Pharmaceutical businesses spend billions of dollars developing medicines that they then protect with a fortress of intellectual property (IP) safeguards to make sure that competitors can't benefit from their work.
But for companies with a bit of patience, it pays to wait out the years of exclusivity protections and then develop generic versions of yesteryear's best-selling drugs, which are typically still in demand by patients. Plus, those patients are frequently tired of paying high prices for their medications, driving them into the market for off-brand drugs as soon as those versions are there to buy.
And that's why Viatris (VTRS 0.52%) manufactures and sells generic versions of crucial medicines. It owns the rights to sell some of the most popular branded drugs like Lipitor, Xanax, Viagra, and Zoloft, to name just a few. And it's also a relatively new player in the generic medicine space.
But does its ownership of big-name brands and its slow-burn business model make it a buy?
What's the long-term thesis?
The main reason investors might want to buy Viatris is that it has a relatively stable business. It sells medicines that will more or less always be in demand. People take many of its products to control chronic conditions, so they'll need them for the rest of their lives. This company will be great to hold for investors who have a long time horizon and plenty of patience.
As a result of the steady income from its base of patients, the company should be able to slowly expand into international markets while gradually growing its portfolio of drugs and consistently increasing its earnings, which it will then have years and years to give back to shareholders. Because demand for its products should be ongoing, its shares could end up being resilient during a downturn -- just not the current bear market, apparently. Its shares are down by more than 31% in the last 12 months.
Over the next few years, the company should become more profitable through a combination of trimming operations and reducing its cost of goods sold (COGS). Before the end of 2023, it plans to realize around $1 billion in cost synergies left over from its spinoff from Pfizer. Given that its net loss in 2021 was around $1.2 billion, those cuts and optimizations will go a long way toward achieving better results.
Furthermore, management plans to continue using its excess capital to make acquisitions, buy back its shares, and to pay (and perhaps hike) its dividend. At the moment, its forward dividend yield is a hair over 4.9%, which is quite appealing for a slow-growing pharmaceutical company. Investors who buy the stock today will thus get the advantage of that high yield while also potentially benefiting from future increases to the payout.
Better times perhaps ahead -- not right now
The trouble with Viatris stock as it is today is that it isn't consistently growing its revenue from its core products. According to its second-quarter earnings report, its sales of generic medications dropped by 11% year over year on a constant currency basis, and its total revenue declined by 3%. That undermines part of the investing thesis for this company, specifically the portion that claims the demand for its generics will be fairly uniform over time.
Furthermore, the drop in revenue is concentrated precisely where the business' future growth should be coming from: emerging markets. Across South America, Africa, the Middle East, Southeast Asia, and most of the rest of Eurasia, Viatris' net sales crashed 19% year over year. It's unclear exactly what's going wrong, as management's only comment is that the quarter's sales performance was "in line with expectations" given the shifting foreign-exchange rates, so it's hard to say whether the situation will worsen or improve over the next few years.
Then there's the sub-optimal distribution of projects in its pipeline. It plans to launch one drug in 2023, another in 2024, and then four in 2025. That means big top-line growth is still a few years out, so the current revenue issues might be troublesome for a while.
What's the right move?
Viatris is a favorable stock to buy and hold for making passive income from its dividend. But if you're not looking for dividend payments, it's hard to see how it would outperform the market, since it isn't engaged in a high-growth niche, nor is it planning to make significant innovations that would give it an edge over the competition.
On the other hand, if you're looking for safe growth, it might be an appealing option in a few years, once its post-spinoff cuts are done and its pipeline has had a little time to bring new revenue drivers on line. Either way, if you're not investing for the dividend, it's probably best to steer clear for now.
