Viatris Inc. (VTRS) Earnings Call Transcript & Summary

Good day, everybody, and thank you for joining us at the Virtual Bank of America Health Care Conference. My name is Jason Gerberry. I cover Specialty Pharmaceuticals and Biotech here at Bank of America, and I am pleased to be introducing our next company presenter, Mylan. I was pleased to be joined by Rajiv Malik, President; and Ken Parks, CFO. I'm going to turn the call over to Melissa Trombetta from IR, who's got a few disclaimers to read, and then we're going to jump into our fireside chat.

Great. Thanks, Jason, and good afternoon, everyone. Just wanted to remind you that during today's discussion, we'll be making forward-looking statements on a number of matters, including our financial guidance for 2020 and the proposed transaction pursuant to which Mylan will combine with Pfizer's Upjohn business in a reverse Morris Trust transaction, to create a new company that will be named Viatris. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's projections. Please refer to our SEC filings for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. Thank you, Jason.

Great. Great. And gentlemen, thanks so much for joining us today for today's fireside chat. I thought that first off, we can just discuss some of the more topical points about COVID-19 and how this is affecting the landscape within which you guys operate, then I wanted to walk through some of your business units. And talk about some of the key opportunities within each of those. So maybe just for starters, this may be more of an appropriate question for Rajiv. But Rajiv, I guess, you guys, a number of other generic companies, seem to be insulated from any meaningful, generic supply chain impacts that are going on as a result of COVID-19. And I caveat by saying, so far, but what are your thoughts regarding -- we hear a lot of noise about the potential for the U.S. government to try to push for incentives to bring more manufacturing domestically on board as there's a lot of tension, obviously, between U.S. and China. China being an important source for API and key study materials. So just curious, any perspectives that you can have on the topic just because it is a very, very topical hot button item.

Thank you, Jason. Great question because it's on perhaps, everybody's mind. And as you will appreciate that we all rely on a very global economy where -- especially when it comes to availability of medicine. It's not one thing which makes this product, it starts with the several: the raw material, which turns to -- takes its shape into a intermediate, intermediates get into the API and API into the dosage form. So I don't know where to start from. It's so globalized that if somebody is not taking into a complete picture, taking everything into a picture, a complete picture and then looking into what can be done or what cannot be done. So everything can be done, but it's -- somebody needs to think it through holistically rather than just saying, we need to flip the switch and we can do it overnight. So that the -- this supply chain is very geographically diverse. The various countries have different roles to play it in. But let's -- why not we do something like simple things that the countries can start attending to, like creating a list of the critical medicines, strategically sourcing a national stockpile of identified critical medicines. And doing so consistently over time to ensure that access to the critical medicines, when the next public health emergency strikes, is not an issue. And it might sound very simple, but a country like U.S.A. -- or let's start over here, doesn't have a comprehensive plan of this nature in place today. And just to give you an example that I'm going to talk because this is a hot product now, remdesivir. If somebody needs to respond to, one country is not a solution. Here, in this case, several raw materials will come from China, intermediates will come from maybe India, API will come from India and finished product can be made in Ireland or U.S.A. or wherever you say. So the whole number of -- host number of countries are getting together to respond to this huge ask, which is being put on the industry to respond to on as-soon-as-possible basis.

Got it. So it sounds like, obviously, a more comprehensive solution from a U.S. legislature standpoint. Easier said than done. Makes for good political soundbites, but very complicated, and it sounds like you'd be more of an advocate for more of a targeted, more customizable solution if there's concerns about antibiotics in the sorts of medicines that people have concerns about in a shortage situation?

Yes.

Yes. Okay. Now Rajiv, we also heard from the [ AAM ], some mention of potentially a spike in shipping cost. It wasn't something that came up necessarily on any of the earnings calls, but can you talk at all, shipping costs for API, raw materials? Is this in any way impacting you guys from a gross margin perspective? Or could it come up in the future?

It did come up even when the lockdown started when different countries started taking the steps to lock on their economies. And I can give you example from India point of view because that's where our lot of supply chain is. And when we saw that air carriers taking off their flights. That disruption, we did not want to see disrupt. We did not know how long this will continue, how long this state of affairs will continue. So to respond to that, so that there is no drug shortage because many of the ICU critical products, many other products, there was a surge in demand. So to respond to that, we did book some chartered flights to make sure that there's no disruption and this cost doesn't come in the way of that. So did we see some spike? Yes. Was it meaningful enough for us to say that it's going to change the cost base, our overall cost base, given the scale of our operations? No. Are we keeping a very close eye on it as we move forward? Absolutely, yes. And if it comes to a point that we have to call it out as we move along, we will call it out.

And Jason, I think I'd -- to just to add to that because, I mean, I think it's a nice segue into, kind of, the overall look at COVID and how we're watching it from a business perspective and a cost perspective. I mean, we're tracking things like freight, we're also tracking things like our travel and entertainment expenses, which you would obviously expect, and I think I referred to on the call that kind of came down naturally because people aren't moving around. Our employees aren't moving around the way that they would have normally. So there are things that we are tracking like Rajiv said, we'll keep an eye on freight for sure. We're also keeping an eye on those other kind of, I call them variable costs, that may move favorably for us as we move through the quarter if COVID continues. And then also keep in mind that we had talked about business transformation activities, and we were very clear that some of those will continue, but some of the restructuring-related pieces underneath that we're deferring while COVID is happening. So you kind of have moving buckets of incremental costs for certain types of goods and services, lesser costs because people aren't doing certain things during this period. And then, oh, by the way, we're deferring some of our restructuring activities, which defers not only the cost, but the savings to flow through the way we budgeted it. But I think what -- our biggest -- what we want you to understand out of the call and out of this discussion is that all of those variables we're watching and they're encompassed in the fact that we reiterated our outlook for $3.2 billion to $3.9 billion of EBITDA for the full year. But we appreciate and are happy to give you color on it. I just think it's important that we think of all those buckets.

While absorbing $200 billion of FX.

Yes. Yes, that's right.

Sure, sure. Now Europe was a beneficiary of COVID in 1Q, 2020. And one of the questions I get was, why was North America a much smaller beneficiary? And is there a dynamic there where -- I wouldn't think there would be, but like any type of catch up? Or is there a fundamental reason maybe why North America was not as much of a beneficiary as Europe in 1Q?

One way to think, Jason, about is, let's say, how the COVID spread through the world. It started from China into Asia Pacific, and then it came to Europe. Italy was ground zero for a period of time while we were watching. And then hit U.S.A., and we are talking of Q1 results over here. So that if you see the -- most of the March, where Europe saw that little bit of impact, that's one factor. The second factor is the portfolio in a deployed -- portfolio which is deployed in any country. Europe as -- our European portfolio is heavily weighted towards injectable products, certain ICU critical products where there was surge in the demand and the buying patterns change. U.S., as far as U.S. is concerned, we did see on 2 products: performance, which is a respiratory nebulizer -- nebulized product. And Cold-EEZE, which is just a flu product. We did see, but it was not as much as what did we see in Europe. So that's why we called out Europe specifically. We did see a little bit of that. There are some offsetting, like in a situation like this, there are some products where you have built launches and you've built ramp, and you've seen some offsetting impact of that. So when we were preparing for the commentary around business that what has impacted, we thought they're 2 pieces. One was worth calling was Europe because $40 million -- there was a big piece of that was coming from the -- Europe. And then, a little bit in Asia-Pac, which we called out, which was China and Japan. And I gave you that number of $10 million, $15 million, which was offset by strong performance in our [ anti-detritivores ] as well as Fulphila.

Okay. Now you guys recently announced a collaboration or partnership with Gilead on remdesivir for the manufacturer and distribution in certain countries. The press release was silent on economic terms. So is it safe to assume that this deal would not provide a material or meaningful benefit to Mylan from a net income perspective?

Okay. I think you would assume when we were -- if you would read Robert's comments very carefully in his script a day before, he did give sort of an example about how Mylan's nimble approach of working, how entrepreneurial way, how the globalization, how this comes together. And how he's so proud of that in circumstances like this, our science and supply chain has kicked in to create an option -- some options. From COVID-19 point of view, he was giving that example. So you would expect us that we would, at that time, we had not signed this agreement. But we were, of course, working with Gilead like we had worked with them for the last 10 years as a partner to work out this agreement. And when you see it, the way we have guided for the year, taking into consideration everything, including $200 million of FX hit, which we are taking to absorb that. There are some moving pieces. So that's one piece I would like you to keep in mind. But let's just put this -- remdesivir like product, where currently, we are focused -- our 100% energy, Jason, is about how quickly we can ramp up. How quickly we can put ourselves in a state of readiness to respond to the patient needs in this 127 countries for which we have signed up the license. Half of the global -- the patient population, as per some of the projection, is going to be based in these countries. Put that -- that's where our energy is. Second, you should look into this business as our [ anti-detritivores ] business. It's -- as you get volumes, it's not only a revenue driver. It's not -- it's also meaningful from the margins point of view, once you get to a critical scale. Tenofovir is a good example from a prototype point of view. So while it's too early for us to model anything and give you anything, but I would never say that anything is financially not meaningful and all that. But we are right now trying to assess, put our arms around that, but while taking everything into consideration, all the moving pieces. That's why -- these were the pieces, which we took into consideration while affirming the guidance for 2020.

Now are you guys having to make the investment to get to a point of being able to scale up? Or is that being -- is that cost -- is Gilead helping with that cost? Because I guess there would be a concern that as the science evolves, could remdesivir potentially get phased out by other, new experimental medications if they show greater activity. So I'm just sort of curious how you think about making an investment into a very fluid situation?

Yes. There is definitely investment involved. We are staying very close to the clinical trials, which are being conducted around the world. We are monitoring those studies. Today, it has 31 -- today's data says that it basically improves it by 31%. And we are also part of the -- as you know, Jason, the WHO Solidarity Trial, where remdesivir, hydroxychloroquine and lopinavir and Ritonavir, which has been provided by Mylan is being studied. So we are staying very close to this from science point of view. We are absolutely aware of the investments, which it will take. It's a balance. So you would not expect us to go all the way out over there and make so much upfront investment that if there's a, sort of, hydroxychloroquine-like situation. We are very sensitized to how much we should get out, and how much we should be in the state of readiness, so there's a balance over here. But Gilead is not providing any financial assistance. Gilead is not providing any financial assistance for us to get ready.

Got it. Okay. Now shifting gears to the U.S. generics business. Rajiv, I think there's a perception amongst the investors after the most recent quarterly updates and trends over the past few quarters that the U.S. generics industry is stabilizing, that GPO consolidation has been lapped, that perhaps, smaller players are foregoing, launching through a lot of like low-value products that were in the backlog and maybe new product opportunities are helping provide some stability into a business that was obviously more volatile between 2016 and 2018. So could you provide a little perspective where you think we're at in the cycle here? Are you more encouraged in terms of how the U.S. generic market is evolving?

Yes. If you look into our 4 -- last 4 quarters, I can confidently say that we are much more today at ease, it was very -- it was highly volatile. It was ups and downs. We saw some ups and downs, which we have not seen for a number of years in the last 2, 3 years. But for the last 3, 4 quarters, we have seen this stability come back. If you ask me more than anything, stabilization of the market or stability of the market is at the moment, much bigger, we can't ask more than anything, but to first stabilization, and then realization that the COVID pandemic there, if you ask me, one positive thing for industry as people more -- various stakeholders today more appreciate what this generics industry brings to the table. That's another element I would like to put it. And third, the new product launches, how that new product launches are putting life back into the business, you're right to call that out. So overall, we see -- overall we see the practice you mentioned are bringing a little bit more confidence around this industry.

Got it. And maybe a question for both of you, more taking a longer-term view of this industry. What do you think, Rajiv, the industry will look like in the next 3 to 5 years? Do you think companies like Mylan, do you move up the value chain? Do you want to be a one-stop shop for all generics of all -- across the spectrum of value? Or do you want to pivot more to specialty drugs as the branded pharmaceutical industry has shifted more to specialty drugs? And then, on top of that from Ken, I'm curious, the margin structure historically for a generics company was lower gross margins, but a very lean OpEx ratio. Does the model flip, if you go more to specialty, higher gross margins, higher gross margins, but also a higher OpEx as a percent of sales ratio?

Yes. Great question. Rajiv, why don't you start off? I'll take the last part of that.

Sure, Jason. Look, generics, 90% of the U.S. market today are perhaps generics from the volume perspective and generics are here to stay. And a big part of Mylan and going forward of [ that list ] is going to be still generics. I would say, first of all, one-stop shop, addressing your point about one-stop shop. Even in the prime days of the generics, go back a few years when Teva was perhaps the leader in the industry, no one company had more than 20% market share. So nobody was a one-stop shop. This industry has been fragmented quite a bit. The industry has -- and mostly after the market share has been hovering around a different players between 12%, 13% to then 5%, 4%, 3%, 4%, 2%. So -- but then, again, it comes back to the company strategy. Going up the value chain, Mylan started this journey 10 years back. And we have been, in our way, leading the science going up, whether it's a complex generic, give a drug device, example like the [ Advair ] we can now at least call that out, whether it's Copaxone or whether it's the biosimilars. So I think this comes back to the -- a company by company, their portfolio strategy, how they want to go up the value chain, value going up the value chain is very core to Mylan's strategy. And we have been executing to that strategy. We have been trying to leverage our own strength. Wherever we realize that we don't have, we have been striking those partnerships to bring the science -- to move the science up the value chain. So that's been one part. And if you take -- from different companies' point of view, if I've now rolled that forward from the competitive landscape, you need scale in the balance sheet, you need that sort of ability to spend because higher you go higher up the value chain, it's a high risk, high reward game also. You should be ready for taking that risk. A product like Advair, just from capital point of view and from R&D can -- point of view, can take hundreds of millions of dollars of investment. So it may not be possible for every company to do a lot more of those. Yes, every company will be doing 2, 3 products here, 2, 3 products over there. But it come back to the leadership of this industry. We have been in this industry to create that portfolio of the complex and highly complex and going up the value chain. So we continue on that part. We know this is core to our strategy. We're going to be looking to -- whether it's complex generics, the biosimilars, 505(b)(2)s, finding those smart, smart opportunity and even trying to know when we go further up the value chain looking into -- looking around some nice complementary NCE opportunities, leveraging the global health care gateway, which Robert has shared with you all in our JPMorgan.

And to the last part of your question, it fits perfectly with the work that we've been doing for the last 18 months, we keep -- we refer to it multiple times as business transformation work. But really what it is, is we are looking at economic profit by every single product and so to your point, if it's a product that brings along more revenues generally, we're also tracking every cost that goes against that, whether it be investment for development, whether it be the infrastructure required to support the sale of that product, the tracking of that product, all the different pieces of it. So your question is exactly, and our look at the market is exactly why we've been doing what we've been doing. So now as we look at these opportunities to move up the chain, we're actually also looking at the products that we have in our portfolio today and saying, "Do they bring economic value when you look at the specific cost that it takes to support those products?" So that loop is closed, and we are doing that work as we go every day.

So while going up the value chain is addressing the -- how can we maintain the healthy margins, the business transformation work is also focused on not losing the lean and mean OpEx structure.

Yes.

Yes. Okay. Now Rajiv, what can you say you've learned about the rollout of Fulphila, the biosimilar of Neulasta. Is it as simple as needing to just ensure adequate supply from day 1? And if you run into issues, it can be difficult to get that back and to get competitive? I'm just wondering, as we think about going forward, are there key segments of the market that are still up for grabs, be it the device that's marketed by Amgen. I just think a lot of investors are curious kind of how the Coherus has been able to capture such a large market share as a smaller player. And obviously, you guys had some supply issues. So just wondering how you see the learnings from that and where you go from a go-forward basis?

So I'll first address the biosimilars in a little bit totality and then I'll come to Fulphila. And Jason, as Robert and Tony mentioned on this conference call, we never looked at this portfolio and this franchise as a product-by-product basis. We have been investing in this -- on this franchise for last now, around 10 years. We were behind the bus. Our first foremost focus was to prove ourselves from the science point of view. And we have pleasantly surprised even ourselves that we're -- how we -- how strongly we finished from the -- proving the science point of view. Now give it -- because I want to give you that example because that dovetails right into Fulphila. Now we spent time to build in the most diverse portfolio, which we have, I think, is one of the industry-leading between the several oncology products and whether it's diabetes or rheumatology and all that. And looked into this, not from one market perspective, we looked into it from how we will globally roll it out. Because we -- sincerely, we thought U.S. will be the toughest market from regulatory and the legal landscape perspective. So that was the second surprise, which we got -- when you are thinking something about new. But we were very well prepared for the rest of the world, Europe as well as for U.S.A. Now on Fulphila what happened. I'm giving you a little bit of background because I never want to be in a situation that we don't have adequate supply at the time of launch. But sometimes, circumstances. And in this case, when we started journey on Fulphila, perhaps we were the #5 filer. We had -- Sandoz ahead of us, we had Apotex ahead of us. We had Amgen ahead of -- we had about 4 companies ahead of us. Coherus was ahead of us. I think there was also Teva. There were 4 players ahead of us. And we were the fifth one, but we ended up from the execution point of view from the -- be the one to open the market. Because we were the first one, we had whatever capacity we had and we had assumed because we would be the fourth or fifth one, we would not need this much capacity, and there was also a hiccup. We never want to be in that situation, never want to be in that situation. If you ask me learning, we will absolutely, as we go along. Yes, it was a very costly learning. We had a very strong launch of Fulphila, and then we ran into a supply situation. And I'm not giving you excuses. I'm just talking about learnings over here. But having said that, you would believe that Mylan would do everything. Mylan would do everything. Mylan cannot be just written off today, like, okay, somebody wants to figure out. It's very hard for a second person to come in the market and take market share. Now that hypothesis, there are so many moving pieces. It's -- we are in for a long haul. It's a strategic space for us. And Mylan will do everything in its capacity to get the meaningful place in this industry, and to play the role like we have played in the generics as generics market was evolving. We have a -- as I told you this year, we are not only we're launching [ full Fulphila ] and Ogivri in many important markets of the world, including Europe and U.S.A. We're going to be launching Enbrel in Europe in the second half. We have been launching Semglee, our insulin glargine in the coming few months. So we are very bullish on this segment. And you should expect us to bring everything to the table to get the maximum out of this franchise.

And a comment -- yes, Ken.

Jason. Could -- I know we're going to run out of time, but I do want to address one point that if you'll allow me that between the time of the earnings call and the filing of the K on the same day, you probably saw that we had the -- the FDA lifted the warning letter on Morgantown. We've received a couple of questions following that. And we just want -- I just want to take a minute and clarify expectations there. People have said since the warning letter is lifted, should we expect to continue to see remediation costs running through your P&L or is that complete? The short answer is, while the warning letter is lifted, we certainly had a remediation plan that will continue through the year. And so we will continue to see those costs. And I apologize, that's a little bit of a cleanup item, but we didn't get a chance to address it on the call because the letter had not been lifted at that point.

No. No, that's really helpful. So maybe Rajiv, just last question for you. You -- some interesting comments on the 1Q call about insulin or biosimilar of Lantus and the potential for interchangeability with the first past regulatory decisions. So I guess what's fundamentally changed? I mean I know historically, we've kind of characterized this as the most probable outcome's a non-interchangeable designation. I know that the FDA really wants to have an interchangeable biosimilar. So any color you can provide on what sounds like a slight tone shift from you guys on that front?

3 years back or 2 -- yes, almost 3 years back when we filed this product, we filed it as a 505(b)(2) because that was the path, which was available filing for an insulin, bringing on a biosimilar or generic insulin [ unit ] call. We had a very strong sign. And we had a number of meetings with the FDA, but there was a sort of mental block of FDA accepting a 505(j) because at the core of the -- if you take science and how insulin is made, they knew that it's actually a biologic, and it's -- it doesn't belong to 505(b) category, it should move over there. So they didn't want to give a 505(j) part. But we got an opportunity and several face-to-face meetings to talk about the science and how the science is strong from interchangeability or giving us a -- making us a case of 505(j). FDA took that into consideration, they denied us 505(j). But when -- towards the last phase of where are in the review process, they put out a guidance, which was exactly in line with the data, which we had presented. So the data, which is a part of the file is actually -- basically is enough to support the interchangeability as for the current guidance. But we are in an administrative glitch over there that we filed a 505(b)2. So we are meeting with the FDA, which we are asked to clarify, how 505(b)(2) approval will get translated to 351, from a to k. And that's why, Jason, I said, if not by the time of the launch, very soon after the launch, we will be able to bring the interchangeability feature to this product. Which will be a unique one. This will be the first interchangeable. And second, we will be the first company to offer both vial as well as the pen.

Got it. Great. So it sounds like it's just an administrative issue from a timing perspective either at launch or shortly after launch.

Yes.

Okay. Great. Well, I know we're a little past our time. But gentlemen and Melissa, thank you so much for joining us at our conference and sharing the latest updates on Mylan and the company story, and we look forward to the close of the Viatris merger and the next update.

Thank you, Jason. We appreciate it.

Thank you, Jason. Thank you.

Thank you.

All right. Well, have a good day.

Bye-bye.