Q3 2021 Viatris Inc Earnings Call
You need assistance on todays conference. Please press Star zero.
[music].
Good morning, My name is Leo and I will be your conference operator today.
At this time I would like to welcome everyone to the Beatrice 2021 third quarter earnings call and webcast. All participant lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you would like to ask a question at that time. Please press star one on your telephone keypad.
In the interest of time, we ask that you. Please limit yourself to one question.
If you need to ask further questions you may reenter the queue.
Lastly, if you should require operator assistance, please press star zero.
Thank you.
Now I'll turn the call over to Melissa from better head of Global Investor Relations. Please go ahead.
Thank you operator, good morning, everyone welcome to be interested in third quarter 2021 earnings conference call. Joining me on this call are the interest is chief Executive Officer, Michael Gettler, President Rajiv Malik Chief Financial Officer tend to even a ruler Chief accounting Officer and controller Paul Campbell.
Head of capital market, they'll simply ski well some of US are in remote locations I would ask for your patience should we encounter any technical difficulties.
During today's call, we will be making forward looking statements on a number of matters, including our financial guidance for 2021. These forward looking statements are subject to risks and uncertainties that could cause future results or events to differ materially.
From today's projections. Please refer to the earnings release that we furnished to the SEC on form 8-K earlier today for a fuller explanation of those risks and uncertainties and the limits applicable to forward looking statements. We also posted supplemental slides on our website at investor interests Dot Com <unk>.
The interest routinely posts information that may be important to investors on this website and we use this website address as a means of disclosing material information to the public in a broad non exclusionary manner for purposes of the SEC's regulation fair disclosure Reg FD.
Also we'll be referring to certain non-GAAP financial measures, including free cash flow and adjusted EBITDA.
We will reference such measures in order to supplement your understanding and assessment of our third quarter 2021 financial results and financial guidance for 2021, non-GAAP measures should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP.
Most directly comparable GAAP measures as well as reconciliations of the non-GAAP measures to those GAAP measures are available in our third quarter 2021 earnings release, and supplemental earnings slides as well as in the investors section of our website and.
In addition to supplement your understanding and assessment of our third quarter 2021 financial performance. We have provided in our earnings release and supplemental slide and we'll discuss during today's call certain financial measures relating to the third quarter of 2020.
Including combined result of legacy Mylan, and Upjohn business with indicated adjustment, which do not reflect pro forma results in accordance with ASC eight O five or article 11 of regulation S X.
Such measures do not reflect the effect of any purchase accounting adjustment. Let me also remind you that the information discussed during this call except for the participant questions is the property of via truck and cannot be recorded or rebroadcast without beatrice's Express written permission an archived copy of today's call will be available on our web.
Right and will remain available for a limited time with that I'd like to turn the call over to Michael.
Thank you Melissa and good morning, and thank you for joining us on our third quarter.
Quarter earnings call.
I am pleased to say that we have again reported another strong quarter.
Generating robust free cash flow.
Delivering on our financial commitments.
And building a strong foundation for our future.
Nearly one year ago today, we formed Beatrice with the vision to assemble a best in class capabilities across commercial manufacturing R&D and enabling functions in pursuit of removing barriers and expanding access for patients. We serve while also returning value to shareholders.
Okay.
Today's continued strong results are a testament to that vision and to the execution of our colleagues around the world with shared dedication to patients and shareholders drives our strong business results.
And we believe it's putting the interest on our path to an even stronger future.
I could not be proud of all that we have accomplished together.
Now here are some highlights.
In the third quarter, we reported total revenues of $4 $5 4 billion U S dollars.
Adjusted EBITDA of $1 7 billion U S dollars and free cash flow of 965 million U S dollars.
Year to date that is quarter one from quarter three combined we have generated approximately $2 2 billion U S dollars and free cash flow already exceeding the lower end of our most recent guidance for the full year.
Optimizing cash flow generation will continue to be our financial North star and we anticipate cash flow to grow in the coming years.
As a result of our expected continued strong performance.
A reduction in one time cost.
Continued improvements in cash flow conversion.
Yeah.
In North America, we are preparing for the imminent launch of Assembly, which as most of you know received this toric approval from the FDA for the industry's first ever interchangeable biosimilar designation in the U S. In July.
We expect the assembly will be available at pharmacies before the end of the year.
And we believe this is an important milestone to help increase access to insulin for those living with diabetes in the United States Rajiv will aid to provide more details on the progress we're making in that regard.
Yeah.
In addition at the end of October we filed the BLA for our Biosimilar to Eylea with the FDA as planned.
We believe this is the first biosimilar registration of this important medicine to treat age related macular degeneration.
And looking further into the future. We're excited about the potential to be first to market for a botox biosimilar.
Overall, we generated $158 million in new product revenue in the third quarter.
$557 million year to date.
We are therefore, well on track for approximately $690 million in new product revenue for the full year.
Importantly, our strong performance enables us to continue to execute on phase one of our strategic roadmap.
Which is expected to be completed by the end of 2023.
During this time, we are focused on strengthening our balance sheet.
Returning capital to shareholders in form of a dividend and building a strong foundation for the future.
Now one year into that three year effort.
And we continue to deliver on our financial commitments with debt repayment dividends.
And synergies.
On the last quarter's earnings call. We said, we would reevaluate our 'twenty to 'twenty, one financial guidance at the end of the third quarter.
Based on our strong performance to date, we are again, raising our financial guidance across total revenue adjusted EBITDA and free cash flow, which sanjeev will discuss in more detail later.
I'm also pleased to say that we are near completion of a rigorous bottom up strategic planning effort.
We look forward to sharing the results of these plans with the investment community at a virtual investor event.
Now scheduled for the morning of January seven 2022.
And on that day, we provide additional details on our two phased strategic roadmap, including for the rest of phase one that as the year 2022 and 2023, we'll.
We'll be providing specific financial guidance targets and metrics to complete the space.
We will also be discussing the substantial free cash flow that we will.
We'll be generating over this period to satisfy our phase one capital allocation priorities of returning capital to shareholders.
And of repaying $6 5 billion.
Of that.
And with that said, we continue to remain confident.
At $6 2 billion of adjusted EBITDA is the true floor.
Our business.
For phase two of our roadmap, that's 2024 and beyond.
We will provide an overview of the catalyst that we expect will drive future growth, including laying out our capital allocation priorities for the space in order to maximize and further unlock shareholder value during this period.
We'll also be giving specific details.
Our own organic opportunities for discussing our own pipeline and links.
And we will providing the inorganic business development priorities that would be focusing on through our global healthcare gateway.
Before I close I'd be remiss to not call out the VHS was recently recognized as a top five company on a prestigious fortune change the world list.
This recognition is a testament to the hard work and dedication of our colleagues to stem the tide of HIV AIDS over the course of more than 10 years.
And as just one example of how corporate social responsibility is deeply embedded in our mission and our operating model.
And in addition, we recognized on the Forbes 2021 world's best employers list.
Underscoring our success and laying the foundation for the kind of company, we want to be.
Now with that I'll turn it over to Rajeev for more details Rajiv.
Thank you Michael and good morning, everyone.
Before I get into the quarter at hand, I'd like to Echo Michael's excitement about our upcoming investor event.
But you can expect to hear from me.
Comprehensive review of the significant value and <unk>.
Capped off our pipeline and clinical programs, including Biosimilars complex genetics and now our medicine that we have been strategically building over many years.
These development programs are expected to play a significant role in our ability to drive organic growth over time.
Firstly at our costs and that these roll off at the end of 2023.
Once laid out in January we believe our pipeline will be recognized as one of the company's most under.
I appreciate the efforts that will enable us to continue to deliver value, while fulfilling our mission of expanding access and addressing patient needs.
Now, let's get into our results.
I'm pleased to report that we have executed three strong quarters, which is a testament to our diversified and differentiated commercial and operations platform, but more importantly, the dedication of our workforce.
As I walk you through the performance in each of our segments and product categories.
B, making second comparison.
Combined adjusted third quarter 2020 to those on a constant currency basis.
Compared with our expectations as included in our guidance back in August.
Beginning on slide seven overall.
The business performed strongly across all of our segments versus our expectations.
When excluding the impact of Japan's Lyrica, and Celebrex and Louise as seen on the bottom left hand side of the slide total net sales were down 1% as compared to combined adjusted quarter D. Puneet.
Our brand business performed better than our expectations, primarily driven by a lipitor viagra <unk> an epipen.
Our complex generics and Biosimilar category performed in line with our expectations.
We are pleased with the continued growth of our global Biosimilars portfolio this quarter.
Grew by 14% and helped to offset the expected competition related to select complex generic products.
Lastly, our global generics category also performed in line with our expectations, reflecting mid single digit decline compared to the prior year.
Turning to slide eight.
Our developed markets performed slightly above our expectations for the quarter.
Europe continues to perform very well generating 10% year over year growth in net sales driven by strong performance by brands like <unk> Lipitor and Dymista allergy.
The strong performance of our <unk> portfolio.
Biosimilars in Europe grew by over 50% led by our strong full year.
How many.
Moving to North America, we are very pleased with our overall performance. Our branded segment performed strongly driven by Epipen Upsilon re and a better than expected performance of our performance.
These results were partially offset by Mark Edison, we can experience.
And do you expect it.
Competition.
Hum.
Generics and Biosimilars in North America was better than our expectations with strong performance in Biosimilars, which helped to absorb the competitive impact on vaccines and Xu Lei.
I would also like to make a few comments on U S generics business and pricing.
For the last few years, we have continued to work on our portfolio by investing in science and difficult to make dosage forms like injectables mythological patches and drug device combinations, while pruning certain commodity products at the same time.
We believe we now have a very diversified G&A explored folio, which is being very well supported by our strong customer service levels.
This is what differentiates our ability to effectively manage this business.
Accordingly, as we normalize this quarter for exceptional onetime events like <unk>, fumarate with seller and Xu Lei <unk>.
Price erosion for this quarter is mid single digit and very much in line with our expectations.
We are also excited about the upcoming launch of our branded product.
<unk> injection and unbranded incident Latvian injection.
Both products will be available in pen and wild presentations and interchangeable for the reference brand Lantus.
This dual product approach is intended to ensure that this interchangeable biosimilar insulin can reach.
As many patients as possible.
Regardless, our financial circumstances insurance our Shannon.
We are pleased with some recent formulary wins that go into effect on January one 2022, including the inclusion of our interchangeable Biosimilar Assembly on express scripts national preferred formulary.
Brian 10 applications National formulary.
We expect that the product will be available in pharmacies before the end of the year.
To ensure that as many patients as possible when benefit from these products, we will provide copay assistance, a patient assistance program and cash pay alternatives.
In addition, beginning inquiry tool will be a participant in the CMS Medicare part B senior savings model, which limit certain patient out of pocket costs do no more than 35 part of one month's supply.
Moving to the next slide.
Marketing market segment also performed in line with our expectations this quarter.
Our branded business, primarily driven by <unk> and <unk> continues to perform strongly in these countries that have began to recover from COVID-19.
In this quarter, our complex generics and Biosimilar category performed below our expectations due to the COVID-19 related regulatory plate, which we expect will come as we close out the year.
Our generics business was in line with our expectations.
We had higher than anticipated.
From this week and <unk> this quarter that helped offset the lower <unk> volume.
We expect that the demand for COVID-19 related for us to tamper off in quarter four.
The next slide shows our John Heckman.
We are pleased with this quarter's performance across our product categories.
Frank and genetics performing better than expectations.
Amitiza Lyrica and Creon drove strong brand and our authorized generics to Lyrica and Norad continued to contribute growth.
Biosimilars were in line with expectations with continued strong performance from <unk> in Japan.
Greater China is our last segment slide and the business.
Another strong quarter delay.
Delivering.
Therefore, better than our expectations.
This performance was primarily driven by retail channel growth of 20% and better than expected performance in the hospital channel.
The segment benefited from some phasing of customer buying patterns. This quarter that we expect to normalize in quarter four.
Overall, we are very pleased with how the business is navigating the evolving policy environment.
With our new launches performing to our expectations and our base business anticipated to be in line with our expectations.
Approximately a 4% base business erosion for the year.
Feel very strong about the underlying building blocks of this business.
Now turning to the pipeline update.
Regarding our Botox Biosimilar development program, we met with FDA in early September.
Aligned on analytical non clinical data as well as our clinical program expectation and have a clear path forward.
At this juncture, we do not expect <unk> 43, and a complete response letter related to the taxi pillar to impact our submission timing for this program, which is scheduled to be filed by the end of 2024.
We will provide an additional update when we have more information.
Okay.
Additionally, we recently submitted to FDA, what we believe is potentially the first eylea biosimilar.
Moving to incident at park.
FDA completed a pre approval inspection of <unk> manufacturing facility in Malaysia.
It resulted in a few minor 43 observations and Python has provided a complete and comprehensive response to FDA for it.
We are confident that we will hear soon from the agency as this is the last remaining elements needed for approval of another potentially interchangeable insulin therapy.
Regarding avastin.
Our U S approval continues to be impacted by the delay of a pre approval inspection.
As previously mentioned, we have now opened for questions.
FDA.
In our complex product pipeline, we have initiated a rule in lora.
<unk> phase III clinical trial and are actively screening and enrolling patients.
We are also happy that our Levothyroxine oral solution was accepted for filing with FDA.
Okay.
This quarter, we made good progress in our complex injectables portfolio.
We successfully completed pivotal pharmacokinetic studies for our long acting Octreotide agitate injection and have demonstrated that our product is blackberry to say understated.
Our Kelly Barrett.
Three months NDA for 410 milligram and 273 milligrams tense have now been accepted for filing and we believe that we have the first to file for all strengths of the Palo Verde three month depot injection that he planned to infer that cleans up.
We have also successfully completed our pivotal PK study.
Eddie.
All modify the leaves injection, which is genetically linked for Abilify maintainer.
Before I hand, it over to Sandeep I'll quickly address our ongoing integration and restructuring activities.
We're coming up on our one year anniversary and our initiatives are progressing.
As planned.
We continue to remain on track to realize $500 million of cost synergies this year.
And are confident in our overall plans to achieve at least $1 billion of cost synergies by 2023.
Let me now turn the call over to Sandeep.
Thank you.
Thank you and good morning, everyone as Michael and Rajiv mentioned, we had another excellent quarter and I'm really pleased with the focus on execution exemplified by our team, especially the financial results.
The results demonstrated the financial strength and the nature of our global diversified platform.
In the slides ahead I'll provide drivers for Q3.
Expectation for Q4 that are leading to an increase in the current year financial guidance.
On slide 17, we have summarized our results versus prior year on a reported basis, which reflects mylan standalone results for third quarter 2020.
Moving to slide 18. This is a comparison of combined adjusted Q3 2020 results, which includes Mylan Standalone results and Upjohn carve out financials for a period of July one 2020 to September 32020, adjusted for Eloise and transaction related items, including divested.
In connection with the combination.
Beginning with Louise.
As we've seen throughout the year, our commercial teams have continued to manage the rate of erosion of political and Celebrex in Japan.
As a result genetic penetration levels have come in slightly better than our expectations.
Adjusting for these alloys total reported net sales in the quarter were essentially flat to prior year in the quarter, our branded business performed solidly driven by thrombosis and influence in Europe, an epipen in North America.
In China sales were strong for both lipitor and Norvasc in the hospital channel and wider in the retail channel.
Our team continues to navigate the policy environment and erosion from the BP was in line with expectations.
New product revenue was in line with expectations and our global Biosimilar sales grew 14%.
Base business erosion includes price and volume decline in our North America generics business, including competition across complex products, such as <unk> seller Xu Lane, Mike Harrison and our genetic for tech data.
Coupled with declines in our ARV business in emerging market on balance. These items are tracking in line with our expectation that full year assumption is unchanged at approximately 4%.
We're seeing a gradual recovery from Covid in emerging markets, North America and Europe.
Lastly, with respect to foreign exchange the weaker dollar relative to key currencies, such as euro provided an approximately 1% tailwind compared to our combined adjusted 2020 revenue results.
Moving to slide 19, which bridges adjusted EBITDA.
In the quarter.
<unk> gross margin of approximately 60% came in ahead of expectation and were driven by brand performance and favorable cost of goods.
Integration and restructuring activities remain on track and SG&A was in line with expectations.
Turning to slide 20.
Free cash flow of $965 million exceeded our expectation due to strong operational performance and cash flow improvement initiatives.
One time costs were lower due to timing affectivities between quarter, three and quarter four and capital expenditure came in below our expectations, partially due to COVID-19 related global supply chain delays.
As a result of strong year to date free cash flow of approximately $2 2 billion, we've been able to repay $1 9 billion of debt year to date, including $730 million in quarter three.
We've also returned $266 million in dividends to our shareholders.
These actions are consistent with our phase one capital allocation priorities of prepay prepaying $6 5 billion of debt by 2023, and returning capital through dividend, which we expect to grow in future subject to board approval.
As we look to Q4, we expect free cash flow to be significantly reduced from Q3 levels due to lower adjusted EBITDA.
<unk> of one time cash cost semi annual interest payments and ramp up of capital expenditure.
Moving to slide 22.
Based on the underlying strength in the business, we're raising the guidance for total revenue adjusted EBITDA and free cash flow.
The midpoint of increased total revenue guidance is now $17 8 billion, an increase of $100 million versus prior guidance.
The increased outlook of revenue reflects the continued strength in our China business driven by pull through.
Of retail convergence strategy.
Performance in developed markets benefited from strong epipen back to school season, and Interlink volumes in Europe.
Partially offsetting these positive trends, including genetic erosion and competition of key products in North America, and lower volumes in emerging markets.
The mid part of an increased adjusted EBITDA guidance is now about $6 4 billion also up $100 million versus prior guidance.
The increase is primarily driven by higher forecasted total revenue. In addition to our expectation that gross adjusted gross margin with land closer to the high end of our range at 50% to 59% for 2021.
For adjusted SG&A, We expect a sequential increase in fourth quarter with the resumption of activities due to COVID-19 recovery and greatest market, bringing our full year range of this key measure to 21%, 22% for total revenue of total revenue.
The midpoint of free cash flow guidance is increasing to $2 5 billion, which is 200 million higher than our previous guidance.
This reflects capital expenditures of approximately $500 million lower cash tax and cash improvement initiatives that we expect to continue to benefit us in 2022 and beyond.
Now a few comments on Q4.
For revenue, we expect a sequential decline due to customer buying pattern that benefit in Q3.
Lower sales of Epipen in developed market and lower sales of industrial and MB some in emerging markets.
But our adjusted gross margin. We also expect a sequential step down from Q3 to Q4.
From 60% to approximately 58%.
Due to the evolution of our product portfolio mix.
I'm extremely pleased with our ability to generate substantial free cash flows.
And we fully expect that operational momentum exiting 2021, we'll get into next year.
Based on additional cash flow improvement initiatives and the expected reduction in one time cash cost with highly confident on a clear path to generate an aggregate.
$8 billion of free cash flow from 'twenty, one 'twenty two.
Despite our phase one capital allocation priorities, the underlying strength and momentum we see in the business position us for a solid starting point heading into 2022, and we look forward to sharing more about to face strategic roadmap in early January.
Before I turn the call over to the operator, I would like to announce that our head of Investor Relations Melissa from better is moving to a broader leadership role in our office business performance with.
We sincerely appreciate all her contribution over the past four and a half years, leading the IR function.
Going forward <unk> head of capital market and Lewis director of Investor Relations will be the main contact for the Investor community with that let me open the call for Q&A operator.
Thank you at this time, if you would like to ask a question. Please press star one on your telephone keypad again to ask a question. Please press star one on your touch on keypad, if you wish to remove yourself from the queue. You may do so by pressing the pound we remind you to please pick up.
Your handset and please limit yourself to one question.
We will take our first question from Chris Schott of Jpmorgan.
Great. Thanks, so much for the questions I know youre targeting a January 7th analyst meeting, but I. Appreciate the comment on I think it was $6 2 billion in EBITDA as a floor for the business I guess my question here was I think in the past you've talked about 2021 is a trough number I know you've raised the guidance a few times have gone through this year I was hoping just understood.
A little bit what's going on here some of the upside we're seeing.
It's more onetime in nature of this year or are there any other factors that contribute to that dynamic I'm just trying to kind of bridge between I guess, a new midpoint of $6 4 billion versus that floor six 2 billion if I can slip.
Really quick second question I guess my question as we think about capital.
Capital deployment and where your stock is right now, we're just repo share repo fit into the mix.
And a lot of discussion around like BD around dividends, but for instance.
Is share repo something that you're considering as well thanks so much.
Hi, Good morning, Chris and thanks for the question, let me start with your second question on the share buybacks.
Just to go back.
As part of our <unk> offering and become the beginning we always contemplated both dividends and share repurchases that was always part of our thinking I think we've been very very clear about what our priorities are for phase, one which is the 'twenty one 'twenty, two and 'twenty three and Thats the debt paid down $6 5 billion returning capital through dividend and then growing that dividend annually right.
If there are additional opportunities obviously, we will consider it share buybacks will obviously be the benchmark for any kind of major BD investments.
Investments that we do and then just one other factor that you may not be aware of that we have to consider is there is a tax matters agreement that we entered into with Pfizer as part of the tax free spin up Upjohn from Pfizer and then the combination with Mylan and there are certain limitations and conditions on share buybacks in the first two years that we need to take into consideration.
But I look forward to telling you more not only about the phase one commitments, we've made very clear, but also our capital deployment priorities for phase two how we do that and how we maximize shareholder value and unlock further shareholder value in phase II. So that's forthcoming and please join us.
The general meeting.
On the EBITDA question, you have clearly, we're not giving guidance today.
Very very pleased with the performance that we have now three consecutive quarters, we strongly feel that we stabilize this business we get a good handle on the business. We now finished almost finished the bottom up rigorous strategic planning process and with that we are reconfirming again, what we said before the $6 two as the floor that means floor.
Let me midpoint of the guidance Thats a floor, but thats a floor that is very very important because that drive. So we can deliver on <unk>, whereas we laid out a clear priority for what we need to do.
That drives cash flow is not the only thing that drives cash flow is one of the things driving cash flow and we remain confident that the EBITDA combined twists and you can easily do the math yourself $8 billion or more in cash flow over those three years sets us up to deliver on our phase one commitments. We remain confident that we can do so and look just at this year.
$2 5 billion midpoint already and that sets us up really for very successful phase II with a much stronger balance sheet much more increased financial flexibility and firepower and I look forward to telling you more about that.
At our Investor event.
Next question please.
We'll take our next question from Omar <unk> of Evercore.
Hi, guys I'll also ask one question, which has two questions.
Michael I know theres been a lot of investor questions and confusion around.
Dividend payout and I'm curious, if we should expect a more definitive number let's say, a 20% payout or something as we go to January 7th Investor Day, and then Rajiv I'm trying to understand some of your comments around Botox Biosimilar, a little better I know you were scheduled to have conversations with FDA in September what he had said last.
Jim.
You also just said that the <unk> lead response on manufacturing deficiencies should not impact your 2024 timing. So I'm just trying to put those two things together I guess, what specifically was the FDA focused on when you sat down with them in September and is your manufacturing process and manufacturing location for Biosimilar Botox shared with Readouts. Thank you.
Okay I'll start with the dividend and then versus you can answer the second question.
Thanks for the question dividend.
Dividend is opera.
A key component of our story going forward.
And what you should expect from us.
Our growing dividend and absolute dollar subject to board approval of course, but I don't want to get ahead of the board of directors here, but my hope is my hope is that we will be able to declare or 2022 dividend framework.
In time or at the January seven events and I think we can be confident they can do the math around cash flow, whether we have sufficient cash to pay down the debt and grow the dividend and we'll tell you more about that later.
And tax.
Part of your question regarding Botox.
We met with FDA in early September and have a clear alignment on their expectations about biosimilars.
<unk>.
Non clinical data as well as our clinical program expectations. So once you have that clarity and we have a clear path forward.
All about execution and we have been on this at this place several times said most important thing is to get it from.
Alignment with FDA.
I would say nine months, yes, these things evolve, but at this moment they have given us a very clear understanding of that and what are you waiting to see a biosimilar product come through in the market.
Regarding the math, yes.
<unk> is a developer desk manufacturing partner and we shared facility, which reaches that are absolutely for taxi and getting a 48 hour a complete response letter.
<unk> got a new team when you are evolving or developing a product towards the end of 'twenty. Four therefore, we have a filing that we have a lot of time and we said as we have been giving you complete transparency. We will keep you guys updated as it was but at this juncture I don't see that Seattle is going to impact our development program timing.
We'll take our next question from Elliot Wilbur of Raymond James.
Thanks, Good morning wanted to ask a question around synergy realization over the course of the year and I apologize.
The lines, where we're cutoff I may have missed this during rajeev prepared commentary, but just wanted to get an update.
On where you were in terms of realizing the $500 million in targeted synergies, which.
Buckets are over performing or underperforming versus original expectations and then just looking at the numbers in terms of SG&A and R&D targeted spend percentages and those numbers on an absolute basis as well as Cogs theyre not really moving low.
So how should we think about the progression of those numbers kind of on an absolute basis as we move toward that ultimate target of $1 billion in synergies.
Yes, so thanks Alex.
And so on the synergies we are absolutely on track for the $500 million and we're confident the $1 billion for the three years and I'll give it to Rajiv maybe to give a more nuanced answer and then the SG&A R&D and Cogs question, maybe between you know Marc Michael you check everything, which we have laid out.
The different buckets, whether it was.
Cost of widened from the cost of goods from the SG&A everything is on track I don't see any.
We are right on track as far as our 'twenty. One target is concerned we have a great plan for 'twenty, one 'twenty three and we.
We remain committed to.
Pete.
Amit meet and beat this one 1 billion target as we go along.
<unk> covered that very well.
Maybe just one other thing to keep in mind the synergies as you pointed out is covering all line items.
And and.
That's fair and just kind of reflect what you should expect when we provided the guidance the absolute dollar for SG&A will come down next year based.
Based on the flow through of the synergy and we'll provide more clarity in detail when we meet in June January 7th.
Next question please.
Yes.
We will take our next question from Jason <unk> of Bank of America.
Hey, guys. Thanks for taking my question.
My question is on on China, and just as we think about the $300 million headwind that was talked about heading into the year. It looks like it's an impact did the ERP price.
Impact probably pushed out to next year, arguably which is probably the big swing factor with the floor EBIT a floor as we think about that next year. So I'm. Just curious are you seeing anything on the China retail side, which has been a growth story.
That suggests some of this upside that you are seeing in China in 'twenty one.
Is sustainable and if I could just squeeze in a point of clarification. There was mentioned about out of pocket assistance on <unk>, which I would think of as a generic having negligible patient out of pocket costs. So if you could just provide some clarity on what the co pay differential would look like on assembly versus an established brand that'd be helpful. Thanks.
Steve I think you can answer both questions okay.
So Jason on China, we could not be more pleased with the performance and hollow, China, China team our management team over China is evolving and navigate include evolving.
Very fast evolving policy environment.
So we have done it with team has done a great job of shifting.
<unk>, what they have in hospital channel.
No.
Doing better than our expectation in the hospital as well as the growth in the retail channel and this is where the focus for the future is that we continue to shift our focus and momentum around the retail channel which is growing.
This quarter also it was 20% plus growth but to act.
China of laws, we always said that although we are not providing guidance, but we knew that China is going to be a step down.
One or two.
Given the implementation of ERP in fact recently there has been some updates on the at the policy level in China.
We are pleased that in a perverse way. It is right now very clear clarity about the timing and extent and we see this.
Bottoming out of the China business, our hospital business by 'twenty four 'twenty five.
That gives us a great runway to continue to implement our business and moved up business, where we need to move and focus.
Full year around that it is so that's about John and Sam.
Assembly I think the launch of the two products. The deal broke launches intended to ensure that this interchangeable product can reach as many patients as possible regardless of financial circumstances in Crs.
And we just want to be at or not.
No not any of the patient should be.
Going back from the pharmacy point, our dispensing plan because they don't have a plan called <unk> syndrome patient assistant program or casually alternatives. So we are trying to match every guest every map.
And provide them whatever week gap, Hawaii, whatever theyre getting today from Sanofi correct.
Thank you next question please.
Our next question is from <unk> Prasad of Barclays.
Hi, good morning, and congratulations on the results just following up on the Biosimilars and tangible depart.
Two you indicate thoughts on how relevant you think interchange ability will be for the Biosimilar Humira landmark landscape.
And on the same subject with assembly.
Market exposure that they spoke to believe that assembly can potentially increasing its volumes by Forex to finance again don't want to steal the Thunder from your John event, but curious to get your thoughts on it. Thanks.
Yes.
Okay.
So.
Interchange ability if I characterize interchange ability of Humira I will put it in a nice to have bucket rather than a must stop bucket quite a number of reasons. So first of all as you know as the market formation happens nobody will have the advantage of interchangeability Amgen are the number two player with not having to have tangibly at that point of time.
But more of R&D.
The difference is.
Lynn as box and Humira is the boat.
Insulin is the pharmacy product.
Specialty pharmacy pillar, we are at the point of dispatching you have a lot better control and interaction between that offering.
So ongoing interaction at the same time also.
Today, no nobody will highway interchange ability for all of the presentation. The low concentration the high concentration the Ben <unk> as the preferred exchange. So there will be somebody that highway.
Maybe boehringer has a one one for the strength for the lower concentration, but not far off so.
And even if let's say, let's say.
Nice to have you can expect us to do as.
Such an important product.
By the time, the flipped exclusivity expires into changeability exclusively expires, which will be somewhere in the 24 aldar.
We might have we will be having that interchangeability will go up and complete that indicate ability.
Great any other questions yes.
Okay next question please.
Our next question is from Greg Fraser of choice Securities.
Good morning, Thanks for taking the question you mentioned in discussing the potential global healthcare gateway or ASU on the strategic roadmap should we think about inorganic growth driven by the gateway is more of a longer term opportunity or while the gateway for business before then.
Okay. Thank you Greg look I think we said it we said it clearly the gateway is open for business, we have I think a unique opportunity here of having this.
Amazing platform that makes us the partner of choice.
Both of them, where we built commercially operationally R&D regulatory et cetera, with the scale, we have to reach and we can offer that to partners have ready access. We also said that we're very clear about our capital allocation priorities that we go ahead and be very disciplined in the way.
We do that but.
But should the right opportunity presents itself, we're absolutely able to execute on that.
I'll give you more guidance in terms of what we what the priorities are for business development and global House Gateway for Phase II and our January seven event.
Okay.
Thank you for the question next question please.
Our next question is from Navan tie of Citigroup.
Hi, Good morning can you give us more details on what drove the better free cash flow for your guidance and maybe if you could discuss the improvement the cash improvement initiative.
We expect a higher free cash flow growth in 2022.
The reduction in onetime call.
And then on just kind of follow up on China do you expect a more benign.
<unk> impact or just a postponement of the reform. Thank you.
Okay. So.
If you take the free cash flow question.
Sure Yes.
Nevada is very pleased with the cash flow generation.
And the company and all the effort and the focus that we have on the cash flow in terms of that so that's what's going on in terms of where we're looking at kind of the opportunity. So firstly, obviously the operational rhythm of the business is better.
As Michael and Rajiv pointed out so that's obviously helping him back.
But on top of that as a company we've implemented a very comprehensive capture cash optimization program. As you brought the two companies together. So we looked at every element of the balance sheet as you would expect that they looked at.
Working capital is deployed whether it's accounts receivable accounts payable and inventory and other working capital we looked at that we looked at the best practices in the both company and obviously trying to gravitate towards the best practice and we're looking at the industry as well. So we came up with a program that we are kind of implementing a dry well.
Also as we looked at the operational metrics and each of the asset owner start driving those that we can see the benefit on the bottom line of business. This is a very sustainable program.
At the grassroots levels in the organization not only IC, Nevada benefit this year, but I see the benefit getting into next year and year after that and as the onetime cost come down, which we're expecting that to come down next year after that I see our cash flow our free cash flow to improve next year after that and that will then satish.
We will have enough cash flow.
Billion.
To satisfy fifth phase, one commitment of debt pay down and paying and growing dividend subject to board approval.
Okay.
Maybe on China, I think you clearly shouldn't expect further step downs, we always said that we always anticipated that we always factor that in and what was always unclear is the speed and timing of that.
Because that's subject to a further clarification on rules and how that rolled out et cetera, I think we have more clarity on that now obviously offsetting that the other factors that we have whether it's our retail business, whether it's all future pipeline et cetera, we will give guidance on that again at the January seven events, but we always anticipated a step downs, we have good certainty.
The timing of that now.
Next question please.
Our next question is from Gary Nachman of BMO capital markets.
Thanks, Good morning in terms of the competitive dynamics for some key complex generics is this in line better or worse than what you've been expecting I'm curious if you are getting the returns on your complex generics that you expected a couple of years ago.
Given competitive dynamics there.
And then just gross margin it showed good improvement relative to our expectations in the third quarter. So how should we think about that trending going forward and it'll be down a little bit in <unk>, but what are some of the pushes and pulls there maybe going into next year. Thank you.
Steve.
Yeah no.
The margin expectations and the market dynamics are complex products are exactly in line, how we ever anticipated.
First up market market is lower than we've talked about these products, maybe 678 years back what we are but we always expected.
Slower ramp and the longer annuity and obviously still I'm looking at him. So far looking forward to walk you through how this new logarithm and great return on investment on this bucket, whether its a big seller or a copaxone et.
Set of tight.
<unk> walked through we will walk through those models. So we are really in fact excited and feeling bullish about this segment and Thats why we have been investing in this segment over the years, so Dave on the graph.
Sure So Gary.
Gross margin in.
Quarter three came in ahead of our expectations clearly driven by strong brand performance.
Including Greater China region, and then we had.
One time items in our cost of goods line.
Going forward in Q4, I expect the step down that is expected.
Because of the evolving product mix that we have and the non repeat of some of those onetime items in Q4, but overall for the year, we expect to end the higher end of our range of 50% to 59% going forward.
2022, again, we'll provide the specific guidance in January but we should think about and expect that.
The gross margin will continue to evolve and there is going to be slight pressure because of the evolving product mix that we have and that's all expected.
And we'll obviously provide further guidance on January seven.
Okay.
Next question please.
Next question is from Nathan Rich of Goldman Sachs.
Good morning, Thanks for the questions.
Maybe just on the cadence of earnings into into <unk>.
Can you maybe talk about.
What drives the step down in EBITDA I know you talked about China as well as it seems like epipen sales might have been pulled forward a little bit.
But fourth quarter is normally a seasonally strong quarter. So just wanted to get a little bit more color on sort of the cadence for the final quarter of the year and kind of what gets you to the low versus the high end of the range and then at a high level are you kind of willing to maybe preview some of the key <unk> and headwinds that we should have in mind for 'twenty, two and 'twenty three.
The analyst day. Thank you.
So Nathan let me take the first one on.
On the Q4.
As you know we are trust us.
It's a different company has got a different profile of our revenue and what we're sharing with you in terms of the full year guidance is reflective of the <unk> portfolio. So let me have said the Oxford.
Nothing IC.
That concerns me regarding the underlying fundamentals of the business getting into Q4 or for that matter exiting this year into beginning of next year.
So on the on all the items that I talked about in my prepared remarks had had a commentary on that specifically for the EBITDA.
That you asked if you look at the kind of.
<unk> stepped down in the revenue, which is all due to the expected events that explain that.
There is a flow through of the EBITDA going down the gross margin pressure.
<unk> talked about that because of the evolving product mix and then you have.
Some one time events on the Cogs line. The other thing that is also happening in Q4, which is obviously impacting.
The EBITA level is this step up in the SG&A line as we are.
Seeing the world recovering from Covid that is going to be step up in the SG&A expenses, which actually helps us position well not only this year, but sets up well for the next year. So all that is planned and expected but bottom line. There is nothing that is of concern to me about what's happening in Q4.
For that matter.
And maybe on the pushes and pull Nate look here's what I feel very strongly about we now have three quarters of very strong performance.
We have a good handle on this business you remember we brought two big companies together, we had to learn the business understand the business I think we have a very good handle on it were near completion of a very rigorous very thorough high quality bottom up strategic planning process and that really gives us increased confidence and understanding all the pushes and pulls up yet.
No what I'm all right then all the secrets.
Ana business as the base business erosion Thats part of the nature of our business at the end of lease that we know and expect and on the upside to this.
Pipeline the upcoming launches I think we're going to lay out to you on Investor day, how the pipeline is really one of the most underappreciated assets that we have in our ability to generate really really strong cash flow. So we're confident in our ability to deliver on all of our phase one commitments that we laid out and it gives us kind of give us a great startup phase II looks.
Forward to telling you about phase two when they come to the investor event.
Next question please.
Our next question is from Ronny Gal of Bernstein.
Good morning, and thank you for squeezing me in a couple of actually really small points first.
Leah IPR was supposed to have an answer by the first of November it seems to be delayed somewhat can you give us an update on what's happening there and second I noticed the RNC.
Biosimilar that youre disclosing a few other companies have tried that and found its very hard to keep rins is stable and storage just the way the molecules Ned and I kind of wonder if you over that hump and trying to find a way to resolve it or is it still ahead of you.
Okay. Thanks.
Regarding the Ronny about Eylea Youre right.
Going to let Dan take that.
No in another couple of weeks, where do we stand with the institution of the IPR, Okay that youre correct thats been delayed.
Second on <unk>, yes, it's in the developer is challenging.
We had it we tried a couple of years back we had.
Alright.
The challenges like everybody else is having and we are seeing some light at the end of the tunnel and we continue to build the momentum on that program.
Okay next question please.
Our next question is from David <unk> of Piper Sandler.
Thanks, So wanted to ask at a high level question just in light of.
What.
Novartis commented regarding sandoz and particularly their challenges with their U S business and then in light of.
How is your business is formed and is evolving can you give us some color as to how you're thinking about your base U S generics business and just your overall.
U S.
Small molecule retail presence over time.
Really the more commodity end of the business.
Can you just talk to how you're thinking about that philosophically.
Sure. It makes you very happy.
So David.
Yes.
This has been one of our core business and we have lived through the various cycles over the years and for me that cycles continue and Theres nothing new for the last few years, we knew how this business. Obviously Huawei there was a commodity bucket and then where they stood a bucket of hard to make and complex.
From Science perspective, we continue to invest for several years to bring up the value chain. So that's being off on the commodities, where we saw that.
<unk> of the vertical integration, we still retain doors, where we see a huge competition.
Commodity meat actually turning on a commodity with a <unk> 15 per market.
<unk>.
The opportunity to prune that portfolio and if we now put together, we have a well diversified generics portfolio, which is being which is performing very well and as we expected.
Strong customer service level, given what we are doing with the rationalization of facility or in the Covid. We have not missed a beat we are very.
Very strong service levels, so that puts us on a great position to manage the challenges as less grab the opportunity. So we couldn't.
I think we feel good how we are all excited about this business and if we normalize the onetime event slide deck for Ddos.
Alloy of art.
Lots of those exclusively our weekday lunch land, we are right at where we forecasted mid single digit mid single digit price erosion.
Thanks for your question, Yes, clearly we've done the work.
Companies Alright, Thank you very much everybody for the question, but unfortunately out of time.
Let me just say, we're pleased with yet again, another very very strong quarter and we.
Look forward to seeing you at our virtual investor event and Jeremy Thank you very much.
This does conclude today's via Trust 2021 third quarter earnings call and webcast. Please disconnect. Your line at this time and have a wonderful day.
Okay.
Yes.
Okay.
Yes.
Yeah.