Viatris Inc. (VTRS) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Day 2 of the Barclays Healthcare Conference. Continuing the [ spectrum ] track for the day I'm delighted to have the management of Viatris with me. Just like what the slide says, we have Mike Goettler, the CEO of Viatris with us; and Rajiv Malik, President; and Sanjeev Narula, the CFO.

So starting with -- this is going to be a fireside comment -- fireside chat format. And really since the last 15 days, Mike and Rajiv, Sanjeev, in further discussions, right, think -- I don't think you would have expected the reaction to your announcement, the way the stock has reacted. Investors are understandably in angst. So let's speak about capital allocation. Basically, what do you think about the biosimilars business and exiting the business and then investing in the newer assets, which is asset undisclosed or newer areas? And how do you think competitors, in terms of, like, the ROIs from each of these sectors? And clearly, exiting the biosimilar segment is a strong signal, so?

Right. So Balaji, first of all, thank you for having us. It's a great opportunity for us to also clarify some of the things that we said and maybe weed out some of the misunderstandings that are out in the market. So let me back up a little bit. And we always looked at our path in kind of 2 phases. There was a Phase I, so year '21, '22, '23; and then there's a Phase II. The Phase I, we had some very clear goals, right, $6.5 billion debt repayment, paying and growing dividends, strong cash flow generation, synergies, all of that. All of that is on track with the base business that we have, right? On top of that, we then underwent a strategic review, as we promised we would do. We spent most of the year 2021 through that. As a result of that, we identified what we think is core for the future of our company, what's noncore, right? And then those noncore assets, we announced that we can create significant optionality with that. We can divest them, starting with the biosimilar business, right? And the biosimilar business, I mean, Rajiv can comment a little bit later on as well, but the biosimilar business is clear about the generation, $3.335 billion in proceeds that we're getting out of that $2 billion by the end of this year, $1 billion in terms of equity with a potential for upside to participate in what's now a vertically integrated biosimilar champion, which we think is a much better way to set up the business going forward. We continue to participate in that. And then we have the other assets. right? You take all of that together, you have -- after debt paydown, after tax, about $4 billion to $5 billion in investable net proceeds, right? And now the question is what are we going to do with that? So the clear priority for that, the clear priority for that has to be share buybacks, especially the share -- current share price that we have, right? That's all the way down from the Board. That's a commitment. And everything else that we have, BD investments, et cetera, we laid out a path. We said, "Directionally, we want to go with that," but that still has to compete with the share repurchase, right? And that allows us then, after debt paydown, to switch to an EPS model, and we see significant opportunity here for EPS accretion. That's the overall picture. And maybe, Rajiv, if you want to comment on the biosimilars specifically.

Yes. No, Balaji, I know it's a great business to be in. Ex U.S., well, for us, it has shown several times. And business has evolved, we have evolved with the business. Partnership has been about 13 years old. You learn at every stage and all that. And now at the market, we have -- as I said, it's maturing. What I meant from that, that we have seen the cycles now. We have seen the customer cycle also. And you see how the -- our drugs stack up, even for a prophylaxis, there are 15 [ stairs ] out there. It's best so if you can control your own destiny in terms of the response of the market, the portfolio supply chain, cost of goods. You have to be vertically integrated. That's how we were successful in generics for 15 years, because we took charge of our destiny in terms of all these elements of supply costs, new product flow and all that. And we have 2 options: either we double down, or we create an opportunity for our partner where they can be vertically integrated and be set up and we can participate in a different way, which is through the equity stake. So I just -- it was the right natural call at the right time. Unlocking the value was the more important thing, because where we -- how we use those proceeds, did we then [ distribute it ] at 5%, That's it.

So Balaji, just can I add on to that. So we are coming from a position of strength as we are -- go looking into outer years. We've executed very well against our commitments on 2021, and we are giving enough guidance in terms of what we are planning to do. So the base is, as Michael pointed out, is strong in allowing us to do a cash flow generation of $8 billion that we set out as a commitment. So we're coming from a position of strength. We have an investment-grade rating. We want to strengthen as we go into this. But the acceleration of Biocon and the other transactions gives us additional flexibility to accelerate, maintain and improve investment-grade rating and then allow us to do a share buyback, which always was the case, but now it gets accelerated.

Perfect. Great. And as we think about share buybacks, and clearly, as you have commented recently that every opportunity is going to be comped against share buyback for ROI, so do you see opportunities currently now which can exceed ROI that share buyback can generate for you?

I mean, at current prices, as Michael talked about, if you look at it, we are significantly undervalued. If you think about it, you think about an investment-grade rating company, you think about a dividend yield of close to 5% and you think about our free cash flow yield of higher than 20%. I mean, this -- these prices, I mean, there is probably very little that is going to compete against that. But hopefully, things will change, share price will go toward -- pent up. But right now, any excess capital that we see, I think this is where our focus and priority is going to be. And then Board and everybody is fully behind the approach that we've allowed and that's why they have given us an approval authorization for $1 billion, which we hope to look at in the fourth quarter once we get the $2 billion share buyback.

Got it. On the $1 million buyback that you authorized, I think one of the questions I got was if there was any potential for you to increase this $1 billion further as you dispose all the assets and generate the $4 billion to $5 billion?

So Balaji, right now, the $1 billion is the right size for what we -- the market cap looking at. We looked at the analog. That's the right size for us. And then we'll look at implementing that from the fourth quarter. Going forward, as we divest some of these assets, there is nothing preventing us going back to the board and increasing the authorization from that. But that's going to come in more in time, but right now, we feel $1 billion is good enough for where we are.

Understood. Other question that I've got recently was if you have the sale agreement in hand, why don't you draw down on the revolver? And with where the stock price is currently, why not start the share buyback and instead of waiting until the end of the deal closed?

So if I can, Michael. Let me start -- we are committed to an investment-grade rating, We've instead laid out our plans that they're going to pay down $6.5 billion of debt and get to approximately 3x leverage -- gross leverage at the end of 2023. Nothing is going to come in between that. So we're going to do that. And the first opportunity we have for anything on the share buyback is probably going to be around the fourth quarter. Once we get the $2 billion proceeds, we close the transaction. And we pay down requisite debt to maintain a leverage neutral and then we're going to look at it. But I want to be very clear that nothing is going to come in our way. And the other thing to keep in mind is, looking at the business, now we have confidence in terms of our ability to kind of manage. We've executed and done well. We've changed our long-term rating target. We were talking about 2.5x at one point in time. Now we have 3x the long-term rating target pickup. That gives us flexibility and while maintaining the investment-grade rating.

And just a point, when we talk about the $4 billion to $5 billion, the way we calculated that, it includes the additional debt paydown, right, to keep it leverage neutral. So that's after that.

Got it. I think one of the challenge that I'm seeing for investors as they look at the stock now is you do not know what you're investing it to. One does not know what is being divested and what is being acquired. And so the degree of confidence that investors can draw upon to invest in the stock is challenging. So is there anything that you can provide to increase their confidence in stock?

Look, I think we laid out how we see the interest in the future, right? We even quantified it. So if you take the 2022 numbers, you take out everything we've divest on a pro forma basis in '22, you're looking at roughly [ $15 billion ] to our top line, $5.2 billion, $5.3 billion on EBITDA line. So that's just on the numbers. In terms of business, we said what we're going to be after this. We're going to be a diversified business of generics, complex generics, off-patent brands and then we're looking to add, like, we already have with Yupelri and others, some 505(b)2s and some NCEs. That's going to be the kind of the interest you're going to be expecting. On the divestitures, we just can't say that [ with ] the integrity of the process, with the competitive process, as you can imagine. We're going to obviously disclose it when time comes. And keep in mind, it's not that far away because we said we'll complete the whole process by the end of '23.

Got it. And can you talk about kind of the regions, Rajiv?

Yes. No, look. Your question about what is this business. This is a globally well-diversified business from the geographies perspective as well as from the portfolio perspective. Ex U.S.A., U.S.A. more perhaps for the last 4 or 5 years, Balaji, we have moved towards complex products, complex generics. And we have been adding opportunities like Copaxone once a month. Our Yupelri launch is a great example. Currently for [ our product ] programs, you may know those as a great product, which will be coming in by '24, '25. As well as some lapse, again, let's say, opioid sort of option. Option against opioid and all that so -- but just not -- I think, your non-opioid option. But just on -- I underestimated this, potential of this pipeline, even excluding biosimilars, with the product life. Because yes, they gave us the work, That is a couple of weeks back, again, the first to the market and building upon the successes of Wixelas or the Copaxones. And we have a whole lot of products like first-to-market positions on products, like, [indiscernible] generic, whenever it comes; INVEGA, just paliperidone injection, aripiprazole injection. So there's -- you see this business has been stacked and it's very well diversified, although within -- heavily, this still is a generic space, complex generics. You take -- pickup a 5%, 6%, 7% erosion. We have enough launches to offset and grow in this region. Europe is steady eddy, 65% brand, 35% generic. Brands like Creon, Influvac, Pulmosphere, which we acquired a couple of years, we have been able to grow 10%. It's LOE, but we have been able to grow it. And that's what the strength of this platform is. And again, the launch is very much offset, and that's why you saw European grew 5% to 6%. Similar is the profile of the emerging markets. China was 1 question mark, everybody expected, like, China is going to go over the cliff because going through this policy implementation of increasing the cost efficiency around the reimbursement funds. I think our team did a great job, not only just managing a strong commercial infrastructure we have in hospitals, but use this opportunity to move the business towards retail. So we have been able to hold that business pretty much while we are building up more or investing in the [ air ], too, so that we can offset whatever is left there in the hospital over there; and, second, add new products. So living through the 18 months into this business, I think I'm very optimistic about how this business is getting stabilized. And once we -- and don't underestimate, again, the pipeline we have now on that, which is more complex and longer annuity, maybe slower lapse, but nice bunch of the products roughly -- even excluding biosimilar which had almost $500 million to $600 million of launches every year. So that's a business -- investors should look into that.

And Balaji, one thing you should always remember, the cash flow generation capacity of the business. We've demonstrated this year, even on the base business, this still shows the guidance and then what the outlook -- what we have at least for next year. So that strong cash flow generation, it is, again, something that is there. We continue to feel confident about how we're going to do based on everything that is going on in the company and able to generate more cash flow.

I can't say it often enough. I know it sounds like a broken record. You take this, you overlay the additional significant financial flexibility and the impact that can have on EPS accretion. And I think it's a pretty [ good case ].

Great. I think on that front, again, you partly addressed my question, Rajiv, in terms of where you're looking at next. I think as you've gotten towards increasing R&D spend, I mean, that definitely creates pressure on EBITDA, and you'll have to have new products, which flows in this EBITDA hole. And how confident are you of this ability to ensure that EBITDA is, basically -- it's more that, that's stabilized as you increase R&D spend?

So let me clarify this point, because I think this is the one point where 9% has taken -- gone to a whole another level. It was very directional matter. Okay. I mean, see, what are we? We are a powerful development house. You see, whether it's any dosage form or any technology, we can pick up a product from Phase II or 505(b)(2) or a complex generic. And the track record we have speaks for itself. 95 plus merchants sort of strike their [ feet ]. It might have taken us 7 years or 8 years to get a product like this that sits over the finish line or 5 years or simply recall from 9 years on Copaxone. But we got them over the finish line and first-to-market opportunities. So I think that there is no challenge to that. Second, we are good in 505(b)(2)s and taking this the strength we averted on both -- even more on the clinicals, for example. Take it, your building, and take it to the finish line and expand the indication, if you can. A good example is what we are doing in EFFEXOR on an old product in Japan. We are trying to get to the generalized anxiety disorder, trying to address that indication. So -- and I don't see -- I think that this is the sweet spot for us. This is where we are not a research company. We are not a discovery company. This is where we're going to do that. We have -- second half part, I would say, we had a very productive R&D house. We spent 4% today. Out of 4%, almost 1.5% or 1.75% is on this, the maintenance of our broad portfolio. Like, you have a product like Xanax in your portfolio, the pharmacovigilance costs and maintaining those products across the globe. So we roughly spent about $400 million on new R&D. And if you look into what we produced, $500 million, $600 million, there should not be any question about productivity of this R&D. So whatever we said, I think you should expect us to be very diligent, very prudent. When we go from here, we will consider every option on the table before we allocate incremental R&D dollars within this space.

Got it. Understood. Thanks for clarifying that, Rajiv. As I think about your asset sales, I think the other question that I've been getting is also on if there's anything in the contract which precludes you from asset sales currently before the deal closure? Or are these 2 disjoint movements, so we could expect to hear more about it any time now?

It's likely, yes.

Yes. Okay. Great. And maybe shifting next to the business side of things. I mean, you came out with the guidance and you have the new product contribution expectations. So can you take us through the next set of new product launches? And do you have any expectations for 2020 and beyond? And how should we think about this?

Sure. '22 is about $600 million worth of launches and the big launches of this year is going to be Semglee. The interchangeable Semglee is going to be the one key one. [ Development ] launch towards the second half of the year is going to be the second one. Restasis is the third one. And some launches like Zytiga in Europe and [ Singulair med ] and some of the other launches. These are the key launches, I would say. These are the main launches out of 2020 and it comes to '22. '23, and -- simply, let me just also say about Symbicort. It's not in the '22 plan, but there can be a potential upside. '23 was, again, built on, and I'm very optimistic also about the potential 180,000 exclusivity on Symbicort. That will roll into '23 here. And then we have products like as for Avastin, again, which were part of the launches and which will still be a part of it because we are [ PSE ] over there. But following that, I can tell you, this is where products like from '24 onwards products like Copaxone, usually low dose; all these complex injectables, Venofer. Venofer is '22 launch, another one, which is key one for '22. But next year is again, Victoza, that's another key one. Of course, Humira is there. So there's just -- there's a pipeline stack from '22, '23, '24, '25 onwards. And excluding biosimilars, we looked at -- for $500-plus million on every year launches for at least next 4, 5 years.

Got it. And just to clarify, this year, $600 million includes biosimilars handling?

Yes.

Yes.

So paradoxically, you should be doing less sales movement this year so that...

The other products contribute more. And I -- I don't know. It's going very well. Yes.

Okay. Great. And maybe I do want to spend a couple of minutes also on some of the bigger macro picture questions mostly on inflation and supply chain and what you're seeing with regard to the business and what kind of net figure would you have -- anticipate factor from those thoughts.

Look, supply chain point of view, we are very comfortable, and we lived through this 2 years of COVID without any disruption. We did our customer service level at all-time high, all our 50 plants around the globe, functional. We did see some pressure on the margins, which we had already built in into our '22 plans because of the inflation. There were 3 distinct buckets. One was China, Winter Olympics and [indiscernible] shut down some of these units over there. So you will see some impact on the intermediate, where we are vertically integrated. And it's not easy to pass on those costs to the standard business like ARBs and sort of this business. And then the second one, I can name what's in Europe, where the PPI is at all-time high, and contractually, some of the products we get from our third parties, that's naturally passed on to us. And it's -- yes, you can pass it on. It takes time to passing it on to the channel. But other than that, I think pricing position, we see pretty much steady eddy. And this '20 inflation to me was more of a '22 issue, not going forward.

But you didn't ask it directly, but we get the question a lot, given current events with Russia and Ukraine, that is less than 1% of our business. So obviously, we're focused on safety of our employees. We continue to supply medicine, essential medicines to the patients that need it. But from business impact, it's less than 1%.

Okay. Yes, we're not going to come to that, but thanks for that, Mike. Maybe I want to spend the remaining 4, 5 minutes on your focused therapeutic areas now. And clearly, there have been questions on why these areas, not necessarily the greatest areas, dermatology and ophtha. And additionally, it's like what are these anchor assets? What will they look like? And I did ask you about it. You said you can't comment about it, but maybe you can define the characteristics of an anchor asset that you're looking. And how do you actually think about these businesses?

Yes. Maybe I'll start with this one. So look, we -- let me talk to the therapeutic areas, why we fix them. I think our capital allocation priorities, all that is clear, right? I don't need to repeat that. But as we make a move, as we always said, into going up the value chain, you need to focus on something. You can't be -- if you want to be in the 505(b)(2)s and more innovative areas, again, we're a development house, not a discovery house. But even then, you need to be focused. So we looked at all the different therapeutics areas out there and looked at our capabilities, what we have, what we're good at and try to find the best match. And we think these 3 areas really hit the sweet spot, right? They are reasonable-sized markets. They're between $27 billion and $56 billion, they have single -- low, mid-single-digit growth, right? You look at the characteristics of them, it's not where big pharma plays. It takes the inflammatory INI checks out, right? There's a lot more to dermatology and a lot more to GI than just inflammatory assets. Take those out, that's not where big pharma plays. It's small and midsized players. You have availability of Phase II and Phase III assets in the market. The majority of them are with small-cap pharma. So kind of easily even for us to add value to that, but potentially take some of these products globally. You have lower development risk, because often what you see is existing molecules that are reformulated in a way. So we have kind of lower development risk, clearer end points, smaller studies, no outcome studies that are necessary like in cardiovascular or other areas. I think -- take as an example the Pimecrolimus deal that we just announced. It's a small asset. I don't want to hype it up. But it's a type of asset, an existing molecule reformulated for an indication where there's nothing indicated right now. We structured it in a way that we have no scientific risk. So we paid a little bit upfront. The development is with a partner. We have an option to buy it upon successful Phase III. So it shows you kind of how we're smart about growing it. The areas make sense for us, right? The way they have scientific and commercial characteristics, and we're obviously very clear in terms of capital allocation [ as we mentioned ]

Great. Thanks. I'll probably also just speak about biosimilar BOTOX, still kind of being under early stages from some time. You retained it obviously. Maybe your thoughts around why you retained it and maybe if Biocon Biologics was not the right partner for it. And what are you liking...

We changed it because, as Mike [ lauded ], for dermatological was one of the perhaps areas. And second, I tell you, we see this, again, yes, it's a biosimilar. It's a toxin. It won't fit in, in the backward integration plan of Biocon because you need to have that separate facility. But -- let's just -- saving, it's a -- creates a good example of challenging products we have been taking to explore and navigate the science. We have made some good progress with the FDA around their expectations and what we need to deliver that. We are now into the execution mode, and I'd say '25, '26 is the opportunity.

Okay. Great. With that, I do want to give it over to you, Mike, to see if you have any closing remarks and key message you want to convey or to say.

Yes. And I'll sound like a broken record again, Balaji. I think the medias like these are a great opportunity for us to get our message out there. And look, the key is that we have taken some significant steps to unlock value, generate financial flexibility on top of the base business that we have, on top of the commitments and the goals that we had for Phase I to accelerate that. And I think it's going to be an exciting story in terms of EPS accretion. I think that's the main message we want to get across.

Great. We'll look forward to that. And Sanjeev, Rajiv and Mike, thank you so much for your time. And I wish you a very productive conference.

Thank you. Thank you for having us.

Thank you.

Thank you.