Viatris Inc. (VTRS) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Balaji Prasad. I lead the specialty pharma coverage at Barclays. Thank you for dialing into the Barclays Global Healthcare Conference. And continuing the [indiscernible] track of the conference, I'm pleased to introduce you to the management of Viatris today. We have with us Michael Goettler, CEO; Rajiv Malik, President and Executive Director; Sanjeev Narula, CFO; and Bill Szablewski, Head of Capital Markets. Apologies, Bill, if I didn't pronounce your name right. So Michael, Sanjeev, Rajiv, Bill, thank you for taking your time and participating in the conference. So...

Thanks for having us.

Great. So we've had a couple of interactions recently. You had your guidance call, and then you have the detailed Investor Day, lots of useful information. So coming fresh off these, I want to focus our discussions on what investors have been asking about regarding the outlook for the company. I think the stock has been down around 25% since the guidance was presented, and a fair bit of investor frustration has been that there was no quantifiable guidance beyond 2021. And while the global growth platform and the global gateway that you articulated so well is something intuitively graspable, market probably needed some directions from you on what it means for growth. So could you maybe start there and we could take one of the next questions?

Thanks, Balaji. Thanks for the question, and thanks, everybody, for joining us today. Balaji, what I would say, look, Viatris came into being a little bit more than 100 days ago, November 16, right? And as we got together, we said exactly what we said we're going to do, is we're going to get the 2 companies together, get immediately started on understanding the business, have the new manager understand each part of the business, build a bottom-up budget of quality, and then that's accumulated in February in our guidance. And as I said, we guided with a midpoint of 6.2 for EBITDA. That is our base, right? That's guidance that takes all the puts and takes into account that we see in the business and that we think is the right starting point for us as part of the interest. Now what you also have to appreciate, what this is, all the strategic tenants that we've been talking about for 2 years now, almost, right, are in place. This is a business that is transformative and global scale, right? And we now have a significant and formidable presence in China, yet none of the countries are oversized. China is about 10% of the market. The U.S. generics business, 10%. So there's diversity and opportunity that we can build on. The same for the product portfolio. It's diverse. It's differentiated. There's opportunities there. And on Investor Day, Rajiv gave a couple of good examples of how, going forward, we can leverage that. He gave an example of Korea, but there are other examples as well. There's a strong and sustainable cash flow. We guided at midpoint 2.15. That is held back by a lot of the onetime costs that we have as a result of the restructuring that we do. But you can easily imagine, as that fades out, it will show the true underlying strength of the cash flow that we have. We're very focused on delevering. We have a good balance sheet. We're investment grade, as confirmed by S&P and Moody's. But we committed to another $6.5 billion in debt paydown. That's what we are focused on executing at. We've been initiating a dividend. And the $1 billion in cost synergies, we're now achieving in 3 years it's set up for. So we, as management, very, very focused on executing against the plan we have. Going forward, we see lots of opportunities, but we didn't have the time with 100 days to do a quality, quantitative bottom-up budgeting. That will come later in the year. And at that time, we will follow up.

Great. That's a great response, Michael. And maybe leaning off from there, I want to again call into your attention another slide that you presented on road map to total shareholder return. That's again another question that I was getting. So you had Horizon 1 going up to 2023. And Horizon 2 that you defined as a phase of durable growth. And again, many of the interpretations has been -- a couple of questions I got was, does this mean that there is no growth until 2024? So even though we cannot probably call out quantifiable way, directionally, does this mean that we'll only see growth from Horizon 2 onwards or 2024 onwards? Is that the right message?

Well, I think what we consistently said is that the focus is on -- in the first 3 years is on rebalancing and delevering. That's where our priorities lie. We also very consistently said that we see 2021 as a trough year. Now trough year clearly means it's not going to go lower than this, right? And we say trough year, that's for revenue. That's for EBITDA. And it's more certainly for cash flow, right? For cash flow, you can clearly see -- you don't need to believe in anything else to see that the cash flow will grow as the onetime costs kind of start diminishing. We see opportunities. But again, to give you quantitative guidance of the percentages, on top line percentages, on bottom line, how much exactly it is, we want to do a quality bottom-up work before we put those numbers out.

Got it, Michael. So maybe let me just take off on the cash flow component. So as we look beyond this and say this is the trough year, as you have stated, and looking out to 2022 EBITDA and free cash flow, so can you maybe take us through the components of improvement in EBITDA and free cash flow? Is it going to be growth where -- is it going to be from synergies or lower number of onetime costs? Or could -- so...

Yes. So I'm going to start maybe on EBITDA and let Sanjeev comment on cash flow. But just to walk you through it, right? So the one thing, as in we try to be very transparent with it as we gave the guidance on Investor Day, is to separate the kind of special items from the ongoing business. And a lot of the special items like the Lyrica LOE in Japan, like the performance LOE, these will not -- obviously not repeat. In fact, we have no major LOE ahead of us. Lyrica is the last big one. No major LOE in the planning horizon that's in excess of $100 million. So these onetime item's kind of behind us. So what you're left with is the underlying base business. In the base business, there's a natural erosion. We quantified that for our 2021 guidance. It doesn't mean necessarily that it will be like this every year, right? We have a very different commercial infrastructure now. We've got medical skills. We can get -- we believe we can get more out of the base business that we have. Then you have -- offsetting that erosion, we have new product launches. Again, that number is not written in stone. We've been running at an average of about $600 million in new product revenue every year. Maybe we can get some more out of that by launching more, launching better. Maybe -- we have never guided any revenue synergies. Revenue synergies can potentially come on [indiscernible]. Then you have the cost synergies, right? The cost synergies -- sorry, I have one of my voice assistants talk in the background here. That jumps off. So the cost synergies, we have about 50% that we achieved in the first year, but there's more to be had. And I said, we accelerated that from 4 years to 3 years. So that gives you kind of what the key movers on EBITDA are, on cash flow, right? We've not included any potential cash flow -- cash conversion cycle improvement in the numbers. That's certainly something we want to strive for. And then, Sanjeev, maybe you can comment on the onetime costs a little bit.

Yes. So Balaji, so you're spot on. So Michael talked about EBITDA and revenue. If I just focus on free cash, other things being equal. The $1.5 billion that we explained, it's important to understand that for the drivers of that $1.5 billion, then I think it will give you a sense of what the rhythm of the cash flow is going to be purely on that account. That's made up of 4 items. You've got restructuring cost. You've got cash cost to achieve synergies. You've got litigation and settlement. And you've got integration-related cost. 3 out of those 4 are very event-based and linked with the restructuring and synergies that we talk about in integration. They will come down substantially over next 2 years. And that then automatically will increase the free cash flow that we're expecting. A simple way to think about it -- obviously, we're not giving guidance. I will give guidance later in the year. But a simple way to think about it, Balaji, at the end of 2023, somewhere around that, we should get to a normal level of a onetime cost, which will be what historical Mylan level used to be. So I think that's kind of about there, and you can look at that. And I think the cash cost will come down significantly between now and 2023. The other item that I want to double-click that Michael talked about that is the businesses come together. It's a large platform. And we got fairly decent investment in our working capital. We, as a combined company, will look at that with the additional focus that we have on the cash flow and the total shareholder return, look at the opportunities, and those opportunities haven't been identified. We're working on them right now, and they will certainly help us improve the cash flow as we think about this going forward.

Great, Sanjeev. Maybe just on the onetime cash cost and the potential for them to recur or not. Can you help clarify if you accrued any amounts for the couple of major litigations that we are still [indiscernible] price fixing or the opioid litigation at this point of time?

No, we have not. We don't believe there is a reason for us to accrue, not only pay it. So there's -- they're not reflected. So what you see, the settlement on the chart that we shared, are previously disclosed IRS settlement or some tax settlement in some of the international jurisdiction.

All right. Great. That's helpful. So maybe shifting to the business side of the discussion. Biosimilars, I mean, that's part of the business that I've always been very excited about. I like the platform and the broad [ step ] of the pipeline that you, Mylan, historically had and Viatris has. So I get it when you speak to the global gateway, but why not take on unpartnered approach, especially [indiscernible] being so massive and you're bullish on it. And why don't you go on it on your own instead of having like 5 or 6 partners for your 15, 16 products?

Rajiv, do you want to take that question?

Yes. So Balaji, it's a great question. And as you know, we -- it's a strategic area for us. And if it's a strategic area, we will be looking forward to build the core competencies, which we have been working on. And our first core competency, which we have been building upon, has been in our science side, R&D side, regulatory, medical affairs, which we have been building up. Now still partnership continues to be a sort of -- for us, it has worked very well. These are deep partnerships. These are not one-off products. Our partnership with Biocon is more of a strategic sort of relationship, and I think we have done pretty well in executing that. Of course, the FKB one is -- which is one around the biosimilar [indiscernible] full year is one of -- where it's one product opportunity. But I tell you that there's enough capacity available, as you know, from the manufacturing point of view. So building our own -- allocating our own CapEx to build that today perhaps is not the smartest way to allocate our capital when we have very -- many other priorities very well defined. But you can be rest assured, because if this is a strategic area for us, we will be building those components as we go along, starting with the science and, more importantly, what we need to enhance and build on our commercial site. And what are those areas so that we can get more out of this platform?

Rajiv, that's very helpful. But is that something that you'll consider for the next wave of biosimilar programs? Or would partnership still be the preferred approach? I can understand that rationale for the existing partnerships, but what about future programs?

As I told you that as we keep on building our own science, we will be -- we will take -- be taking up some of those programs internally, but we will also continue to enhance and bolster our partnerships.

Got it. And Rajiv, maybe just on the question of biosimilars. Can you help us understand how should -- how we need to think about competition in the space? There are not too many players globally who would want to be global biosimilar players, right, who are -- were in that capacity. And I can also see the advantage partners having partners from other economies or geographies [indiscernible]. And Sandoz just came out recently, an hour ago maybe, saying that they expect biosimilars to be a major growth engine for them globally. And what would competition entail for you? And is it going to be where you vastly talk on losing economics as it happened in the generic side? Or is this going to be much more impact to opportunity?

I think we always said that biosimilar for us is not a U.S.-specific business or a market-specific business. For us, it's a global franchise. And we -- I gave in my Investor Day, I gave example of one Herceptin biosimilar being launched from one country and today being in 65 countries. And you're so right, there is no global competition. Yes, Sandoz is now shaping up as a global sort of competitor, but many of these markets, especially the emerging markets, there are -- this is something which you can't play much locally. Now, of course, there is a competition coming in from some of the Indian biosimilar players, which we will have that, but I think we have the advantage that -- from our partners point of view, that we have the infrastructure to take it to the -- any part of the world, right from the China to the Latin America, to the Africa. So that's the advantage of partnering with somebody like us. And I'll tell you, our commercial infrastructure in these markets enables us to get more of this platform in -- just starting with what we have -- already what we have. And we see that this will continue to be one of the key growth drivers as we launch more and more of these products in more geographies.

Great. As I look into maybe other geographies and discuss it, the one question that I constantly keep getting about is about China [indiscernible]. There is still probably not as much disclosure information as you have on the U.S. side. So can you discuss a bit more about the Greater China opportunity? As we [indiscernible] away from hospitals, the drug dispensing system there is very different and very unique. And you focus on the retail channels. So what is the sustainable growth that we can factor in, in line with the Chinese economy or growth there?

Yes. So on China, I mean, as you see in our guidance, it's still, at the moment, a decline. We forecast that decline because of the VBP impact. And then starting in '21, the URP impact, which will bleed into '22 as well. But overall, for China, we are extremely bullish. We have -- it's about 10% of our global revenue right now, but there's no doubt that this is a growing market. And it's a growing market in a transformation mode. It was a -- the market was very, very focused on a hospital channel. It is broadening. It's broadening to retail. It's broadening to digital. It's broadening to empower consumers. There's private insurance emerging, the rise of consumerism. So this is the moment of opportunity. And you see a company like Viatris, which has such a broad product portfolio that is really well positioned with the local presence that we already have. It was built over 30 years by legacy Pfizer and Upjohn, really well positioned to take advantage of it. And we already have. About -- almost half of our business this year is going to be already in the retail segment, which is a self-pay segment. So -- and that's still growing at 20%. We just approved about 2 dozen projects that we want to bring to China, submit via launch in China. So we're bullish on the opportunity. The market is transforming, and we're adjusting with it.

Yes. And if I can add, Michael, it's not -- Balaji, you should see it about not what we have. We have the [ F '20 ] iconic brands, few Mylan legacy products pipeline. But more than that, we have one of the best infrastructures from selling and marketing teams perspective, deep relationship with the channels, the hospitals as well as other channels over there and one of the best compliant sales force. So we -- you should expect us -- when we talk about Global Healthcare Gateway, I think that's one market which will be the sort of poster child for us. We believe we can do a lot more with this infrastructure by being a partner to many other companies who are looking forward to go into this and venture into this growing market, very attractive market. So we are very bullish on China. Not only what -- internally we are lining up what we can do, but also being -- projecting ourselves as a partner of choice as we build upon this geography.

Got it. Great. Maybe on China, Rajiv. So you have previously stated that the impact is around $300 million for -- especially on the back of VBP and URP both. Split 20 -- 50/50 between 2021 and 2022. So does it mean that I should be expecting another $150 million headwind in 2022 as I think about the numbers for next year?

That's a minimum because that's based on -- this first round of URP is 11 cities. And it depends. When we said the trough year for China will be determined by the implementation timing and sort of extend of that whether it expands to the full China and when it expands to the full China. But I'll tell you, the shift -- the rebalancing of this portfolio has already put us in a position to offset some of these losses. So as you see, the 20% growth in retail channel, I think, has already positioned us that we'll be able to recoup some of those losses as we go along and before we start dropping in the new or additional products in this pipeline.

Got it. So maybe let me shift a little bit more near term or imminent 2021 on the guidance that you provided. So as I look at the 2021 waterfall chart that you provided so well and all the moving pieces within that, base sales erosion was offsetting the new product combination. And you had mentioned doing more to manage the tail assets and optimizing launches, but can you talk about what the net new product contribution is for the business in 2021?

Sure. And Rajiv, why don't you take that and break down the $690 million into Aspen and all the components?

Yes. The $690 million is the revenue contribution from the new launches, $200 million of [indiscernible] comes from the Aspen acquisition and $476 million, $475 million is coming out of the new launches, which is over '21. Coming out of 260 products, there's no one big launch like -- take, for example, we didn't assume Symbicort. Although we were 100% sure of our scientific success, we have not factored in as long as we carry [indiscernible] from the course that we are doing [indiscernible] and all that. So you will expect us to not include something like this into the base plan. Then I said 260, so it's not dependent upon any 1 or 2 or 3 products. And most of these products already, we have achieved our scientific milestones, not about executing these products.

Yes. And Balaji, that's the one number that keeps -- I mean, surprisingly, every time I hear the 260 launches. So you have -- that means if you do the math, there's a lot of onesies, twosies in there. And there's no binary risk, really. I mean for something to go wrong on that, a lot has to go wrong. Yet the opportunity, if one hits -- like a Symbicort or something like that hits, then the upside is [indiscernible].

Great. And Rajiv, that would have been my next question. So thank you for leading into it with Symbicort. So you've not factored that revenue into your 2021 guidance. We saw the [indiscernible] tested on time. So we'll see how the legal pathway evolves further and look at it. Maybe another specific question on the 2021 number itself is, recently, you saw [indiscernible], and you are the only player in the market with more than $300 million sales. So did you anticipate this coming through in 2021?

And you would expect us to monitor the competitive landscape for something such meaningful product for us. So yes, we did factor it in. We did take a new consideration. And that's why I'm so happy to tell you that we not only [indiscernible] is just one good example. We put every [indiscernible] on the table and try to take everything into consideration while mapping out the operating plan for '21. It's a very balanced operating plan because we took into consideration something -- we learned very late in the game when we were finalizing this operating plan, that there is a potential competition on [indiscernible]. We didn't shy away to take into consideration and build it into the plan. That's a good example. We just tell you that -- how we have taken every risk into consideration.

And maybe as we come close to our time, I just want to put in one big picture question again, Michael. I hope and believe that we are all gradually emerging out of COVID. And typically, when such a major event happens, the industry has changed in ways we do not anticipate and will evolve in ways we do not anticipate. So can you call out, maybe talk 2, 3 changes that you expect on the -- being on the generic side, on the specialty side, on the biosimilar side as an outcome of COVID and how things will be different for you and what it means from a bottom line perspective going forward?

Yes. So let me start with the bottom line perspective. So we have -- if you look at 2020 [indiscernible] numbers, we had about $800 million in negative impact from COVID. That's about 4% of revenue, which is kind of an average, right? That's how the industry overall was roughly impacted. For 2021, we expect that number to be less, so that we expect the second half of the year to slowly recover. If you take that $800 million, 75% of that was because of just generally lower prescription [indiscernible]. Not share loss, not higher cost, freight expenses and all the other things, it was basically just less visits to doctors, less diagnosis, less opportunities for prescription. That is -- the good news is -- the encouraging news is that should normalize starting the second half of this year and then into 2022. So we see kind of that sea rising all the boats again, and it's really awesome. So that's, I think, from a business perspective. I think how does it impact the industry, it impacts us, I think, in multiple ways. One is internally. I think we just internally launched a new flexible remote working policy because we all learn how to work better by video and make a good opportunity for employees, to attract employees that want that flexibility rather than showing up to an office every day. So that's certainly the way of working for all industries, not just the pharmaceutical industry is going to change. The second thing, I think, that will start emerging is COVID, in many ways, is a big accelerator. So even on the medical side, things like remote visits to a doctor, patients -- we see that in China, for example, the emerging of a digital health care landscape where patients don't want to stand in line at a hospital for 2 hours to get a prescription, and they find more convenient ways to get the health care. I think those are the kind of changes that we're going to see going forward.

Great. So we just hit the 25-minute mark, so [indiscernible] probably a good place to stop. But again, Michael, Sanjeev, Rajiv and Bill, thank you all for your time, and good luck, and we will stay engaged.

Thanks for having us.

Thank you, Balaji.

Thank you, Balaji. Thank you.