Viatris Inc. (VTRS) Earnings Call Transcript & Summary

Alright everybody, we're going to get going here with our next company presenter at the Bank of America Annual Healthcare Conference. I got Viatris and joined with us is CFO, Theodora Mistras; and Philippe Martin, Chief R&D Officer. So thank you both for joining us. My name is Jason Gerberry. I cover SMID Cap Biotech and Specialty Pharma. And so yes, let's jump into it.

I think a big part of the Viatris story I think of late has been solidification of the base business, some divestitures and then strategic pivoting to more long data durable kind of growth specialty brands at a high level. Maybe we can start with the base business in terms of where the company is at with its key regions and where you're seeing the most momentum? Where you've got a little bit of work to do, perhaps markets like JANZ, where I know you guys have flagged, looking to do some things to offset some of the kind of pressures in that segment. And maybe we'll start there and then go into other deeper questions.

Yes. Great. First, Jason, thanks for having us. We're incredibly excited to be here. And we're on the back of reporting earnings last week. And I would say in summary, we feel good about where we are, both from a continued execution perspective as well as kind of the business continuing to deliver as we expect. In terms of our key strategic priorities, you mentioned a few of them in terms of continuing to focus on closing our divestitures. And so specifically, as we think about the base business, it's a stable and steady portfolio, really given our well-diversified global platform, and we expect total revenue to grow operationally, approximately to existing complex generics like Wixela and its strong contribution from new products like Breyna and [ Lisdexamfetamine ] as well as expected new product contributions from our complex pipeline, which we expect to come over the next couple of years. Then moving to Europe. This is a business that grows -- we expect to grow 3%, and it's really driven by our -- kind of our broad portfolio across brands, across generics in key markets like Italy and France, as well as new product introductions like generic Aubagio. In emerging markets, this is a kind of mid- to high single-digit growing market, again, driven by strength in our brands, whether it's Lipitor, Elidel, Xalabrands and our generic portfolio. And we continue to feel good about our business in China, continued focus on execution, their focus on the retail and self-pay market, and the opportunity to bring new products into the market over the next couple of years. And so as you look at our kind of portfolio, we -- kind of the diversification of it, we feel good about the portfolio that we have and the opportunities ahead of us.

So that's a helpful characterization of top line. As we think about these different units and how the company sort of structured and leverages the cost structure that you have. Are there certain geographical segments that are probably meaningfully better margin contributors and more important to the bottom line at the moment versus others that might be more strategic and offer top line diversification, but are maybe less consequential to the bottom line? I mean most investors had to think the U.S. market drives most of these companies' operating profits. But curious how you'd frame that?

I think one of the uniqueness of our portfolio is that it is broad and diverse. I mean the U.S. market, currently for us, is kind of less than 20% of our revenue. And so we do benefit from having this global platform. As we think about growth, U.S. will continue to be a kind of key driver for us as we look to contribute. We have a strong base there that we can leverage. And as we've talked about, we're looking for branded, durable, high-margin assets that we think we can be successful in continuing to add to that portfolio. But there's opportunities to leverage that beyond that, right? There's opportunities to add regional country-specific assets that leverage our global infrastructure. And so it's really about kind of balancing those various components and kind of finding opportunities to drive growth.

And so maybe if we just kind of go through some of the segments, start with China. I mean how do you feel about the geopolitical landscape, VBP exposure and then the appetite to -- as you look to acquire more innovation in the portfolio, the ability to get properly, kind of a good return on investment in that market? I mean, so how are you feeling about that as an end market that you'd want to maybe increase exposure to or just sort of maintain kind of where you're at?

Yes. So China, actually, about 95% of our business in China has already gone through VBP. And so given our focus on the retail channel, on the self-pay channel, we're focused on continued execution as well as bringing in new products. And we have the opportunity not only to bring additional products into the market and leverage our existing infrastructure, but we also have the ability, for example, with selatogrel and cenerimod, two assets that kind of -- we recently brought into our pipeline. Those are both global opportunities, especially in selatogrel. And given kind of our cardio franchise globally, there's real opportunities, not only with what we are doing kind of globally in terms of our expansion, but also on regional specific opportunities to continue to invest in. It continues -- you mentioned it, kind of it does continue to be a very complex dynamic given the breadth, and we continue to kind of manage that evolving policy dynamic.

Okay. I'm just trying to get my head around the retail model, right? And so Lipitor and Norvasc, these sort of products where you're leveraging an established brand equity that's been built over years, and those seem to be disproportionate drivers of growth through this retail channel. Will more innovative products move through retail? Or we have to go to like more of the traditional hospital model in the early infancy of the product life cycle. I guess I'm trying to understand that distinction if there's a distinction at all to be had.

Yes. I mean it's evolving, and we still kind of have infrastructure both in the hospital, but there's also opportunities much broader than that, just given the kind of feet that we have on the ground, the relationships that we have. And so there's real opportunity to kind of broaden our presence there and kind of really create a portfolio approach, but it's not just -- the benefit we have is it's not just China, it's the other regions and kind of how that all plays together.

Okay. And then maybe in terms of North America, how that's been evolving. It sounds like you're getting good momentum on the brand side. To whatever extent say, the U.S. generics, which may be was problem child 5 or 7 years ago as an end market that natural erosion is more than outpaced by what you're seeing kind of collectively on your brand growth. Is that sort of what drives the operating assumption on growth there?

Yes. It's a couple of factors. One, it's -- we continue to evolve our portfolio towards more branded products like Yupelri, and our eye care franchise, Tyrvaya, Ryzumvi. But then there's also the kind of our existing complex generics products like Wixela or additional product opportunities. And so kind of at the same time, we're also trying to manage our base legacy brand portfolio that we have. But on the brand side, there's really the opportunity to continue to evolve that portfolio. And then on the generic side, it's the combination of existing products, new products, our pipeline that we expect to contribute kind of over the next several years. And then the totality of that, to your point, we expect to more than offset the base business erosion.

Okay. Now there's a lot of moving parts with divestitures, with scaling up a brand business and investing in that and then potentially even overlay with future BD. So how do you think about the legacy margin structure of the business? And do you want to sort of accomplish all these future goals while maintaining that margin structure? Maybe if you can just sort of outline how you're thinking about the margin structure within that broader context?

Yes. And I think it's evolving story. But we feel really good about our base, the ability to generate kind of the 2% top line growth that we've talked about in the immediate term. We realize that it is going to take some investment in order to continue to migrate our portfolio towards these kind of higher -- more durable, higher-margin branded portfolio. But underpinning all of this is our stable free cash flow generation, right? And that allows us the ability not only to invest in growth, but also to deploy that capital to shareholders, whether it's via share repurchases or dividend, and really also drive EPS growth over the longer -- over the longer term. And so as you think about the branded portfolio coming in, driving some margin -- driving some of that higher margin, coupled with kind of capital allocation, you have the opportunity to really deliver on the EPS side.

Okay. Maybe you'll pull Philippe into the conversation here. So maybe thinking about BD and therapeutic areas of focus. I know that at one point, there were sort of the 3 core areas, GI, optho and derm. It's been broadened out, right? So should investors think more about the focus being more opportunistic and TA agnostic ultimately, and with a focus on just good drugs and drugs that can be differentiated in large markets? Just kind of curious if you can give us a little bit of a snippet or sense of what's going on behind the scenes in terms of the asset scans?

Yes. I mean, I think we haven't changed our strategy. We're still looking at the three areas we said we were going to look at: dermatology, eye care and GI. There's a lot of good drugs there that we're looking at and may bring in at some point. But we're not stopping there, right? We have a lot of inbound interest that -- we're seeing a lot of assets and when the assets make sense and that where we can leverage our existing structure globally to commercialize those drugs, then that might make sense for us to go forward. Again, it's more important, it's often more difficult to get a good drug than to commercialize it, at least from an R&D standpoint. And so I think that's really where we're looking at is trying to get the best drugs that we can possibly develop and/or commercialize. There's a level of opportunities, we've got to be a little opportunistic when it comes down to BD.

Yes. And I think maybe spend the legacy shareholder base was less accustomed to the company taking on clinical risk, right? And so when you think about the Idorsia deal and we think about future BD, how much appetite for clinical risk is there, at a minimum, the company wants to see maybe a Phase II proof of concept data set in place to feel comfortable versus maybe earlier stage deals and building out more platforms, for example.

Yes. I mean, risk is top of mind, right? Clinical regulatory risk. When we look at these assets, we screen them. So typically, the assets we're going to be looking for are either Phase III assets, either about to start Phase III or already in Phase III, such as Idorsia, where the asset is considered derisked to some extent, strong proof of concept. And so -- and good regulatory interactions that lead you to believe that there's the probability of getting the drug approved is very high. So we're looking at these assets that have where the level of risk is lower. We're not going to go in Phase I, II assets that don't have a clear proof of concept.

And I imagine you're somewhat opportunistic about the geographical availability of these assets. Oftentimes, assets are encumbered. And I imagine you want assets that give you worldwide rights, given the infrastructure and the ability to kind of maximize value for those?

Yes. I mean, generally speaking, we're looking for global rights, where we can leverage Viatris' current structure. Sometimes it happens like with the scenario mode where one of the region is already taken, such as Japan, that's fine. If the asset still makes sense for us globally, for the rest of the markets, then we'll certainly go forward with it.

And the only thing I would add to that is we are looking for global opportunities, selatogrel, cenerimod fit in that camp. But we also have this global infrastructure. And there's a lot of companies out there, especially in biopharma that may have a great line of sight in terms of how to commercialize the drug in the U.S., but may lack whether it's resources, expertise outside of the U.S. And so we have the opportunity to leverage that -- our global footprint, potentially kind of partner with some of these assets to not only potentially drive growth within the U.S., but globally as well. And so there's kind of we have a lot of options in terms of how we think about things given the global diversification that we have.

Okay. And just coming back to the point on therapeutic area and just construction of a more of a branded longer tail durable business. I get the sense that like the cost of the sales infrastructure is not rate limiting so much, right? So when you think about building out a solid vertical, is it more about internal know-how and expertise to scale that and to get more brands and maybe that gives you more leverage with payers versus just -- it used to be in the old days, get more bang for your buck in terms of your sales infrastructure and multiple products in the bag. But that seems like the areas you're targeting, you could probably target and say, the U.S. with 150 reps.

Yes. I mean, [indiscernible] comment if you can add, but I think the -- we're looking for specialty type products, right? It's where the sales force is generally relatively small targeted. So you don't need to build a humongous sales force, right? It is pretty constrained and relatively easy to do. Again, getting the right drug is probably more important in long term than this -- than the commercial considerations.