Viatris Inc. (VTRS) Earnings Call Transcript & Summary

Thanks, operator, and good morning, everybody. Thanks for joining us at the Bank of America's Annual Healthcare Conference, which is being held virtually for the second year in a row rather than Las Vegas, but hopefully, this is the final year of virtual get-togethers. I'm pleased to be kicking-off the conference with Viatris. We're joined by Rajiv Malik, President; and Sanjeev Narula, CFO. So Viatris just reported its first full quarter as a combined merged entity, which previously was Mylan and Pfizer's Upjohn. So gentlemen, thanks so much for joining us after your first full quarter and all the exciting updates yesterday.

Good morning, Jason, and very excited to join you today this morning about this conference. We are very excited especially, after the first quarter, which you all see. We are very -- we as management, we as a team, are very pleased with.

Right. And thank you for hosting us. And having us here now right for perfect timing for having a great dialogue.

Sure, sure. So I guess some of my initial questions were really spun from things that kind of came to my thought process after absorbing the first quarter update. And I think the ongoing China market dynamics, it's a newer end market for investors who've historically just focused on Mylan as an entity. And I think surprising some of the performance that you're seeing in the retail channel from the China market. So I was hoping maybe as a leadoff question, if you can enlighten us a little bit in terms of what's going on with the China end market? It's a relatively sizable business for Upjohn. Within the combined diversified entity, probably not a massive exposure point. But nonetheless, as we think about some of the pricing reforms that were going on in that end market with VBP and URP, how much of that is sort of washed out? And I know I think you guys mentioned that most of it is reflected in guidance. But it also sounds like it could be a swing factor as we think about sort of the 2021 outlook and potentially a guidance upside as you guys get to the middle of the year and reassess your financial outlook. So I'll start there.

So, Jason, I'll take that one. Very fair question. And just let's just understand the underlying dynamics in China. So from the pricing point of view, pricing control point of view, China embarked on a very ambitious volume-based procurement after the QCP that -- leveling the QC field, they wanted to basically manage more effectively their health care dollars and they kicked off with the VBP. And they're very -- they have outlined very clearly that after a couple of years, they will -- they intend to go towards the uniform reimbursement pricing. So that was -- that's the URP [indiscernible]. We have at the same time, there's a second factor which you have to understand is the rising health care consumerism. What I mean that more and more population is coming -- falling into that bracket, where you can afford for your own health care out of the pocket health care . That's the second part. The third factor, which is not very much talked about is the rise of the private hospitals. So even the hospital business you name it, you see the government state-owned hospitals and the private hospitals. When we are modeling because this is first time happening, all this is happening, we are also trying to understand and learn the landscape and model it accordingly. So our first thing was, take into consideration everything from the VBP. We know what all molecules are coming through into the VBP from -- for us by this year, everything, every molecule will be among. So we take that into consideration. And then as China had indicated that this year, '21, the 11 cities will go through the URP as it kicked off the VBP. While at a policy level, there is a little bit of freedom over there who is implementing, who's slowing it down, who already has secured their health care rebates or dollars, whatever they're looking for still to catch up. So the implementation plan is a little bit choppy. But we know the destination, where they are heading. So we are trying to stay close to the ground and trying to continue to build that into order. That's why, we said at the very beginning, when we gave the guidance that this year, we resume mid-year implementation of the URP in the 11 cities. Now that changes that swing factor change. And as I said yesterday, we absolutely will -- we are now seeing 5 of these promises instead of 11 cities. They have already hinted and once Shandong provision is already implementing, and we can only tell you the bottom of the trough of China once we fully understand the extent of the implementation. But put that aside, for us in the business, which is going right is, one our health -- our rebate -- sorry, our retail business is kicking on all cylinders. As a part of reorganizing, as a part of basically bringing these 2 companies, we got an opportunity to organize ourselves so that we can set ourselves to manage VBP more effectively and leverage where the market was going. Market was going more towards retail. So if market is going there, we could -- we are ahead of that -- the growth curve, 30%, 35% year-over-year growth we are seeing. And today, our 40% business -- close to 40% business is retail and 60% is hospital. Now it doesn't mean now people that even if we are not participating in the VBP, we are not going to lose all the hospital volume. So your question, some of the people from the hospital are moving towards retail and out of the pocket. So that's the underlying dynamics, which are a little bit difficult to spell-out, but we have right day 1. China was one of the regions behind this very strategic coming together of the 2 assets. We remain confident about our execution in China. We are pleased what we have done. And now we are in a sort of driving the [indiscernible] investing in China, identified about 35 products now for China as a market. We'll each process of basically filing 7 to 10 products, 7 products this year and then more products next year. So this is how we see China. We see China as a long-term strategic opportunity. And as soon as we know the bottom of this, I think we will swing back to the growth in this market.

Yes, Rajiv, I think the most interesting thing, less interesting is how quickly the hospital stuff goes away with VBP. More interesting is this retail growth dynamic. And is it a short-term bolus because of COVID and people not wanting to go to the hospital and deal with the exposure point? And then what proportion of the consumer base might be able to absorb perhaps a branded price point for a Lipitor or Norvasc? And so as we think about those future market dynamics, I don't know if you can comment on pricing and how you kind of see the proportion of the market that could shift to retail longer term?

I won't say this is just because of the COVID that patient doesn't want to, that can be main factor. And we called yesterday when Michael was overall giving the [ mass enrollment update, ] he did caught COVID and URP as 2 reasons why we can't give you a very correct answer on some of the broad overall top line questions, but I think the patient which is moving towards consumer is patient which can afford health care today. Patient who doesn't want to be in queue in the hospital for hours to get his prescription refilled and then don't underestimate the intersection of the digital world. China is way ahead from the health care perspective, where they are basically using the digital tool or the online pharmacy. So if you can generate a prescription and find a way to track that prescription, I think that's a whole new [ vista ]. So I think there are underlying dynamics, Jason. For us, focus is to optimize what we have to the best of our ability and continue to add products, which are basically more inclined or more moved towards retail. So we continue to [indiscernible] retail-oriented portfolio, and we continue to execute and leverage what we have in terms of the assets at this moment. And the third option, our third thing is, I think the way -- we are very proud of this team over there. The sales force, one of its kind, a very compliant, can unlock this global health care gateway. The China will be at a forefront I can tell you to add more opportunities and more opportunities for us.

And Jason, if you want me to talk about -- you mentioned about the other swing factors that we're watching outside of China that Rajiv covered very well on URP. I think there are a few other things that we're watching, which is what we will assess at the end the second quarter. But so obviously, Michael talked about COVID. We're all watching the COVID situation. It's fluid, obviously, watching the effects. I think it was a big factor in quarter 1, not expected to be that way. We're watching EpiPen, right? We had an acceleration of EpiPen sales because of COVID vaccinations. We're trying to see how much of that is an incremental or an acceleration of demand from quarter 2, quarter 3. We're watching Remdesivir in India. There is a demand, Rajiv mentioned about that yesterday. The demand has gone up in India significantly. So we're just trying to assess what that means, but not only for quarter 2, for a full year. We're looking at all these 3 or 4 swing factors in addition to China. That's what Michael said when he said that we'll reassess the guidance at the end of the second quarter by looking at all these swing factors.

Right. Right. And just continuing along the China discussion, specifically as it relates to the gateway, the business development strategy that was articulated. And I know that the focus right now is debt pay down although companies, typically, when they partner development stage medicines can oftentimes do back-end loaded deals where you don't have to put up a lot of cash, where you could pay a royalty and perhaps some milestones along the way upon commercial success. So as I think about the portfolio build-out, I'm curious, on the one hand, when I hear retail-oriented medicines, that's kind of like where the U.S. biotech market is moving away from. They're moving to specialty medicines, which are more high-priced. You have to see a certain physician specialist like an oncologist or an MS specialist versus retail is typically the realm of primary care, probably stuff that doesn't have as onerous of monitoring requirements, things for those types of medicines. So as you think about the portfolio build-out, can you talk a little bit more about -- it sounds like perhaps there's more of a focus right now, just internally moving medicines you have in-house to the China end market. But then longer term, what does that look like for you guys?

So Sanjeev, you're right. See, if you look into the Upjohn's legacy strengths in China was cardiovascular, cardiometabolic as well as the pain, as well as the CNS, Mylan legacy had strength in the respiratory, given our U.S.A. and some other markets like Dymista and all that. So I think we won, we see adding the top of another therapeutic areas in China is to add more portfolio, but you're -- And we are -- the first phase is looking into internally what we have and what can be deployed to China. That's a low-hanging easy one, and that's why we could rush to reengineer that science and make it fit for China from China point of view, whatever. The second part is looking for the deals. You are absolutely right. When you're looking for a pipeline perspective, it opens up a whole new spectrum formers. And believe us when we are saying we are evaluating aggressively the opportunity. Because there are many companies, western-based companies who have not taken their trends or innovation to China. And we are perhaps -- we believe we are one of their preferred partners. You're right, there are many ways you can do these creative deals, and one is the perfect deal. And now we are not at a point that we can share with you, but we can at a point that we'll share with you that we are actively exploring when there's a pipeline of these opportunities, which we're trying to figure out what will fit in for China perspective.

Okay. Another thing that I was curious about as we're starting to peel away the onion and learn about this new entity that you've created. And one thing I've noticed, I think in the realm of generic drugs at least pipeline wise, it's a lot of onesie-twosies nowadays. Like it's very difficult, I feel, like to have a really big generic launch with a long duration of exclusivity. You almost got lucky with Tecfidera there, but obviously, the courts didn't -- were accommodating. But so as I think about it, do you think that's just the realm that we operate in, maybe some biosimilars can be $400 million, $500 million type products. But as you think about the model and kind of the realm of your pipeline engine, just curious if you can comment on that.

So Jason, it's a great question. '14, '15, '16, there were sort of large as well as solid opportunities. The big IP cliffs, big patent cliffs. So there were a lot of opportunities from the 180 day -- 280 day exclusivity. That game has been well fitted out, and you have to be smart to continue to identify those opportunities. Now Tecfidera is a good example. It was 20 partner -- 20 players on a day of one, but we could carve out some niche, some unique opportunity for us. So is the Zytiga. So every year, you would expect us that we will be diligently looking into some of these nice to have where there's a cutting edge science that we are ahead of the curve. So we'll keep on doing that. But I think the focus has more shifted on -- there's a number of molecules, still, the big ones, the multibillion-dollar molecules, where still there is no generics because of the complexity around the science, because of the complexity around the regulatory partway, because of all the scientific hurdles or big dollars you need to just execute from the creating a new infrastructure. So this is where you're right in seeing onesie, twosies, you are right. But that onesie, twosies can take you for 3 to 4, rather than 180-day blip. Wixela is a good example. Copaxone is a good example. Symbicort, when we hit, it will be a good example, that the products of that nature. But you're right, there's not more Symbicorts, which you can do that. That's where the biosimilars kick-in. That's where those opportunities kick-in. And that's why we said going up the value chain for a company of our size that we cannot be relying on that 1 -- 6-month hits and all that, we are moving up to looking for the next Copaxone once a month or a Botox opportunity where you can bring little bit more sticky business. So I'm not saying to say that biosimilars are not going to be eroding, but they are each going to have 180-day cliffs. They're going to be of a longer annuity to take time for us to ramp-up. Overall, the DC -- if you run a DCF model, there's much more value in those products than in 180-day exclusively models.

Jason, one thing that we can't ignore in coming from the branded side, is the risk mitigation of the portfolio, these onesies and twosies, because they are high volume, multiple goals at the chart, if some of them fail, it's not going to impact your overall portfolio, whereas in case of a branded company. If one of Phase III fails that can whole change the complexity. So there is a risk mitigation factor, which we cannot underestimate that, and that account brings the certainty of the new product revenue that we talked about it, which is a unique strength for our portfolio.

Another small angle there is, Jason. Chances of regulatory and scientific success. There might be a delay in the execution that you thought you would bring the product back in '22. Maybe there might be a delay in any molecule, so the chances of getting it over the finish line is always more [indiscernible].

Yes. Got it. Okay. A couple of questions just on risk factors, and then we'll jump back to biosimilars and how the company is playing offense. But one thing I wonder about, it seems like once or twice a decade, we see an important country market space something game-changing in the generic realm with pricing. So we saw 2015, 2016 U.S. purchaser consolidation. In late 2000s, we saw Teva bought Ratiopharm and then the German market went to a more aggressive pricing dynamic. And that really impacted, I think, the value that they were hoping to get out of the Ratiopharm acquisition. China just went through VBP and now URP. So as you think about your portfolio of important country, country level market and maybe your top 5 markets or so, how do you manage and navigate and keep tabs on where there's potential next country risk with respect to generic drug pricing?

It's a great question. The only difference between Teva buying the Ratiopharm and us, we knew China VBP was already announced, and we knew still it makes sense from that point of view. But you're right, this -- if you ask me. Look, let's just start with Europe first of all. Europe is not just again one country, but Europe deal pricings and all that happened maybe about a decade back. And there are bunch of countries, there are markets like Germany, which are standard driven. But then there is a gain in between, still a lot of private and commercial market, if we call it. Then there are countries like France and Spain and Southern Cluster, we call it, where still it's a genericization of this industry is not more than 35%, 40%, 45%. There's still a lot of branded generics and the pharmacy play in the markets like Italy and all that. So we know where Europe stands for the last 4 or 5 years. I don't think that there's a lot of volatility over there. But that's Jason, the beauty of the diversification. All the markets are not going to turn around or turnover overnight. We -- if I get out of China, Japan already had seen from this point of -- we know exactly what happens. Japan at one point of time 6%, 8% in generic penetration. Today, it's about 70%, 75%. When we model Lyrica, we're modeling about 70% penetration like that. There are markets, big markets in our portfolio, Australia is another good example. New Zealand is already a tender market. Our machine is well tuned if with the tender markets, if the channels like where are the opportunities like the pharmacy channels and stuff like that. And then there's wholesaler markets like Germany, U.K. or -- and the biggest market is the U.S.A. And this compare the pricing reforms with keeping -- we're staying very close to what's happening over there. I think a portfolio like ours, which is more towards complex products, the biosimilars and all that. Any government which is trying to work towards to expand the access, I think we are a part of that solution. We not -- we are watching it very carefully, but we are not concerned after the China VBP behind us. I think it can be a sort of an opportunity for a player like [indiscernible] just bigger risk out there. But your question is part of that we always keep the cap on our top 5, 6 markets, the underlying political upheaval or what's happening over there from the health care perspective.

Yes. Okay. Yes. And then with the U.S. market, it seems as though your update if -- but for COVID, you would have only had about a mid-single-digit decline year-over-year in the U.S. generics, I believe that was the commentary. So it seems like that marketplace is stabilizing. When I look at the results of both Viatris and Teva in the U.S. generics market, much different than what's going on with Sandoz. And I think with Sandoz, perhaps they had [indiscernible] bundle, perhaps some internal distraction, if you will. But I'm just kind of curious how you'd frame that market, which is obviously not as important as it was once to Mylan, but still an important market.

Yes. So 2 years back, when we launched on the business transformation, one of -- we knew the landscape in U.S. was changing. The over solid sort of highly -- getting highly commoditized. A lot of Indian players were coming in and FDAs, PDUFA had opened up. Not -- it was not 1 of 3, 1 of 5 [ units ] but becoming 1 out of 8. And driven by the customer expectations, needs, where the gaps are, we took this rigorous financial commercial exercise of rationalizing our portfolio. And that lead to us bringing what you saw in '18, '19, that the ability of us taking some volume down, that was that exercise. I think there's a market -- a lot of, I would say, '17, '18, a lot for low-cost offerings with no supply disruptions from competitors. And we rationalized the portfolio. Now the focus is to pursue I'm not saying we are shying away from commodities, but we have been diligent. We have been diligent by keeping eye on our source allocations. We are keeping an eye on the customer needs, where it doesn't make sense. And there also it meets some financial incentives for us for a company like us. We left with the U.S. generic portfolio, which is a nice mix of some even oral solids, which are extended-release or some high volume, even if a customer needs that we have but more injectables, transdermal and patches. And I'm not -- we talked about it, it's 11% of our business, but it's an important part of our business. And we continue to benefit significantly and smartly. And I think the volatility, which you saw in '17, '18, '19 around this business, is relatively behind us. See the stability. And it depends upon, I think, Jason, company to company. What is your profit who you're left with? What are you dealing with from the competitive landscape on those molecules? Are we going to get competition? Yes, we have factored in competition for [indiscernible]. We have factored in competition for Wixela. We have factored in competition for Copaxone. But we know it's not going to be an overnight turning out to be a commodity market. You may have Amneal come in [indiscernible]. You may have a Hikma come in [indiscernible], but it's not going to overnight turn into a market where they are 6 to 8 players. So that's where our ability to predict, our ability to model as, I think, improved with this changing landscape.

Yes. Okay. And maybe shifting to the realm of biosimilars, right? I think we're now seeing a phase of at least in the U.S., a wave of oncology products that are going biosimilar. And a unique aspect outside of certain channels like 340B, is that there maybe necessarily isn't a pull-through for lowest net cost provider necessarily, especially in the first couple of years of market formation. So I know you guys, as a company have talked about biosimilars as a global opportunity, but the U.S. market still ends up being the driver in terms of global dollars for biologic medicines. And so I guess, how do you see your strategy for the U.S. biosimilars, given the sort of tricky -- perhaps you need a sales force, you need to offer service, you might need to offer value dollars to, I don't know, providers who aren't operating -- or operating in value-based OCM type of initiatives. Just curious where you see your strategy fitting?

So first of all, biosimilar is an important space, as you can understand that so many next wave of policies from the patent expiry perspective is biologics. So if you are in this space, you need to have that portfolio. And then come back to the U.S.A., U.S. is an important market. As you said, it is going to drive a lot of that space. So when we select our portfolio, when we identify our investments, U.S. is in the forefront from the business model case. It's not a generic market. It's a quasi brand market. In every channel, everything is different. Insulin can be a different, oncology can be a different [indiscernible]. So you need some -- absolutely, you need based on the molecule, you need to provide those services whether it's a foot soldier, sales reps or whether it's sort of patient services from that point of view. But I think the important learnings which are -- we have been having is, first to market is playing out to be a huge factor. And we have now 1,2,3,4 different cases, and not just in U.S.A., even outside U.S.A. For example, if we were first in [indiscernible] Canada, we can run -- we can have the competition against the same Roche or same Amgen at 35%, 40% market share. So first, to market. The second point is you just can't have disruptions in this market. We -- as we publicly mentioned, we phased one of our first to market opportunity on full flow satisfied disruption. We lost that position. And the third is, again, the cost for U.S. market may not be one of the criteria, but when you are a global player competing in the global tenders like European tenders, you have to be ready for that. And I'll tell you it's still evolving because then we have the brand companies who are leveraging the portfolio who are in this space. And we have seen them, and it's not that the pricing at the moment is being led by -- let down by a company like us or company like Teva [indiscernible] the ASP towards the bottom is being led by none other than Amgen. And we have seen instead of the 5 -- 4%, 5% decline quarter-over-quarter, much more 6%, 7%. Moreover there trying to leverage their other brands that how can they use those brands to create a pull-through or push-through for biosimilars also. So there's a lot of underlying dynamics, which are going on. But having said that, anything new, which take 3, 4, 5 years through wall, biosimilar is from U.S., right here. I think we are encouraged by the pickup. We're encouraged by the thinking of the policymakers, that assess will be important, and that's where this -- it's an important space for us, and we will continue to be focused on the first 2 markets.

Okay. And I want to squeeze in a question for Sanjeev here quickly. On the dividend, I am mindful that this is a board-level decision, but I guess there was a little bit of confusion kind of going into the guidance update and I think my ultimate takeaway from all this is that not committing to a 25% payout ratio, 2022 plus. But that the company is committed to growing it year-over-year, and the company is committed to a dividend. Is that a fair synopsis?

Yes. I mean, so Jason, just I'm mindful of the time, but just let me going to step back. I think dividend is a very important part of our TSR story, that was the foundation of Viatris. And so that's going to be center of all in addition to the debt paydown. So you heard that, right? For 2021, we are committed. The dividend framework was communicated. And we initiated the dividend, which is $0.11, which is 25% of our midpoint guidance of the free cash flow. Now as you know, we talked about that, the free cash flow is going to grow significantly in the outer years, right? As the onetime costs go down, as we improve the EBITDA, the free cash flow is going to go down significantly. And I also said that the dividend is going to grow in absolute dollars, right? The value. And what that number is going to be? I think that's going to be the Board's decision. I can assure you that it's going to be a growth. But the 25% connection to the free cash flow was a criteria for 2021 and we're living by that, and we announced that [indiscernible].

And just to correct for the transcript, I think you meant the free cash flow is going to go up.

Free cash flow is going to go up.

Yes, you said that, but...

No, one-time cost will go down, free cash flow will go up.

Yes. Yes.

Yes. Absolutely right. Yes. Yes.

Thank you, gentlemen, for joining us today. This is a really helpful discussion. I really appreciate it.

Thank you, Jason.

Thank you.

All right.