Viatris Inc. (VTRS) Earnings Call Transcript & Summary

Great. Why don't we get started? Thanks, everyone, for joining us. My name is Nathan Rich, I cover the generic and specialty pharma space for Goldman Sachs. Very pleased to have the Viatris team with us today. Going from my left to right, Scott Smith, CEO; Doretta Mistras, CFO; and Philippe Martin, Chief R&D Officer. Thank you all so much for being here. I really appreciate the time.

Thanks, Nathan.

Scott, maybe starting with you. Could you kind of take us through the strategic transformation at a high level. And I think as you look forward, kind of what are the priorities for the company for the next few years? And what are kind of the keys to delivering kind of sustainable growth over time?

So first of all, I just want to say that -- just a reminder that I'm going to say some forward-looking things. We are towards the end of Q2 here. So I won't be talking about Q2 or any changes or movement on our guidance. So when I look at '24, I think it's a little bit of a transition year for us. We are finishing our divestitures, and we're moving into really Phase II of the strategic plan. When I think about where we are, I'm very, very pleased with where the company is. We delivered very strong Q1 and at the same time, delivering strong financial results. We are executing on all our strategic imperatives, right? We're close to getting our divestures done. We've announced 2 that have closed, and we're hopefully close to third in the next few weeks. So hopefully, that will be done, and we'll move forward from that. At the same time, we're returning capital to shareholders through share buybacks and through the dividend. We bought back $250 million in shares in the first quarter. So we're returning capital to shareholders. We've also invested and brought in some key assets, which could be drivers for the future. These are very, very important cornerstone assets. I think they're very important for patients. They're focused on areas of very high unmet medical need, but they also could be very important cornerstone products for revenue -- our revenue growth going forward in the future. So we're very excited about those 2 assets that we brought in from Idorsia. And I'm sure Philippe and others are going to talk a little bit more about those products, cenerimod and selatogrel, which again, I think, could be really transformational assets for patients and for the company and finances. We've also brought in some new skill sets into the company. I think there was a fantastic group of executives who were here when I got here 14, 15 months ago, and a lot of them have stayed, but we've needed to sprinkle in some new skill sets. You see on the stage, we've got Doretta, we've got Philippe, both of whom have tremendous experience in the space. Philippe has developed a number of blockbuster drugs and innovative products. So it's very good to have him on the team and not with us on the stage, but sitting in the front row, Corinne Le Goff, our new Chief Commercial Officer, who joined just a couple of weeks ago and is getting involved and has tremendous global experience in commercialization. So we started with a really good team. We've really sprinkled in some outstanding skill sets. And then sort of lastly, we spent a lot of time strengthening and simplifying the base of the company. So if you look at all those things, paying down the debt, getting to the right leverage ratio, closing on the divestitures, bringing in new skill sets, strengthening the company, I think it puts us in a great position as we move into '25 and beyond.

And can you kind of help investors think about what kind of ties the recent deals that you've done together, Eye Care, Idorsia assets [indiscernible] you currently have in your pipeline, kind of what's kind of the expertise that you bring and why these are the right assets for Viatris?

So these are very important assets for us. The Eye Care business is a series of different assets. We have 2 products on the market right now. We've launched Ryzumvi and of course, we've got Tyrvaya. We've got a pipeline of 4 or 5 late-stage assets there. So we're going to continue to launch products in the Eye Care division over the next 2, 3, 4, 5 years and really try and build something there. In terms of the Idorsia assets, cenerimod, selatogrel, I think, to me, the hardest thing in this business is finding assets that can really be blockbuster assets, that could be differentiated relative to the competition, that could be cornerstones for franchises that have got long patent protection that you can invest in over time. And so that's the most important thing to me is that trying to find assets that really can be game changers and move the needle. I think you can always build commercial structure and distribution structure and some of those things, but those assets are what, to me, really, really are important for us to find. And I think when I'm talking to companies and looking for assets, the thing that companies say back to me a lot is just the strength of our footprint and the backbone that we have, commercialization perspective for distribution, development and others. I mean we are commercializing in over 160 countries right now. We reach 1 billion patients every year with our medication. And so we've got a very strong diverse company with a very, very strong footprint globally.

And I guess, how do you go about kind of finding those kind of blockbuster type assets? I think you kind of talked in the past about preferring low-risk Phase III commercial-ready products. Can you maybe just talk a little bit about the evaluation criteria the company uses to just figure out which ones have an attractive risk return.

Yes, I guess the way that I think about it a little bit is this is a difficult business, right? And there's risk in everything in development, right? There's always risk, but I think the way that I try and communicate is what I'm looking for is sort of relatively derisked assets. I'd like them to be at minimum through proof of concept and in Phase III, even better if they're through Phase III and have registrational data, even better if they're filed and pending registration. Some of those things or even on market. So we're not looking to do science experiments. We're not looking to do early drug development here. We're focused on late-stage relatively derisked assets that we think have a good chance of making it over the line.

Got it. Okay. And I wanted to follow up on the divestitures. So the EU, I think, extended the deadline around the European OTC divestiture through later in June. Just any update on kind of what's needed to close that deal? Is that sort of the cornerstone of the divestiture that you are dealing?

Yes. I think we're getting very, very close. I think I'm very optimistic that this will close in just a few weeks there, likely early in July. Whenever you're dealing with the regulatory process, particularly as diverse as our OTC business, I'm not sure there was something like 1,600 different products in that bundle. And there's a lot of regulatory process and procedure that needs to go through that, which is a little bit out of our control, but I think we're at a place now where we definitely see the finish line. We think we have everything in place to get the deal closed, and that should close, hopefully, early July is the sort of latest time frame. Again, with the caveat that there are external factors here, but I think we're feeling very good and very confident that we're going to be able to close this relatively quickly. That really sets us up as we -- again, as we go into '25, we can delever the company to a place where we want to get. And then once we do that, we generate sector-leading free cash flows as a company. We have $2.3 billion, $2.5 billion a year of free cash flow in the years going forward. And we can focus -- once we get the leverage ratio to the right place, we can then focus on using that capital to continue the dividend, accelerate our share buybacks, accelerate our business development activity, and really move the company forward once we get that done. So I'm extraordinarily excited about the hard work that's been done to get the company where it is today. I think there's a very, very bright future for the company.

Great. At this point. So how do you kind of building the pipeline, R&D as a percent of sales and how that should [indiscernible] market a few of these assets that I want to get into kind of think about that?

Yes. So I think we -- I've said very clearly that we have 2 areas of focus. One is more of that base business where we've said we want to continue to strengthen, and we're going to continue to develop our base business, and that's in order to bring $400 million to $500 million in new revenue every year, and we're going to continue to do that, and we're going to continue to invest in that business. At the same time, we said that we'll also continue to acquire assets similar to cenerimod and selatogrel with long patent life with durable revenues that's the -- that our second pillar, and we are very active currently in looking for additional assets.

Please go ahead.

I was going to add some of these assets, yes, will require some kind of incremental investment. It is a portfolio approach to how you think about R&D. And there's also different ways in which to think about that investment. So for example, Idorsia, it wasn't a straight acquisition. It was more of a collaboration. And so there's opportunity for not only both us and Idorsia to collaborate on the science and the assets, but also to share in some of those development costs as well as we think about it.

2 great points just for me to emphasize, I think we want to -- as we move into business development, we want to take a disciplined approach to what we're doing. We want to do things similar to what we were doing with Idorsia, find a way to do it through partnership, through licensing to be able to access a wide variety of assets, not just straight M&A as a way to build the portfolio and pipeline. We want to have a very disciplined approach to it. And Philippe made a great point that we need to continue to invest in the base business as well. We have $15-plus billion in revenue. It's very diversified. It's a strong base. We see through the addition of $450 million, $550 million a year in new products and some degradation of the portfolio due to its age. We see a 1% to 2% to 3% growth in that base business. And it's adding on to that with new products and new revenue streams that can really help us generate -- accelerate the revenue growth.

[indiscernible] an accelerant to that [indiscernible] as those come to market potentially.

Yes. And as we look to do more business development, I would love to get some revenue that's a little nearer term as well, right? I mean this was a unique opportunity for 2 potentially really multi-billion dollar blockbuster products. But we'd also like to be able to have some near-term revenue as well. So we're going to continue, especially once we get delevered, we're going to continue to add portfolio and we'll continue to plan and make sure we're returning capital to shareholders as well.

I guess just in this environment, obviously, we heard a lot kind of yesterday about high rates, how that's impacting kind of how companies are thinking about allocating capital. Has it changed kind of the deal pipeline for you, the types of deals that you might be seeing, as companies think about cash needs, that type of thing. Are they -- are you seeing more kind of biotech kind of look for a partner potentially?

Yes. I mean I don't know more or less, but certainly, I get inbound, I would say, every day. I've got a lengthy biotech history in my background. And certainly, I know a lot of biotech players and help start companies and done IPOs and I know a lot of people in that space, and I get inbound virtually every day. And I think the conundrum has been a little bit of a capital-starved world in the biotech world over the last 3, 4, 5 years. And companies are in a position to be able to invest in global infrastructure very often. And so when they come to us and they take a look at the strength of the global structure that we've got, 160 countries, ability to reach 1 billion patients that's something that a biotech is not going to be able to build, right? And so that's a real significant competitive advantage for us, I believe.

Yes. Maybe Philippe going through some of the Idorsia assets. I guess selatogrel [indiscernible] talked about the enrollment that you're targeting and kind of being a decent way into that process. I guess, can you maybe just talk about that enrollment process? What are the challenges of enrolling patients in that trial? And kind of what are the next updates that investors should expect to hear?

So I think from a development standpoint and from an enrollment standpoint, we're not really having issues enrolling patients. We just need to enroll a lot of them. So what we've done is we're accelerating enrollment by basically doubling the number of sites going into regions where Idorsia had little experience with Viatris footprint. We're able to reach patients that typically biotech are not necessarily going after. So we're able to enroll patients faster and we're seeing an acceleration. We think we'll see the full -- we'll get a full idea on the revised time line around next year, see how quick -- how much faster we can enroll patients. But -- so we are basically doubling the number of sites and reengaging with the investigators throughout the world to speed up that enrollment for selatogrel. We think we'll be fully enrolled by the end of 2026. But again, we'll see how that progresses over the next few months with everything we've put in place.

Got it. And so -- but that doesn't really assume any benefit from kind of the expansion...

Right now, that does not -- that's just our standard time line, right, that we've communicated from the beginning. Should we be able to speed it up, we'll be able to revise that early next year, I think.

Okay. And then I guess it's definitely a different type of drug in terms of administration. Can you maybe just talk about kind of level of confidence that patients will be able to kind of successfully self-administer the drug? And then I also wanted to ask about kind of the risk reduction that you're targeting. And I think you've talked about kind of 20% risk reduction, why that's sort of the appropriate.

So around -- for your first question, the -- what we've said publicly is that -- what we've observed to date is that patients are actually self-injecting for the right reason. They are self-injecting when they were instructed to self-inject. So within 30 minutes of the first onset of MI, for symptoms of onset of MI, that's when they're self-injecting. So the study is progressing with -- as well as we could possibly think. We've also reported that from a safety standpoint, which is also another key factor, the IDMC has met multiple times and has told us to continue the study unchanged. We are not seeing any signals that would change the study. So it's progressing [indiscernible] standpoint. The main assumption here is to see a 20% risk reduction. That's our base. We think it's relatively conservative as a number. When you look at other trials that were done with anti-platelet against placebo on top of standard of care, you're seeing about a 30% to 36% risk reduction. And that's in patients that are much further along in the process of acute MI. The whole point here is that these patients are able to self-inject very early in the process of acute MI. That's when the thrombus is platelet-rich. That's when the thrombus is responding to anti-platelet treatment in the best way possible. The more you wait, the more it becomes -- there's more fibrin entering the thrombus and responds less to anti-platelet therapy. So all this to say, it's the -- 20% risk reduction we feel is a conservative assumption, but it's the right assumption to build a Phase III study design so that we are reducing the risk [indiscernible].

As a company, I think we're uniquely skilled to be able to bring life-saving self-administered medication globally to patients. Obviously, it's been -- we've been very successful doing that with [ Epipen ] and others in the past, but I think we're really, really uniquely positioned as a company to be able to do that well. And sort of secondly, the patient experience that the patient input that I get is that an MI is a pretty significant life event to happen to somebody and there's a pattern of symptoms, which are very, very recognizable and it's not very likely that somebody is going to confuse a second MI, right, with another set of symptoms. So I think the product is really, really well positioned to be game-changing in terms of therapy of patients with acute MI.

Yes. And on cenerimod, I mean, it's a challenging disease area to treat. I think the Phase II data, I think, was kind of nominally statistically significant, but you had much better results in the interferon-high patient cohort. And I think you're targeting 80% enrollment of those interferon-high patients in the Phase III trial. So I guess, is that where enrollment is tracking currently? And can you kind of talk about why that was maybe the right approach to take? And would there be any implications for kind of the indication or label that the FDA gives you based on that?

Yes. So when you look at the more recent Phase III studies that have been run with other products. And when you look at the epidemiology in systemic lupus, in moderate-to-severe patients, 70% to 80% of the patients are known to be interferon-1 high. So that 80%, it was actually 83%, 85% is what was observed in the most recent Phase III study in terms of the number of patients that were interferon-1 high. So that's just the natural population we're going after. And we certainly expect that will be in that 80% to 85% range. Should we not see that for some reason? We have ways to modify the trial to stop [ selling strata ] to make sure we enrich for those interferon-1 high patients. So our goal is we need to get to that 80%, 85% interferon-1 high patients because that's clearly where we've seen the best results in Phase II and we'll -- we've put everything in place to be able to do that. From an FDA labeling standpoint, I don't want to necessarily summarize what FDA would do, but I can tell you what they've done with others, which is they had 80%, 85% of interferon-1 high patients, but they got global labels that doesn't necessarily distinguish between interferon-low and interferon-high patients. So that's our expectation at this point.

And I guess I think it's obviously an area where there's a lot of kind of provider expertise in terms of how to treat patients. Is there -- does that -- I don't want to get too far ahead of ourselves of commercialization, but just like how you're thinking about going to market and you guys expect it to be -- potentially be a blockbuster drug, what it would take to kind of be commercially successful with the product?

Yes. So I think the benefit risk profile that we're seeing, I think there's a clear unmet need for better for drug currently in systemic lupus with a better benefit risk profile than what's currently in the market, either the oral standard of care or even the generics, which from a benefit risk standpoint, have a little bit of baggage that comes with those drugs. So having a better benefit risk profile, we're also more convenient than these generics. And I think our Phase II data, clearly biologics, I'm sorry, I said generic -- biologics that we have certainly a better profile in Phase II than what has been observed. And so we think that's key for our success going forward. I think from a prescriber standpoint, as you said, it's highly specialized rheumatologists that typically treat these patients. And so I'm told because it's highly specialized, we won't require a very large sales force to be able to manage those rheumatologists.

And certainly, there's unmet need in SLE without question the way it is today. With this mechanism, the S1P mechanism immunomodulatory mechanism, one that Philippe and I are very, very familiar with. We've developed drugs with same mechanism, and there's real indication expansion opportunities too, which help make us think of this as a blockbuster. There's proof of concept for these S1P molecules and things, multiple sclerosis, IBD, psoriasis, other areas. And so we're focused on getting the initial indication, the initial approval. There's lots of unmet need. There's blockbuster potential just within the SLE population, but there's also a tremendous indication expansion opportunities as well.

And how would that work with Idorsia? Is that currently part of the agreement that you have? Or would that kind of require a separate agreement and additional [indiscernible]?

No, that's our asset we can develop it in any way that we want and certainly part of the appeal of cenerimod is this ability and opportunity to take it to different areas and across multiple different therapeutic areas.

Okay. Doretta maybe moving over to you. Scott kind of at the outset talked about getting to low single-digit growth with the existing portfolio and then potentially having BD add to that. I guess, can you help us think through the path to get there. I think in the first quarter, there's some kind of unique dynamics around formulary design and rebates with some of the legacy products. Is that something that continues to kind of weigh on the business over the course of the year until you kind of lap it? And then is that when we start to see maybe an inflection in the base business growth?

Yes. Well, first, I would say one of -- as Scott Smith highlighted, one of the benefits of our business is the fact that we are global, well-diversified kind of 160 countries, we're not really dependent on 1 market, 1 product to really drive that growth. And so the way we kind of have thought -- kind of have performed, think about our business as kind of that -- generating that $450 million to $550 million of new product -- kind of global new product revenue every year to offset kind of ongoing normal base business erosion due to the kind of age of our portfolio of kind of that approximately $300 million. So that's what gets us to that kind of 2% growth. As you mentioned, in North America specifically, we did see some unique channel dynamics, specifically in the first quarter, really around our branded portfolio in North America. But taking a step back, we feel really good about our North American business. Our commercial team has done a really nice job of balancing a portfolio amongst brands, complex generics and core generics. In our branded business, we've really have a focus on transitioning up the value chain. We've seen growth in Yupelri. We've added the Eye Care portfolio with Tyrvaya, launched Ryzumvi and are seeing kind of stability in our legacy Upjohn portfolio. Within our generic portfolio, our focus has really been moving up the value chain in terms of complex generics. We've seen strength in Wixela. We've seen strong uptake with new product launches like Breyna, and we expect to continue to deliver new products in that portfolio with expected product launches kind of over the next several years. And we're continuing to add to the portfolio. We've talked about the Idorsia assets there. And our focus is really to add kind of durable higher-margin branded protected assets to kind of migrate the business over time. And so we think there's significant opportunity within North America, but that is a piece of kind of the overall diversity that we have in terms of our overall portfolio.

It's my experience in the U.S. and certainly in the branded world, the Q1 can be the most difficult to predict. There's lots of different levers, which affect Q1. And so we'll see how the business evolves over the course of the year, but we feel good as Doretta was saying about where we are in the U.S. for sure.

Yes. So I mean it sounds like you're kind of close to that point where new product launches kind of outweigh the base business erosion and that's kind of what allows you to get back to that kind of low single-digit growth on more?

Absolutely. And we have been delivering $450 million, $550 million for the last 3 years in new product revenue, and we see a line of sight to continuing that '24, '25, '26 and beyond and that sort of stabilizes the base business erosion. We believe that we're going to be adding more new products than the base business erosion on a going-forward basis. So that's a great, stable sort of base to build off of and then adding sort of longer, innovative, stickier revenue streams to that can really then help move us away from low single digits and beyond and really accelerate growth as we move forward here, that's the revenue growth. That's the plan. But it requires us to have -- continue to invest and have a great, stable business as our base and find the right assets to add to it.

Yes. Can I ask on generic pricing and U.S. generic pricing specifically? I know it continues to go down in terms of percent of sales. But I think you have a good perspective on it. And I guess, do you feel like we're -- we've seen any structural changes in the market that would maybe make that more favorable on a sustainable basis, whether it's fewer manufacturers participating a bit more focused on security of supply, that type of thing that would shift it from what I think investors are used to historically.

Generics is still a very complex market, but we have seen, to your point, an evolution in some of the market dynamics. That's been twofold. One, that's been, I would say, driven by kind of actions we have taken as a company in terms of just portfolio mix kind of focusing on that complex side and kind of how we think about the portfolio generally, but there's also been an evolution in the industry and I think appreciation by our customers, et cetera, that it's not just about the kind of what price you can get, but it's about the durability of supply as well. And so we have seen more of a rationalization as it comes to generics. There's a lot of factors that play into it. It has to do with kind of the portfolio, demand supply dynamics, et cetera. But we kind of -- we continue to see kind of price erosion in that kind of mid-single-digit range consistent to generally I think what the industry is seeing as well.

The other question I kind of wanted out from the Developed Markets business is kind of post the divestiture of the OTC business, how should investors be thinking about like the longer-term growth profile for Europe?

Europe continues to be a very stable business for us. And the growth profile actually of the OTC business that we're divesting is consistent with how we see the overall Europe business. And so pro forma, kind of as we think about Europe, we continue to see this as a kind of plus or minus 3% grower and that's really driven by strength in our branded portfolio. We continue to see strength in our generic portfolio. Italy and France continue to be a strong market for us and just the diversity kind of stability and kind of base that we have in Europe?

Yes. And I wanted to also ask on China. It feels like a lot has changed since the Upjohn transaction. Could you maybe just talk about how you see the market today? And is it any different in terms of uptick in the retail channel. Obviously, a lot of your drugs have gone through [ VVP ]. So there's not really like that overhang anymore, but just the level of growth that you would expect from that market.

Yes. I mean China is very large, important market, but there's also a number of kind of dynamics that occur in that market. We have really -- and the team has really focused on the commercial kind of execution in that business. And the business continues to perform -- we feel good about the execution that we've seen in the market and the business continues to perform kind of in line with our expectations. This is an important portfolio with products that have significant brand equity in the market. And so kind of we're focused on continuing to drive execution, but at the same time, kind of managing a very complex and dynamic regulatory environment as well. The only thing I was going to add is we have the opportunity, especially with some of the assets that we've talked about on Idorsia with selatogrel in particular, where kind of -- to really add to the portfolio over time in the region as well.

Yes, despite the macroeconomic and policy challenges in China, we're very, very pleased and proud of the group there. There's really strong leadership. There's a good group of people there. It's a very important affiliate for us and they're doing very well. Again, it can be a challenging environment and an unpredictable environment and asymmetric application of policy and things, but we're very, very pleased with where that particular affiliate is for us right now.

Great. We have about a minute left. Maybe, Scott, just to wrap up, what kind of where the company is trading right now and where valuation is, I guess, how would you frame maybe what you think investors are missing with the story?

Yes. So I view it not necessarily as what they're missing, but what's underappreciated about the company, right? And I think the things that are underappreciated about the company is we have a very, very strong global footprint as we've talked about a number of times here, commercializing in over 160 countries, reaching 1 billion patients every year. It's tremendous scope and reach that we have as a company, an amazing opportunity to affect human health care moving forward, which is I think very much underappreciated. I think the strength of our balance sheet is very much underappreciated. I think it's -- I think our really near-term line of sight on getting the right leverage ratio is a little bit underappreciated. We have sector-leading free cash flows. And post -- with that short line of sight and getting to the right leverage ratio, we're going to be able to be more aggressive in returning capital to shareholders, maintaining the dividend, accelerating share buybacks, and we're going to be able to be more aggressive in terms of disciplined business development to build the portfolio as well, right? And I think the other thing is we've assembled a really good group of people who have tremendous experience in the branded area of the pharmaceutical world who are able to identify, to acquire, to develop and commercialize the assets, including people you see [indiscernible] deliver on the base business and deliver on the new branded innovative side is a little bit underappreciated as well. So again, I see all the hard work that's been done and the way -- how stable the company is gives us a very, very nice launchpad as we move into '25 and beyond and get into really sort of the part 2 of our strategic plan, and we've lived up to all those commitments, and I think the company is in great, great shape to move forward.

Great. Well, thank you all very much for your time. We really appreciate it.

Thank you, Nathan.

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