Companies that produce generic drugs aren't known for being exciting investments, and there's little chance they'll ever expand as fast as your average tech stock or most other growth stocks. If they can manage to be a safer holding than faster-growing stocks, though, they can still be worthwhile to have in your portfolio, assuming you're looking for dividend cash flow and you're relatively risk-averse.
Viatris (VTRS 0.87%) is an up-and-coming generic manufacturer that could have the makings to be a good long-term holding, at least based on its 5.2% dividend. Let's explore whether this healthcare stock can live up to that promise and whether it's worth buying.
What Viatris would need to be a juicy buy
Ideally, an investment in a generic drug manufacturer like Viatris would have (at least) three features:
- Price stability regardless of economic phenomena or market activity.
- Gradual, yet reliable, growth while remaining profitable.
- A regular and meaty dividend payment.
If you could find a stock like that at a bargain, it would be worth strong consideration.
At first glance, Viatris looks like it partially measures up. In the first quarter of 2023 alone, it pulled in solid revenue from several branded generics it produces, it brought in $417 million from its version of cholesterol-lowering drug Lipitor, $115 million from sales of its version of Viagra, and nearly $96 million from its version of EpiPens. These medicines have been popular for years and the need for them isn't going to end anytime soon. So shareholders can expect these branded generics to maintain the company's top line, especially when considering that it produces quite a few other household-name-status generics.
In terms of its payout, Viatris' forward dividend yield of 5.2% is much higher than the market's average of 1.7%. Management said it plans to continue raising it while also performing share repurchases to maintain and perhaps boost its stock price. Likewise, its price-to-earnings (P/E) multiple is 5.4, far lower than the average of the major pharmaceutical preparations industry's 35.
But that's where the stock starts to look less appealing. Part of the reason for that low valuation is that the market does not expect Viatris to grow very quickly in the near future. That's a pretty reasonable conclusion, but the stock is still priced at a steep discount relative to competitors. Furthermore, its share price is down by 16.5% in the last 12 months, meaning that it underperformed the market's gain of 2.5%. So much for price stability.
Why it might be better to wait
The trouble with buying this stock today is that Viatris hasn't yet demonstrated that it can actually grow at all. Sales of its core generic drug segment dropped by 6% year over year in Q1 of 2023, totaling $1.1 billion. Its branded generic drug revenue also fell by 5% year over year, hitting $2.4 billion. Management still expects to onboard $500 million in fresh revenue from the launch of new generics this year, potentially led by demand for its dry eye treatment Tyrvaya.
Beyond that, it has a dozen complex injectable generic medicines awaiting regulatory approval right now, eight of which could become the first generics to hit the market. By 2027, those programs could yield more than $1 billion in annual revenue. Viatris' portfolio of complex generics, and also its eye care pipeline, could hit the $1 billion mark by 2028. But $3 billion in new sales before the end of the decade between those three segments won't add much to the company's total revenue, which in 2022 was $16.2 billion, so earnings growth from efficiency improvements will likely play a large role in generating future shareholder returns.
In short, there isn't any burning reason to log in to your brokerage and buy shares of this business today. It doesn't yet live up to the potential for being a long-term stable investment to hold for its cash disbursement until the cows come home. Over the next few years, however, that might change. Its leaders are currently implementing a multi-phase strategic plan to cut its debt, become more efficient, and then invest in growth. Buying its shares right now means buying the dream of a profitable and low-risk business in the future. Still, if you're looking for a safe place to park your money, this isn't it just yet.
