Viatris Inc. (VTRS) Earnings Call Transcript & Summary

Hello, everybody. Good morning, good afternoon, depending upon where you're located. My name is Jason Gerberry. I cover specialty pharma and biotech at Bank of America. And I'm pleased to be introducing our next company presenter, Mylan, soon to be Viatris, following a fourth quarter expected merger close date between Mylan and Pfizer's Upjohn unit. So I am pleased to be moderating today's fireside chat. On the call with us today, we've got Robert Coury, Executive Chairman; Michael Goettler, future CEO of Viatris; Rajiv Malik, President of Mylan and soon to be Viatris; and Sanjeev Narula a CFO. We also have Melissa Trombetta on the phone from Investor Relations. I'm going to turn it over to Melissa. She's got some forward-looking statements that she wants to make. And then we'll go to Rob, who has a few prepared remarks and then I'll launch into Q&A.

Great. Thank you, Jason. Good morning, good afternoon, everyone. Just a few reminders, first, we're currently in a blackout period and we'll be limited on what we can say on a number of matters, including financial guidance for 2020. In addition, during today's session, we may make forward-looking statements, including related to the proposed transactions pursuant to which Mylan will combine with Pfizer's Upjohn business 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 further explanation of those risks and uncertainties and the limits applicable to forward-looking statements. Thank you, Jason.

Great. And with that, I think, Robert, I think you had a few prepared remarks that you wanted to make and then I can go into Q&A.

Yes. Just a couple of things. First of all, I want to express my thanks to you and to all your listeners. We are extremely excited. As you know, we rounded the corner, we're at or very near the close. I think all of us are very excited about the creation of this new organization. I have spent a tremendous amount of time with shareholders over the last few months. And so without no further ado, I'd like to -- I'm even more excited to introduce this new management team and use today as a beginning of a transition and more of a handoff to them as we move towards the close. So thank you very much, and I'll comment as necessary.

All right. Great. Well, I mean, to the extent that you guys are able to discuss, I am curious to starting with the Upjohn merger. And I know that part of the strategic rationale, expanding Mylan's presence into the Chinese end market and leveraging Upjohn's presence there, potentially being a partner of choice with young biotech companies, who have interesting, innovative assets but lack the commercial presence to bring those therapeutics to the Chinese market. I know that Pfizer had a pilot program, looking to sort of employ this strategy but never really went all-in on it. So I'm curious, maybe for Michael or Robert, if you can talk a little bit about why you believe -- what drives the confidence that Viatris could become a partner of choice in Chinese end market for innovative biotech assets?

Jason, this is Michael. And let me take that question. And you're absolutely correct about Upjohn. We had a few pilot programs. But let me say off the bat, Viatris is not Upjohn, Viatris is a combination of Mylan and Upjohn. And this is really a classic example of how you do more with more and actually much, much more. And it's one of the reasons that I'm so excited about this combination, one of the reasons we are, as a management team, so excited about the combination. Because together, we believe we have a very unique platform that will be of great value, not just to our current business but also to our partners. We now have a commercial presence in over 175 countries, strong commercial presence, China being one great example of that. We've got over 50 manufacturing sites around the world, the ability to be local, where we need to be with our manufacturing, strong technical expertise, strong science, farm side, regulatory, development capabilities, legal, you name it. We have speed, I think, is one of the hallmarks. We have a cost-efficient platform. And we believe there's a high demand out there, especially for mid-sized companies that otherwise don't have access to such a global platform. But if you can, Jason, allow me to step back a little bit and give your listeners a bit more context about all the ways we plan to create shareholder value. And this Global Healthcare Gateway, this partnering opportunity is just one of them. I think it's really important to understand the full Viatris story and our path to shareholder value creation. And let me start off the bat saying that our commitment to total shareholder returns is absolutely clear, starting with the firm commitment to the dividend, as we repeatedly said, 25% of free cash flow for the first full quarter after close. And then we do see significant potential for multiple expansion as well. And the path to get there is very clear and comes really in 5 stages. The first one is, as Robert pointed out, we're very, very close to closing of the transaction now. You saw that very recently, we received EU approval. So now the U.S. approval is the last hurdle remaining, and we're on track to close in quarter 4. I think that will be a very important event. Secondly, we then immediately change to Viatris' new business model, which includes the planned initiation of the dividend. But also, we're going to give 2021 guidance on Investor Day that is transparent to the investors. It takes into account all the puts and takes we see and what we believe we can do. And that will come, I think, end of February, early March is what you should count on. The third element is business execution, is taking these 2 amazing businesses, putting them together, integrating them while delivering and executing in a consistent and transparent way and a measurable way. And integration, we're very pleased with the progress that we're making. We are confident in delivering $1 billion in cost synergies over 4 years. That's an effort that Rajiv will be leading. We're delivering on our significant pipeline launches over the next 3 to 4 years. And also, we believe there are some revenue synergies that we can realize maybe after year 2. And then the fourth one is what you talk about, which is our priorities in capital allocation after dividend and after debt paydown, where all of our future investments will be very focused through the Global Healthcare Gateway. And this will not only fuel future growth but also return to shareholders. And if you look at the recent Mylan deal with Aspen, since you talk about business development, just as one example. Now as a disclaimer, I'm still looking outside-in due to obvious FTC restrictions. But what I can see on the outside, I believe that deal is a great example of what you can expect from us in terms of strategic fit, in terms of margin contribution, in terms of the discipline and shareholder value creation. So the Global Healthcare Gateway is one of the many ways we create value. If you take all of this, what I explained together, what you can expect from us over the next 4 years is an EBITDA, earnings and cash flow growth story, all while strengthening our balance sheet, delivering and returning value to shareholders, and then after those 4 years, top line growth with operating leverage that then continues to drive EBITDA earnings -- and earnings growth with significant financial flexibility. And if you look at all of this, the 5 stages I laid out and the financial profile they generate, in terms of stability, in terms of margins, the investment-grade leverage and the dividend yield, it's clear that Viatris is really in a class on its own and the profile speaks for itself. And therefore, we believe there's significant potential to deliver shareholder values through the dividend but also multiple expansion. So I'll pause there, but I really wanted to provide the context to you.

And I think the only thing I would add, Michael -- thank you very, very much. The only thing I'd like to add specifically to China, since that's been a reference of yours, we've been doing a lot of work in China beginning in 2008, spent a tremendous amount of time in '12, knew exactly what we wanted to do in 2016. And hence, why we saw this opportunity with the Pfizer Upjohn division there as a natural fit and also the closure of the building of the decade-plus of Mylan putting a global infrastructure in place, which is going to prove out to be an invaluable asset, Jason. Not only are we going to play and not only are we going to fill an unmet need globally, but I think we're going to play an extremely important role to governments. But in China, if you know anything there is about the market, you cannot undercut the type of reps, the long-term reps that have the deepest relationship with the government hospitals who control about 85%, 90% of the patient population. Everything is done through the hospital. So you can't even just think you can hire a sales force and think that you're going to get the kind of penetration. So when you think about the combination of especially the Chinese biotech companies, a lot of these biotech companies, even ones outside of China, have fantastic science. And so what we consider to be a partner of choice, either they can partner with us and we can help them with some of the science. But what we really bring to them is a global legal, compliance, regulatory and then most importantly, the high cost of infrastructure, they could never put that in place. So when you think about the high-quality infrastructure that we have, imagine the core competencies that we bring to the table, imagine what the biotech companies have, there's almost a huge need out there for the type of collaborations that we envision. And we're seeing it and living it daily. And China is a very special market. And I think we have an upper hand, given the longevity of the Pfizer Upjohn asset and what they've embedded in China because it's a very high-quality asset. Jason, next question.

Okay. Great. And I don't want to belabor the point on China, but just one follow-up that I have. As I think about where you were as a company, 2016, focused on generic medicines, biosimilars, some OTC products in international markets. Fast-forward, I look at Upjohn's capabilities, they had a portfolio off-patent medicines. So just curious, organizationally, do you need to expand the internal biz dev team to identify new individuals that can the help identify quality biotech assets? Just wondering how the organization is structured to execute against that strategy.

I mean I think it's actually a great question, Jason. I mean there's a lot to your question, but it's a great question because this is not something you can do or even think about overnight. It's something that has to be very, very well planned out. I would just go start at the end, the Global Healthcare Gateway, I mean, you can rest assure that there will be a brand-new infrastructure being put in place there. Because you're going to see that the Global Healthcare Gateway is really not anything new, and forgive me, it's really an opportunity for us to package a lot of the things that we've already done but in a much more fragmented way. So one of the things that the management team, and Michael will take lead on this because the Global Healthcare Gateway will be driven by the CEO, that is the future of our company. But to bring some robustness so that people don't think that the Global Healthcare Gateway is just an inspiration or an aspiration, we are going to consolidate and package all the R&D investments we made to date. And what have we yielded with them? We're going to package all the business development deals we've done to date. And what did we yield? What is the return on investments? We're going to take a look at all the collaborations that we've done with partners and what -- not only what we have yielded for, say, Mylan, but what about the partners? What have we yielded for them? We think that, that foundational -- putting that foundation in place as a starting point, that will give people the real sense of vision of how we're going to scale that up on the Global Healthcare Gateway. So Michael, do you want to add anything to that?

No, absolutely. And I think what's maybe underappreciated a little bit the Mylan's track record here. So maybe I'll ask Rajiv to comment a little bit on that.

Yes, Jason. Thanks for the question. And as you will know, I think just to correct a little bit of those stats, Mylan is not new to the off-patent brands. And as with Abbott, I think after Abbott and Meda, just before, we have this 33% portfolio of Mylan comes from this off-patent brand. And I would say that we have done a pretty decent job. And in fact, I'm very proud of some of the work which we've done with the Abbott brands. When we acquired these brands, these were at best, they were flat or declining. Now for example, this whole portfolio is growing. Creon is a double-digit growth, 12% growth from '17 to '20, Influvac, another double-digit growth, so is Dona or Dymista, which came along with the Meda. And I would say, Upjohn has further enhanced and strengthened our commercial infrastructure, product offering, our sales force, 14,000 sales reps across the globe, a very strong medical affairs team to support this, which you require, I think it's a prerequisite to sustain this off-patent brand. And I'm very confident that with the strengthening of these capabilities, we'll be able to do it even better with this off-patent brand. Michael, back to you.

But let me just add one last thing, Jason. You talk about China, and I don't think you could talk about China enough. I think it's a mistake for anybody to think that what's going on in China is something that happened overnight. We have watched this -- just to maybe give you some color. When we bought Matrix in 2007, we inherited 2 manufacturing sites. And that really was our first exposure to China. We had 2 sites that provide excipients to our API business. So we've been studying China ever since. And I can tell you, in 2012, I think the government in China -- nothing happens overnight in China. The only thing that can happen overnight in China is they walk into your business and shut you down. That's probably the only thing that can happen overnight in China. Outside of that, everything China does is an extraordinarily -- and they have a very strong, very powerful, methodical process. They are well thought out. And so in 2012, I think they put in motion back then all the activity, you could just follow it along of what everyone is seeing today. So it's not anything new. We were able to follow along with that. And so we've actually been in China. And in 2016, because when we bought Meda, we inherited a commercial platform there. That's when we knew exactly what to do there. So I don't -- I think China is a huge opportunity for us going forward in the future. And hence, one of the things that, when I've given soft numbers out there about our starting point, a big chunk of what I've considered is what has happened in China. We just -- going forward, I said 2021 will be a real trough year for -- to start from. And a big portion of that is dealing with what's going on in China.

Just one more thing to add, Jason, as I think your question was not about off-patent, your question was about on-patent and how we do this. So just to say at a high level, I think the platform we have is very, very impressive. There is a need out there. There is an unmet need out there, especially with small- and mid-sized biotech companies that don't have access to the platform that we have. And we fully intend to give you more color on where we see the opportunities, the strategy we're taking on Investor Day.

Great. Now maybe for Rajiv, just this -- can you just elaborate a little bit on the interplay between the Upjohn deal synergies versus the delayed Mylan restructuring program? I'm just wanting to get some clarity. I assume that these are completely separate. But I'm just kind of curious, as you think about the restructuring program, to the extent that, that's incremental to the deal synergies that have been clearly articulated.

So Jason, I'm glad you're asking this question because I think this clarification is important, 2 completely different initiatives. And as we explained earlier, our business transformation work is nothing about cost-cutting but focus on unlocking latent value. We completed -- we took about a year -- more than a year to complete a holistic review of business plan and developed an integrated transformation plan, which included and not limited to. We started with the rationalization of the negative contribution margin products, which were not earning even their cost of capital. We focused on refocusing and redeploying commercial resources to promote further growth of our most responsive products while improving margins of unresponsive products. Centralizing and rightsizing our commercial and operating infrastructure, rather than every country having everything, we created those centers of experience to provide some of those services. We even comprehensively evaluated and reviewed our R&D pipeline and rationalizing investment, taking into consideration the evolving industry landscape and especially regarding the commoditized products and while we wanted to focus on going up the value chain from a science point of view. Now as it comes to synergies, that's -- clearly, these 2 companies coming together and the interplay between that, nothing to do with the business transformation. The first driver in synergy is [ cost to widen ], especially from Upjohn's perspective as Upjohn was in the process of being stood up and now won't need certain corporate functions and can save G&A; the second driver being overlap in selling and marketing when these 2 companies come together across several countries; the third being synergies which we can realize through the cost of goods. And most importantly, as you will appreciate that Upjohn will be relying upon multiple services being offered by Pfizer for a period of time as we separate and integrate through an arrangement called TSA, we will be able to absorb these services over a period of time. And as we come off these TSAs, that will be another contributor to the synergies. And Jason, you heard Michael speak about the confidence in the EBITDA growth. My confidence in EBITDA growth stems from the execution around this transformation and synergy program. And I'm -- we have a great track record. Between Mylan and Upjohn, we have great track record, not only meeting and exceeding these expectations, and I'm very confident about that.