With shares of the generic medication manufacturer Viatris (VTRS 0.87%) collapsing by around 28% in the last five days after its weak fourth-quarter earnings report, I don't blame anyone who's looking for the door. For a company whose appeal to investors relies on the slow march of small gains compounding over time, such turbulence is confidence-shaking, to say the least.
What's more, there's reason to believe that things won't be looking up for at least another year. It's still possible that the stock could be worth holding in the long term, but for now, shareholders aren't experiencing any deficit of reasons to sell, so let's look at the three most important ones.
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1. Sales are flat
The biggest reason to consider selling Viatris stock right now is that revenue growth failed to materialize in 2021. Its total net revenue dropped by 4% last year compared to 2020, reaching $17.8 billion. That's despite adding revenue from launches of new products, which totaled around $700 million.
But how could it add $700 million to its top line while still seeing total revenue shrink? The answer is that competition is fierce among generic drug manufacturers. As more and more drugmakers opt to develop and produce versions of medicines that aren't covered by exclusivity protections, the companies that commercialized the generics first see their market share get eroded.
And for 2022, Viatris predicts that such competition will cause it to lose around $884 million in revenue. In other words, its sales of new products need to increase dramatically each year just for the total revenue to stand still, and that hasn't been happening so far.
2. The margin is worsening
Aside from its exclusivity and revenue woes, Viatris' gross margin is decaying instead of improving, and that's a valid reason to sell the stock.
In 2020, its adjusted gross margin was 60%, but in 2021 it was 58.7%. That's bad news for an enterprise that's never been profitable in its current form. It also undermines the narrative that profitability, and therefore proof of a sustainable business model, is right around the corner.
Management is quick to point out that inflation is causing the costs of inputs to rise, and that competition continues to be stiff. Both are true, but it likely matters little to investors who originally bought the stock while banking on its stability.
Moving forward, the company plans to keep realizing the remaining cost synergies left over from its inception in 2020, when Pfizer spun off its Upjohn generic drug manufacturing unit to combine it with Mylan, a public generics business. The remaining cost synergies are estimated to be in the ballpark of $250 million, which is unlikely to prop up the shrinking bottom line on an ongoing basis.
After all, the margin contracted in 2021 even with the realization of a reported $500 million worth of those synergies, so it looks like these profitability problems are set to deepen.
3. 2022's performance isn't expected to be any better than 2021's
The last new reason to sell this stock is that according to the company's leaders, 2022's growth is going to be flat at best in comparison to last year.
Its projections for this year contend that revenue will be roughly $17.2 billion, with a gross margin of up to 58.5%, and nearly $600 million in new product revenue. Plus, its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) are calculated to fall from $6.4 billion to reach near $6 billion.
Once again, company leaders blame inflation and competition, neither of which is going away anytime soon.
Beyond 2022, revenue will also struggle to grow as a result of Viatris selling off its biosimilars unit to Biocon Biologics.
As part of the deal announced on Feb. 28, Viatris will be parting ways with the right to produce cash cow biosimilars to drugs like Humira and Enbrel. The transaction will be worth a total consideration of around $3.3 billion in cash and convertible preferred shares, and is expected to close in the second half of this year.
In my view, it's true that trading the biosimilars division for cash and equity will also result in costs falling, which could help with profitability. But, letting go of what was expected to be a major growth driver is likely to have ongoing consequences for the top line, and there's no obvious plan to replace the revenue biosimilars would bring in.
Don't write this stock off just yet
As bleak as Viatris' present and near future may seem, it could still be an attractive stock someday.
After all, it has no plans to stop raising its dividend by about 9% per year, and it still has $1 billion authorized for share repurchases. Furthermore, the fact that its stock dropped so much today means that its dividend yield is currently near 4.3%, which is higher than its recent level of around 3.4%.
So, if you're a shareholder, it might be worth resisting your temptation to sell, even though there are a handful of valid reasons to do so. On the other hand, there are almost certainly other companies that will nurture and grow your money more than Viatris will this year.
