars, the company has worked to expand the indications of a few of its other commercialized drugs like Rinvoq and Skyrizi. This is so the drugs can continue to compete in the same markets as Humira.

Next year, AbbVie expects to get regulatory approvals for two more indications for Skyrizi, and one more for Rinvoq, not to mention seven other expanded indications for other drugs. It also plans to make regulatory submissions for two other Rinvoq indications plus a slew of other expansions. All of that is good news for investors because it means that there will be newly approved indications to start ramping up revenue just as Humira starts to ramp down more aggressively in 2023.

For the time being, AbbVie's forward dividend yield of 4.33% is a convincing reason for investors to buy the stock or stick around through the next few years of transition away from Humira. And, if management continues to hike the dividend as it has in the past, people who invest now could benefit significantly over the long term.

Which business will be succeeding in the future?

Both of these businesses are in a somewhat precarious state. Whereas AbbVie's ongoing pipeline projects may or may not be able to overcome the loss of revenue from Humira if they hit the market. Viatris has hardly established itself as a generic manufacturer that's as dependable for investors as its competitors are.

In the event that AbbVie fails to deliver on its promises of revenue growth returning with gusto once again, it'll be bad for shareholders. Likewise, if Viatris can't shore up its gross margin enough that it can start to report profits, the company will lack the steady cash flows that it needs to pay out a healthy dividend to investors.

In a nutshell, the question of which stock is the better buy is a question of what kind of stock you'd rather own in a few years when hopefully both will be done with navigating the challenges mentioned above. AbbVie is a drug developer at heart, which means that it has the potential to create massive returns for investors, provided that its clinical trials are successful. In contrast, Viatris carries a much lower risk, but also a minimized chance for a high reward, as demand for generics expands only slowly.

Alex Carchidi owns AbbVie. The Motley Fool recommends Viatris Inc. The Motley Fool has a disclosure policy.

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