Viatris Inc. (VTRS) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for joining us. We're excited to be hosting Viatris here with us today. Joining us from the company is Scott Smith, CEO, gentleman in the middle; to his left, Rajiv Malik, the President; and to Scott's far right over there Sanjeev Narula, the CFO; and Bill Szablewski, [Indiscernible] who heads Capital Market, he also [Indiscernible] Investor Relations [Indiscernible]. Today's format is just going to be a question-and-answer session. So we'll hope we'll try to get through this as fast as possible. For those of you who don't know me, I'm Glen Santangelo, I cover the specialty pharma, company operation, technology sectors at Jefferies and the analyst responsible for coverage of Viatris. So with that why don't we get started.

Scott it's been an interesting 8 months since you took over as CEO, a lot going on this year. The company transformation really started in the fourth quarter of last year, right with the [sale of Biocon]. The company has now posted 3 pretty impressive quarters on 1Q, 2Q and 3Q. And then recently announced a flurry of corporate activity. And to that point, I just need to quickly read that I wanted to note that Viatris recently announced several transactions and given [Indiscernible] restriction, I'll be refraining from asking direct questions on the deal, but I don't think that's going to stop Scott from bringing those up. So with that why don't I make [Indiscernible] to catch everybody up with [Indiscernible] last 12 months because we feel like a lot has sort of taken place, and I think that will sort of level set the conversation.

Good. So thank you very much, Glen, for the time, and thank you, everyone, for being here. Very nice to be here on a beautiful Wednesday morning. I've been CEO now, I think, for a rough 8 months, as you mentioned, a lot has happened during that time. I feel extraordinarily fortunate to come into this job. It's not often that you see an opportunity for an external CEO to come in and take over a company that is in such good shape that the fundamentals are so strong that so much work has been done to get the company positioned for the future. And during the 8 months that I've been here, and I would say during the course of 2023, a lot has been done to really strengthen the company and put us in a great position to move into what we call Phase 2 of the strategic plan, which will start next year. We just reported a very strong Q3. It was our second consecutive quarter of operational revenue growth, which was really nice to see. We had very strong EBITDA, very strong free cash flow. We also announced, as Glenn alluded to, the divestiture of a number of businesses that we had planned on divesting. And the net effect of that is not only capital coming into us, which helps us pay down debt and do other things to continue to strengthen the company, but also allows us to really strengthen and streamline the company and get us prepared to move into the second phase of the company's strategic plan, which is really moving towards growth. And just for people that don't know that Phase 2 of the strategic plan, our capital allocation plan is to generate at least $2.3 billion in free cash flow every year moving forward using that cash flow to give back to shareholders in terms of dividend and share buybacks importantly and also invest in the growth businesses, build franchises and move the company towards some substantial growth. We can see over the next few years from the base business from the work that Rajiv has done and the teams have done, we can see a 1%, 2% -- 2.5% growth rate over the next little while from a revenue perspective. But then using the capital that we're generating, the free cash flows that we're generating to invest in internal businesses and external businesses, get evolved in business development, M&A, partnering, licensing, those sorts of things, we can see really driving the top line revenue growth over the next few years. And that, coupled with the share buybacks that we can do with our free cash flow, I think, helps us move over the next little while into an adjusted EPS growth story, which I think is very, very important for our future. So that's -- a lot of work has been done since I've been here to really solidify the company and I'm extraordinarily excited about the future.

Okay, perfect. And Sanjeev, Scott alluded to it a little bit, the 3Q results that you reported last quarter. Maybe if you could just give some of the broad strokes for people and then we can dive into the individual businesses.

Yes. I think Scott covered most of that. I think there are a couple of additional points to kind of just highlight. We also did in Q3, reaffirmed our guidance on EBITDA and free cash flow despite the foreign exchange headwind. So we said we're still going to be at the midpoint on that. In revenue, we adjusted the guidance because of the foreign exchange part that you're probably all seeing that in terms of what's happening with dollars in euro and some of the other currencies where we operate. The other thing we also reaffirmed, so to say, our target of minimum cash flow for next year. There's a lot of discussions about what's the starting point for this company. We said despite all the foreign exchange headwind thus far and all the inflation that you see across the world, we still are going to be generating at least $2.3 billion of cash for next year. And with that and with the divestment proceeds that are coming in, there's going to be plenty of firepower for the company to get to our leverage target where we need to be, our dividend that we are committed to, and then obviously invest in the business and buy back shares. There's plenty of cash for that that's going to happen for next year.

Okay, perfect. Scott, why don't we dive into the individual 3 businesses, brands, generics and complex generics. We'll maybe take them one at a time. So I'll throw this to both you and Sanjeev. I don't know who wants to take it, but why don't we start with brands? I mean, in the quarter, revs were down slightly, a little bit in 3Q. And I'm just kind of curious how you think about this business over the longer term? What are some of the bigger drivers? And what do you think drives that inflection back to growth as you were just talking about?

Yes. For me, I'd ask Rajiv to address some of the sectors and our performance in the different sectors of the business.

Yes, thanks. In fact, [Indiscernible], we are very pleased with our brand performance because it's not just quarter-over-quarter. A few -- a couple of years back when we started as Viatris, these brands were declining 4%, 5% because these are -- a lot of these are the LOEs, like iconic products like Lipitor, Xanax and all that, that's one. There's a very few products, which is the patent protected like Yupelri or Dymista [Indiscernible] around the world. But largely, it's these products which have expired, but they have a high barrier like Creon and all that. And we have been able to manage this to bring it to at least around flattish to 1% sort of decline, which is -- that's why you're seeing that stabilization of the base because we were right at 4% to 5%. We saved about 200, 250 basis points on that, and that is 60% of the business. So you take $15 billion -- give and take $15 billion, it's about a $10 billion business, which we have been able to offset that decline and now it's flat or in some countries, it's growing. So that's for -- that's one of the main reasons which is behind the stability of this, and we see this continuing because these brands are -- these are not 1, 2, 3 products. There are about 100 such products over there, and they are in different in different markets and different markets have different -- very different appetite for these type of products. So this is one of the pillars of stability.

Okay. Maybe if we can shift gears and talk about the generics business. Obviously, a lot of different points of view on this. I mean if you look into the quarter, it was strong. I think the business is up a few percent this quarter. This is a market that clearly seems to be evolving, particularly in the U.S. Maybe we're seeing some improvement in pricing in this business. And I'm just kind of curious to get your take on maybe how investors should be thinking about the generics industry? And is the tide turning in this business? Or are we seeing some type of sustainable improving trend?

Yes. Somebody, I think yesterday, you were talking to said, we are -- we don't have anything in generics. We have 33% of business is generics, which is still about $4 billion, $5 billion business for us. U.S. is important market. But let's -- when you say generics, Europe is a pretty good market. We are in Europe, why not start with that. Europe business has been steady teddy hardly maybe -- it's base is stable, 1% even growth. You add about $100 million, $200 million launches every year, you can grow this business well. And that's what we have been doing for the last 7 consecutive quarters, European growth from the generics business and the branded business. Coming back to USA, I think it's about how you want to look at your U.S. business. I would any day, launch a generic Advair, a generic Symbicort, a generic of these complex products, then 50 other products over there. But our focus has been -- yes, excess is driving our focus, highly complex products where we can work with the FDA to break these barriers of the regulatory barriers [Indiscernible]. In every second year or year, we have been bringing some of these first-to-market opportunities. And our -- if you look into this pipeline we have, which we talk about $450 million to $550 million new launches, it's predominantly made up these complex products, complex injectables and all that. So we are very focused. We see market little stabilizing, sector stabilizing, why? It's a demand and supply. Generics has always been a demand and supply. And we see there's a disruption out there. We have been -- our supply network is solid. We have been able to take some of the opportunities -- advantage of some of the opportunities which have come our way. But I'll tell you the discussion with our key partners, key customers have changed from all this price, price, price to the sustainability of the supply and some of those aspects. And that gives me confidence that there's some sustainable semblance coming to the sector.

Well, that's what I was going to ask. Have you started to see some rationalization of supply amongst the different manufacturers globally and maybe that's benefiting a company like yours that has that sustainable supply?

It has because not only us, many other company, big companies like Teva or Sandoz, they also rationalized their commodity portfolio. So instead of 17 amlodipine or 20 amlodipine -- there are not 20 amlodipine anymore, maybe there are 4 or 5. And there is, you see that. When they see that people dropping out because of that cost, there's been a shift there.

Okay. Maybe just lastly, and you touched on it a little bit is complex generics. I mean, maybe about 5% of your sales, but I mean, 25% growth this quarter, clearly, it's a bright spot in the portfolio. And could you maybe just remind people some of the key products in this segment and what's driving that significant growth and the sustainability of that trend?

Yes. We have been, like I said, generic Advair was the one where we started. That's the first one comes to mind. This year, we launched this -- the last quarter, we launched generic Symbicort. That's the first Symbicort generic in the market, which is going to drive the growth. We don't see these products to be commoditized very soon, Glen, because we -- look into Symbicort, I think we might have a 1- or 2-player market for a period of time, and this is going to be continue to be a key growth -- sort of a key driver for the revenue growth for the next year. Similarly, we are verge on launch of products like Victoza, which is again a highly complex product to do. We are verge on launch of next year a Sandostatin LAR, which is, again, a very complex product to do. So there are bunch of complex injectables, which we are about to launch, which is going to drive this $500 million circa basket.

And Glenn, if I can just add to that as a strength of what Rajiv talked about brand, generics and the complex, the gross margin is something that's remarkably steady as a company. And you saw that this quarter again, we had a very strong gross margin. And if you look at it on a full year basis, we actually raised our metrics from 58% by 75 basis points because of the strength of the portfolio and the gross margin from the new product.

Right. So maybe since we're on the topic, let's talk about gross margins. To your point, in the high 50s, and you increased that guidance on this most recent call. Could you sort of talk about that trend? And I think embedded within the guidance, we sort of assume that maybe gross margins take a slight step down in the fourth quarter, if you could sort of comment on that. But overall, as we think about that trend exiting this year and into 2024.

Sure, sure. So clearly, the strength of the portfolio and the diversity of the portfolio and the new launches, the gross margin that is coming, and then how we're managing the brace business. Gross margin has been performing remarkably better than our -- expected for all 3 quarters if you see that. And that's kind of what happened in last quarter. We looked at the new product launches, we looked at how this segment and the portfolio mix, and that mix made us confident about where we are, and that's how we raised our mid -- guidance metrics midpoint from 58% to 58.75%. So we feel very good about that. It's going to step down slightly in quarter 4, nothing unusual except that it's the portfolio mix that you have. And like lenalidomide was in the first half of the year, it's not in the fourth quarter. It's now no more a new product. So those are the kind of changes that happened. But fundamentally it is very, very strong. And I expect that trend to continue for next year in terms of a steady and stable gross margin as we go forward.

Okay, perfect. All 3, you have touched on it to some extent about the new product growth and the pipeline. And just to be a little bit more specific about it, I think your target is about $500 million, let's call it, of products -- of sales coming from new products each year. To put that in perspective, on a revenue base of $15.5 billion roughly, that's 3, 3.5 percentage points of growth. And what I was hoping is maybe you could sort of dive into some of the specifics around some of the products that are coming, particularly as we think about the 2024 and 2025 time frame, so people can sort of put all those pieces together.

So Glenn, we have been very transparently putting the key drivers. There are hundreds of products in our pipeline, you can understand. There are geographic focus like China, we are building together a portfolio of just respiratory products like again Symbicort, Yupelri, which is for COPD, PERFOROMIST, Dymista. But keep that aside, I think we have been trying to bucket -- put it in 3 buckets. One is the complex products like complex injectables, specifically because we believe that's a huge opportunity. And some of the drivers I just mentioned, of course, we have 7 first-to-market opportunities over there with some paliperidones. I just talked about Sandostatin and other products out there for the next couple of years, 3, 4 years. So that's one bucket, where we have about strong [hotty] products at the moment, 10 have already under FDA review and some other regulatory agencies review. So that's one bucket. The second bucket is Eye Care. We said that Eye Care -- we didn't do this Eye Care deal for just one product. We wanted to execute a pipeline around that. So that's the second bucket. And third is this complex 505(b)(2) or some life cycle management products. We have the products like [Indiscernible] once a month, you take it Xulane low dose, which is our - Xulane is our hormonal patch. So there are about 7, 8 products in that bucket. So there are about $1 billion sort of -- plus $1 billion of these opportunities, which we are executing in addition to, for example, next year it comes -- you're in U.K., we launched just Apixaban. There's opportunity to launch many of these products, which [got the patent] across these markets. For me, I've simplified to break it. Europe is a key part of our geography. Can I make sure that if we launched $150 million to $200 million new launch revenue from Europe and another $300 million from the U.S.A. That's all. And everything which comes on the top is [Indiscernible]

Okay. Maybe let's shift gears for a minute. Let's talk about the balance sheet. Obviously, a lot has been announced this year, and I think it's kind of lost on people, the magnitude of the amounts we're sort of talking about. And so maybe, Sanjeev, could you just sort of remind people sort of what has been announced here in the past few months, the impact that may ultimately have on the company's debt load, the balance sheet and sort of. And then Scott, maybe we can shift and talk about capital allocation plans for next year. We'll talk about business development and your focus there. But maybe just before we get to that, Sanjeev, if we just want to talk about the balance sheet and the implications of all these transactions that were announced.

Sure, sure. So let me start even before the announcement, Glenn. So if you can just look at our cash flow generation and what we've been able to do last 3 years. We've generated over $7 billion of cash flow until this third quarter. And we paid down over $6.1 billion of debt. If you look at our debt today, 98% of that is fixed interest. And our average coupon is about 3%, 3.25%. If you look at the industry, look at where that is, that is a very, very attractive debt profile that we have in terms of how it helps on the interest cost and prevents us from volatility that we have. So now take the divestment announcement into account from that perspective. We have sufficient cash flow to kind of meet our obligation, but this announcement actually accelerates that. So what this is actually doing is by the first half of next year, we're going to be getting net proceeds of about $2.5 billion from all these divestments. The gross proceeds are about [$3.6 million]. And then we have sufficient organic cash flow. We said our organic cash flow at minimum is going to be about $2.3 billion. So take those things into account. That gives us a sufficient firepower to meet our obligation to get down to 3x next year, continue to pay dividend and have sufficient money for share buyback and investing in the business from M&A and business development -- so that's kind of what we talk about...

Could you just talk about the timing a little bit of that money?

So the timing of that -- what we're expecting from the divestments by first half of next year, it's going to start trickling in actually quarter 4, some smaller deals, but the majority of that is going to be...

So you expect to hit that leverage target in the first half of next year?

So again, we're kind of working through all the plans -- that's the idea. We have sufficient cash flow to be able to do that, and do other things from that perspective.

That cash flow gives us tremendous flexibility, right? The divesture cash flow plus the free cash flow from operations gives us a lot of flexibility as we go into '24, committed to pay down in the debt and getting to the right leverage target, giving back through dividend, share buybacks and then business development and growing the top line. So I think we have a tremendous opportunity with the free cash flow to really transform the business going forward.

And Scott, you've been pretty clear about that up to this point. I think the company's plan was they wanted to get to that 3x leverage goal. And then post getting to that goal, the plan was to split the free cash flow 50% between business development and 50% of it returned to shareholders. Is that...

50% -- it's an exact number, right? But I think I mean some years, we need to be opportunistic. We need to really manage a business here. We're going to equally divide the cash flows between from a capital allocation perspective to giving back through dividends and share buybacks and investing in business development. So I wouldn't say it's going to be exactly 50% every year. We need flexibility to run the business, but the intention is to get back sort of equally in those 2 ways.

And Scott, on the business development front, I mean, the company has highlighted ophthalmology, derm and GI as being the 3 areas of focus. I don't know how married you are to those 3 areas of focus. I don't know how you think about external business development versus sort of some of the internal priorities for investments you need to make to support that new product growth. So how do you think about those -- investing in those dollars?

So first and foremost, we need to continue to solidify the base of the company and invest in internal research. And again, you mentioned it -- I would say we plan on launching $400 million to $600 million new products every year. We see some decline in some of the businesses geographically. So that will probably lead us to a 1%, 2%, maybe even up to 3% growth over time organically. But then we want to as well continue to invest through business development and business development being M&A, partnership, licensing and other things to really start to drive the top line significantly more than we have.

And I'm sure you're in the marketplace all the time. I mean, obviously, capital markets have been pretty volatile. Are you seeing any trends in terms of valuations for assets in the marketplace? I mean, do you see opportunities? Is it harder than you thought? I mean, how would you characterize the environment?

So you jump -- I jumped over -- sorry, a question that you asked about the 3 areas that we had previously defined, right? And I just want to go back to that and say, those are areas that we took a look at, and we thought we had the infrastructure and we could leverage, and we can operationally bring assets in those 3 areas. I would say I want to make sure that we're a little bit agnostic too, right? The hard part of this business is finding real cornerstone assets that can really drive revenue growth over the long term. And so if there's things that aren't necessarily in those 3 areas, we think could be very good revenue generating, revenue driving cornerstone assets, we would take a look at them as well. I think I spent some significant time in small biotech myself and taking companies through IPO and done some things that I know it's been a very capital-starved environment over the last 3, 4 or 5 years. So there's a lot of good companies out there with good technology, good assets that are looking for capital and more of the capital there, they're also looking for companies that have the kind of infrastructure that we have globally, right? I mean we're in 165 countries, right? We can offer the opportunity to a biotech to partner with them, take an asset and be able to commercialize it virtually around the globe. And so there's a lot of assets out there. I get inbound calls, I would say, every day from companies that are looking for partnerships, the licensing and other things. And so we're going to be smart. We're going to be thoughtful. We have just served on a lot of work to get the company in a really good place going forward, and we want to be thoughtful in the moves we do going forward. But there's a lot of companies out there. There's a lot of assets. I think it's a very good environment right now for big companies with financial strength to be able to partner and license with other companies and pick good assets forward.

Perfect. We got a few minutes of and there's a couple more I want to hit, so I'm going to hit these quickly. In the past, you've talked about some of the long-term targets of the company on the revenue side, EBITDA and earnings side. And this quarter, in particular, right? It was your second quarter in a row of operational revenue growth. And so I wanted to just sort of get your take. I appreciate you don't want to give any forward guidance here, but curious to get your high-level take on how we should think about that path to sustainable growth within the context of those long-term revenue targets you talked about earlier? And maybe, Sanjeev, if you want to just remind people what some of those long-term targets are.

Do you want to start?

Yes. So just maybe I'll make a quick comment and then over to Sanjeev. I think, again, we're looking to launch $400 million, $600 million new products every year. So therefore, we see that sort of low single-digit revenue growth from the internal portfolio. we see free cash flow and capital to be able to allocate, to get more growth out there. And also, we've talked about share buybacks is an important part of our capital allocation plan. That with the revenue growth, coupled with that will help us move to an adjusted EPS growth story over time. And I think that's an exciting thing for me to not only be able to drive revenue, but also drive adjusted EPS growth over time.

And again, Scott covered that. I think we should expect as we grow with the portfolio, we should expect EBITDA growth as well. And that, coupled with share buyback, we should expect a significant EPS growth year-on-year as we go forward.

Yes, perfect. Well, listen, I want to give you guys the last word here. And Scott, maybe you sort of get your post divestitures perspective, right? Because the company has been through a lot of transition. As you wrap up sort of Phase I here with the closing of those transactions. You ultimately are now starting to report some quarters of sequential growth here. And so how do you think about things -- you're going to be in a sort of a good place from a leverage perspective in the first half of next year, generating some significant free cash flow. What message do you want to leave with investors as we get ready to embark on 2024.

There has been, over the past significant change, significant movement in the company, but there's been a lot of work done, particularly over the last couple of years. I've only been fortunate enough to be involved sort of through '23, but there's been a lot of work to really get the foundation of the company very solid. The balance sheet is rock solid. Our ability to generate free cash flow is very, very strong. The divestitures have allowed us to strengthen and streamline the company. I think we're in a great place as we move forward to '24 with those cash flows to be able to really not only move off this very solid base, but really move into a period of significant growth.

Maybe last word on the capital deployment. You said roughly half the free cash flow be returned to shareholders in the form of share repurchase and the dividend. The dividend on any given day, 5.3%, 5.4%, I think it may be the highest dividend in health care that I'm aware of, seemingly not maybe getting the credit that you would maybe hope in the marketplace. And that cash theoretically on an annual basis could be used to buy back 5% of the company. And so I'm curious how you think about that dividend and the sustainability of that dividend and if you feel like you're getting the credit for that dividend.

I think we want to continue to do both, right? I mean we're going to -- because of the strong cash flow generation that we have, we're going to be able to continue to deliver on the dividend and buy back shares over time. And I think we want to balance it and be able to do both. There's a significant number of investors who really value that dividend. And there's other investors who really value share buybacks and others value revenue growth. And I think with the cash flow we're generating, we're going to be able to accommodate all 3.

Okay. Scott, Rajiv, Sanjeev, we're going to leave it there. Thank you guys very much for your thoughts.

Thank you.