Viatris Inc. (VTRS) Earnings Call Transcript & Summary

Good morning, everybody. I'm Chris Schott at JPMorgan, and it's my pleasure to be hosting a fireside chat today with Viatris. From the company, we're going to have a quick presentation from CEO, Scott Smith, and then we're going to open up to a Q&A session with the broader management team. So with that, a happy new year, everybody. And Scott, thanks for joining us.

Thank you, Chris. And I'm just going to make a couple of short remarks here in a couple of quick slides. And the bulk of the presentation is going to be Q&A. I just want to show a forward-looking statement. Obviously, we're going to make some forward-looking statements during the course of this presentation. And then -- so just good morning to everybody here and everybody who's joining via the webcast. 2013 was an outstanding year at Viatris. We integrated and simplified the company. We stabilized the base business and have seen 2 consecutive quarters of revenue growth, organic revenue growth. We've delivered on our pipeline, and we executed on our capital allocation framework, maintaining our investment-grade rating and returning capital via quarterly dividends and share buybacks. And with the completion of our announced divestitures, we will have delivered all our Phase 1 commitments. The resulting company, as we sit here today, is a large global diversified company with a broad product mix and broad geographic reach across the globe and an ability to generate solid and sustainable cash flows. Since the completion of the merger 3 years ago, we have generated $7.2 billion in free cash flow. We paid down $6.6 billion in debt and returned $1.8 billion in capital to shareholders. Importantly, in 2023, we supplied medicines to approximately 1 billion patients worldwide. And just to comment on that, it's just a remarkable figure. I think for me, it really is -- strikes me and what an opportunity for me and the 37,000 employees of Viatris to affect human health care as we move into 2024 and beyond. Now moving into Phase 2 of our strategic plan. We're very well positioned to unlock shareholder value. As I mentioned before, we've simplified and stabilized our base business and were moved to organic revenue growth. We plan to further improve on our target leverage ratio, and we have in line of sight our gross leverage target. Our plan will return approximately 50% of our free cash flow to shareholders through quarterly dividends and share buybacks. And with the other 50%, we plan on investing in assets and businesses that will drive future revenue growth. I believe this combination will position us to be a strong adjusted earnings per share growth story in the future. In terms of business development activity, we plan to engage in all manners of developing the portfolio, importantly, licensing, strategic arrangements, partnerships and also M&A. Focusing on the innovative products. We are going to focus our business development activities on innovative products with durable and predictable revenue streams. There's 4 main areas we see for investment as we move forward relative to our business development activities. We'll continue to invest in organic growth that fuels our base business. We will invest regionally on country-specific opportunities to take advantage of our strong global operations. We'll continue to invest to develop the 3 core areas that we have previously identified, ophthalmology, dermatology and GI, but we're also going to be opportunistic in seeking out assets to fit our company and can help us significantly grow revenue in the future. So that's just a little opening feel for the company in a few words, and I'll turn it over to Chris for Q&A for the 3 of us.

Great. I guess, the first question for me, Scott, would be you've got the divestitures now behind you. You've had a bit more time under your belt as CEO. So what are you most focused on for Viatris as we think about 2024 and as we think about even the next few years? And I guess maybe just similar with that, what do you see as the biggest opportunities for the company going forward?

So I wouldn't say that we have the divestitures behind us. They're announced. We need to work through that and close them and they'll continue to close as we get through to sort of the end of the first half this year. Once we get those divestitures, we'll be focusing on paying down our debt to get to that target ratio. And after that, we're going to execute our strategic plan, right, and our capital allocation plan. Approximately over the next 3 to 5 years, 50% of that free cash flow, which, at a minimum, should be at the $2.3 billion range, 50% return to shareholders through share buybacks which we're going to try and be increasingly aggressive around as we move in '24 and '25, the dividend, of course, and then for business development. And as I mentioned, I see business development as far more than just binary M&A. I think licensing, partnering, strategic arrangements, research agreements and things like that are very, very important to our future. So I see a fulsome approach to business development and building the portfolio long term. And I think for me, the base of the company is so strong, we've integrated, we've streamlined. We're now moving, and we've seen in the last couple of quarters real organic revenue growth. And that solid base of the business allows us to do the other things, but we're going to execute our capital allocation plan as laid out, and we're going to build the company and the future revenue streams of the company through business development.

Great. On that 50% business development, 50% capital return algorithm, I guess, one of the questions we get is, should we think about that as a consistent number year-to-year? Or should we think about that as kind of an average over, let's say, a 3- or 5-year period of time?

Yes, I think it will average out over a 3- to 5-year period of time. Any one year we expect to do both, right? We expect to be returning to shareholders and we expect to be doing some business development. Whether that's 50-50 in any specific year, it's hard to say. It depends on the environment. We want to be opportunistic in pursuing assets when they're available and at the right time. And we want to be aggressive in buying back shares at times that are advantageous to us. So you don't want to be too prescript to do that. You need to be fluid to be able to take advantage of the business conditions ahead of you. But certainly, over the next 3 to 5 years, I'd expect sort of half and half as we've laid out.

Great. I guess, the question I get a lot, and I just think about it, your stock price is fairly -- it's an expensive multiple. Why not focus a lot of the cash on repo, just given -- it seems like you're talking about a base business that's stable, you've got good cash flows. Like why not just return that capital? And the question is like how do you think about like returns on just your own stock versus some of these external deals?

During the course of 2023, we did purchase significant stock back, $50 million worth of shares. I think we want to be more aggressive in share buybacks as we get in '24 and '25, given the cash flow that we see, given the fact that we see getting to the appropriate leverage ratio. And so I think we're going to be more aggressive doing that for sure.

Excellent. In terms of areas for business development, I think you've mentioned ophthalmology, dermatology, GI as kind of the big 3. Where of those 3 do you see the most opportunity for Viatris?

So that's hard for me to answer directly, right? There's different types of opportunities in those 3 buckets. I wouldn't say that one has way more opportunities than the other. I think part of the reason that we were initially focused on those 3 areas is we saw a lot of opportunity in each of the 3 areas. Again, there tends to be different types. It evolves over time, right? Companies become more viable in terms of business development or transaction over time unless. So it's a very dynamic situation, but we see all 3 of those therapeutic areas, I think, being very viable in terms of our ability to partner, to license, to acquire assets in them.

And again, in your time as CEO, is there any interest in looking at assets outside of those verticals and expanding the lens a little bit?

Absolutely, right? I think we've identified 3 areas that we thought fit us very well. I think we want to be a little bit agnostic. The core principle being here, can we find assets with significant revenue growth that we can leverage the space that we build globally as a company and really accelerate and reflect revenue in a way better than the possessing company could, right? So certainly, I think we're not just going to look in those areas. We're going to look for impactful assets. There are -- when I take a look at the company and what the company is, I think there are some areas which are a little too far afield. I don't see any real benefit. I don't see us moving into cellular immunotherapy, for example, certainly even though given my background, I've got significant oncology background, I don't see a lot of oncology assets coming in. But certainly, going into places like neurology or immunology, places, again, that I have significant development, commercial experience, if the right assets are there, would definitely be open for us.

Okay. Great. And as I think about geographies, is there a bias of U.S. versus ex U.S.? Or anything you'd comment on that front?

So I would say no bias. There are 4 kind of opportunities that you see out there from a geographic perspective. You see some very country-specific opportunities, right? There's a product available for Japan and Japan only. We want to do some of that as well. We've got some very strong operating units all around the globe, and we may want to do some of that type of business development, shore up some of the individual countries. You see sort of ex U.S. deals, right? Companies that have -- and I know the story very well from my history in biotech. I think you see companies that can have line of sight on being able to develop, get a registration and commercialize in the U.S., but don't really understand or have the resources to be able to do it outside of the U.S. So certainly, there are ex U.S. assets that we would pursue as well. We've got strong infrastructure from an ex U.S. perspective. About 75% of our revenues are outside of the United States. So those are assets that I think we'd be very, very interested in to leverage the strong international base that we have 165 countries we're operating in. We've got 4,400 products. I mean, it's a big, diverse company. You also see companies that have acquired the rights to a product for the U.S. only. So you see some U.S.-only opportunities out there in the biotech world of people who have licensed something from Europe or somewhere else. So there's those opportunities. We'd be interested in those. And then, of course, sort of the gold standard. The best possible outcome are global opportunities, right, that you see worldwide. And so we'd be interested in any or all of those given sort of the diversity, the strength of the company. And similar to therapeutic areas. I think we want to be a little bit agnostic to that, open our minds to doing any of it. It's where can we find impactful assets that can help drive revenue growth that sort of we can leverage the strong organization that we have.

Yes. I searched through the comments, you talked about partnerships, maybe less about augmenting just the binary M&A. So I think that's one of the -- when we think about capital deployment, historically, we thought about Viatris buying assets that's just outright. Just how much of an opportunity is there? And how big of a piece of your BD strategy is some things you just mentioned of finding somebody has got U.S. rights that maybe can't commercialize globally, things like that?

So in my personal history with Celgene, with BioAtla, with other biotech companies. And before that, I don't know the number of deals I've been involved with either centrally or peripherally, maybe 100. I would say 90% of those would be partnerships, licenses, other things. 5% would be M&A and 5% will be something else. And as I've made my way around this conference and looked at other companies that are highly, highly successful, including a meeting I was at and saw you the other day, I think that's a really, really viable strategy, right? I mean the combination of investing in your own organic programs, which we need to do, finding partnerships and sprinkling in occasionally some M&A, disciplined M&A, I think, is the way to build the portfolio. But I think, if at the end of 5 years, you look at the business development that we've done, I think the majority of it would be licensing, partnership, that sort of thing.

And can I ask just a follow-up on that? In terms of how much of that work is, is this something Viatris has been working on for a long period of time? Or is this a newer piece of the strategy, I think the kind of broader partnership lens, I guess?

So I'm just going to speak to my experience in the almost year that I've been CEO and you come into an organization like this, it's a big complex organization. I wanted to learn it. I wanted to understand the geography, I wanted to understand the people, the business dynamic. So I spent some time doing that. We wanted to sort of get line of sight on are we going to be able to do these divestitures? And are we going to get sort of -- which the divestitures went, by the way, just as an aside, I think very, very well. We were very pleased with the outcome. We got what we were expecting for these assets, which are very well-performing assets. But we want to have line of sight of are these going to get done and when are they going to get done? And when do we get the proceeds so that we can get to our leverage ratio that we -- our target leverage ratio and then really move into BD. So I would say it became apparent to me talking with these 2 extensively and understanding things, it became apparent to me last summer that we were going to be able to do all those things that these assets we're going to transact out of the company, that we were going to be able to do at the valuations that we were looking at, and they would happen during the course of '23. So at that point, I think we became more aggressive in looking at opportunities. I will say, though, the vast majority of the business development activity that's coming in is inbound to me based on my past at Celgene, my past in biotech and other things. Certainly, there are -- and it's been a little bit of a capital-starved world in the biotech world. So there's been very significant outreach coming to me and based on the strength of the company that we built and transparency that we have right now around wanting to license and partner and do real business development and develop the portfolio.

Great. Great. Maybe pivoting a little bit 2024, I know you're not going to give guidance today, but just biggest swing factors we should keep in mind for this year. There's obviously a piece of EBITDA coming out associated with the divestitures, but just other factors we should be keeping in mind for the year?

So I think the base of this, from my perspective and maybe Rajiv and Sanjeev can comment as well, very solid year in '23, right? Obviously, we -- it's a diverse company. I don't know exactly where we finalized and landed in '23. That work is still being done. 4,400 products, 165 countries, right? But -- so what is clear to me was a very strong year. We moved to organic revenue growth. We would expect that to continue in '24. If you're looking to figure out the EBITDA and other things by taking a look at what happened in '23 and removing some of the things that we've divested, I think you're sort of roughly getting to that point. And I don't know if you want to be more specific and comment on that.

So Chris, let me -- so Scott talked about the swing factor. So obviously, solid base business that will continue. So then you have, obviously, the new product launches that we've kind of provided a range of like 450 to 550. And I'm very excited about next year, particularly in the U.S. We should expect some kind of organic growth on an adjusted basis on that. So I think that will continue. I think the most important part that we're going to kind of talk about it is how do we provide guidance to that so people understand that because of the divested that you talked about. So the way we are thinking about right now is we'll provide guidance on an all-in basis so people can do a comparison to '23. So you kind of have that because all these businesses are, by and large, still with us because they will be sold during the year [ we'll lose ]. We'll also provide some kind of framework and guidance on a post-divestiture basis, what did the business look like, right? It's going to be choppy year because as you divest, the revenues will go away. And we will provide transparency like it in the case of biosimilar when that is happening and what is the impact on revenue and EBITDA and free cash flow. So I think we'll provide that so people can see what's the base business, what happens with the divestitures, both on the top line and the EBITDA and what happens after that, so people can look at that. I think the other thing that is important from -- for a purpose of understanding as to what Scott talked about it because we will be aggressively buying back shares, we will also provide guidance on the adjusted EPS basis for next year onwards.

So it sounds like you raised a framework that kind of works with that. And I guess on that, maybe that before we think about the top line and EBITDA impact from the divestitures, there a reason to think that there would be big deviations in terms of performance relative to what we're seeing in '23? Or is '23 a good proxy for the business?

You should not. It's very steady from what we've been talking about -- that range, yes.

It Should be doing on what we've been talking.

It should be in the range.

Okay. I think it's important as well to remember that we have a solid base of business. We've got revenue growth in the 1% to 2% that we can see in the future. We're putting $400 million to $600 million in new products in every year. And so it's a very strong, solid -- fundamentally solid company at this point in time.

Great. And when I look beyond 2024. I think 1 of the question -- things I'm struggling with is how to you think about the margin progression of the business. So can you just elaborate on, is there leverage in the P&L in this business over time? And what is it going to take to see that leverage play through?

Yes. So Chris, starting with gross margins. You've seen like we have a very strong gross margin performance. You saw that 3 quarters this year and then last couple of years, very strong gross margin. And that's just obviously a function of product mix that we have and obviously, the new product launches. So I expect the gross margin to be stable as we go forward as again the gross margin coming from new products tend to be higher than the company average. The other thing that is going to help us a little bit is the gross margin from the divested business is a little bit less than the company average. That's probably going to help. As we go forward, we obviously continue to invest in our business, like we did that in this year, we'll continue with the DTC that we have and the R&D pipeline that we expect to go there in the next years. So I expect our EBITDA to be stable, Chris, from that perspective. But the important thing to keep in mind, and again, because the focuses of the company in Phase 2 is going to be on share buyback. We expect over a period of time to be showing growth in adjusted EPS basis.

The EPS piece starts to lever. Excellent.

And so just a quick comment. I think longer term, looking at margins, right, the businesses that we're looking to invest in and bringing in, license a partner, generally, specialists, patent-protected, longer, more predictable revenue streams, innovative products with a different margin profile than the business currently so that could provide some tailwind to where we're going from a margin perspective as well.

Great. Maybe jumping into the business units. Maybe first starting on China. Would just love to get your sense of just kind of more broadly, how do you see the China business kind of evolving over the next few years for Viatris?

Chris, China has been -- for us, has been performing very well, better than our expectations. We have managed the policy framework, the tightening of the VPP. 95% business has already gone through the VPP. URP is expanding. But at the same time, this is all on the reimbursement bucket is the hospitals. And we have been able to successfully and continue to move the business to the retail as well as the private hospitals. So we see this year, of course, business did pretty well, and we see test business continue to perform well while we're bringing the new products. So for us, this anticorruption campaign live through that, we have not seen much impact on that. We seem very confident about continue to perform the way we have performed in the last 3 years on China.

Okay. So in terms of growth profile going forward, this is -- do you view this as a growth business for the company? Is that fair assessment?

As we bring in the pipeline and we add on to this product, definitely, we are looking into this market becoming one of the growth markets for our business.

And I know there's a lot of worry about business in China and some of the macroeconomic and policy issues that are going on in China. And delivering health care in China is -- from a government perspective, it was very complex, right? It's a massive undertaking. And I think for us, if we are really going to be a diverse global company with that kind of scale and that kind of reach, China needs to be a very important part of our strategy going forward. We don't want to run away from it. We want to understand the changes. We want to make sure that we operate in the environment in the best way possible. But we see China being a very important part of our strategy globally going forward.