Viatris, or just Mylan with a new name? Analysts cast doubt on newco's growth path

Pills shaped like question mark
Analysts were skeptical of Viatris' revenue growth as well as its cash generation ability as execs failed to offer more details on the company's near-term plan beyond 2021. (Getty Images)

Last week, Viatris laid out its first financial targets for the new company, which combined generics specialist Mylan and Pfizer’s established medicines unit Upjohn. But several analysts came away from the investor event skeptical of the blueprint they were shown.

Viatris CEO Michael Goettler described 2021 as a “trough” year for the company, with revenue expected at around $17.2 billion to $17.8 billion. It expects the next two years to be a period for stabilizing and rebalancing the business before it can begin “modest and durable” sales growth in 2024.

But Bernstein analyst Ronny Gal argues the 2021 estimate is either too conservative or reveals some challenging trends. And as he and other analysts picked apart the numbers, they also raised questions about whether Viatris will be any more upfront about its plans—and if necessary, problems—than Mylan was.

For the fourth quarter of 2020, Viatris sales checked in at $4.03 billion, lower than the average $4.75 billion for the previous three quarters on a pro-forma basis for the two separate businesses, Gal wrote in a Monday investor note. The company pointed to COVID-19 and the termination of a generic drug collaboration with Pfizer in Japan in December 2020 as reasons for the decline.

After those factors are removed, one would expect $19 billion in 2021 revenue, Gal said—far more than Viatris is predicting.

The estimate is too low even if several of Viatris' known challenges are factored in—including a potential $500 million hit from the early Japanese launch of Lyrica generics; a $300 million loss in China because of the volume-based procurement scheme targeting off-patent drugs; and another $150 million from its looming Perforomist patent cliff.

So, Gal figures the company’s underlying business is suffering, too—or Viatris management is simply “sandbagging” its forecasts so it can easily beat them.

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During its presentation on March 1, Viatris did put down a 3% to 4% base business erosion rate, or about $740 million for 2021. But it also expects newer drugs to largely offset that gap.

In Europe, Viatris hopes to leverage its sales force of more than 3,000 reps—versus about 400 in the U.S.—to launch more than 200 products this year, Tony Mauro, Viatris’ chief of developed markets, told investors at the event. In the U.S., the company aims to launch 30 new products.

But the main topic that raised investors' eyebrows was Viatris’ projected free cash flow of $2.15 billion for 2021, RBC Capital Markets analyst Randall Stanicky pointed out in a March 2 note.

Apparently, a cash cost of $1.5 billion, which Viatris pinned to driving future cost savings for the combined business and other one-time items, took investors by surprise.

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Viatris expects the majority of the $1.5 billion won’t recur, bringing its free cash flow up to about $3 billion in 2023. That could bring the new firm’s free cash flow ratio to profit to around “historical Mylan levels” of about 51% on average, which has been below typical industry levels, Stanicky noted. But Viatris management didn’t offer details beyond 2021.

At that cash generation level, Gal suggests the company’s near-term value is weak. To compensate, Viatris has to rely on cutting down its debt, the analyst said; the company does plan to pay down $6.5 billion for debt by year-end 2023.

That obviously doesn’t leave a lot of firepower for deals. “This, for a challenging business model which will rely on acquisition to offset base business erosion. Quo Vadis?” he wrote in the note.

As Gal sees it, the Viatris investor event “paralleled prior Mylan days … with limited novel info,” as Goettler—who came over from Upjohn’s top job—was trying to convince investors that he’s leading new management.

Stanicky also complained that the exec team spent a lot of time detailing its “global gateway”—which involves forming partnerships to launch drugs across the world—but was short on specifics around key questions investors have.

“Shares reflect frustration but also value,” Stanicky wrote in his note, “from here we see need to demonstrate execution for a meaningful move higher.”

SVB Leerink analyst Ami Fadia said in a March 2 note: “We remain on the sidelines until we gain better visibility on execution, as well as the long-term growth prospects for the combined company.”