Viatris Views Ophthalmology, Dermatology, and Gastroenterology as Future Pipeline Focus

Equity Analyst

Keonhee Kim

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Viatris is one of the largest generic drug manufacturers in the world. Viatris' generics business makes up roughly 40% of company's sales and, along with other generics manufacturers, it continues to suffer low- to mid-single-digit erosion year over year in developed markets like North America and the majority of Europe. Because price and margin 

headwinds exist predominantly in small-molecule oral tablets that are easy to produce, we expect Viatris’ future pipeline to focus more on complex generics—drugs that have complex formulations, dosage forms, or are injected or have more complex administration. 

Complex generics are more difficult to manufacture which by nature limits competition. And since price, volume, and margin are highly dependent on the competitiveness of a drug, complex generics pave an opportunistic road for Viatris. But other players in the industry are employing a similar strategy so success in this area relies on the company’s ability to seek out profitable drugs and efficiently launching them to market.

The remaining 60% of Viatris’ sales is derived from off-patent branded drugs, including Lipitor, Lyrica, and Norvasc. While macrotrends like the aging population and growing emerging markets can continue to boost sales, we still expect low- to mid-single-digit erosion in the business from pricing and volume headwinds driven from more patients opting generic versions. To combat this, Viatris has identified ophthalmology, dermatology, and gastroenterology as three key therapeutic areas of focus for future innovations. Since these areas are all specialty-driven, a small salesforce can capture a large number of doctors. And a lot of innovations usually come from smaller players, meaning there is not one big leader that Viatris has to displace to gain shares. It launched Tyrvaya, the first and only nasal spray 

for the treatment of dry eye disease at the time of launch, and it expects additional products for dry eye disease going forward. In 2023, it acquired Oyster Point and Famy Life Sciences, two companies that focus on ophthalmology, and we expect additional small tuck-in acquisitions in the three therapeutic areas to fuel its pipeline.

Business Strategy & Outlook

We assign Viatris a no-moat rating because we do not believe the company possesses any structural advantages strong enough to earn excess returns and generate return on invested capital above its cost of capital over the next 10 years. 

While generic drugs were around in the U.S. since the early 20th century, their industry experienced a significant growth following the passage of the 1984 Hatch-Waxman Act. The legislation facilitated the drug application process for generic drug manufacturers by providing them a safe harbor from patent infringement litigation from branded drug manufacturers and allowed the U.S. Food and Drug Administration to approve applications for generic drugs with abbreviated new drug applications. An ANDA requires the applicant to demonstrate its generic drug’s pharmaceutical equivalence and bioequivalence to the reference drug, but it generally does not require preclinical and clinical data to prove safety and effectiveness since it relies on the FDA’s prior approval of the reference drug’s safety and effectiveness. Overall, this legislation paved a much swifter way for generics manufacturers to get their drugs approved compared with a new drug application, which a new branded drug must go through.

The U.S. generic drug industry enjoyed another boost when Congress enacted a series of amendments named the Generic Drug User Fee Amendments (first one passed in 2012, second in 2017 and the latest in 2022), allowing the FDA to collect fees from ANDA applicants to expedite application approval process. The fees (an ANDA fee rate for 2023 was around $240,000) are not meaningful to sway big generic manufacturers away and they also provide additional revenue streams and financial support to the FDA, allowing applications to be approved more quickly and efficiently. 

These regulatory pushes by the U.S. government paved ways for the industry to be highly competitive and be filled with commoditized products, eroding a lot of pricing power that generics manufacturers once had. And although there are a few number of players that make up a relatively healthy share of the generics market, barriers to entry here is quite low, expanding possibilities for firms in the space to face additional competition going forward. This explains the hike in generic dispensing rate (percentage of prescriptions dispensed with a generic rather than a branded reference drug) which grew from 54% to 91% between 2002 and 2019. And while an average of less than 300 ANDAs were approved annually from 1985 to 2012, thanks to these changes, the FDA has averaged around 1,000 ANDA approvals per year over the last five years. 

Beyond government actions, generics manufacturers also face pressures from players within the drug supply chain. The formation of powerful generic sourcing groups and establishment of generic formularies by pharmacy benefit manager enabled drug distributors and drug buyers to effectively negotiate lower generic prices, hurting manufacturers’ margins.

Three large generic sourcing programs that were formed as joint ventures between large wholesalers and drug purchasers—ClarusONE (2016, McKesson and Walmart); Red Oak Sourcing (2013, Cardinal Health and CVS); and Walgreens Boots Alliance Development (2012, AmerisourceBergen and Walgreens)—have acted as additional headwind for generics manufacturers. These entities were created to lower generics acquisition costs through the aggregation of purchasing power and as a result, they can demand higher buy-side discounts and rebates from generics manufacturers, ultimately eating into their profits. They now purchase roughly 80% of all generics sold in the U.S. Additionally, the interchangeability between generics has facilitated the establishment of generic formularies, in which wholesalers can use their purchasing scale to negotiate deeper concessions for placement in the generic sourcing program. As these three players continue to make up a larger portion of generic sourcing in the country and enhance their buying power, generics manufacturers are left with no other choice but to face the burden, resulting in low- to mid-single-digit price erosion in the market year over year.

By our estimate, roughly 40% and 50% of Viatris total sales are derived from generics and off-patent branded drugs, respectively, and both areas are highly susceptible to all the pricing headwinds mentioned above. Viatris has decided to combat this by rationalizing and optimizing its portfolio, carefully deciding which drugs to continue commercializing and which drugs to discontinue. The company opted to exit spaces where it had too many existing players and discontinue small-molecule drugs that are fairly simple to be FDA-approved and to be replicated. Furthermore, Viatris has continued to pursue more opportunities into branded drugs, aiming to launch sizable novel drugs that can have a meaningful impact on the top and bottom lines. Viatris has also sought to expand its presence in complex generics. These drugs typically face limited competition due to a more complicated level of research and development required before reaching commercial stage. Instead of being available in simple oral tablets, which are relatively easy to replicate by competitors, complex generics and biosimilars usually come in injectables, inhalers, and other different forms that pose more challenges to other manufacturers to produce. 

Despite these efforts, we don’t believe Viatris has any structural advantages over other generic manufacturers. It doesn’t have a meaningfully larger number of first-to-file launches compared with other players in the space. And even if it launches a few drugs that are first to market and gain 180-day exclusivity periods in certain products, they are likely to face direct competition as soon as that period expires, leading to significant volume reductions. If Viatris continues to downsize its portfolio of commoditized and easy-to-replicate generic drugs and replace them with more innovative medicines, we could potentially revisit our analysis. For now, we do not believe Viatris earns a moat rating.

None

Economic Moat

Viatris

Viatris, Inc. is a global healthcare company, which engages in the provision of access to medicines and sustainable operations. It also offers support services such as diagnostic clinics, educational seminars, and digital tools. The firm operates through the following segments: Developed Markets, Greater China, JANZ, and Emerging Markets. The Developed Markets segment consists of operations primarily in North America and Europe. The Greater China segment includes operations in mainland China, Taiwan and Hong Kong. The JANZ segment consists of operations in Japan, Australia and New Zealand. The Emerging Markets segment encompasses operations with developing markets and emerging economies including countries in Asia, the Middle East, South and Central America, Africa and Eastern Europe. The company was founded on February 14, 2019 and is headquartered in Canonsburg, PA.

Earnings data Q4 2023

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Viatris stock popped Monday after the company announced it would divest most of its over-the-counter and women's health businesses.

Viatris Stock Bounds Higher As Divestitures Reach Nearly $7 Billion

Drugmaker Viatris said on Sunday that it has entered into agreements to divest its businesses, including the Women's Healthcare business and its Active Pharmaceutical Ingredients (API) business. It received an offer for the divestiture of its Over-the-Counter (OTC) business.

Drugmaker Viatris to divest some of its businesses

Total Gross Proceeds From All Divestitures, Including the 2022 Divestiture of the Company's Biosimilars Business, and the Estimated Retained Value are in Line with the Company's Previously Communicated Range Strategic Decision Made to Retain Rights and Opportunities for Viagra®, Dymista® and Select Over-the-Counter (OTC) Products in Certain Markets Representing Approximately $1.6B in Estimated Retained Value Total Transactions Value Represents up to $6.94B of Total Gross Proceeds Which Represents an Accretive Multiple of 12.4x [1] Offer for Substantially All of OTC Business Reflects Gross Consideration of up to Approximately $2.17B, Representing an Estimated Accretive Multiple of 12.8x; Definitive Agreements for Active Pharmaceutical Ingredients (API) and Women's Healthcare Reflect Gross Proceeds of up to Approximately $1.2B, Representing an Estimated Accretive Multiple of 9.9x Combined Divestitures Would Result in up to 12 Facilities and More Than 6,000 Employees Representing Approximately 15 Percent of the Company's Global Workforce Being Conveyed, Substantially Simplifying the Organization Today's Announced Divestitures Expected to Close by the End of the First Half of 2024, Subject to Regulatory Approvals, Consultations and Other Closing Conditions Completion of Divestitures Will Bring Successful Conclusion to All Phase 1 Efforts and Commitments, Including Prioritizing Use of Net Proceeds for Debt Paydown to Reach Gross Leverage Target [1] of 3.0x in the First Half of 2024 PITTSBURGH , Oct. 1, 2023 /PRNewswire/ -- Viatris Inc. (NASDAQ: VTRS), a global healthcare company, today announced it has received an offer for the divestiture of substantially all of its Over-the-Counter (OTC) business, and has entered into definitive agreements to divest its Women's Healthcare business, its Active Pharmaceutical Ingredients (API) business in India and commercialization rights in certain non-core markets that were acquired as part of the Upjohn Transaction. Viatris CEO Scott A.

Viatris Announces Agreements on Remaining Planned Divestitures; Upon Closing Would Achieve its Original Total Target of a Multiple Above 12x on 2022 Estimated Adjusted EBITDA

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Viatris Inc.'s Q2 2023 earnings presentation notes that generic forms of NVO's Ozempic and Wegovy are under regulatory review. Despite newer therapies, older drugs like Trulicity continue to generate significant revenues, so a generic semaglutide could still compete with newer drugs. Viatris continues to make headway on paying down its debt and there is room for optimism on the top line, thanks to the launch of newer products.

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Viatris (VTRS) and partner Ocuphire Pharma receive FDA approval for Ryzumvi to treat pharmacologically-induced mydriasis of the pupils.

Viatris (VTRS) Gets FDA Nod for Pupil Dilation Reversal Agent

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Viatris Inc. VTRS, and Ocuphire Pharma Inc. OCUP, +3.08% said Wednesday that the U.S. Food and Drug Administration has approved Ryzumvi to treat the side effects of pharmacologically-induced mydriasis, or dilation of pupils. About 100 million eye dilations are conducted in the U.S. each year to examine the retina and for other routine check-ups, the companies said in a release, but the dilation can last up to 24 hours and side effects include light sensitivity and blurred vision.

Viatris and Ocuphire Pharma get FDA green light for eye treatment

RYZUMVI Expected to be Commercially Available in the U.S. in the First Half of 2024   PITTSBURGH, and FARMINGTON HILLS, Mich. , Sept. 27, 2023 /PRNewswire/ -- Viatris Inc. (NASDAQ: VTRS), a global healthcare company, and Ocuphire Pharma, Inc. (Nasdaq: OCUP), a clinical-stage ophthalmic biopharmaceutical company focused on developing and commercializing small-molecule therapies for the treatment of retinal and refractive eye disorders, today announced that the U.S. Food and Drug Administration (FDA) has approved RYZUMVI™  (phentolamine ophthalmic solution) 0.75% for the treatment of pharmacologically-induced mydriasis produced by adrenergic agonists (e.g.

Viatris and Ocuphire Pharma Announce FDA Approval of RYZUMVl™ (Phentolamine Ophthalmic Solution) 0.75% Eye Drops for the Treatment of Pharmacologically-Induced Mydriasis Produced by Adrenergic Agonists (e.g., Phenylephrine) or Parasympatholytic (e.g.

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Viatris is a healthcare corporation formed through a merger, with a diversified global portfolio and a focus on ophthalmology, gastrointestinal, and dermatology therapeutic areas. Despite its elevated debt load, Viatris has demonstrated strong financial performance, including revenue growth and high free cash flow, supporting its strategic progress and dividend sustainability. Trading at low multiples of EBITDA and free cash flow, Viatris stock presents a long-term investment opportunity, but its valuation improvement may take several years.

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Viatris (VTRS) reported earnings 30 days ago. What's next for the stock?

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Biocon Biologics Continues to Expand Global Footprint, Completes Integration of Viatris Biosimilars' Business In North America Ahead of Schedule

Viatris (VTRS) obtains tentative approval from the FDA for a pediatric formulation of abacavir/dolutegravir/lamivudine, a once-daily treatment for children living with HIV.

Viatris (VTRS) Gets Tentative Approval for HIV Regimen for Kids

Tentative approval will help enhance access to WHO-recommended paediatric regimen with the goal of improved adherence of HIV treatment for children in low- and middle-income countries PITTSBURGH and BANGALORE, India , Sept. 5, 2023 /PRNewswire/ -- Viatris Inc. (NASDAQ: VTRS), a global healthcare company, today announced U.S. Food and Drug Administration (FDA) tentative approval for a New Drug Application for abacavir 60 mg/dolutegravir 5 mg/lamivudine 30 mg tablets for oral suspension for the treatment of HIV-1 infection in paediatric patients.

Viatris Announces U.S. FDA Tentative Approval of a Paediatric Formulation of Abacavir (ABC)/Dolutegravir (DTG)/Lamivudine (3TC), a Once-daily Treatment for Children Living with HIV

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NEW YORK--(BUSINESS WIRE)-- #A--Bragar Eagel & Squire, P.C., a nationally recognized shareholder rights law firm, is investigating potential claims against Viatris Inc. (NASDAQ: VTRS) on behalf of long-term stockholders following a class action complaint that was filed against Viatris on May 15, 2023 with a Class Period from March 1, 2021 and February 25, 2022. Our investigation concerns whether the board of directors of Viatris have breached their fiduciary duties to the company. Throughout the.

VIATRIS ALERT: Bragar Eagel & Squire, P.C. is Investigating Viatris Inc. on Behalf of Long-Term Stockholders and Encourages Investors to Contact the Firm

On August 7, Viatris released its financial results for the 2nd quarter of 2023, which, after a long time, finally managed to beat analysts' expectations. Viatris' revenue for the second quarter of 2023 was $3.92 billion, up 5.1% from the previous quarter but down 4.9% from the second quarter of 2022. Viatris' R&D spending was $207.9 million in Q2 2023, up 28.3% year-over-year due to increased investment in developing product candidates such as MR-148 and MR-141.

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