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Viatris stock slides 24% as analysts say sale of biosimilars to Indian partner removes key growth driver

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Viatris Inc. said Monday it has agreed to combine its biosimilars portfolio with privately held Indian company Biocon Biologics Ltd. for up to $3.335 billion, as part of a broader overhaul of its business following a strategic review.

The Pittsburgh-based company
VTRS,
-24.21%
,
formed by the merger of generic drug maker Mylan and Pfizer
PFE,
-2.14%

unit Upjohn last year, said the move is the first in a planned series of asset sales that could generate pretax proceeds of up to $6 billion by the end of 2023.

Under the terms of the deal, Viatris will receive $2 billion in cash upfront, plus an additional up to $335 million in cash payments to be made in 2024, and $1 billion in convertible preferred shares, equal to a stake of at least 12.9% in Biocon Biologics, its longtime partner. The deal is expected to close in the second half.

“Upon closing, the transaction is expected to provide Viatris with immediate, enhanced financial flexibility, and accelerate its Phase I financial commitments,” the company said in a statement.

Biocon is targeting an initial public offering in India in late 2023.

Shares initially jumped on the news, before reversing course to trade down 24%, as analysts said it would remove a key growth driver.

Viatris is expecting the portfolio to generate revenue of about $875 million in 2022 and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of about $200 million. That gives the deal a multiple of 16.5 times estimated 2022 adjusted EBITDA, compared with Viatris’ own EV/EBITDA of 6.5 times.

“Despite the negative impact to the current growth narrative, total consideration of $3.335B is simply too good to walk away from in our view,” said Raymond James analysts. “Reality is that financial markets will never pay 17.0X for anything VTRS ever does in the future.”

Raymond James has an outperform rating on the stock.

Bernstein analysts said they expect the rationale for the deal is related to the valuations of biosimilars in Asia, where Samsung Biologics recently did a similar deal with Biogen
BIIB,
+0.63%
.

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 “The exit is tactically smart; longer term we will see,” analysts led by Aaron Gal wrote in a note to clients. Bernstein has a market perform rating on the stock.

“Our view is that the biosimilar business of VTRS was struggling, with lower margin (the projected 2022 margin was 23%; let’s see if we can get the trailing number), and there is reasonably tough competition looking forward. The challenge is that biosimilars is strategically positioned between the generic and off-label businesses and exiting it, together with the infrastructure supporting it, suggests even less focus on the generic business.”

Bernstein is expecting some of the proceeds to be spend on stock buybacks, after the Viatris board approved a share buyback program of up to $1 billion.

Viatris also reported earnings early Monday, showing a net loss of $263.8 million, or 22 cents a share, for the fourth quarter, narrower than the $915.8 million loss, or $1.07 a share, posted in the year-earlier period.

Revenue came to $4.331 billion, up from $3.588 billion a year ago.

The company expects 2022 revenue to range from $17.0 billion to $17.5 billion, compared with a FactSet consensus for $17.6 billion.

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