Mylan presented on Viatris at the 38th Annual J.P. Morgan Healthcare Conference. Below are selected slides from the presentations of Mylan and Teva at the conference and figures comparing the existing business entities prior to the merger with Upjohn.
Teva has closed many manufacturing sites, but still have more than Viatris; ~60 and ~50 respectively.
The cost synergies between Mylan and Upjohn are expected to be approximately $1B, whereas Teva has already realized annual cost savings of $3B as part of their restructuring plan.
Whereas Viatris will be paying a dividend from day one (25% of free cash flow), Teva does not currently pay a dividend. This cash flow is spent almost entirely on reduction of debt.
It is not impossible to imagine an expansion of multiples at Teva and Viatris, if legal headwinds disappear.
Teva and Upjohn have lost revenue in part because of generic competition to Copaxone® and Lyrica®, respectively.
Teva is the only company that have lowered their SG&A significantly as part of their $3B restructuring plan as a response to the falling generic drug prices in the US.
The lowered SG&A translates to stabilized operating income.
Future growth seems like a possibility for both companies.
2019-11-25 Bloomberg – Teva, Drugmakers in Talks With U.S. to End Generics Probes
2019-11-12 Mylan and Pfizer Announce Viatris as the New Company Name in the Planned Mylan-Upjohn Combination
2019-11-07 Bloomberg – Teva Profit Outlook Edges Up With Cost-Cutting Plan on Track
2019-07-29 Mylan and Upjohn, a Division of Pfizer, to Combine, Creating a New Champion for Global Health Uniquely Positioned to Fulfill the World’s Need for Medicine
Kraft Heinz issued a press release on its third quarter results before the market opened. Organic growth was -1.6% in the US and -1.1% for the whole business.
Revenue and income by geographic and product segment
Revenue growth was impacted negatively by negative organic growth, currency headwinds and divestitures.
The natural cheese business being sold contributed approximately $560 million CAD (approximately $427 million USD at current FX rates) to Kraft Heinz’s net sales in 2017.
Press release from November 2018 announcing sale of Canadian natural cheese business to Parmalat.
The Kraft Heinz Company announced today the closing of the previously announced sale of its Canadian natural cheese business to Parmalat for a purchase price of $1.62 billion CAD (approximately $1.24 billion USD at current FX rates). The agreement includes Cracker Barrel, P’tit Québec, and aMOOza! brands in the Canadian market.
Gross margins and operating margins reached lows of 32.0% and 19.5% respectively, whereas SG&A excluding impairment losses was down from $803M to $762M.
The US experienced negative organic growth of -1.6% despite price growth of 1.5% and revenue in the US for the quarter was $4,361M.
EBITDA was down in all geographic segments, but EBITDA and EBITDA margins seem to have stabilised. Except in the Rest of the World segment, where increasing supply chain costs are causing damage to the EBITDA margin.
The product segment condiments and sauces as well as infant and nutrition both saw some of the biggest declines in the quarter.
CEO Miguel Patricio had the following comment regarding the segments.
While overall performance is improving, our numbers are still negative versus the prior year, and our performance remains uneven across categories and across geographies. This includes ongoing share and distribution losses within our natural cheese, cold cuts and coffee business in the United States, lower-than-anticipated promotional lifts in Canada, ongoing infant nutrition declines in both EMEA and China as well as increasing supply chain costs in our Rest of the World segment.
Kraft Heinz CEO Miguel Patricio on the 2019 third quarter earnings call.
Organic growth was -1.1% and -1.6% in the US despite growth in price of 1.5% in the US.
Debt and interest expenses
S&P in August affirmed the credit rating but revised the outlook from stable to negative. This followed the downgrade in June. S&P commented on adjusted leverage.
The negative outlook reflects the potential for a downgrade to speculative grade by mid-2021 if we believe Kraft Heinz cannot reduce adjusted leverage to below 4x. This could result if operating performance weakens further and we come to believe the strategic plan to be announced by the new CEO in early 2020 will be unsuccessful, including a failure to stabilize and reverse EBITDA declines, or an inability or unwillingness to reduce or eliminate the dividend or conduct meaningful deleveraging asset sales.
The adjusted leverage is still above 4x, but there are small signs of improvement following the deleveraging asset sale of the Canadian natural cheese business for approximately USD1.24B.
Interest expenses were up, which further stresses the need to deleverage.
Impairment charges and the balance sheet
Unlike the previous three quarters and the disastrous fourth quarter of 2018 there were no significant impairment charges and long term debt was reduced to $28,112M following the deleveraging asset sale in Canada.
Why is the share price up in the pre-market?
That the share price is up in the pre-market is probably a combination of valuation, the return of the CFO, the absence of impairment charges. Especially the valuation was attractive following the share price collapse.
And despite all of the bad news that landed in February it still remains a fact, that Kraft Heinz has some of the lowest costs and best margins in the industry.
And unlike the share price neither the sales nor the operating income have imploded. The business is intact despite the headwinds and the mountain of debt.
Procter & Gamble [$PG] issued a press release on its first quarter results prior to the market opening. The company raised its full year guidance. The share price jumped by 2.6% from $119.08 to a 52 week high of $122.18.
All segments except grooming displayed positive organic sales growth. The main contributors to top and bottom line growth is the beauty segment along with the fabric & home care segment.
P&G has in 12 months gone up by more than 50% through expansion of multiples. As a consequence it is anything but cheap at current levels irrespective of having one of the best operating margins and currently displaying one of the best growth rates in the industry.
Netflix issued a press release on its quarterly results after the closing bell.
In Q3, we grew to $5.2 billion in revenue, up 31% over the prior year, and operating income doubled to$1.0 billion. Paid net adds totaled 6.8m compared to our 7.0m forecast and prior year Q3 of 6.1m. As we’ve improved the variety, diversity and quality of our content slate, member engagement has grown, revenue has increased, and we’re able to further fund our content investment.
The number of memberships keeps increasing.
But the net addition of paid memberships is leveling off and so are the number of free trials.
Revenue has grown faster than the number of memberships, because the revenue per membership continues to go up for especially domestic streaming.
Profits are further boosted by the fact, that marketing expenses have mostly stayed flat. This has sent profit margins to all time highs.
The share price of Netflix has had an incredible 10 year stint. As has the revenue and profits. But the share price might possibly have gotten ahead of itself. The multiples are not low and the stock still appears grossly overpriced in absolute and relative terms.
Reuters – Netflix shares jump as subscribers grow ahead of Disney, Apple attack
Bloomberg – Netflix Restores Faith Just Ahead of Offensive by Disney, Apple
Bloomberg – Netflix Approaches Critical Test of Its Viability
Johnson & Johnson [$JNJ] issued a press release before the market opened on its third quarter results with the following headlines:
Sales of $20.7 billion reflecting growth of 1.9%, operational growth of 3.2%* and adjusted operational growth of 5.2%*
EPS of $1.81 increased 25.7%; adjusted EPS of $2.12 increased 3.4%*
Company increasing Full Year Sales and EPS guidance due to strong performance
CEO Alex Gorsky issued the following statement:
“Our third-quarter results represent strong performance, driven by competitive underlying growth in Pharmaceuticals and Medical Devices, as well as continued optimization in our Consumer business. As we look ahead, we remain confident in the strength of our broad-based business model, which is fueled by our disciplined portfolio management, focus on transformational innovation and dedicated employees around the world who position us for success today and well into the future.”
The figures below summarise revenue, expenses, profits, margins and each segment. The revenue growth is driven by contact lenses (7.6%), interventional solutions (14.3%), beauty (8.1%) and the pharmaceutical segment and within it immunology (Stelara®, Tremfya®), neuroscience (Invega sustenna®) and oncology (Darzalex®, Imbruvica®).
Valuation and outlook
The share price of J&J has gone up in recent years, but the top line and bottom line have not quite followed suit. The company does not at all seem undervalued at current price levels despite the guidance being raised. Many lawsuits are looming and keeping the share price at check.
United Healthcare [$UNH] issued a press release on its quarterly results before the market opened with the following headlines:
Total Revenues of $60.4 BillionGrew by 7% or $3.8 Billion Year-over-Year
Operating Earnings Grew 9% to $5.0 Billion, Including Double-Digit Growth Rates in Each Optum Business
Net Earnings Per Share were $3.67, Adjusted Net Earnings Per Share were $3.88, Bringing Year-To-Date Growth to 17%
Cash Flows from Operations were $3.2 Billion in the Quarter, Bringing Year-To-Date Cash Flows from Operations to $12.3 Billion or 1.2x Net Income
The share price went from $220.59 to a closing price of $238.59 (+8.2%) following the earnings release and comments by the CEO David Wichmann and the CFO John Rex during the earnings call.
“Based on this year’s year-to-date performance, we have increased our outlook for full year 2019 adjusted earnings to a range of $14.90 to $15.00 per share.”
“Our strong year-to-date results lead us to raise our full year 2019 outlook for adjusted earnings to a range of $14.90 to $15.00 per share, at the mid-point an increase of $0.40 per share from the initial outlook we provided late last year.”
The figures below summarise the increasing revenue and operating income in each of the operating segments.
UnitedHealth has the best margins in the industry, but the multiples are also higher as a consequence. The recent pullback provided an entry option at somewhat lower multiples, but the share price growth has mostly been fuelled by expansion of multiples in recent years.
Reuters – UnitedHealth sees 2020 profit above Street target; shares climb 8%
Bloomberg – Health Insurers Gain Most Since 2013 as Medical Cost Fears Ease