Here are a few surprising facts about the Pharmaceutical / Biotechnology companies Organon (OGN) and Viatris (VTRS).
Firstly, both of these companies – which began trading on June 3rd, 2021 (Organon) and November 16th 2020 (Viatris) – are dividend payers.
Organon declared a quarterly dividend of $0.28 per share when announcing its FY21 results a few days ago, and Viatris – yet to release FY21 earnings – announced in January that it would be increasing its quarterly dividend by 9%, to $0.12 per share.
Viatris and Organon’s dividend yields are therefore 3.25% and 3.1%, which is more than respectable for companies that are respectively just over, and just under 1 year old.
Viatris was formed via a merger between the legacy brands division of Pfizer (PFE), which the Pharma giant elected to spin out, and the generics giant Mylan, whilst Organon was formed after the big pharma Merck (MRK) elected to spin out its Women’s Health, Biosimilars and Established Brands divisions into a new entity.
That may not sound like a sound basis for launching an investable company – siphoning off your poorly performing assets – in Viatris’ case brands such as Viagra, pain therapy Lyrica, and cholesterol lowering Lipitor, that have long since lost their patent exclusivity; and in Organon’s a struggling Women’s Health division, and 49 branded products that are no longer patent protected – and asking a new management team to somehow make them profitable again.
If we look at some investment fundamentals in relation to each company, however, the numbers tell us a completely different story – namely that both companies are significantly undervalued.
Across the full year 2021, Organon earned $6.3bn of revenues, which met the higher end of its forecasting and gives the company a price to sales ratio of ~1.5x, which is a very low figure. Non-GAAP adjusted diluted EPS was calculated at $6.54, which gives a forward P/E ratio of 5.6x.
As mentioned, Viatris is yet to release its final financial results for 2021, but if guidance of $17.8bn at the midpoint is met, Viatris will record a price to sales ratio of almost exactly 1x – exceptionally low – and using net cash provided by operating activities as a substitute for net income, the forward P/E ratio can be calculated as ~6x.
To put that in context, we can compare these results to other major companies regarded as exceptionally strong investments – within and without the Pharmaceutical industry.
Apple (AAPL) has a P/S ratio of 8x, and a P/E ratio of 29x. Amazon (AMZN) has a P/S ratio of 3.5x, and a P/E ratio of 49x. Google (GOOG) (NASDAQ:GOOGL) has a P/S ratio of 7.25x, and a P/E ratio of 24.5x.
Amongst Pharmaceutical companies, Johnson & Johnson (JNJ) has a P/S ratio of 4.8x and a P/E ratio of 21.4x, Pfizer (PFE) has a P/S of 3.5x and a P/E of 13x, and Merck has a P/S of 4x and a P/E of 15x.
In other words, Pfizer and Merck’s spinouts are apparently the superior investment options when compared to their parent companies, and by comparison to many of the most successful stocks and businesses, their valuations appear to be staggeringly low.
That, in a nutshell, is why Viatris and Organon offer investors an almost unique opportunity to invest in a company that by most key measures is significantly undervalued, although there are more reasons besides.
Both companies have exciting opportunities within the biosimilar drugs sector – one of the fastest growing areas of the pharmaceutical industry – both have a global presence and infrastructure already in place – and both benefit from highly experienced management teams, in a position to attract some of the best talent around.
There are some caveats to be aware of however – a mantra that is often repeated in the world of investing is that if it sounds too good to be true, then perhaps it is. Both companies’ legacy assets will bleed revenues over time as doctors turn to more modern and effective treatments, and both companies have a high level of financial leverage.
In this post, I will compare and contrast the 2 companies to try to present prospective (or existing) investors with a balanced view of each company, their strengths, weaknesses, opportunities and threats, differences to one another, and prospects for growth – in terms of revenue generation, profitability, and valuation.
Viatris Is The Bigger Company, With Better Growth Prospects Thanks To Mylan Merger
In terms of market cap valuation – $18.3bn versus $8.8bn – Viatris is the much larger company, which is down to the fact that it was formed not only by the Pfizer Upjohn division spin-out, but also via a merger with Mylan.
In a previous note on Viatris, I discussed some of the reasons investors might have for being suspicious of Mylan. The Netherlands based generic drug manufacturer’s Chief Executive Robert Coury – now Executive Chairman of Viatris – once received $97m in annual compensation, at the same time Mylan was being forced to pay $465m in fines to the Department of Justice for overcharging Medicaid for its flagship EpiPen product.
EpiPen is now a key pillar of Viatris’ Brands division – we don’t have the FY21 figures yet, but in Q321, Brands – which also includes the likes of Viagra, Lyrica and Lipitor and blood pressure drug Norvasc – contributed $2.8bn of Viatris total revenues of $4.52bn, or ~62%. The remaining 2 divisions – Complex GX and Biosimilars, and Generics, contributed $332m, and $1.39bn, or 7% and 31%.
Growth Within Women’s Health Division May Not Be Enough To Drive Long Term Growth At Organon
In the case of Organon, across FY21, its Women’s Health division contributed $1.6bn of revenues, or 26% of all revenues earned, whilst its Biosimilars division contributed 7%, Established Brands 65%, and others <2%.
Therefore Viatris and Organon have an almost identical exposure to their legacy or established brands divisions – 62% and 65% – which, more than anything, drives down their market valuations, because investors expect these revenue streams to keep falling in the face of new competition, with no patent protection.
According to Viatris Q321 data, the Established brands division was down just 3% year-on-year, whilst Organon’s FY21 data suggests that sales fell by 10% year-on-year. Organon, however, which makes 75% of its Established Brands sales overseas, believes that it can make up in volume what it is losing in loss of exclusivity (“LOE”), and lowering prices, as shown below.
The fact that Organon expects its revenues to fall only slightly in 2022, or perhaps not at all, is an encouraging sign for investors, although if Organon is to make genuine headway, and achieve organic growth, management must find a way to revive a Women’s Health division that had formed an underwhelming part of Merck’s business.
Organon’s strategy in this regard seems to be to spend its way out of trouble, as I discussed in a November Seeking Alpha post on the company. Alydia Health – and its JADA system designed to stop excessive bleeding after childbirth – was acquired for $240m, and Forendo Pharma was acquired for $75m upfront plus up to $870m of potential development and sales milestone payments, to gain access to its endometriosis (which affects ~170m women globally) therapy pipeline. Ebopiprant was also acquired – a Phase 2 stage asset indicated for treatment of preterm labor, which impacts an estimated 15 million babies.
Organon wants to drive its Women’s Health division revenues by 10% per annum to erase any deficit created by falling Established Brands sales – it is a tough ask, but encouragement can be taken from the performance of birth control treatment Nexplanon, whose sales in FY21 reached $769m – up 13% year-on-year.
It might take 2-3 years before any new products come to market, however, and by my rough calculation, an additional ~$160m of revenues per annum across Women’s Health is not going to be enough to make up a 10% annual drop in Established Brands revenue, which would be more like ~$400m. Organon must continue to stabilise Established Brands losses, and I actually believe this may be possible.
Viatris’ Biosimilars Division & Global Reach May Give It The Edge
Biosimilars – a “biological product that is very similar to a reference biologic and for which there are no clinically meaningful differences in terms of safety, purity, and potency” (source: Drugs.com) – is an important, growing and controversial part of the pharmaceutical landscape.
A biosimilar is very similar to a generic, but its biological profile is not identical to the drug it is trying to imitate – so long as the efficacy and safety match the drug, however, the biosimilar can get around some of the restrictions that apply to generic drugs.
With drug pricing a constantly recurring issue in Pharma, biosimilars – that are potentially cheaper to manufacture and can undercut established drugs on price – are considered to have massive growth potential – a slide from Viatris’ 2021 Investor Day presentation makes the point powerfully.
In essence, Viatris believes there is ~$161bn of revenues up for grabs, if biosimilars can be brought to market that exactly match the performance of the drugs whose mechanism of action (“MoA”) they are designed to mimic. Below is Viatris’ biosimilars pipeline as of Q321.
As we can see, some of the targets already lined up by Viatris are compelling. In July, the FDA approved Viatris’ Semglee – an insulin glargine biosimilar of Sanofi’s (SNY) Lantus, a drug that once earned peak sales of $7bn per annum, albeit less than $1bn in 2021. Hulio – a biosimilar of Humira, AbbVie’s (NYSE:ABBV) >$20bn per annum selling anti-inflammatory therapy – has been launched in Canada,
An Aflibercept biosimilar looks to be nearing approval, capable of challenging for market share against Regeneron’s (NASDAQ:REGN) $8bn per annum selling Eylea, whilst Botox and a range of cancer drug biosimilars promise to genuinely shake up the prescription drug landscape. There is bipartisan government pressure on drug pricing, and biosimilars, which typically enter the marketplace at a 15%-35% discount to the branded drug, could be a significant part of the solution.
Viatris is a truly international company, leveraging both Pfizer and Mylan’s sales and marketing networks and global R&D centres, which is another advantage in the biosimilars race.
In Q321, Viatris earned 18% of its revenues in developing markets, 11% in Japan, Australia and New Zealand, and 13% in Greater China. These regions would likely benefit disproportionately from access to cheaper biosimilars, presenting a large growth opportunity.
Organon also has a biosimilars division, but presently it is not in the same league as Viatris’, nor does it seem to be the company’s main priority, which is Women’s Health, as discussed above.
That doesn’t necessarily mean it should be discounted, however. Organon has a commercial partnership with Samsung, whose Bioepis division is expected to become a major player in biosimilars, and sales of its 3 approved biosimilars – Renflexis, Ontruzant and Brenzys – for autoimmune conditions, breast cancer therapy trastuzumab and plaque psoriasis respectively – were up >10% year-on-year, to $424m.
Debt Weighs Heavily On Both Companies
Of course, when spinning out their legacy assets and certain other businesses, Pfizer and Merck also saw an opportunity to dispose of some of their dirty laundry also – namely substantial portions of debt.
Organon’s net debt stood at $9bn in June 2021, and it stood at $8.4bn at the end of 2021, according to management, which represents progress, but with interest expense $400m in 2021, and forecast to be the same next year, Organon’s debt is eating into its profitability, which is a shame.
In Viatris’ case, the company’s current liabilities as of Q321 are stated to be $10.1bn, and its long-term debt position $19.9bn, which gives management a mountain to climb.
Viatris’ CEO Michael Goettler has promised to pay down $6.5bn of debt by 2023, roughly the same as its annual EBITDA, whilst free cash flow generation is expected to be ~$2.5bn. Clearly, the debt burden is high, but at least Viatris has been able to introduce a dividend, although across the first 9 months of 2021 its R&D spending was just 3% of its total revenues, which strikes me as worryingly low.
Conclusion – Viatris Is The Larger & Has Better Growth Potential But Organon Has The Momentum – Consider Holding Both
As I have discussed in this post, when we study investment fundamentals, Viatris and Organon are evenly matched, and their P/S and P/E ratios are highly attractive and suggestive of significant upside potential. From a debt perspective, neither looks to be in a great place, but there is at least no threat to the dividend, which I would expect to grow.
R&D investment at both companies is perhaps a little thin, presently, which raises questions as to how the falling sales of legacy brands will be replaced. But with that said, I may have been less optimistic than I should have been in relation to Organon’s Women’s Health division – this is a projected $40bn market, its management believes – and I think I have been clear about my enthusiasm for Viatris’ opportunity in biosimilars.
The marriage of Pfizer and Mylan derisks Mylan with established brands as ballast for the experimental biosimilars division, and brings a truly global network into play, whilst Organon may lack the size and scale of Viatris, but benefits from 49 products with many years of strong sales left in them, handing the business the steady cash flow generation it requires to become a global leader in Women’s Health – that is the theory at least.
Although there is an argument to say that both Viatris and Organon will not present financials as strong as in 2021 for many years to come, as legacy brands sales erode, I prefer to take a more positive outlook and consider just how cheap each of these stock prices are currently, and even looking at 2022 guidance.
I am tempted to compare the 2 companies with Abbott Laboratories’ (NYSE:ABT) spinout of AbbVie in 2012 – AbbVie shares are up >300% since that time, although largely thanks to Humira, whose runaway success was unexpected at the time.
So long as revenues at both companies remain relatively stable, as the new business divisions are given time to grow and deliver, I remain confident that company valuations will climb, as the debt pile shrinks, allowing both companies’ managements to become bolder and more adventurous.