Viatris Inc. (VTRS) Earnings Call Transcript & Summary

I'm Dan Busby, the pharmaceuticals analyst at RBC Capital Markets. Our next company presenting this morning is Viatris, which was created not too long ago by the combination of Mylan and Pfizer's former Upjohn business. I'm joined this morning by Viatris' Chief Executive Officer, Michael Goettler; as well as the company's Chief Financial Officer, Sanjeev Narula. Michael, before we jump into Q&A, why don't I turn it over to you for a minute or 2 just to provide some brief background on Viatris and the rationale for last year's deal for those investors who may not be as familiar with the story.

Sure. Dan, thank you very much, and thanks for having us today. And I would say this conference really comes at a great time for us. As you know, as you just said, Viatris as a combined company, is still a relatively new company, formed a little bit less than 6 months ago, in November. And the vision we had was to create a new kind of health care company, one that's differentiated by a truly global operating platform, one that has scale. It has commercial capabilities and has expertise in science, in manufacturing and legal and IP; secondly, one that has a broad and diversified product portfolio. It's very important to us across brands, complex generics and biosimilars and generics and, very importantly, one that's agnostic to any particular therapeutic area, dosage form delivery mechanism, et cetera; and thirdly, one that has a strong R&D platform that's well positioned to deliver a broad pipeline of complex and novel product, including our late-stage biosimilar pipeline. So just a few days ago, we were able to report the results of our first full quarter, and I'm happy to say it was a very strong and high quality quarter for us. And we believe that those results validate the success of that diversified and robust business model that I just explained, one that can absorb headwinds in any particular part of the world while seizing on opportunities when and where they present themselves. And our results this quarter, we believe, reflect that. And in addition to those strong results, we're able to share the excellent progress we're making on integration of our 2 legacy companies, And for our shareholders, we are delivering on our commitments. We initiated our inaugural dividend at $0.11 a share for the quarter, and that's consistent with what we set, 25% of the midpoint of our free cash flow guidance for the year. We're on track to achieve $500 million in synergies for this year and on track $4 billion for the program. We're also on plan and continue to target $6.5 billion in debt repayment by 2023. And I would say, lastly, we're very pleased with the positive feedback we received then from you and other analysts and shareholders about the enhanced transparency and the disclosure that we've initiated in this quarter. And last but not least, we reaffirmed our guidance for the year, and we said we will reassess that guidance at the end of the second quarter. So we're very pleased with the start. And then in many ways, if you think of Viatris as a book, the prologue is over. It was a long prologue, but it's over. And the first quarter was really our first chapter of the story, and it's a very exciting story. So this conference really comes at a great time for us but, very importantly, then for your audience and for the investors. So thanks for having us, and really looking forward to the Q&A.

Great. Thanks for the intro. And that's a good segue to my first question. We get a lot of questions around financial outlook for Viatris and the company's longer-term growth profile. So a 2-part question here. One, you said a number of times that you expect 2021 could be a trough year for the company. Can you talk about the factors that give you confidence to say that? And second, you still have some headwinds ahead of you this year, including China Universal Reimbursement Pricing, heightened competition on some of your U.S. products. Now what would you characterize as the biggest downside risks to the 2021 guidance that you've provided?

Yes. Thank you, Dan. So let me back up and talk about the trough year question and kind of the outlook for the business first. And then maybe Sanjeev and I can tackle the question on downside or uncertainties together. No, we're not giving long-term guidance. We're very clear about that. We're committed to giving some color on that towards the end of the year. But what we did always say is this trough year term, that '21, we see that as a trough year. And we also get a lot of question on what that means. So at the earnings, we actually defined what that means by saying, we have a midpoint of our adjusted EBITDA guidance for the year, that's $6.2 billion. And then we believe that, that $6.2 billion is the floor for our business going forward. So that's about as hard as a line as you can draw at this point. And we're confident in that for a number of reasons. Number one is we know the robust business model that we have. Now that's balanced, that's diversified. We can absorb the headwinds and tailwinds. So we have high confidence in that, and again, our first quarter results reflect that. We understand the base business that we have and the natural erosion that we have in that base business. We understand what our pipeline can deliver. So that gives us a good feeling, and that's just top line. So from there, you go down, and you know all the levers that we have to go between revenue and EBITDA. So it gives us high confidence to be able to make that statement of $6.2 billion being the floor for the business going forward. And if you look at trough for free cash flow, free cash flow, you have even more levers, right? We have cash conversion opportunities that Sanjeev can maybe talk about. But even if you don't believe any of that, just a reduction in onetime costs as we move forward with integration, which would make free cash flow grow significantly. So where do we go from there? For longer-term targets, and to give you some color on that, we need to do the internal. Our business model is very different from, let's say, brand pharma, where you have relatively limited portfolio that you focus on and gets centrally driven and then you're kind of looking for the country where you can sell it. Our model is very different. We have 1,400 molecules, and we tailor that portfolio to the individual market. We tailor our R&D to the demand and what we think is right for the market. So it requires a bottom-up work. That bottom-up work takes time. And we just started that strat plan, what we call strat plan process, and we'll get back to you towards the end of the year with a bit more color on that. For the year itself, your question on downside. I would say rather than downside, I'd rather talk about unknown, right? And 2 things come to mind. One, of course, is COVID. COVID still is a headwind. It's improvement, we believe, over last year. We saw that playing out in quarter one for China, where last year was a very low quarter. This year was a normal quarter. You still saw the updraft from that. And we assumed in our guidance, and we reaffirmed the guidance, a gradual improvement in the second half of the year. But you see in India and Latin America, you see the kind of resurgence, how that can happen very quickly until really the world is fully vaccinated. So that's unknown, if you will. And the second one would be URP. We assume our guidance URP will happen from the second half of the year. But to be honest, the details around that are still a little bit unclear. We wouldn't assume it will start with cities. Now I think it looks more likely that some provinces will roll it out but not all provinces. So we'll have to see how that evolves. And I think the timing of the URP very much determines the trough for the China business, whether it's a trough this year or a trough next year. So there's some, I would say, movement around that. I don't know, Sanjeev, do you have -- anything you would like to add to that?

Yes, Michael, you covered there a couple of points. Dan, if you go back to the cash flow point that Michael talked about. If you just step back and look at the rhythm, so our guidance is $2 billion to $2.3 billion [indiscernible]. In that, the single largest amount is $1.5 billion of onetime cost. And as I said that during the guidance call, there are 4 big components of that. So we got the restructuring cost. We got integration cost. We got cash cost to achieve synergies, and then we got legal and settlement and the tax payments, some prior cases. The first 3 items alone, which is almost 2/3 of that, is going to reduce as the programs get wrapped up. So as you can see, by the end of 3 years, I expect the $1.5 billion to come down significantly, go back to kind of what would be more a traditional company's onetime cost and that alone will give you a significant improvement in the cash flow in the next couple of years.

Okay. So on that point, what's the right way to think about normalized free cash flow after those 3 years? If we look at legacy Mylan, I think it had a free cash flow conversion ratio of around 60% on average if you look at free cash flow as a percentage of adjusted EBITDA. Is that a reasonable proxy or baseline for Viatris once you've moved past the integration?

So Dan, I'm not going to give you a percentage, but I'll give you all the pieces. So I think you can get an understanding on that, right? So as you look at the EBITDA, we expect our EBITDA to improve as the net operating leverage of the company improves in terms of our margins, and we continue to work on synergies and those kind of things that we laid out. So that should actually help on the cash flow. Net working capital. We've initiated programs to optimize some of that. That -- I expect that to improve as we go forward in the next couple of years. Onetime cost, as I mentioned about that, that should come down dramatically. Then you have the capital expenditure. That probably will remain the same because we got a still large network of about 50 network plants and that you require that kind of spend on that. So those elements will probably show. So this will improve. I mean you can make the model on that. But clearly, in the onetime cost and the networking capital cost improvement, the conversion will improve from where we are significantly over the next couple of years.

Okay. And last question on this topic before we move to the pipeline. You've talked in the past about growing the dividend over time. Obviously, that's a decision of the Board. I think it's fair to say the initial dividend came in a little bit below what some investors were expecting, and I understand how you get to that number. But as we think about the next few years in the above-market growth you'll have in free cash flow, would it be unreasonable to assume that your dividend may grow at a more meaningful amount than some of your peers?

So Dan, let me step back. So clearly, as we said that before, dividend is a key pillar in our overall TSR approach. As we said that right from the beginning and continues to be that. The whole capital deployment is 2 pillars dividend and debt paydown. So we're absolutely clear. And as we said that in the call, and Michael alluded to that in his opening comment, we said the dividend for the year 1 is going to be back at 25% of free cash flow, which is how we get to the $0.11 if you take the midpoint of our guidance. And that will stay the same for this year. Clearly, as we go forward, I think Board will -- as you pointed out, Board will make a decision. But I do expect -- I do expect that dividend in terms of dollar value will grow in the outer years. How much and where that would be, peers will obviously take into consideration all of that in our business profile, that I think Board will make a determination there.

Okay. Fair enough. Let's move on to the pipeline. This is another important aspect of the story. How does Viatris grow going forward? You have a deep pipeline of biosimilars, complex injectables, other products. You provided a few detailed slides on the last earnings call. If you had to pick a handful of those that you're most excited about, which represent the greatest revenue opportunity and where investors should be focused, what would they be?

Sure. And then let me back up a little bit on the question and just try to characterize our pipeline overall because I think what you need to understand about our pipeline is maybe 3 things. One is, Just like our product portfolio, our pipeline is very broad and very diverse, right? And you just look at a couple of numbers. This year, we said new product revenue, $690 million. Part of that is product that already launched last year. Part of that is from franchise and part of it is the stuff, the products that get approved this year. And there's about roughly 200 submissions and approvals that we have in the year. So you can easily see that we're not dependent on one make or break kind of pipeline projects like some other companies. We're very broad, very diversified. I think it's point number one. Point number 2 is that we have very high PTRS, probability of technical and regulatory success. Usually, we get our things approved. We may not always get them approved just in the prime as we planned. There may be delays, but we usually get them approved. And the third one is that we're moving up on differentiation. I think some of the products where we feel we have particularly strong differentiation, we disclosed, right? And then you can track on biosimilars that you highlighted, a number of things I would point to. One is our insulins. both glargine as well as aspart, We are leading the charge on interchangeability. And I think interchangeability is very close now. We're on track for FDA goal date of July for both of them. And I think interchangeability is something very important for patients to have the confidence in your biosimilar that intended change it as well as for us commercially to differentiate ourselves and launch insulin glargine. BOTOX is another interesting one, another groundbreaking kind of biosimilars. We just submitted all the documents for our Phase III discussion with the FDA, good progress there. We had positive Phase III results for EYLEA, very interesting ophthalmological product. And then we received approvals in Europe for aspart and bevacizumab or Avastin. So a lot of good things happening on the biosimilar side. And I would say on the complex side as well, you have Copaxone once monthly, which continues to track along, on track for 2022 submission, right? We have, I think, over 900 patients recruited now in the study. So that's tracking along very nicely. Meloxicam is an interesting molecule, where we have a [indiscernible] formulation that allows for faster onset, and that's a non-opioid pain reliver. So again, very, very important from a public health perspective as well. We -- XULANE, which is a contraceptive patch. We just initiated Phase III with a lower dose. So there's a series of those and then other complex injectables. So a number of really exciting things happening in our pipeline there, every product.

And Dan, if you just look at the numbers, just see the rhythm of the numbers, we printed $163 million of new product revenue in quarter 1. You take the run rate and gets you to $690 million. So first of all, broadly, we're absolutely in line with where that is. And if you take the $690 million in terms of the numbers, the 2 big pieces that Michael alluded to that, one is the thrombosis franchise, which is close to about 1/3 of that, right? We're on track with that. Actually, based on our first quarter, we might be a little bit ahead of that in terms of how we are expecting. And then rest of that is all these 200 programs that are talking about, including remdesivir, complex generics, biosimilars, all of that. So, so far, based on where we are on quarter 1, what we see, we're absolutely confident about hitting $690 million that we have for [indiscernible] customers.

Yes. Maybe just to highlight on thrombosis, since you mentioned it. It's important to point out that we actually grow the business in quarter 1. It shows our ability to take on these established brands and not just continue the performance, then have the cash flow and everything that's associated with it, but actually improve the performance with the global platform that we have. So...

Okay. And the $690 million, you just kind of talked about where that's coming from. I know you're not going to provide long-term guidance today. But directionally, how should we think about new revenue contribution, new product launch contribution going forward? Is taking the $690 million, stripping out the thrombosis business, is that a reasonable baseline? Or are there any kind of unique factors to this year that might understate or overstate that number?

I think what we would say is we would see $600 million as a normal rhythm. If you look back in past years, you have a year where you have $1 billion, you have a year where you have $400 million. But $600 million as an average is kind of the click that our pipeline is going at.

Right, right. And Michael you are right, it's again, there are peaks and troughs in this. Sometimes, we have got a big product like Wixela, the number could go up. But I think the important thing to note here is our intent and long-term kind of focus there is that the new product revenue will, by and large, offset the base business erosion. That's kind of how we should need to think about that. So that everything else that we do can stabilize and grow the revenue, but base business erosion can offset by the new product revenue.

Okay. And your new reporting structure has 4 regions. Where do you expect most of this growth to be coming from? Is it fairly balanced across the portfolio? I know there is some unique headwinds in China. So where -- are you overlying on a few regions to drive that growth? How are you thinking about that? And how should we think about that?

Sanjeev, do you want to take that?

Yes. Let me take that. So Dan -- so clearly let me go region by region what's going on. So Europe -- so we expect Europe to growth this year, not only because of the thrombosis franchise, but the base business in Europe have stabilized in terms of LOEs and those kind of stuff. And so we expect Europe business to continue to grow and Europe is sizable part of that business. North America, we'll expect that to decline because of specific LOEs that we have in the current pipeline right now and some competitions like Wixela and XULANE. So North America -- but take those things apart, in North America, probably stable to slightly declining because of the generic business. JANZ region will significantly decline this year because of the 2 big LOEs that we're experiencing. When we put those LOEs aside again, JANZ is, again, I'd say, stable business because of a lot of the growth we expect in generic business for the portfolio. China, I mean, right now, with the URP, we expect China to kind of just decline clearly second half of the year. But again, all depends on the URP. We saw first quarter China growing. I think second quarter, China probably stabilized to maybe decline a little bit because of the comparative last quarter, but it all depends on China. So I think overall, we see every region playing their role. I think the regions are uniquely impacted by the LOEs, particularly JANZ and North America, but I expect Europe to grow and then taking out the LOEs -- the other rest of the portfolio, we'll continue to grow as we go forward.

And then as you can see from Sanjeev's explanation, we're not -- this is our new business model. We're not overly reliant on any particular region. And if even developed markets, the way we reported the segment is -- it's almost 60% of the business, but you break it further down, we have less than 30% is the North America and then the rest is Europe. Within North America 11% is the actual generic -- classic generic business. China has that same percentage, right? So we're not -- we're very, very -- much more balanced now geographically. So that as tailwinds come, we can absorb them. And as headwinds come, we can capitalize on tailwind.

All right. Okay. And I want to circle back to something you mentioned a minute ago, Michael, the interchangeability with your insulin glargine and insulin aspart biosimilars. I think this would be the first time we've seen that. What kind of an impact do you expect that to have in the market? Is this a game changer? Or is this more of an incremental benefit? How should we think about how that will play out competitively?

Yes. We think it is a positive. We think it's going to allow us to commercially position these products differently, to compete more effectively and, very importantly, give patients and doctors the confidence that these are interchangeable products, which I think is very important. How much of an exact commercial uplift that gives that we have to see probably very little impact on this year, right. If you just look at the rhythm of the numbers, it's not going to change the guidance for this year in any dramatic way.

Okay. And we have a few minutes left, and I want to hit on business development. Obviously, one of your near-term priorities is deleveraging and you're also committed to paying the dividend. Can you talk about your appetite and capacity for business development over the next few years?

Sure, Dan. And look, we get a lot of question on that because, as you know, we termed -- we coined the term, Global Healthcare Gateway. So we kind of branded it in a way. But at its core, business development is not new to us, right? It's something, if you look at the legacy companies, we've always done. What's new about our approach is the enhanced discipline that we bring to it, the enhanced discipline around capital allocation. What is new is that the focus that we're putting to it. And what is also new, quite frankly, is the completeness of the global platform that we have now that makes us more attractive, now with China, right, make us more attractive to partners. And we can approach those partners in a way that is agnostic of a particular therapeutic area and very opportunistic in nature. Now what we're excited about is the number of opportunities, the number of avenues that we really have here starting -- we talk about Global Healthcare Gateway starting internally, starting with our own R&D towards more differentiation. We're going to continue to invest in that and then also voluminous external inorganic opportunity. Again, we're not focused on a particular therapeutic area. But what's important is the focus we're putting on it, the discipline around capital allocation, making sure that everything we do has not only a strategic fit but generates value to shareholder and is very, as you pointed out, consistent with our commitments to capital allocations, right? And that's really where I want to put my fingerprint as we move forward.

Okay. So is the Global Healthcare Gateway, when do you think it will really be running at its stride? Is this -- it sounds like you can start doing some things right away. But when do you really expect to be unimpeded and really execute that vision that you have for that part of the business?

Yes. Look, I don't want to get to have my skis and kind of announce when deals will come in, because when deals come in, they come in. And we'll do them at the time. And as I said, we will do them in a way that's consistent with our capital allocation priorities. But that kind of discipline and capital allocation was internal and external is starting right now, right? That is ongoing right now, both for our portfolio as well as for opportunities that we look at. And in business development, I always say you kiss a lot of frogs before you find the prince. So we're active. We're going to be very selective, and we'll talk about deals as they come.

Okay. And we're almost up on time. I'll squeeze in one more question. You talked about internal business development. Is this really about finding revenue synergies between the Mylan and Upjohn businesses and finding ways to create opportunities that way? And have you built any of that into guidance? Or is this all potential upside?

So our guidance does not assume any revenue synergies for this year. That's not assumed. Having said that, there are clearly opportunities, right? So you look -- I mean, for example, if I look at the China business and I look at the legacy Mylan business there, which is very much -- part of it is a retail kind of consumer-focused business, they can really benefit from the oomph that we can now have with client, sales force there and the capabilities we have in retail. So there I think opportunity is there. Or you look at countries like Korea, where there was really no business to speak of from legacy Mylan, and now we have a presence there. And then the flip side, I would say in Europe, where the previous Upjohn had no retail presence. Now we have very strong retail presence. So I think the opportunities, we'll explore these opportunities [indiscernible] strat plan. And as we -- as our leaders continue to learn more about the business, but our guidance does not assume any of that.

And Dan, that's one of the point that we're going to be looking very hard at this time as part of our strategic plan to look at molecule by molecule the opportunity of revenue synergies and then build that into our guidance as we go forward and be transparent about that. That's again the work that we began the last couple of weeks.

Okay. Great. Well, we're up on time. That's probably a good place to stop. Michael, Sanjeev, thanks so much for joining us.

Dan, thanks for having us.

Thank you, Dan. Thank you for having us. Thank you.

Take care.