Fitch Ratings has affirmed the Long and Short-term Issuer Default Rating (IDR) of Viatris Inc. at 'BBB'/'F2'.
Fitch has also affirmed the 'BBB' LT IDRs of Mylan, Inc. and Utah Acquisition Sub Inc. as well as the 'BBB' senior unsecured debt rating of Upjohn Finance, B.V. The Rating Outlook is Stable. The ratings apply to approximately $18.7 billion as of Dec 31, 2022.
Viatris' 'BBB' rating reflects the company's global scale and diversification by product and geography, diverse pipeline of new products and commitment to debt reduction. However, revenue growth challenges, restructuring costs and pricing pressures offset these strengths. Following its sale of selected assets, Fitch anticipates Viatris will prioritize debt reduction to sustain its EBITDA leverage at or below 3.5x and FCF/debt at or above 10%.
Key Rating Drivers
Global Scale: The combination of Mylan Inc. (BBB/Stable) and former Upjohn business of Pfizer to form Viatris in November 2020 brought together two entities with global commercial, R&D, regulatory, manufacturing, legal and medical expertise. Viatris provides medicine to patients in more than 165 countries and territories. Viatris' portfolio comprises more than 1,400 approved molecules across a wide range of key therapeutic areas, including globally recognized brands of generic and complex generics. Viatris operates approximately 40 manufacturing sites worldwide that produce oral solid doses, injectables, complex dosage forms and active pharmaceutical ingredients.
Solid Brand Portfolio, but with Concentration Risk: Viatris possesses a distinguished group of off-patent branded generic drugs that address a variety of therapeutic needs. These products generated more than $5 billion of net sales in FYs 2022 and 2021. However, for those years, the top-ten products in terms of net sales represented approximately 33% of total net sales. This concentration leaves Viatris vulnerable to potential material changes in its cash flows in the event one or more of these products lose sales momentum.
Shifting Strategy: In February 2022 and in November 2022, Viatris announced various strategic initiatives, transactions and business arrangements, including a two-phased strategic vision. In Phase 1, Viatris contributed its biosimilars portfolio as well as related assets and liabilities to Biocon Biologics in exchange for approximately $2 billion in initial cash proceeds and approximately a $1 billion preferred equity stake in the combined business. Also, Phase 1 includes the planned divestitures of selected assets, including Viatris' over-the-counter business, most of its active pharmaceutical ingredients, selected women's healthcare products and Upjohn Distributor Markets.
Fitch understands that Viatris will use the proceeds from these divestitures for debt reduction, share repurchases and corporate development. Over the near term, maintenance of Viatris 'BBB' rating and Stable Outlook will depend heavily on how these transactions unfold (amounts, timing and use of proceeds) until it is clear that the revenue and EBITDA from Viatris' base business and any new investments completed during Phase 2 of its strategy will support its expected debt structure.
Promising Pipeline of Launches: Fitch sees a promising pipeline of future product launches over the next several years comprising complex injectable products and select novel 505(b)(2) products; also, the creation of a meaningful ophthalmology franchise appears feasible with the additions of Oyster Point and the Famy Life Sciences Portfolio, both of which can benefit from Viatris' global commercial footprint, regulatory capabilities and global supply chain.
Regulatory Environment/Commercial Sector Pricing Pressure: Pricing and reimbursement for pharmaceutical products partially depends on government regulation. For example, the majority of U.S. states use preferred drug lists to restrict access to certain pharmaceutical products under Medicaid. Viatris will face a number of regulatory pricing pressures in the EU member states, Japan, China, Canada, South Korea and other countries.
Likewise, the potential for additional pricing and access pressures in the commercial sector continues to be significant. Private third-party payers, such as health plans, increasingly challenge pharmaceutical product pricing, which could result in lower prices, lower reimbursement rates and reduced demand for Viatris' products. Pricing pressure for products may result from highly competitive insurance markets. Healthcare provider purchasers, directly or through group purchasing organizations, are seeking enhanced discounts or are implementing more rigorous bidding or purchasing review processes.
Derivation Summary
Viatris' 'BBB' Long-Term IDR reflects Fitch's expectation of management's commitment to manage leverage commensurate with its evolving operating profile. The EBITDA and cash flow generation potential of Viatris is expected to continue to evolve over the near to medium term as management repositions Viatris for growth through both organic and external investments. Key catalysts for change are expected to emerge from repositioning the generics portfolio toward more complex products, fewer LOEs and the divestitures of selected assets. Financial flexibility is expected to improve with a material reduction in LT debt compared to levels at the time of the Mylan-Upjohn merger.
These risks are offset by the still substantial indebtedness created by the Mylan-Upjohn merger, the erosion of the North American generics portfolio and the branded Upjohn portfolio, and modest contributions from asset or business acquisitions.
Compared with other pharmaceutical companies rated in the 'BBB' category, such as Amgen (BBB+/RWN) and Bayer (BBB+/Stable), Viatris is less well positioned in terms of its size, market position and history of innovation. However, relative to those firms, Viatris has substantially less litigation risk and lower debt; in addition, Viatris is expected to pursue a less aggressive corporate development strategy compared to Amgen or Bayer.
Viatris' 'F2' Short-Term IDR is supported by the company's strong financial flexibility, financial structure and operating environment. Viatris' financial structure subfactor of 'bbb'; financial flexibility subfactor of 'bbb+', with very comfortable liquidity of 'a'; and good operating environment of 'aa', given the locations in which it operates, all support the Short-Term 'F2' IDR.
The ratings of Viatris and its subsidiaries reflect the guidance in Fitch's parent-subsidiary linkage criteria of a weak parent/strong subsidiary. Based on the existence of cross-guarantees on a senior unsecured basis between Viatris and the Fitch-rated subsidiaries, Fitch has determined the Linkage Factor Assessment for legal ring-fencing and access and control between Viatris and such subsidiaries to be open and, therefore, the ratings are the same.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer Include:
Viatris completes the sale of selected assets no later than 1H of 2024 and realizes pre-tax gross proceeds of $5.5 billion ($4.8 billion after the purchase of Oyster Point Pharma and Famy Life Sciences);
Revenues assumed to range between $15.5 billion and $14.5 billion over the forecast period, reflecting the divestitures of biosimilars and selected assets offset by modest growth from the pipeline and acquisitions;
EBITDA assumed to range between $4.5 billion and $5.0 billion over the forecast period reflecting the same drivers for revenues; material restructuring charges are assumed in each of the forecast years related to the sale of assets;
Net working capital investment is expected to be 1.0%-1.2% of revenue over the forecast;
Capex, including IPR&D investment of approximately 3% of revenues over the forecast;
Debt repayment, share repurchase and dividends are managed to achieve a Fitch EBITDA leverage of approximately 3.5x over the forecast period; asset sale proceeds are applied to debt reduction to manage leverage prudently; Fitch assumes that future debt issues will be have coupons of 6% or higher over the forecast period through 2026.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Expectations that EBITDA leverage will be sustained below 3.0x and FCF/debt will be sustained above 20%;
Effective execution of the company's operational priorities such as retaining base business, delivering on pipeline investments, maximizing the integration of the eyecare acquisition and completing divestitures.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Expectations that EBITDA leverage will be sustained above 3.5x and FCF/debt below 10%;
Development of material litigation that threatens FCF.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Sufficient Liquidity: Viatris' principal source of liquidity is cash flow from operations (CFFO), which is expected to sufficiently cover capex, dividend, interest and principal payments. In addition, Viatris maintains a $4.00 billion committed revolving credit facility. Viatris uses a $1.65 billion CP program from time-to time, which is supported by up to $1.65 billion of the revolving credit facility. The CP balance was zero at Dec 31, 2022.
Mylan Pharmaceuticals Inc., a wholly owned subsidiary, has a receivables facility that provides liquidity up to $400 million that will expire in April 2025, as well as a $200 million notes securitization facility, expiring August 2023. As of Dec. 30, 2022, neither facility had an outstanding balance. Fitch expects liquidity to remain solid throughout the forecast.
Viatris' schedule of long-term debt maturities is considered to be manageable and is expected to be funded principally through FCF and asset sales. Fitch anticipates Viatris will pay at minimum its announced target of $6.5 billion of debt by YE 2023 and potentially more depending on the timing of asset sales. Fitch includes any short-term borrowings under CP or securitization programs in its measurement of total debt reduction and uses the principal or notional amount of debt outstanding in its credit metrics. Fitch assumes that future debt issues will be have coupons of 6% or higher over the forecast period through 2026.
Issuer Profile
Viatris is a global health care company formed in November 2020 through the combination of Mylan and the Upjohn Business. Viatris' portfolio comprises more than 1,400 approved molecules across a wide range of key therapeutic areas, including globally recognized brands, generics and complex generics.
Summary of Financial Adjustments
Historical and forecast EBITDA were adjusted to add back stock-based compensation, restructuring, merger and integration and litigation costs.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Viatris has an ESG Relevance Score of '4' for Exposure to Social Impacts due to societal and regulatory pressures to constrain growth in U.S. healthcare spending. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
VIATRIS INC. 
