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Two High-Yielding Mid-Cap Spin-Offs On Sale (OGN & VTRS)

As I suspect that many have limited exposure to small- and mid-cap stocks, we’ve updated our special report, Small Companies, Big Potential.

We also offer a reminder of the methodology we utilize for all our value-based equity strategies. I think you will find the report to be valuable reading.

And for those seeking specific mid-cap names I think are attractively priced today…


Spin-offs often fall in the months after separating from their parents as folks either are surprised at the new name in their accounts or would rather avoid additional due diligence to support continued ownership, while most lack much or any institutional following.

But such treatment has historically created an opportunity for discerning investors able to separate the wheat from the chaff. I think drugmakers Viatris
& Organon
fit the bill as the pair separated from their large-cap parents over the past couple of years, only to be ignored by investors in an otherwise very good 2022 for pharmaceutical stocks.

At first glance, the two companies appear unexciting, offering little in the way of top-line growth and having been saddled with debt. However, I think significant total return potential exists for those who share my long-term time horizon as significant cash generation reduces debt levels, the single-digit P/E ratio may expand and meaningful dividends are paid out.


Viatris is a spin-off of Pfizer’s
former Upjohn segment combined with Mylan
that occurred in November 2020. The company markets well-known prescription branded drugs like Lipitor, Celebrex and Viagra in addition to generics and biosimilars across 165 countries.

The duo isn’t resting on the laurels of previous successes, as management pursues a pipeline of new product launches to offset erosion from the base business. Starting in 2024 – what the company deems Phase II of Viatris’ progression as a standalone entity – management projects EBITDA growth in the range of 4% to 5% per year and EPS growth in the mid-teens.

An average maturity for its debt approaching 10 years gives Viatris time to execute its strategy, with the longest maturity out to 2050, and the weighted average coupon of 3.41% less than the current 10-year Treasury yield.

Still, management has chipped away at the debt load, paying down $4.2 billion since the beginning of 2021, and the company is on track to repay at least $6.5 billion by the end of 2023.

What’s more, VTRS trades for just 4 times next-12-month estimated earnings and yields more than 4%.


A similar opportunity exists in Organon, a spin-off from Merck that houses legacy Women’s Health products (including Nuvaring and Nexplanon), biosimilars and other established brands (particularly for Cardiovascular and Respiratory therapies). Revenue within the Women’s Health segment grew 23% in Q3 2022, backed by record sales of Nexplanon, contributing to $1.32 of earnings per share, well ahead of the $1.10 expected by Wall Street analysts.

Management expects revenue between $6.1 billion and $6.2 billion for all of 2022 and continues to project more than $1 billion of free cash flow per year going forward. Should it reach its free-cash-flow goal, the dividend (the current yield is 4.6%) appears well-supported, while enabling further progress in paying down debt.

Indeed, Organon’s average debt maturity is 6.1 years with an average coupon of 4.2%, while substantially all of the obligations aren’t due until 2028. Additionally, the company only faces modest loss of exclusivity going forward for its established brands, with the most significant occurring prior to the spin-off.

While EPS growth will be challenging for the next couple of years, the stock is priced at less than 8 times forward earnings expectations, making it a bargain in my book.