Viatris Inc. rating downgraded by S&P due to high leverage expectations

Investing.com -- S&P Global Ratings has downgraded Viatris Inc (NASDAQ:VTRS).’s corporate credit and issue-level ratings to ’BB+’ from ’BBB-’ due to elevated leverage expectations. The downgrade reflects the company’s financial pressures anticipated in 2025, resulting from a warning letter from the U.S. Food and Drug Administration (FDA) on its Indore manufacturing facility. The agency’s action is expected to strain Viatris’ EBITDA by $350 million to $400 million, contributing to an increase in debt leverage.

In 2024, Viatris’ constant currency organic revenue grew, despite a 5% decline on a reported basis compared to 2023 and 2022. However, its S&P Global Ratings-adjusted EBITDA margins were roughly 300 basis points lower than the previous year due to higher restructuring and litigation charges. This led to a leverage of about 4x, consistent with levels in 2023 and 2022, but above S&P’s leverage tolerance of 3.5x for the ’BBB-’ rating.

The company’s commitment to deleveraging is constrained by the need to address other strategic priorities, including enhancing shareholder returns and investments to spur revenue growth. As a result, S&P expects the leverage to stay above 3.5x in 2025.

The credit rating agency has also lowered Viatris’ commercial paper rating to ’B’ from ’A-3’ and assigned a recovery rating of ’3’ to the company’s senior unsecured notes. This indicates an expectation for meaningful recovery, between 50% and 70%, in the event of a payment default.

Despite operational challenges and a warning letter from the FDA about its Indore, India manufacturing site, Viatris has continued to generate strong annual free cash flow of over $2 billion. After dividends of roughly $600 million, the company has significant flexibility to enhance its product pipeline and further pay down debt.

Despite the downgrade, S&P maintains a stable outlook for Viatris. This reflects expectations for the leverage to generally remain between 3.5x and 4.0x over the next year and for the company to return to sustained revenue growth in 2026, aided by the maturing pipeline of patent-protected products.

Viatris, under CEO Scott Smith since April 2023, has focused on building its branded drug franchise, which could offer higher margins and improved growth prospects. Despite recent challenges, Viatris remains a leading competitor in the global generic drug industry, along with similarly sized competitors Sandoz (SIX:SDZ) and Teva.

S&P could further downgrade Viatris’ ratings if its leverage exceeds 4.0x for an extended period due to operational setbacks or a more aggressive financial policy involving higher levels of acquisitions or share repurchases. Conversely, the rating could be raised back to investment grade if the company reduces leverage below 3.5x on a sustained basis and consistently generates modest growth and solid profitability.

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