Viatris

Viatris delivered 5% revenue growth and 11% adjusted earnings per share growth during the second quarter. Both figures landed ahead of the FactSet consensus. EPS guidance was raised 5% at the midpoint. Shares traded down 3%.

Why it matters: We think shares are moving lower despite Viatris beating estimates, as investors had hoped for an even brighter picture in the back half of 2026, given such strong performance in the first two quarters of the year. We don't see this as a sign of any particular concern, though, and appreciate the good sequential improvement, with both the top and bottom lines landing ahead of our expectations. Developed markets and China—Viatris' two largest regions that combined make up 77% of sales--had a solid quarter with sales up 4% and 21%, respectively. Adjusted EBITDA margin was up 150 basis points and continues to show nice momentum. Viatris has been investing in its pipeline of branded drugs through acquisitions, and we think favorable progress in clinical trials and commercial success will boost the bottom line over the long term, though the near-term benefit appears immaterial given the timing.

The bottom line: We are inching up our fair value estimate to $17 per share from $16, reflecting the outlook update and recent cash flows. Our valuation reflects a 7.2x EV/2026 adjusted EBITDA multiple, and shares appear appropriately valued. Our expectation for $14.8 billion in revenue and $4.4 billion in adjusted EBITDA (30% margin) in 2026 lands around the midpoint of management's updated guidance range.

Coming up: Notable pipeline potential updates in the next 12 months include a Food and Drug Administration approval of meloxicam (pain management) and a phase 3 readout of cenerimod (SLE).

We are inching up our fair value estimate to $17 per share from $16 to account for its outlook update and recent cash flows. Our valuation reflects 7.2x EV/2026 adjusted EBITDA. Our $14.8 billion in revenue and $4.4 billion in adjusted EBITDA (30% margin) estimate for 2026 lands around midpoint of management's updated guidance range.

As with other generics manufacturers operating in developed markets, Viatris is prone to pricing pressures from governmental actions and other players in the drug supply chain as well as volume pressures from increasing competition in once-profitable drugs. In North America, for example, legislation like the Generic Drug User Fee Act, which had its third iteration passed in 2022, as well as regulatory pressures to lower drug prices, act as industrywide headwinds. Furthermore, three large generic sourcing joint ventures that were formed 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)—as well as the formation of generic formularies from large PBMs that continue to squeeze manufacturers’ margins. While we expect Viatris to continue to launch new generic drugs with hopes of being a first-to-market player, such opportunities are rare. We expect the company’s generics to grow in the low single digits over our forecast period.

To combat pressures that its traditional generics portfolio faces, Viatris has identified two avenues for future growth: complex generics and new innovative drugs. The company’s pipeline looks solid, with a number of drugs in phase 2 or phase 3, and it tackles a variety of indications. With Viatris' global footprint, we think the firm can enjoy macro tailwinds including the aging population and improving access to healthcare in emerging markets. While some pipeline assets look to tackle small end markets and our expectation on their earnings contribution remains low, there are promising drugs including treatment for dry eye disease and pain management.

Complex generics, especially injectables, are more challenging to manufacture compared with small-molecule oral tablets. Therefore, competition in this market is usually less severe, leaving more opportunities for manufacturers like Viatris to earn healthy profits. We expect three-fourths of Viatris’ pipeline and research and development spending to be allocated to complex generics. The company has a robust pipeline, with many complex injectables with potential first-to-market opportunities, which should fuel long-term growth.

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 have been around in the US since the early 20th century, the industry experienced 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 US 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 provided a significantly faster path for generics manufacturers to obtain drug approvals compared with new branded drugs.

The US generics 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 the approval process. The fees are not meaningful enough to push 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 paved the way for the industry to be highly competitive and be filled with commoditized products, eroding a lot of pricing power that generics manufacturers once had. Furthermore, barriers to entry here are quite low, expanding possibilities for firms in the space to face additional competition going forward. This explains the hike in generic dispensing rate (the percentage of prescriptions dispensed with a generic rather than a branded reference drug), which grew from roughly half in 2000 to over 90% today. 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 the establishment of generic formularies by pharmacy benefit managers 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 created additional headwinds for generics manufacturers. These entities were created to lower generics acquisition costs through the aggregation of purchasing power, enabling higher buy-side discounts and rebates from generics manufacturers. They now purchase roughly 80% of all generics sold in the US. 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. With these industry developments, generics manufacturers are left with no other choice but to face the burden, typically resulting in a 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 pricing headwinds. 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 chose to exit spaces where it had too many existing players and discontinue small-molecule drugs that are fairly simple to be FDA-approved and replicated. Furthermore, Viatris has continued to pursue more opportunities in 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 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. 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.

Recent additions to the pipeline, which span many attractive therapeutic areas, should support Viatris' long-term growth potential and margin expansion.

Effective portfolio optimization from divestitures and a promising pipeline of first-to-market generic launches should provide solid top-line tailwinds.

Exiting biosimilars business will reallocate resources and help the company focus on long-term goals in its core generic and branded markets.

Base business erosion will persist in developed markets and act as a headwind that Viatris must try to offset with new product launches.

Failure to develop its pipeline and launch products could cause the company to lag its competitors in terms of innovation and development, especially since Viatris has exited biosimilar opportunities.

The impact of pharmaceutical-specific tariffs on the generics industry remains uncertain and could weigh down Viatris' earnings.