Viatris Inc. (VTRS) Earnings Call Transcript & Summary

Excellent. Listen, thank you guys for joining here. Pleasure to have Viatris management join us. There's a lot to discuss, but let me turn it over to Bill to introduce the management perhaps and share some opening comments for Michael.

Yes. Thank you, Umer, and really pleasure to be here. Today, we have our CEO, Mike Goettler, our President, Rajiv Malik; and our Chief Financial Officer, Sanjeev Narula. Before we get started for today's discussion, a quick forward-looking statement from the company. During today's discussion, we may make forward-looking statements on a number of matters. These forward-looking statements are subject to risks and uncertainties and that could cause future results or events to differ materially from today's projections. Please refer to our SEC filings for a full explanation of these risks and uncertainties and the limits applicable to forward-looking statements. Also during today's discussion, we will not be providing any updates to our 2021 guidance. We're discussing Q4 2021 or full year results of 2021. Thank you very much.

Excellent.

Back to you, Umer.

Okay. Excellent. Well, I know there's so much to discuss, and I think we have until 8:00, so we're going to be very judicious with time. Maybe just at a high level for you, Michael, for Rajiv, Sanjeev, all 3 of you perhaps. There's a lot of buzz out there right now around another large -- one of the big 3 generics businesses potentially getting spun out of Novartis. And there was an interview last night with Novartis Chairman, where they were asked if there's any possibility of a combination with one of the large players like a Teva or Mylan, Viatris. I guess, how do you guys think about something like that? Is that even something you guys are even contemplating? Plus, wouldn't there be some massive antitrust problems with anything like that in the first place?

Yes. So I can comment on that. I think our strategy has been very clear we laid it out, right? We break it into 2 phases, what we call the Phase 1 with year '21, '22, '23. And what we want to focus on there is on delevering, on paying back our debt, on growing the dividend and delivering on the integration and the synergies. We're well on track for that, and we're strongly committed to that. Phase 2 is about our catalyst to growth. It's new capital allocation priorities, unlocking more value for shareholders and delivering on our pipeline and moving up the value chain to a more sustainable, longer life cycle type of products. We look forward to sharing details on that with you on our investor event on January 7. So all I can say is we also read the reports this morning of what Joerg Reinhardt commented. I can tell you we haven't had any discussions on the topic. Of course, if there's a possibility to create more shareholder value, we consider it, but it's not something we're actively considering at this point.

Got it. Okay. Got it. Maybe I'll just leave it there, but I do recall a lot of antitrust issues that Teva ran into with Actavis. Rajiv is shaking his head, yes. So I think the practical limitations perhaps also maybe even beyond the business considerations. Okay. Got it, though. Maybe turning a little more specific then. I know from a business perspective, the Street expectations on your business are sort of in 2 phases right now. There is a near-term phase where business is being modeled to be flattish, and then there's a post '23 phase when some of the investments historically from the R&D organization in the biosimilar starts to set the case for growth. Is that consistent with how you guys think about it? And how does that translate from an EBITDA perspective near term versus post '23?

Yes. So look, I mean, I think, you're looking at it right. We think of it also in 2 phases. We look at it in the Phase I where our commitments are very, very clear, and then a Phase II. We're not giving guidance today. Obviously, we're going to lay out on our Investor Day exactly how we deliver on our commitments for Phase I. And then we're going to give you the catalyst for the growth in Phase II. And the catalysts are our pipeline, which we think is underappreciated. We've got some very strong investments in biosimilars, in complex generics that will drive it. We're going to talk about our capital allocation priorities for that time and how we unlock value for shareholders. And I think the pipeline is really key. And maybe, Rajiv, you can give a couple of pointers on the pipeline.

No. Thanks, Michael. And I think the Phase 2, and as, Umer, you said, pipeline, the complexity and all that elements, which we have been building in, I think there are 2 elements, which are under appreciated. One is the -- what is the new model or algorithm of a complex product. And we are getting more and more data points, and it's both the sustainability and the durability of this pipeline. And if you see like go back, right, from '18 to '19 or '20, there has been 1 or 2 anchor launches like it was Copaxone in '18; '19, it was Wixela; '20, it was Herceptin and Fulphila. And then this year is going to assembly and as part next year. As we go into '23, '24, it's more than one over there, whether it's the GA once a month, whether it's a BOTOX coming in '25, '26, whether it's coming to EYLEA. So those launches, I think, the concentration of those complex launches starts building up. And also, you would see the contribution of '22, '23 launches is not going to fade out. So I'm very excited to share with you guys on the Investor Day what are the catalysts for Phase 2 and how they're going to contribute to the -- and it's going to -- my feel is, once we do all that math, it's is going to make our base business relatively more durable than it was yesterday or it today.

Rajiv, can I just -- 2 quick follow-ups on that. A, I noticed you didn't mention EYLEA in the growth drivers, you just mentioned because I want to put those [indiscernible] after.

I thought I mentioned it.

Okay. Okay. So okay. Okay.

Umer, there are too many of them. I might [indiscernible].

Excellent. Fantastic. And then also, Rajiv, maybe 2022 growth drivers, what are those?

I think 2022 is going to be the systemically interchangeable launch for us is going to be a new driver, number one. As part is going to be a second one. Hopefully, we'll be able to get Avastin very soon. And I'll tell you, first time we are seeing the European launches picking up in '22, it's whether, [indiscernible]. These products are now kicking in. Zytiga in Europe is kicking in. So European launches are also -- generally, European launches are not more than 50%, 20%. But I think there, Europe is gathering momentum. Our European business is perhaps the largest business in the segments now, and it's contributing. And it has a different profile. So I think European contribution is going to get enhanced as we go further.

And Umer, as you were thinking about next year, I think, I'm sure you're watching that as well as we are watching it is the foreign exchange. As you've seen compared to the first half of the year, dollar strengthened, and a large part of our business comes from international affiliate. Because of the strengthening of dollar, that's going to probably may have some impact on 2022 as we look at our business. So I think that's the other thing that we're monitoring closely.

Makes sense. But Sanjeev, maybe just to pick off of that point and maybe, Rajiv, if you want to jump in on this, too. I remember speaking to a couple of folks who had very large API businesses in India. I'm not going to get more specific, Rajiv probably knows them. But I remember speaking to a couple of those folks. And the feedback that was very consistent from both of them was that key starting materials that they buy from China, the prices are at an all-time high. And they said this to me 4 weeks ago. So my sense is that the starting material prices probably got higher. So the way I thought about it is, when I cover a company like a branded big pharma company like Bill's prior company, when the gross margins are 80% plus, plus/minus 200 bps doesn't move around a whole lot, which is technically a 10% move on the COGS as a percentage of revenue. But when we're talking about COGS, which is 50% of revenues are in that ballpark, up 10% swing back and forth could move around your gross margins quite substantially. I guess how should we think about the impact of inflation on raw material prices heading into 2022?

Yes. It's a 2-part answer. Let me take the first one, and then Rajiv can absolutely cover the input cost part. So first part is, obviously, on the gross margin, is the product portfolio mix. Umer, as we mentioned, I mentioned that in the Q3 call, the evolving product mix, the way we have is going to have a slight negative gross margin pressure on next year and the year after that. What's happening here? Is it a simple function of our evolving product mix? The revenue or the gross margin that we're gaining from new product launches is less than the revenue we're losing on our base business and some of the competition of complex products. The function of that is going to have a slight gross margin pressure, which we fully anticipate into next year. And then obviously, the input cost, Rajiv, you can speak to that.

Yes. No, Eric, you're -- sorry, Umer, you're right. You are right about your point about some increase which we are seeing, especially from the key starting materials, some of the components, especially around the API business, and we see that. And we're seeing this across the sector and in other verticals also. And other verticals also sometimes impact because we get components and so many other things from the -- not just the raw materials, but so many other things to package a product. So we've seen that. And in our industry, again, it's not that as we get this increase, yes, it's a pressure on the gross margins. And we can't easily pass it on to our customers because of the highly competitive nature of this business. So yes, we've been -- expect to see some gross margin pressure also because of this, like what Sanjeev said, one is the evolving mix. And second is this inflation.

Yes. Umer, if I may, I think, we have all the different pushes and pulls, some of what you mentioned some that weren't mentioned, right? I mean, obviously, we have got the natural erosion. We got the pipeline that Rajiv mentioned. We've got inflationary pressures. We've got the FX, we've got all these things. But taking all of them into account, what I can say, and again, we're not giving guidance, the guidance will come on January 7, but we remain confident that the $6.2 billion we put out there as a floor, continues to be the floor. And that's really for EBITDA, adjusted EBITDA. And that's really an important number because that floor of adjusted EBITDA allows us to deliver on our commitment, allows us to generate $8 billion or more in cash flow over the 3 years. And with that, pay down the debt and grow the dividend, which is a commitment that we had for the Phase I. So I think that's the bottom line picture here. There are lots of pushes and pulls on that, but we're very confident in delivering on that.

Got it. Maybe -- and just to pin it down just a bit more, Michael, and maybe for you, Sanjeev, as well. The business is tracking somewhere -- at least by sell-side numbers, somewhere between $17.5 billion and $18 billion in revenue, somewhere in that range. And consensus is modeling high 50s in gross margin and basically holding it steady year-over-year. So my takeaway from sort of looking at numbers being flat year-over-year on gross margin, but then looking at these raw material prices is there must be 100 to 200 bps of sort of gross margin that should be lower on a year-over-year basis, which could even perhaps drive EBITDA to fade just a little bit. Or how should I think about that?

Okay. There's certainly pressure on gross margins. Sanjeev, can you elaborate a little bit on that?

Yes. Yes. So Umer, there is clearly going to be a gross margin. I mean that we fully expect that, and we've been very clear about that. We expect that to happen both from the evolving gross margin mix and then the inflation we talked about that. Now the impact on EBITDA, obviously, we'll talk about that on January 7, but we also have the synergy flow-through that's going to happen this year, next year and the year after that. So obviously, you've got to keep that in mind to figure out. As Michael pointed out, I think, the key thing to note about it is the $6.2 billion is the floor. And rest of all that, what the number comes out is probably something that we'll talk about at the Investor Day on January 7.

Got it. So it sounds like there's enough levers in the business to pull to ensure that EBITDA strength -- EBITDA momentum continues even while absorbing impact from a gross margin pressure. Am I hearing that right?

I think -- yes, go ahead, Michael.

Yes, we're not giving guidance, but the $6.2 billion is the floor and we're confident in that.

Okay. Excellent. Excellent. On free cash flow, I know I've brought it up a couple of times in the past as well. But every time I look at the $6.5 billion debt paydown by 2023, and I sort of add in the impact of dividends, et cetera, it looks like a $3 billion free cash flow for 2022 is not outside the realm of possibilities. Could you -- I guess, how would you speak to that?

And, Umer, again, I'd say that we're not giving guidance, but your math is not far from what our internal expectations are. And I'll tell you, it's kind of a function of a couple of things if you just kind of step back. So we raised our guidance on free cash flow this year. Right now, the midpoint is 2.5%. There are 2 factors you think in -- on top of that, which makes me highly confident of step-up in cash flow next year and the year after that. So one is obviously the continued focus of the organization on cash optimization activity. The whole organization focus on looking at net working capital, looking at all aspects where we're investing and how we're investing and continue to optimize that. That's number one. And then second, as I said that in the Q3 call was the reduction in the onetime cash cost to achieve synergy. As those 2 things happen, the -- there will be a step-up in free cash flow in next year.

Got it. Maybe this is a hot bigger picture, but Michael, as I think about growth kicking in, in the post 2023 time frame with the biosimilar launches, et cetera, and new products, should we expect over time, and again, not looking for guidance, but over time, the free cash flow to grow over time?

I think certainly, we expect free cash flow to grow over the Phase I period, right? That's for the drivers that Sanjeev gave you, which is, if you just take out the reduction in onetime cost that alone would make the cash flow growth. And then we have active cash flow improvement activities, what we're trying to do with EBITDA, et cetera. So that all will lead to significant growing cash flow, which makes us confident to deliver at least $8 billion in those 3 years. We're not giving guidance for the later years, and we'll lay out some of the key drivers for that when we have our Investor Day.

And, Umer, that clearly lays out that over $8 billion of cash flows, you can do the math very clearly, not only allows us to pay down our $6.5 billion of debt we said, will allow us to pay dividend and grow dividend over this 3-year period. So I think that's kind of what we are looking at, and we feel very good about our clear path to achieving that in the Phase I.

Got it. Okay. Fantastic. As I think about the tax matters agreement, which I clearly didn't read on time. One of the things I'm finding is you guys were held back on the ability to purchase shares, which my understanding is the ability to be able to repurchase shares kicks in November next year onwards. But I guess one of the questions I've had is, is there considerations on the -- at the Board level to potentially put out an announcement that's sort of ahead of that November time frame because I feel like there could be a sort of stock impact to a potential investment like that, too?

Yes. So Umer, let me maybe give a little bit more background on the tax matters agreement because not everybody may be as familiar as you are with it. This relates to the tax-free spin that Upjohn from Pfizer and then the subsequent combination with Viatris. And as a result of that, we entered into this tax matters agreement with Pfizer and that tax matters agreement has certain conditions and limitations on a number of things we can do, including share buybacks, right? And that is for the first 2 years after closing, which means, as you pointed out, it's sunset in November '22. So November '22, at the latest, we would be able to consider doing share repurchases, but that may not be the only time. In addition, Pfizer received a supplemental tax ruling from the IRS, which further specifies some of the conditions. So that's just for background. And look, our TSR framework always contemplated both share repurchases and dividend as ways to returning capital to shareholders. A share repurchase program authorization is the topic of active and ongoing discussions at the moment. And the Board of Directors will consider implementing such a program at the appropriate time.

Got it. Got it. I guess is it too premature, Michael, to get into a potential repurchase announcement as a percentage of free cash flow? Could it be worth 1 year of free cash flow? Is it too premature?

It is premature, Umer.

Got it. Okay. Makes sense. And maybe also, Michael, from all the time you guys spent in China, just your overall take on, are we at a bit of a normalization in China? Or do you expect further fade? Because it looks like the retail business is holding in quite well, but is Chinese government really just focused on their government dollars? Or are they focused on any dollars?

Yes. So obviously, we're very proud of the performance that we have in China in '21. I think we would expect a further evolution of that business driven by VPP and Europe in '22 and beyond. And Rajiv, maybe you can comment on the retail question specifically.

Yes, Umer. China, I think, health care policy continues to evolve, as you have seen. And the focus of their health care policies to use the BMI or the state dollars to cover as many people, and mostly focused on the state hospital system and tax over there. But having said that, I think, the health care consumerism has been what has been driving the retail that cash pay and the contribution of the cash pay. The cash pay, whether it's in the pharmaceuticals or even in the hospitals, adopt uptick in the private hospitals and private insurance, you have seen, that's a segment, which is contributing to the growth of retail. That's our focus. I think team had done a good job of transitioning our business more from the hospital into the retail. It's about 40%, 45% -- 45% of our total business over there. And we continue to focus on that and execute on that path.

Got it. Any thoughts -- maybe just a question for the broader panel. Any thoughts on you guys potentially exploring given all your presence in China, are you guys potentially exploring some of the approved branded products in China and launching them in non-China markets basically sort of the opposite of just bringing your existing products into China? Because it's a strategy that's resonating quite well in the marketplace for several companies now increasingly.

Yes. Look, Umer, I think, we're open to all kinds of possibilities. And one of the -- I think, real assets that we have as a company is what we call our Global Healthcare Gateway, right? The infrastructure to bring products to more patients all over the world, right? The ready infrastructure, regulatory, manufacturing, marketing, sales, legal, development, et cetera. And it's one of the things we can offer to midsized companies, small-sized companies all over the world, including companies in China, yes.

Got it.

And China is a good market to source any such product. You're right. China is there a lot of opportunities are coming up. So yes. given our presence over there and the knowledge of that market, I think, China will be one key market from the sourcing point of view, where we can source such opportunities and take it to the other markets, emerging markets and European markets.

Rajiv, one question I do want to ask is because you have a lot of experience commercializing several products that have come in at a lower price point. And I guess 2 notable ones that stand out to me are, recall, you had the Truvada equivalent at a cheaper price, the generic Truvada you guys launched, which didn't get much commercial traction in U.S. and then perhaps at some level, some believe without the interchangeability. I guess is there any big takeaways from seeing that? And then also on the flip side, you guys came in on Neulasta at 20% lower and then it started to work. So just curious what the takeaways are on coming in at a cheaper price point in U.S., and it's a whole different commercial dynamic across those types of markets.

Yes. No. Look, it's the health care system over here. If you take assembly as an example, about 30% of market is commercial, which is a PBM's, we have PBMs control it, 35% is Medicare Part B. And then you have the hospital -- FFS is about 7%. Government is about 17%. If you break that egg, your any launch or pricing strategy need to take into the pushes and pulls and dan mix of all these channels and then come up. And that's why you saw on an interchangeable product launch, we have a dual launch strategy. The whole focus was that we should be able to -- whether it's a product in a patient on a commercial segment or a hospital check or Medicare Part D, we should be able to address the needs of those patients. So any time you launch a product, you need to understand the market and have a comprehensive launch strategy so that you don't leave any patient unaddressed. One -- for example, 1% of the -- in the assembly or insulin is about cash pay. So the recent adoption by the Walgreens as well as a good Rx is just to address that component.

Got it. So sorry, Rajiv, just to be clear then, is there segments of the market that are more open to lower price, lower WACC in U.S. or...

Yes, there are. There are segments. For example, there are segments in the -- even in the institutional channels. There are segments which you can approach them in a different way.

And those are not rebate sensitive.

They are not rebate sensitive. To the extent which PBMs are -- you know the commercial channel is.

Commercial is not open. Okay. Got it. Okay. Makes sense. Maybe in the last few minutes or so, it might be helpful if you can just turn to your -- some of the key pipeline programs. But Eric, do you want to kick it off?

Yes. I guess we could start off with biosimilar EYLEA. What's your level of confidence you can have a biosimilar on the market by [ BRN ] '24?

Look, there are always -- there is a science, and then there is an IP and legal strategy. On the science, I think, we feel very confident on the scale of 10, we are right up there because of our already BLA being filed. We are in the state of operational readiness. We have a lot of time to make product operation we need to do to be operationally ready for that. On IPR, it looked -- or illegal, it will continue to evolve. As you see, our -- 2 of our IPRs have been accepted, instituted. And we -- that strategy continues to evolve. Our fourth focus is that's '23 and the sequence patent expires and somewhere right after that, we should be in a state of readiness. And you should expect us to working all the way through the legal strategy to make that happen. But we'll keep you guys posted as we continue to learn some wins and some hiccups, if there are any, that will determine whether it's '24, '25 or what is the launch?

Got it. And in terms of the market, what are you seeing in terms of market demand for a higher dose? In other words, 8 milligrams versus 4 milligrams in terms of dosing frequency as well?

Yes. It's too early. I think we are getting into their Phase III next year, somewhere in the next year. And always, it's not just -- if you look into how -- what patients are going to benefit from. You also need to take into the HCP practices, their incentivization and Lucentis is a good example, where hard dose didn't work out well. So I think you should look into from this point of view that life cycle management is a part of this strategy for the big pharma, and our strategy is to respond to that. So while they are trying to get to move the cheese, we are trying to work -- working in the lab at this point of time to catch up with that. So we'll continue to understand where the puck is going, and we'll be doing everything to make sure that we are there. And if the market moves here, we'll be doing everything to do whatever we need to do as a leader in this race.

Rajiv,, maybe 2 quick follow-ups to that. One, let's say, your Humira -- so there's a lot of expectation that a biosimilar Humira, even second or third to market does north of $500 million in sales. How does that look in year two, year three, year four? Should we assume like a biosimilar like erosion, like 20%, 25% erosion from there? How should we think about that? And then also, where are we with your EYLEA and your confidence on when you can come out?

Look, on the -- Humira is going to be a little bit more competitive product than what you have seen. And the algorithm, Umer, I have to say, algorithm of a generic versus a complex generics for the biosimilar is different from the market uptick. And you will see us when we come out of this Phase I, Phase II plan, we are adopting that if generics were -- if you are on a first wave, you can take 45%, 50% market share in the complex, you have seen that 30%Wixela, or 40%, 45% of the Copaxone has been the sort of our market share or that benchmark over there. When it comes to the biosimilar, it's not that. I think it's around 15%, 16%. That's where the things are settling for every player. Now for a product like Humira, I think, it's more competitive. And when we are modeling, we are not modeling 15%. We are modeling maybe around double digits, 9%, 10% is what we are hoping that because it's going to be a highly competitive market, there are going to be 8, 9 players out there in the second, third year, as you see. But having said that, market is going to expand. We have seen this in Europe. Europe, Umer, when it used to -- for a new patient to be put on Humira, it's used to -- a patient used to be on a therapy, different therapies, and it will take them 3, 4 years before they put out on Humira. Now they are putting the patient after 5, 6 months, just because of the access and affordability. And market will expand. It's a big product. I think there's room for everybody to grow over here to expand the market. And we are very encouraged by where we are. I know interchangeability has been the buzzword. It's a little bit different than insulin. Nobody is going to have interchangeability for every presentation or every stent. So I think the 1-year exclusively whosoever gets, maybe it's boring there. So you can imagine, Amgen, who is the #1 to launch or [ Arganon ]. They are not going to have interchangeability. Market is going to settle without interchangeability. And by the time, interchangeability kicks in, there's going to be enough time for people to catch up. And if it's required, people will be able to do the interchangeability and get there.

Got it. Excellent. Maybe in the last 30 seconds, then anything on EYLEA, the exact timing?

No. I talked about timing. I said...

We talked about it.

Okay. Okay.

Yes, we address that on that.

Okay. Makes sense. I know you guys had 8 a.m. hard stop. So I want to be very respectful of that. So thank you so much for making time. This was super helpful and super efficient as well.

Thank you, Umer.

Thank you, Umer.

Thank you guys so much.

Thank you.

Absolutely.