Viatris (VTRS)

Medication company Viatris (NASDAQ:VTRS) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 11.2% year on year to $3.25 billion. The company’s full-year revenue guidance of $13.75 billion at the midpoint came in 0.5% below analysts’ estimates. Its non-GAAP profit of $0.50 per share was in line with analysts’ consensus estimates.

Company Overview

Created through the 2020 merger of Mylan and Pfizer's Upjohn division, Viatris (NASDAQ:VTRS) is a healthcare company that develops, manufactures, and distributes branded and generic medicines across more than 165 countries worldwide.

The generic pharmaceutical industry operates on a volume-driven, low-cost business model, producing bioequivalent versions of branded drugs once their patents expire. These companies benefit from consistent demand for affordable medications, as they are critical to reducing healthcare costs. Generics typically face lower R&D expenses and shorter regulatory approval timelines compared to branded drug makers, enabling cost efficiencies. However, the industry is highly competitive, with intense pricing pressures, thin margins, and frequent legal challenges from branded pharmaceutical companies over patent disputes. Looking ahead, the industry is supported by tailwinds such as the role of AI in streamlining drug development (reverse engineering complex formulations) and manufacturing efficiency (optimize processes and remove inefficiencies). Governments and insurers' focus on reducing drug costs can also boost generics' adoption. However, headwinds include escalating pricing pressure from large buyers like pharmacy chains and healthcare distributors as well as evolving regulatory hurdles.

Viatris competes with major pharmaceutical companies including Teva Pharmaceutical Industries (NYSE:TEVA), Novartis' Sandoz division (NYSE:NVS), Pfizer (NYSE:PFE), and Sun Pharmaceutical Industries (NSE:SUNPHARMA) in the global generic and branded generic medication markets.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $14.33 billion in revenue over the past 12 months, Viatris has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Viatris’s sales grew at a mediocre 4.3% compounded annual growth rate over the last five years. This was below our standard for the healthcare sector and is a poor baseline for our analysis.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Viatris’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 4.8% annually.

This quarter, Viatris missed Wall Street’s estimates and reported a rather uninspiring 11.2% year-on-year revenue decline, generating $3.25 billion of revenue.

Looking ahead, sell-side analysts expect revenue to decline by 3.4% over the next 12 months, similar to its two-year rate. While this projection is better than its two-year trend, it's tough to feel optimistic about a company facing demand difficulties.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D.

Viatris’s high expenses have contributed to an average operating margin of negative 1.2% over the last five years. Unprofitable healthcare companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

Looking at the trend in its profitability, Viatris’s operating margin decreased by 16.7 percentage points over the last five years. This performance was caused by more recent speed bumps as the company’s margin fell by 29.7 percentage points on a two-year basis. We’re disappointed in these results because it shows its expenses were rising and it couldn’t pass those costs onto its customers.

In Q1, Viatris generated a negative 88.6% operating margin. The company's consistent lack of profits raise a flag.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Viatris, its EPS declined by 11.2% annually over the last five years while its revenue grew by 4.3%. This tells us the company became less profitable on a per-share basis as it expanded.

We can take a deeper look into Viatris’s earnings to better understand the drivers of its performance. As we mentioned earlier, Viatris’s operating margin declined by 16.7 percentage points over the last five years. Its share count also grew by 131%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q1, Viatris reported EPS at $0.50, down from $0.67 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 1.6%. Over the next 12 months, Wall Street expects Viatris’s full-year EPS of $2.49 to shrink by 7.9%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Viatris has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 14.1% over the last five years, better than the broader healthcare sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Taking a step back, we can see that Viatris’s margin expanded by 4.8 percentage points during that time. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Viatris’s five-year average ROIC was negative 2.9%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Viatris’s ROIC decreased by 3.8 percentage points annually over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Viatris reported $755 million of cash and $14.19 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $4.4 billion of EBITDA over the last 12 months, we view Viatris’s 3.1× net-debt-to-EBITDA ratio as safe. We also see its $299.5 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Viatris raise its full-year EPS guidance. On the other hand, its revenue and full-year revenue guidance fell slightly short of Wall Street’s estimates. Overall, this quarter could have been better, but the stock traded up 8.4% to $9.32 immediately following the results due to the profit outlook.

Updated: May 16, 2025 at 11:35 PM EDT

When considering an investment in Viatris, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Viatris doesn’t pass our quality test. To kick things off, its revenue growth was mediocre over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its impressive operating margins show it has a highly efficient business model, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Viatris’s P/E ratio based on the next 12 months is 3.9x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $11.75 on the company (compared to the current share price of $8.83).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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