A company that struggles to grow can be a headache for investors. So can one that's not generating profits and has a boatload of debt on its books. Viatris (VTRS 0.61%) checks off all those boxes.
Its share plummeted to new lows shortly after it reported its latest quarterly results, which were lackluster and failed to inspire investors. Is the business really in as much trouble as it seems, or are investors overreacting, making Viatris a potentially appealing contrarian buy today?
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The big news wasn't the earnings result
Viatris reported its year-end results on Feb. 28, and the numbers didn't necessarily look horrible. Sales for the three-month period ending Dec. 31 totaled $4.3 billion and declined 2% on an operational basis. But given the impact of the omicron variant and physicians issuing fewer prescriptions due to COVID-19, a drop in sales may not be all that alarming. It was even encouraging that the company's quarterly net loss of $263.8 million shrunk from a loss of $915.6 million in the prior-year period.
However, those numbers aren't likely what spooked investors and sent shares down 8% the following day. In its earnings release, Viatris also announced that it would be selling its biosimilars to Biocon Biologics for more than $3.3 billion in pre-tax consideration, calling it "the first in a series of expected initiatives anticipated to unlock up to an additional $6 billion in pre-tax proceeds by the end of 2023."
Is the sale of its biosimilars a bad move?
Viatris says that by making this sale, it will benefit from an influx in cash, which will allow the business to reduce complexity and focus on higher-margin products in multiple therapeutic areas, including ophthalmology, gastrointestinal, and dermatology. It says the divested assets are not part of its core, so at first glance this shouldn't raise too many alarm bells for investors.
The company estimates that its biosimilars portfolio would have contributed $875 million in revenue for 2022 and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $200 million. That's not significant when you consider that for the full year Viatris projects its revenue to top more than $17 billion, and adjusted EBITDA to come in around $6 billion.
When a business gets a pretty rich cash infusion at a great deal (Biocon paid a multiple of 16.5x adjusted EBITDA for the biosimilar business), that can put the company in a great position. As of Dec. 31, Viatris had just $701.2 million in cash and cash equivalents on its books. Adding billions more will certainly give Viatris more options for pursuing growth opportunities and acquisitions down the road. The move definitely doesn't appear to be a bad one, and investors may be overreacting to what may initially look like a large restructuring of its business. In reality, it just scored a great price for non-core assets.
Should you buy Viatris stock today?
On March 1, after the release of the results, multiple brokerages downgraded their price targets for Viatris. But with the stock trading around $10 a share, analysts still believe it could climb at least 30% to $13.
There are certainly reasons to be bearish on the stock, but there are also reasons to be optomistic. For one, the company has generated positive cash flow from its operating activities in each of the past four quarters. And its focus on shifting to higher-margin products is also encouraging since they can help pad that cash flow and pay down the company's long-term debt, which at $19.7 billion is nearly the size of its total equity ($20.5 billion).
There's definitely some risk here, and that's why Viatris stock is trading at a discount. But at a price-to-sales multiple of just 0.7, it's well below the average stock in the Health Care Select Sector SPDR Fund, which trades at 1.9 times revenue. For contrarian investors, this could be a steal of a deal.
If you're risk-averse, however, you may want to wait until at least the sale of the biosimilars is complete (this will likely happen in the second half of this year) to see how Viatris is doing and whether it's putting the proceeds from the sale to good use or not. Plus, this is only its first move; there will likely be others to follow that investors may want to watch before making any decisions on this healthcare stock.
