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 have a broader Q&A session with the rest the management team. So with that, over to you, Scott.

Thank you very much, Chris, and welcome, everybody, and good morning to everybody here and on the webcast. I'm going to be making a couple of comments before we get into the Q&A, which will be the bulk of the presentation. But I just wanted to first show a forward-looking statement and just let everybody know that we will not be commenting on full year 2024 or providing guidance in 2025 during this presentation. Slide, please. Just for those who aren't familiar with Viatris, just a little snapshot of the company. We are a very strong global, diverse company operating around the world, in the last 12 months, $15 billion in revenue, $4.8 billion in adjusted EBITDA. And $2.4 billion in free cash flow, tremendous financial strength in the company. Not only do we have a strong global Generics business, but we are also home to some of the most iconic brands in the pharma world, the Lipitor, Lyrica, Celebrex, Norvasc, Viagra, many, many very important global brands that we own and we're the home of, which is a very important aspect of our company. From a geographic perspective, we operate in 165 countries. We have 32,000 employees, we have 26 manufacturing facilities, and we currently commercialize 1,400 approved molecules in 4,400 different SKUs. And I think the most important thing about the company, from my perspective, is every year, we serve approximately 1 billion patients worldwide approximately 1 billion patients take Viatris medication, which gives us, I think, a phenomenal platform for which to affect human health care in a very positive way. So we're going to talk a little bit about '25 here, but before I want to go through '24, it was an outstanding year for us, full of tremendous accomplishments. And if you don't mind, I'll read the accomplishments because there was a lot of them, and I don't want to miss any of them, Chris. We returned the base business to growth in '24. We increased our new product revenue to approximately $600 million. We completed our divestitures, we simplified and streamlined the company. We returned close to $1 billion to shareholders in share buybacks and dividends. We paid down our debt to the desired leverage target. We expanded our innovative portfolio and added 3 new products, cenerimod, selatogrel, sotagliflozin. And I think very importantly, we expanded our leadership team and added some new skill sets to the team and you'll see some of those people here at representing Viatris at JPMorgan for the first time. So very, very excited about where the company is right now as we move into '25, very excited about the company, the foundation, the team we put together and exciting times ahead. So when I take a look and think about moving it to '25 and beyond, for me, it's a capital allocation story. We are generating sector-leading cash flows, and we intend to use them to build the pipeline and return capital to shareholders, very importantly. On the BD front, we want to be very disciplined. We want to be focused on in-market or near-market assets that can help us grow our revenues in the short term. And the shareholder return front, we'll continue to deliver on the dividend and we will accelerate share repurchases. I expect share repurchases will be a priority for us in 2025, given where the share price sits today. I'm very, very proud -- before we go to questions and answers, I'm very, very proud of what's been accomplished, particularly over the last 12, 18 months, the work that's been done to put the company in this position and very, very excited about the future and the future being not just '25, but in the years beyond that. I think the company has been putting great shape to be able to use our sector-leading cash flows to really accelerate value for the company through building a pipeline and returning to shareholders. So with that, that's a little bit of a basic -- so Chris, I'll turn it over to your questions.

Maybe first question, Scott, just you're about two years in the seat as Viatris' CEO. Just as you think about the business that you joined versus the business today, I guess what have been the biggest takeaways positive and negative for the [indiscernible] of the company?

So I have to say -- so just my -- almost 2 years in the CEO role, my impressions. The first impression is I spent a lot of time in airplane seats traveling around the world. It is a big company and there's people all over the world. It's amazing just how big and diverse this company is. And one of the key initiatives that I had was to try and get around see people really understand the culture, really be there geographically as a leader for the group. And the thing that really impresses me, first and foremost, was the strong dedicated, committed workforce that's out there. There's been a lot of mergers and integrations and divestitures and things and what's been left for that is a core of really tremendous, very skilled, very dedicated employees. So that really hit me. The other thing that hits me is just the scale and diversity of the company. It's incredible how big we are. 26 manufacturing facilities, for example, operating in 165 countries. Just a really, really big, diverse company with tremendous scale. The thing that I didn't know about Viatris until I joined was this idea that we service 1 billion patients approximately every year. And that's not just a statistic or a number. It's what, I don't know, 15% of the world's population that will take the Viatris drugs this year, which is just an amazing thing. And it really speaks not only to our capability to be able to manufacture, deliver, commercialize to 1 billion patients. But I think it speaks to our future opportunities and the base that we put together as we bring products in, as we bring new technology and we have a base that's able to deliver to 1 billion patients globally every year.

Great. Divestitures, I know we're a big focus over the last couple of years, but that's now largely out of the way, what's the team's biggest areas of focus right now?

So moving forward, a lot of work on the divestitures, obviously. And I think it was very, very important for us to do that. We have paid down or will have paid down by the end of the '24 billion, $10 billion in debt, which is just amazing. And then so not doing that anymore, we move into a new era for the company. I think we're really focused on our 3 strategic pillars. And those are continuing to build and support the base business right? It's very, very important that we don't move away from the base business as we're evolving the company. We need to continue to invest in that base business. We need to build the pipeline. And we need to move from this 1% to 2% growth profile to 5%, 6%, 7% growth profile over the next 3 to 5 years. And so bringing new innovative patent-protected molecules into the pipeline is very important for us, more predictable, sticky revenue streams, those such things. So very important for us to continue to build the pipeline. We want to do it in a disciplined and smart way, though, and returning capital to shareholders through dividends and share repurchases. And again, you have to be opportunistic with these things. But I think in these early years with the share price where it is, particularly this year, I think we want to lean into share repurchases and return to shareholders a little more while building the pipeline and maybe in a few years, maybe it moves more towards business development. But in the short term, I think we're prioritizing share repurchases.

Right. Maybe one last bigger picture one. Just -- I know, you're not giving formal guidance for 2025. But just headwinds and tailwinds, what are the things we should watch for as we go for this year?

So headwinds and tailwinds. So just 1 thing, and I'll let Doretta take on the headwinds and tailwinds from a finance perspective. One of the things that was announced was an Import Alert from our facility in Indore, and she will address that, I think, a little bit as a headwind for us. And I just wanted to say before she gets into the headwinds and tailwinds. So we take it very seriously. The Indore facility is 1 of 26 manufacturing facilities. It's an important facility within our global network. It's focused on oral solid doses. The Warning Letter and Import Alert are a result of an inspection which happened about 8 months ago. And we're in close communication with the FDA and receiving initial FDA feedback some months ago. We -- when we got that feedback, we agreed to immediate remediation at that time of the issues that they had. And the Import Alert involves 11 products in the U.S., however, 4 products of the 11 are on an exempt list, and we're in active discussions with the FDA to add more products to that exempt list. So that was one of the things and Doretta go into it a little bit more to provide a little bit of headwind for us as we move into 2025.

Yes. Just to give some additional color regarding our headwinds and our tailwinds. There are some pushes and pulls as to consider as we think about 2025. From a tailwind perspective, we currently expect strong performance from Europe and China, contributions from our Complex Generics portfolio as well as our broad portfolio of new product launches are expected to contribute somewhere between $450 million and $550 million of new product revenue next year. From a headwind perspective, as Scott mentioned, specifically with respect to Indore, currently, we're having ongoing discussions, both with the FDA as well as current customers. And so we're not in a position right now to disclose specific products, and we're continuing to assess the potential impact from Indore and lastly, just from a headwind perspective, we're continuing to monitor just given the strength of the U.S. dollar FX across our key currencies. About 70% of our business is outside of the U.S. And just to give some perspective, if you were to apply '24 rates to -- the spot rates to kind of the average rate over '24, that would have had a 2% to 3% impact to our '24, just to give some connection. And so we plan, ultimately, intention is when we kind of consistent with historical precedent to provide our outlook when we give Q4 results and guidance end of February, early March.

I know the specific products aren't disclosed and you're still working on it. Just any -- just to quantify just how big is this facility from a revenue perspective?

So as Scott -- it's 1 of 26 facilities. It's an oral dose manufacturing facility. It services our network across the world. So it's a global facility for us as it relates to Indore.

Okay. Great. Maybe pivoting over to capital allocation. I know you've talked about share repo or capital allocation skewing more towards repo and '25, which I know has been a topic of conversation we've had over last a little bit here. Can you just maybe first talk about the capacity you have for capital return in 2025? And how heavily weighted should we think about that capital returns as we think about share repo versus BD as an example?

Yes. So I think in terms of what the capacity is we've talked in the past that once we get through -- once we get through taking down the debt, once we get through onetime costs and things, we were talking at $2.3 billion in free cash flow on a yearly basis. And again, we're not guiding to what '25 looks like, but that's what we've talked about publicly around that area, excluding onetime costs. And so now that we're not paying down debt, that capital is available to us to be able to deploy business development and for share repurchases and paying the dividend, right? It's very, very important for us. So having that capital to be used more productively as we move into '25 and beyond is a really important principle for the company and something I think that's very attractive for us moving forward here, a lot of that chopping wood and hard work and block and tackling done. Now we can be more future-facing and more productive with our capital. In terms of the 50-50, it's funny. This is one of the questions that I that I get asked most often that there's a number out there 50-50. And when I think of the 50-50, I think about -- over a 3- to 5-year period from now, if we say 5 years, you could be talking about something like $10 billion, 12 billion in free cash flow, and we're going to try and do relatively equal amounts of return to shareholders and business development. In any 1 year, you need to be opportunistic, I think, if the share price is low, you lean into share repurchases. If the share price gets a little more frothy and there's good opportunities to build the pipeline that you maybe lean into business development. So not every year is going to be exactly 50-50. We need to be opportunistic to operate the business in a strong, productive way. But I think over a period of time, we want to deploy that capital relatively evenly between those 2 things.

But in terms of '25, your focus seems like it's skewing more towards share repurchase.

I think so based on where the share price is and based on a lot of work that we've done on BD and understanding the opportunities and based on where the company is I think that 25% should be skewed more towards share repurchase, I believe, yes...

I guess the question is on deleveraging end of 3Q, I think you said you were down to about 3x by year-end. How should we think about where leverage goes from here? So I was thinking about potential BD would you everything to bring that leverage back up? Conversely, is there a view that 2x is the right number? I'm just trying to get a sense like where directionally you think the right place for Viatris is?

So I think what we stated in the past and I'm fully supportive of is getting to 3x -- approximately operating between 2.8x and 3.2x somewhere in there. We don't plan to relever, hit 3x at relever we don't plan to heavily pay down debt more than 3x at this point in time. I think 3 and operating between that 2.8x, 3.2x is the right place for us to be. It puts us in a good position. In terms of doing something transformational, something bigger, something that would really change the company. From my perspective, that's not part of the base plan. The base plan is looking at business development, which is incremental that we can leverage the existing infrastructure that we have that is either in-market or near-market. That's our real focus. That being said, right, if there's transformational deals, which can be very helpful to us, which can be accretive, which bring good value to the company, to shareholders, we would certainly look at that. But at this point in time, that's not part of our core plan for sure.

And as you think about the type of deals, I think you mentioned, it seems like near term, contributing to growth is a priority. Is that fair to say?

Absolutely. We've got a couple of products which should read out either in '26 or '27 in terms of selatogrel and cenerimod, which could be major drivers of revenue in the future. We can also -- we see some things in the pipeline from a Complex Generic perspective and others that could really drive future growth. And I think what we want to do is start to bring that forward, really start to accelerate growth in the short term, try and turn the near term into revenue growth higher than the sort of 1% to 2% that we've seen from the base business so far. So my focus -- and again, you look at everything -- and if there was a tremendous opportunity to bring in that fit our capital allocation plan, that was a little bit longer term, we would think about it, but my focus is on in-market or near-market things to drive revenue.

Great. And then maybe just talk a little bit about therapeutic verticals in terms of areas of focus. I think you've talked about eye, derm, GI being areas. Are those still really the categories to think about? Or should we think without broadening out over time?

So those are 3 good categories for us, right? I mean I think there's good opportunities within them. We've made some investments in ophthalmology. We look at GI and derm opportunities as well. We've taken a couple of derm opportunities very far down the road in terms of assessment of things. I will say, however, I think we should be a little more opportunistic than just looking at those, right? To me, the important thing is, can we find cornerstone assets that we can build on that can generate revenue -- sticky long-term revenue that fit that we can leverage this great organization we have. To me, that's the most important thing. The cornerstone asset is more important than therapeutic focus my perspective. And as we talked about a couple of times, we have 1,400 approved molecules in the company, which means we're probably in every therapeutic area known to man, right? So we do have infrastructure somewhere in some of it. So although we do have a focus on those 3 areas, I'm open-minded to be opportunistic beyond that.

Great. And then just talk about the landscape for BD right now? How competitive is it? Are you seeing interesting assets out there? Just give some flavor of the...

Yes. I mean I think if I think about I've spent time in big pharma and big biotech and small biotech. And here, if I think about the last 10 years, I think sort of the last 2 years of that 10-year period, have been maybe -- I've seen more assets available and good assets available than in the prior years. I think it's a very asset-rich environment right now. You see a little bit of a capital starved world from the biotech perspective, particularly '21, '22, '23. There's a lot of companies out there with interesting assets that have been able to advance them through clinical development, get them near-market approved or filed and can see the way to potentially commercializing in the U.S. maybe, maybe with a partner, maybe alone, but certainly don't have the capacity and the capital to be able to commercialize on a global basis. So it seems like there's a lot of interesting assets out there that fit what we do, right? And I think where we're a little bit different than, say, a big pharma company or a small biotech. We've got the infrastructure. We've got the infrastructure of big pharma. And yet -- I'm very interested in doing BD deals that could be $500 million, $1 billion at peak where there's not a lot of competition for those, and we can put together 3, 4 or 5 of those, I think that would be very, very helpful for us. And so we're looking at a little bit different size and a little bit different type of asset. We're more than willing to work with partners in a constructive way, which works for them and works for us together. And so I think we've got great opportunities to be able to build the pipeline over time. I don't feel pressure to do any kind of deal now. The company is in good shape. We want to be disciplined. We want to be smart in how we do it. We want to find good assets that we can leverage and bring in and build the pipeline, but we also are taking our eye off the ball of capital allocation, share repurchases, dividend and other things.

Great. Maybe just pivoting to the fundamental business. Just in terms of I guess, new launches for 2025. What's on the horizon there? What should we be focused on?

So let me start just by saying that 2024, as Scott mentioned, was a great year for Viatris R&D in terms of new product revenue...

Before you start, can I ask you to introduce yourself -- some people -- People may not know who you are...

Philippe Martin, I'm the Chief R&D Officer for Viatris. So yes, so 2024 was very strong. We were able to exceed our target range in terms of new product revenue, but also in terms of the number of submissions we were able to do over the -- in 2024. For 2025, we have very good line of sight on the portfolio. We certainly believe that will be within that $450 million to $550 million in terms of new product revenue, and that will be also, again, this year, be able to file over 100 submissions. In terms of what we're particularly excited from a launch standpoint, we have a number of complex generics that we believe we'll be able to launch this year. These are liraglutide, iron sucrose, octreotide and glucagon that I think we're particularly excited about launching in 2025.

Just to comment on that. I mean, every year since the inception of the company, we've been able to deliver that $450 million to $550 million in new product revenue. I think it was at one of the highest rates in '24 I think we were guiding to around $600 million in new product revenue. And so regardless of what the individual product set is in any 1 year, we've got the machinery and the ability to continue to find $450 million, $550 million in new revenue every year. And so that's where we get, and we're losing because of the age of the portfolio and some price erosion, losing $300 million a year kind of thing, which gives us that sustainable 1% to 2% growth profile in the base business over a period of time.

And question up on those generic launches, just line of sight in terms of your confidence that those are kind of achievable this year?

Yes, we're very confident. We believe we're at the end of the negotiation -- the conversation with the agency. And so we feel that we'll be able to launch all of them this year.

Yes. Great. Other one is just on Idorsia and some of the assets there. Can you just get an update in terms of latest thinking in terms of maybe timelines around the Phase III readouts and just how you're thinking about the commercial opportunities for those products?