Q3 2022 Viatris Inc Earnings Call

Please standby your program is about to begin.

Good morning, My name is Gretchen and I would be your conference operator today at this time I would like to welcome everyone to the V interest 2022 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 period.

You'd like to ask a question at that time. Please press star one on your telephone keypad. If you need to ask further questions you may re enter the queue.

Lastly, if you should require operator assistance. Please press star zero. Thank you I will now turn the call over to Bill Schabowski head up global capital markets. Please go ahead.

Good morning, everyone. During today's call, we will be making forward looking statements on a number of matters, including our financial guidance for 2022 very strategic initiatives.

Phase, one and phase two outlooks.

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.

Please refer to today's presentations and our SEC filings for a full explanation of these risks and uncertainties and the women, it's applicable to forward looking statements, including certain assumptions and risks related to the phase one and phase two outlooks.

We will be referring to certain actual and projected non-GAAP financial metrics to supplement investors understanding and assess.

<unk> of our financial performance.

<unk> of those non-GAAP measures to the most directly comparable GAAP measures can be found on our website and in the appendix of today's slide presentation. A copy of today's presentation and other earnings materials will be available on our website at investor <unk> Dot com.

Following this call.

Now I'd like to turn it over to our executive Chairman Robert Coury.

Good morning.

Almost two years ago today, we brought together two great complementary organizations to form a new company <unk> with the purpose of creating a sustainable global health care leader.

Under the leadership of our board of directors, along with management, we laid out a very clear and deliberate strategy to build a highly diversified company with multiple capability spanning numerous geographies and therapeutic areas.

At that time, we established a two phase roadmap that detailed and emphasize our strategic priorities to deliver value to our shareholders phase. One has always been designed as our setup space for <unk>. It is about building a rock solid foundation setting us up for phase II, which is expected to be up.

Period of renewed growth and leadership in our sector.

Up to now we have been laser focused on executing our phase one consisting of the years 2021 through 2023.

In doing so our priorities have been clear in.

Integrate the two organizations generate $1 billion in cost synergies.

Deleveraged, our balance sheet pay down at least $6 5 billion in debt reduce our gross leverage to our long term target ratio of three times and maintain our investment grade rating all while returning capital to our shareholders.

Today, Here's where we stand.

First we continue to execute on our integration plans and are well on track to capture and at least $1 billion of cost synergies by the end of phase one.

Second we continue to exercise our financial discipline and intend to keep our investment grade rating.

Third.

We paid down $4 2 billion in debt since the beginning of 2021 and are on track to paying down at least $6 $5 billion by the end of phase one and.

And lastly, we returned capital to shareholders beginning in 2021 with our inaugural dividend growing the dividend by 9% in 2022, given our strong cash flow generation and plan to add to such return through the execution of our share repurchase plan.

All of this while delivering on the seventh straight quarter of strong operating results. Despite many industry headwinds, including inflationary pressures and a negative impact that we estimate to be approximately one 3 billion year over year for 2022 to the top line as of <unk>.

Result of the material facts of adverse foreign exchange movements, we anticipate that V interest a second full year results will only further demonstrate the strength and robustness of our business.

This past February we announced a strategically important transaction with Bicorn biologics regarding our Biosimilars franchise, which we anticipate will close shortly.

We also reported strong results on our first year of operations as well as announce after careful analysis, the economics and proceeds that we anticipate receiving through other potential divestitures I will give more detail and speak more about these potential divestitures shortly.

But first while we will remain therapeutic agnostic overall.

This morning, two acquisitions consistent with one of our previously announced therapeutic areas of emphasis ophthalmology.

We anticipate the combined assets of these acquisitions to add to the top line immediately and grow in strong double digits from there potentially reach into at least $1 billion in sales by 2028.

As a result of the expected strong topline growth. We anticipate these acquisitions will also add at least $500 million and adjusted EBITDA by 2028 as well.

The aggregate purchase price for the acquisitions is approximately $700 million to $750 million, which we expect to fund with cash on hand upon closing.

Michael and Rajiv will discuss more about this in their prepared remarks.

Furthermore, <unk>.

Given that we believe that our shares are significantly undervalued. Our view is that in addition to investing in growth assets <unk>.

Repurchasing our shares is another one of the best uses of our cash therefore, we intend to increase our return of capital to shareholders not only through the continuation of our dividend, but also following the receipt of the proceeds of the <unk> biologics transaction, we intend to begin executing in 2000.

23 of the $1 billion stock repurchase program authorized by our board of directors earlier this year.

And now with almost two years of operations under our belt, we are even more confident in the strength of our platform and can more fully address a number of important questions that we have received from investors since our last investor update.

These include one further details on our planned divestitures too.

The stability of our base business post phase one.

Three our future capital allocation priorities and plans for phase III.

For how we will return our business back to growth and lastly.

Confidence in our ability to ultimately execute on all actions that we have outlined to date.

I will start with our announced divestitures.

In February management provided commentary with respect to our planned divestitures.

We currently expect approximately $5 billion to $6 billion in pre tax proceeds in addition to the proceeds expected from the sale of our Biosimilars business.

In order to fully address the stability and outlook of our current base business in phase II.

2024 and beyond.

I will need to identify for you additional detail on the planned assets to be divested.

It is important to note that these identified assets, which once more core assets to us in the past based on where we were at in our business lifecycle then.

But have been now determined not to be core assets today based on where we are taking V interests on a going forward basis, which is continuing to move up the value chain.

Similar to our Biosimilars transaction, we believe some additional benefits of divesting. These noncore assets are reduced SG&A costs reduced capital expenditures.

And the aggregate average gross margin profile of these assets is lower than the company's current gross margin as a whole.

The noncore assets that have been identified and that we intend to divest are as follows.

One our OTC business.

To our women's health care business.

Three our active pharmaceutical ingredients business, our API, but but retaining some selective development API capabilities and lastly.

Certain geographical markets that were part of the combination with upjohn's business that are smaller in nature and in which we had no established infrastructure prior to or following the transaction.

We expect to complete these planned divestitures by the end of 2023 and also expect the proceeds to provide additional significant financial flexibility for both our phase one and phase two commitments.

Now that Ive addressed our divestiture plans, let me provide some additional detail on the outlook of our current business and phase II.

My comments will refer to the base business from that point going forward, but before any positive impact of the two acquisitions, we announced this morning, unless otherwise indicated.

We believe that our base business will be well positioned.

To deliver 1% top line growth long term.

This is supported primarily by our strong internal organic pipeline for our new product launches.

We expect our strong pipeline alone to more than offset our annual base business erosion, which we now expect to be 2% to 3% beginning in phase II versus previously forecasted 4% to 5% that we model for phase one.

Rajeev will provide more details later.

Additionally, when including the potential financial impact of the two acquisitions announced this morning, which we expect will only be additive to our growth.

Our targeting toward phase III, a top line total revenue CAGR of approximately 3%.

Adjusted EBITDA CAGR of approximately 4% to 5%.

And most importantly, an adjusted earnings per share CAGR of approximately mid teens.

Note that while these CAGR does include acquisitions announced this morning.

They do not take into consideration the positive impact of any future business development or M&A.

These targets reflect our commitment to executing and delivering growth to our business only using the assets that we already have in house, a continuation of paying down debt and thereby decreasing net interest expenses and most importantly.

Returning capital to shareholders through our anticipated future share repurchases plans, which I will discuss shortly.

For modeling purposes.

You should consider two adjustments in exchange for the additional $8 billion to $9 billion of aggregate pre tax proceeds we anticipate to receive by the end of 2023 or shortly thereafter from all our divestitures, including our Biosimilars business.

Therefore, as we enter phase II beginning in 2020 for.

You should think about making the following adjustments, where we see ourselves for 2022.

First an adjustment of $2 $1 billion in revenues and $700 million and adjusted EBITDA to reflect our four planned divestitures just mentioned, including our Biosimilars business.

And to an adjustment of approximately $300 million and increased R&D expenses, partly due to the impact of the recent SEC guidelines for licensing deals that were previously excluded from adjusted EBITDA, but will be included in the future.

Also in that number are some continuing development expenses for the two acquisitions announced this morning, which will drive our continued long term growth.

Although we are not given any official guidance today beyond 2022. These adjustments have taken into consideration the remaining actions that need to be taken on our divestitures as well as other expected pushes and pulls in 2023, as we reshape and re.

<unk>.

Now turning to our future capital allocation priorities.

For phase two beginning into 2024, we expect the reshaped and Rebase features to generate at least $2 3 billion of free cash flows per year, excluding transaction costs and taxes.

We intend to earmark, 50% annually to be returned to shareholders in the form of dividends and future share repurchases.

With the remaining approximately 50% we do intent to identify.

<unk> be able to reinvest further into our business organically and inorganically with value, creating financially accretive bolt on transactions and other potential transactions that fit the mold of what we announced this morning.

We are excited as we begin to approach the end of phase one and enter phase two of our strategic plan.

After reporting on seven straight strong quarters, we are hopeful that the market will increasingly begin to recognize the value of our strong balance sheet, our ability to generate strong cash flows our ability to return capital to shareholders through our dividend and especially now with our commitment to future share repurchase plans given the tremendous.

This undervaluation and our security shown by our current PE multiple.

No in terms of adding to the growth of our base business. When we laid out our strategic vision at our February investor event.

We discussed business development in the areas of ophthalmology Gi dermatology as an important complementary vehicle to drive inorganic growth for our company.

As Michael and Rajiv will elaborate later, we believe that the acquisitions of Oyster point and family Life Sciences are excellent examples that will establish <unk> a strong foundation for a leading ophthalmology franchise.

We expect these acquisitions over time to be substantially additive to both our topline and bottom line.

And on a standalone basis, when combined with our commitment to begin repurchasing our shares we expect these acquisitions to be adjusted earnings per share accretive in 2023.

I would like to personally welcome Dr. Jeffrey now.

Oh voiced their point pharma, who upon closing will be the newest member of <unk> management team and who will be introducing himself and speaking to you shortly.

Doctor now will be leading our new ophthalmology franchise at via <unk>, along with its talented and seasoned management team.

We have been keenly impressed by Jeff and his team's accomplishments and especially Jeff's leadership and vision. We are confident that their talent and expertise will be a great asset to <unk>. Following the closing of the acquisition of Oyster point pharma and the complementary acquisition of family Life Science.

Yes.

In terms of the confidence in our ability to execute on all the actions that we have just detailed.

When you consider the tremendous operational and financial progress that we've made over the past two years. Despite a challenging external backdrop. There is no stronger testament to our entire company's ability and capabilities to successfully execute on all facets of our plan and delivering the consistent results.

That we have.

Another notable achievement and our continuing successful integration is haven't been able to exit substantially all of the transition services with Pfizer last month.

And for all of this the board of directors would like to thank the senior management team and all of our approximately 37000 employees around the globe for their unwavering commitment dedication and performance, especially towards some of the toughest years in this industry, including taken on the global fight against Covid.

Yeah.

Before I conclude my prepared remarks, I would like to provide to the broader investment community a few items from our perspective that might be self evident.

But underappreciated.

One how truly differentiated our company has amongst many of our peers.

I believe that it sometimes gets lost on the investment community that we are no longer just the U S generics and specialty pharmaceutical company that as materially exposed to all the volatility and the level of erosion that exist in the U S market.

In fact, only one 8 billion out of an estimated $16 5 billion of our estimated sales in 2022 will represent the total sales of our generics in the U S.

We have deliberately taken steps to minimize such exposure by Derisking, our business model in the United States through geographical expansion and also by moving up the value chain with more highly complex products launched in the United States and elsewhere, where our products would be differentiated and with a better financial.

Analog.

Two.

The interest is the only U S company with an investment grade credit rating amongst our peers, which we believe is significant and meaningful especially in today's environment.

Three.

With one of the strongest balance sheets amongst our peers and significant cash flows we have significant financial flexibility, which we believe positions us to be able to quickly adapt and adjust to the ever changing global healthcare environment.

Four.

We have one of the lowest gross leverage ratios amongst our peers.

Five.

We will be returning a quantum capital to shareholders through what we believe is an attractive dividend and soon through share repurchases.

Six.

The board will continue to look at opportunities to add or even further unlock value win and where we see opportunities.

And lastly.

We represent a unique opportunity for the investment community to participate and what we expect to soon be a strong adjusted earnings per share growth story.

Simply put once our businesses Rebased, we feel very confident in our future prospects for where we believe we will be able to deliver top line growth adjusted EBITDA growth and adjusted earnings per share growth.

And with our significant cash flow generation, we expect to be able to return capital to shareholders through dividends and especially through share repurchases.

With that and before I turn the call over to Michael Rajiv and Sanjeev.

I would like to note that following the call today.

We will be commencing our annual shareholder outreach program. So please look forward to hearing from us in the coming weeks.

Thank you and.

And especially thank you for your interest in <unk> and look forward to answering your questions. During our Q&A period, I will now turn the call over to Michael.

Thank you Robert.

Now following your detailed outline let me go directly to todays acquisition announcement and a high level overview of our Q3 results.

In February we announced three therapeutic areas of focus for moving up the value chain with <unk> and <unk> and that included ophthalmology.

We believe that the two ophthalmology acquisitions, which we're announcing today oyster point pharma and semi life Sciences give us a significant head start in creating an ophthalmology franchise within the company that will set a strong foundation for what we expect to be a future ophthalmology leader and an accelerating.

Our strategy to move up the value chain.

The total cash consideration for both acquisitions, including equity and debt will be between $700 million and $750 million.

I am excited about the assets.

The talent the <unk>.

<unk> and the capabilities, which we are bringing into the company with these acquisitions.

Oyster point will provide us with an exciting commercial stage growth asset Tia via the first and only FDA approved nasal spray for signs and symptoms of dry eye disease with unique and novel mechanism of action activating the trigeminal parasympathetic pathway to increase the production of the patient's own.

Natural tear film.

<unk> was launched in November 2021, and.

In patient and physician feedback is very encouraging.

Dry eye disease is an area of major unmet medical need.

Approximately 17 million patients in the U S alone and.

And we are excited to bring an important innovation like <unk> to more patients in more countries consistent with our mission to empower patients worldwide to live healthier at every stage of life, regardless of geography or circumstances.

Clinical development is also ongoing to expand <unk> into further indications such as neurotrophic keratopathy.

In addition to that the family Life Sciences acquisition will add five additional phase III or phase III ready front of the eye programs in various indications.

We believe to buyer empties front of the eye ophthalmology assets could potentially have combined annual revenue of at least $1 billion by 2028.

Together with our own capabilities. We believe we will have everything we need to set the foundation to become the next global Ophthalmology leader.

The entire management team ni.

Looking forward to working with Dr. Jeffrey now who will be leading this effort and his talented team as we build a leadership position ophthalmology.

And as we execute to make this area one of several billion dollars growth drivers for the interest.

As you can see and consistent with our strategy, which we announced in February .

We continue to make important strides to reshape the interest.

And we believe we have a clear defined path to return our company to top and bottom line growth for 2024 and beyond.

And to have the necessary financial flexibility to return significant capital to our shareholders as well as to continued business development.

And this all would not be possible without the solid performance in our current business and focused execution of our integration and reshaping plans.

We now have a track record of seven quarters of consistent and strong business performance.

And for the third quarter of 2022, which is about total revenue.

<unk> zero 8 billion U S dollars adjust.

Adjusted EBITDA of $1 5 billion U S dollars and.

And free cash flow of $765 million U S dollars.

Our teams across the world are highly engaged.

And are performing at peak levels.

Our pipeline continues to deliver especially in the area of complex generics and Injectables, we added $144 million in new product revenue in the quarter suite.

The year to date performance is operationally in line or better than our own expectations and.

And we believe enables us to continue to deliver on our phase one financial commitments, notably we have paid down approximately $2 1 billion in debt year to date in 2022, and approximately $4 2 billion since the beginning of 2021, putting on squarely on track for our target to pay down $6 5 billion in U S dollars.

By the end of 2023.

Our board of Directors has declared another quarterly dividend of <unk> 12 per share.

Cumulatively since the formation of interest we've already returned more than 800 million to shareholder through dividend payments.

We are reaffirming again, our most recent 2022 full year guidance ranges with total revenue adjusted EBITDA and free cash flow driven by solid operating momentum and in spite of further increased foreign exchange headwinds.

As Robert has already clearly indicated we are confident in the outlook and future growth potential of electronics.

The key tenants for their confidence our.

The strength and market dynamics of our remaining base business after the divestitures.

Base business stabilizing a result of business transformation and portfolio choices, we have made in the past years as well as solid performance of our branded portfolio.

The strength of our pipeline, especially it was complex generics and complex injectables as well as novel products <unk> entities.

And the expectation of our growing ophthalmology franchise upon completion of the acquisitions.

With that I would like now to hand, it over to Rajiv to give further details on the Q3 performance and the outlook of our business going forward Rajeev.

Thanks, Michael and good morning, everyone.

Im very proud of what we have accomplished in our last two years as we add to this.

We have executed seven consecutive quarters of strong performance underscoring the underlying strength of our diversified base business.

Let me begin with brief commentary about our strong third quarter operational results.

On an operational basis, we were down 1% year over year for the quarter.

Every segment performed solidly versus our expectations, including China, Despite COVID-19 headwinds.

Our genetics segment in developed markets benefited from the launch of lender to might in North America.

Overall, our brands grew 1% year over year on an operational basis in the quarter and performed better than expected.

By Lipitor, <unk> and PR.

Our resilient global operations once again delivered excellent customer service levels, while we weather increasing headwinds from inflation.

Moving to integration, we successfully completed our remaining SAP got divorced from Pfizer and we have now substantially exited all of the remaining transition services.

For the full year 'twenty, two we now expect to deliver approximately $525 million in new product launch revenue with better than expected margins, but below our expectations due to the timing of certain launches.

And on the R&D front, we crossed a major milestone with the announcement of positive topline results from our GH people phase III clinical trials, along with our partner MAPI.

We remain on track for submission to FDA in quarter, one 'twenty three.

Now turning to the next slide I wanted to remind you all fall our operational priorities for phase one.

We are well on our way to integrate and synergize step.

Stabilize the base business and deliver the pipeline.

In addition, we are on track to complete the planned divestitures by the end of 'twenty three.

We believe these achievements position, we address well for the future growth.

Flipping to the next slide as we look ahead to phase two.

Priorities are to continue to optimize and minimized total base business erosion.

While that enhance our existing durable higher margin organic pipeline to offset base erosion.

Maximize the execution of our <unk> franchise.

And identify.

And in organic opportunities to further accelerate our growth.

Now on the next slide I'll walk you through some details behind what is driving our total base erosion improvements.

Recall, we originally modeled our total base erosion in phase one to be about 4% to 5%.

Based on our better than expected brand performance and combined with other key catalysts. We believe the total erosion for phase two is expected to improve by 200 basis points.

Getting us to the total 3% of total erosion range.

Turning to the next slide.

<unk> business, excluding China will make up slightly more than 50% of the portfolio.

Brightcove far basis number address our combined brands, we're trending at approximately 6% erosion.

At the launch of the Atlas, we modeled approximately four 5% to $5 five brand erosion based on that trend.

But as a result of our ability to effectively manage.

The brand business, we have been able to contain this erosion to one five to two 5% over the last seven quarters.

The line graph on the right depicting our total brand sales, excluding China from 2017.

This quarter is an insightful to Europe .

Our business operating model completely <unk> and stabilize that trajectory of our expected erosion and we expect this improvement to continue in phase, two which will potentially contribute an uplift of 150 basis points to our total base erosion.

The next slide lists some other key contributors to our total <unk> improvement.

Stabilization of the core in phase II.

Which we expect to contribute an additional 50 basis points.

These include.

No additional significant Luis on the horizon.

Our purposeful diversification of our core genetics portfolio, which is now repositioned towards complex products.

Our decrease dependency on the Commoditized Uhm kinetics market.

The total U S generics portfolio contributes approximately 11% of total net sales.

And the anticipated divestitures of certain noncore assets, which once completed will not only help simplify the company, but will also help to further stabilize the remaining business.

We believe that our ability to minimize the total base erosion when combined with our current organic pipeline lays a solid foundation for us to return to growth in phase two.

I will color on the next few slides.

Our current pipeline, which is driven largely by the U S. Market consists of an increasing number of complex hard to make products with a higher barrier to entry as less pure number of partner programs.

In addition to this.

Some other key geographies like China, Europe , and the rest of the World markets will also benefit from the efforts of the last few years because of the dedicated.

And focused programs to build their pipeline.

We expect Europe to a $100 million to $150 million of new product revenue every year in China to get the benefit of close to $100 million every year from 'twenty five onwards.

As Robert said, we have certain under appreciated assets in our pipeline that we have invested in during the recent past.

We anticipate our complex injectables and select novel products to each make up at least $1 billion in peak annual net sales in phase two.

Given all of these pieces, we feel confident to deliver $450 million to $450 million of annual new product revenue.

On the next two slides I'll share more about our complex injectables.

Our science team has successfully developed several technology platforms, including but not limited to nanoparticles microspheres liposomes and nano emulsion.

We expect these platforms to deliver a strong portfolio of approximately 40 products.

All of which are already filed and under review with FDA.

This portfolio represents a rapidly growing 50% to 60 billion growing market.

Perhaps a genetic copaxone analogs as a reference is the clauses to help model these products.

I would like to highlight the pipeline chart on the next slide.

The <unk> products, which are already under review with FDA. We are confident that we will be the first to market with seven genetics, including Abilify maintainer and work at Windsor and Sandoz Statin AAR.

On a risk adjusted basis, we believe this complex injectables franchise represents at least a 1 billion dollar peak net sale opportunity in phase II.

Turning to the next slide.

Another growth catalyst of our organic pipeline is our novel products franchise with several <unk>.

We expect a slight <unk> once monthly and our novel Meloxicam formulation will have patent protection.

Additionally, our products on the slide include <unk> and low dose <unk>.

This chart also highlights our continued pursuit of highly complex products like the biosimilar to botox.

On a risk adjusted basis, we believe these five select assets alone represent at least $1 billion peak net sales opportunity in phase two.

Now, let me move on to the Great News, we announced to date.

We have taken a major step to create an ophthalmic franchise.

I want to equal the excitement you heard from Robert and Michael about the future addition of Oyster point and family Life Sciences, two vectors family.

Let me walk you through the strategic rationale for bringing these foundational sf's together.

Oyster point brings to we address not only a novel marketed product in the U S.

But more importantly, a very experienced team that possesses deep knowledge of the ophthalmic space from a clinical medical regulatory and commercial perspective.

Further when combining <unk> with family life Sciences pipeline and our global commercial footprint.

R&D and regulatory capabilities, we believe that we are setting the foundation to become the next global ophthalmic leader.

Moving to the next slide Im more excited that in addition to <unk>, we are getting to start with the combined pipeline of exciting complementary programs, which include additional indications like Neotropical erotopathy and quite phase III ready program, we are acquiring from family life Sciences.

Yeah.

This combined global pipeline has the potential of net sales up more than $1 billion on a risk adjusted basis by 2028.

As we close this transaction.

Ophthalmic franchise will function as a separate division within the company and will be led by Dr. Jeff now.

In summary, as I've walked you through this morning, we believe we are well positioned to bring this back to growth in phase II.

We remain confident in our ability.

Gain erosion to two to three person and generate $450 million to $550 million in new product revenue annually.

We expect will not only offset the erosion.

But enable us to generate a 1% organic topline cargo growth of the base in phase two.

Maximizing and executing our <unk> strategy will help us see a total revenue CAGR of approximately 3% from 24 to 28.

Further it's worth noting that this growth does not include <unk>.

Any additional inorganic opportunities, which we expect to identify and add to our portfolio in phase two.

With that I would like to welcome Dr. Jeff now to the call to share some more information about <unk>.

This exciting growth driver as well as his perspectives on the Fermi ethics, but before I do.

I'd like to attack our reactors belief while their continued performance.

And look forward to welcoming our future colleagues from <unk> and family life scientists who are listening today.

Thank you Rajiv and thank you <unk> for allowing me the opportunity to speak today. Good morning. My name is just now and I'm, the president and CEO of Oyster point pharma, a public biopharmaceutical company focused on the discovery development and commercialization of first in class pharmaceutical therapies.

To treat ophthalmic diseases are.

Our mission at Oyster point is to advance truly breakthrough science to deliver therapies that patients in eyecare professionals need I.

That was the first employee at Oyster point in 2017, and since then we have grown the company to more than 250 employees, including launching one of the most exciting commercial products in dry eye disease with a leading sales team in ophthalmology.

Educational training I hold a master's in medical science, and a ph D in public health and epidemiology and for over 20 years I have dedicated my career exclusively to drug and device development in the field of ophthalmology.

Prior to joining oyster point pharma I was involved in the development of a number of promising therapies in the retina space, including wallet Genentech, where I was part of the FDA approval and commercialization of numerous indications for the anti VEGF therapy with Lucentis on medical breakthrough for treating blindness, which generated multibillion dollar peak.

Annual sales.

<unk> team brings decades of experience in the eye care space with most of the leadership team dedicating their entire careers to eyecare.

Currently we are one year into the successful launch of our first FDA approved product to Euro VI is the first and only nasal spray for the treatment of the signs and symptoms of dry eye disease dry eye disease is a large market affecting an estimated 38 million Americans and over 700 million people worldwide.

It's a chronic multifactorial disease, which is characterized by an imbalance to the nutrient rich layers of the ocular surface known as the tear film.

Increasing the production of natural tear film is believed to reduce the signs and symptoms of dry eye disease.

Prior to your bias entry into the market many patients reported being dissatisfied with older treatments in the class due to lack of efficacy slow onset of action and the stinging and burning associated with prescription eyedrops.

<unk> at Oyster point broke new ground with tier file <unk> differentiated clinical profile rapidly bioactive eight tear film production to help the body create more natural tears and can be easily administered it's.

It's a preservative free nasal spray that's convenient with a twice a day dosing regimen with no contra indications.

Revised unique motive action involves activating the trigeminal parasympathetic pathway nodes, which is believed to trigger tear film production.

<unk> was studied in a broad population of adults with mild moderate severe dry eye disease.

Clinical trials patients achieved statistically significant improvements in tear film production and other key dry eyed measurements.

In addition to this exciting product, let me share details on Oyster point, we'll add from a pipeline perspective and our <unk>.

<unk> pipeline, we have several programs aimed at treating other ophthalmic disease with unmet needs, including stage, one neurotrophic keratopathy, a severe degenerative condition affecting the nerves of the cornea.

<unk>, our proprietary transformational gene therapy program is currently progressing towards IND, enabling studies in 2023 prestigious two and three neurotrophic Keratopathy and we've begun early development for therapy to treat vernal in atopic keratoconjunctivitis severe allergic conditions of the eye.

Hi.

We used to appoint originally engage with DHS on ex U S licensing and partnering opportunities for our products as discussions progressed, we quickly realized that the global healthcare gateway. The <unk> Bill provides a unique partnership opportunity to accelerate and amplify the interesting oyster point's growth.

Cheese and would enable increased access to ophthalmic therapies for patients worldwide.

Justice Oyster point could propel <unk> expertise in ophthalmology.

Infrastructure and deep knowledge of the space from a clinical medical regulatory and commercial perspective.

To your volume and pipeline assets <unk> could propel oyster point with its global commercial footprint, R&D and regulatory capabilities supply chain as well as the multiple additional ophthalmic assets.

Conceptually this is not a one plus one equals two addition of companies, but potentially more like a one plus one equals. Four addition, with some of the merger amplifies itself based on the synergies that both companies would provide to each other.

Oyster point is the foundation of the ophthalmology franchise of futures will bring a team with deep expertise in ophthalmology to advance research and drug development as well as an experienced U S commercial sales and medical affairs infrastructure that I'm confident will lead to future innovations at matrix.

The ophthalmology and optometry communities deserve partners, who are committed to investing in and bringing new therapies to market for patients in eyecare professionals on joining <unk> as its new.

New ophthalmology franchise will be committed to being that market leader in addressing the industry's unmet needs.

As Rajeev previously stated the ophthalmology portfolio that has been created to date is expected to have significant peak potential by 2030.

What we have outlined here today is simply the foundation of what is expected over the next few years, our focus will be to invest in the resources behind the continued launch and international expansion of tier buyer as well as the clinical development of multiple key assets ranging across a full spectrum of eyecare disease areas.

<unk> dry eye disease, and potentially glaucoma neurotrophic keratitis, blepharitis presbyopia and a number of other vision related disorders.

In closing and on a personal level.

I would like to thank the oyster point team for building such a strong organization over the last five years, we have built capabilities in R&D clinical development and commercial within the eye care space in such a short period of time.

It is the value of our people our lead asset to your Avaya and our pipeline that compelled us to decide to bring our company into their organization.

I would like to thank Robert Michael Rajiv and our future colleagues at <unk> for the opportunity to join the <unk> family and to say that I also share in the excitement surrounding the future of the interest.

Thank you, Jeff and good morning, everyone. It's great to be with you today to share my thoughts on the recent quarter and expand upon what you heard from Robert Michael and Rajiv on the outlook of our company.

Please turn to the slide with our third quarter financial highlights and the outlook for fourth quarter and full year 2020.

We had another strong quarter operationally that was in line with our expectation.

On a reported basis revenue was impacted by foreign exchange headwinds by approximately 9%.

Versus Q3 2021.

Let me walk you through the key drivers that contributed to the strong performance in third quarter.

For revenue, we saw continued stability in our segments, including developed markets and China New.

New product revenue in the quarter benefited from the launch of Lenalidomide in the U S.

This performance contributed to an overall favorable mix, resulting in better gross margin.

With respect to SG&A, we continue to benefit from synergies.

R&D increased due to continued investment in the pipeline.

We had another strong quarter free cash flow generation.

This underscores our confidence in the stability of our base business and the organizational effort around cash optimization initiatives.

On a year to date basis, we have 2020 commitment and have paid down approximately $2 1 billion in debt and have also paid out approximately $436 million in dividends.

With three quarters of solid performance under our belt, we feel good about the rest of the year and expect the positive momentum to continue.

Now a few comments on the expected Q4 financial results.

We anticipate that gross margin percentage will moderate from third quarter levels due to product and segment mix.

SG&A similar to last year is expected to step up from Q3 2022.

Free cash flow is expected to be significantly lower compared with Q2 2022 due to anticipated known adjusted EBITDA phasing of interest payments and higher Capex.

Given the continued strength from operations, we expect to absorb the incremental impact from foreign exchange, we are reaffirming our guidance across total revenues.

EBIDTA and free cash flow.

As previously mentioned on our Q2 call. It is likely we will come in at the lower end of the adjusted EBITDA range due to foreign exchange.

And for free cash flow. It is likely we will end up at the midpoint of the range fully absorbing the foreign exchange headwind.

The next slide is an illustration of free cash flow over the last seven quarters.

Q3 was another strong quarter, especially considering it included epipen settlement for approximately $259 million.

Taking this into account the underlying free cash flow would have exceeded Q3 2021.

This is another indication of stability, we've seen our business.

I'm very pleased with the progress we are making in improving cash conversion. This is a focus we expect to continue in 2023 and beyond.

As mentioned, we expect the <unk> transaction to close shortly and we expect to update you at that time with the associated impact on the current the current guidance.

Yes.

The next slide is an illustration of our sources and usage of divestiture proceeds.

A key takeaway.

We expect significant amount of cash over the next year or so.

On the left we anticipate total estimated pre tax proceeds of approximately $8 billion to $9 billion.

This includes approximately five to 6 million of pretax proceeds from the divestitures identified non core assets.

Since our Investor day in February we have made significant progress on these initiatives and have updated our ranges based on latest discussion without advisors.

We expect to cover all taxes and transaction costs with the divestiture proceeds.

It is important to note that the proceeds from these divestitures will not be reported in the U S. GAAP net cash provided by operating activities.

However, the taxes and transaction costs will be reported in our future U S. GAAP net cash provided by operating activity and therefore will impact reported free cash flow.

As these costs are incurred there will be appropriately disclosed in order to bedroom better model the underlying base business free cash flow.

Totaling the estimated users, including the cash to quite ophthalmology franchise, we expect.

Divestiture proceeds of approximately $4 9 billion to $6 1 billion.

We intend to allocate this significant financial flexibility towards incremental debt pay down share buyback and potential future business development.

Turning to next slide which highlights a few key points on the acquisition, we announced earlier today.

We're excited about the acquisition of Oyster point pharma.

The transaction will consist of $11 per share in cash upfront through a tender offer.

In addition to upfront cash consideration each oyster point's stockholder will receive one non tradable contingent value rights, representing up to additional $2 per share contingent on achieving certain metrics based on full year 2022 performance.

Concurrent to asked upon closing we also expect to acquire family life Sciences, which has a complementary ophthalmology portfolio productivity cash payout of approximately $281 million.

Once the transaction is subject to customary closing conditions. We expect this transaction will be funded with cash on hand.

Now moving to next slide which captures all the components of capital allocation framework.

Taking into account the net divestiture proceeds and the significant free cash flow from our base business.

Have the confidence that we will not only able to deliver on phase one commitment, but also be able to increase our return of capital to shareholders in phase two.

To recap our phase one commitments our highest priority in this phase has been debt paydown and leverage reduction.

There are two components of this commitment.

Paid down $6 5 billion of debt, which represents the short term and scheduled maturities between 'twenty one 'twenty three.

And pay down additional debt to reduce our pro forma gross leverage ratio to three times by the end of 2023.

This product fully supports our commitment to maintaining our investment grade rating.

The outcome is a financial profile that we believe differentiates us from our peer and has afforded us an attractive capital structure in these volatile times.

Another part of Phase one commitment was returning capital through our dividend, which we initiated in 2021, an increase in 2022.

As he mentioned the net divestiture proceeds and the underlying free cash flow gives us the necessary flexibility to begin executing executing on the authorized share buyback in 2023.

The expected completion of these phase one commitments, especially meeting our gross leverage target of three times by the end of 2023 will enable us to rebalance our capital allocation plan for 2004 and beyond.

As you heard in Roberts opening remarks, we expect to take a more balanced approach with a focus on capital return and business investment during phase two.

This is a result of an expectation of significant free cash flow growth during this phase.

We will remain committed to our investment grade rating and will target gross leverage at three times with a range of $2 eight to three two times.

We expect there will be significant cash available for capital return.

We anticipate allocating approximately 50% of annual free cash flow to share buyback and the dividend.

The organic adjusted earning growth expected during this phase and the reduction and we will ship.

<unk> is expected to accelerate our adjusted EPS growth.

With respect to investing in our business organically and Inorganically and taking into account the importance of our investment grade rating.

We will continue to be financially prudent and targeting bolt ons and tuck ins.

Moving to the next slide.

After roughly two years of managing the business and the solid performance of last seven quarters.

<unk> high confidence on the rhythm of the business the outlook the investment needs to drive future growth.

Therefore, we are in a position to provide long term targets for total revenue.

EBITDA free cash flow and adjusted EPS.

As Robert noted in his comments.

Targets exclude associated revenue of approximately $2 1 billion and adjusted EBITDA of approximately $700 million from the divestiture of Biosimilar noncore assets and $300 million of increased R&D.

Key assumption to support these targets, including base business erosion of approximately 2% to 3% being fully offset by new product revenue from our pipeline.

The return to growth we will also be supported by the ophthalmology franchise.

The anticipated, 3% total revenue cargo from 'twenty to 'twenty. It does not reflect any additional business development activity beyond the acquisition of ophthalmology franchise.

Now a few assumptions supporting the growth of adjusted EBITDA.

With the evolution of our portfolio moving up the value chain and the focus on more novel in branded products, we anticipate relatively stable gross margin during this period.

We anticipate SG&A investment on a total basis to be stable, but to decline on a percentage basis as revenues grow during this period.

R&D investment will include a novel and complex pipeline as outlined by Rajiv and the ophthalmology asset it.

It will also include the impact of recent SEC guidelines for licensing deals that were previously excluded from adjusted earnings but will be included in future.

Free cash flow growth is expected to be significant and will benefit from reduced interest expenses reduced one time cash cost than expected benefit from cash optimization initiatives.

Finally, we expect adjusted EPS growth to be enhanced by share repurchases.

We believe will be an important part of our focus on capital return to shareholders.

These assumptions based on July 2022, foreign exchange rates do not assume any benefit.

Foreign exchange rate return to historical averages.

In conclusion, I am really pleased with how the business is performing up to seven strong quarters and the actions, we're taking to strengthen our foundation.

The free cash flow generation, along with financial flexibility from divestitures gives us confidence in achieving our phase one commitments, increasing our capital return to shareholders and positioning the business for future growth in phase two.

With that I'll turn the call back to the operator for Q&A.

At this time, if you'd like to ask a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue. You may do so by pressing star two.

Mind, you that please pickup your handset and please limit yourself to one question, we will take our first question from Elliot Wilbur from Raymond James.

Thanks, Good morning, a lot to digest. This morning, we appreciate the team taking the time to walk us through the.

The detail.

The first question and only question I guess is with respect to the acquisition of Oyster point and.

<unk> life Sciences.

I know you've talked about the ophthalmology portfolio generating around $1 billion in sales by 2028, but if I look at current external expectations at least for oyster point they seem to.

Embed peak sales somewhere around $400 million, which I assume is to buy exclusively in 2027, and I know that youre expecting contribution from some other pipeline assets, but it doesn't seem like many of those would hit before 2025, our 2026, so I am trying to close the gap there between external.

<unk> expectations, and what you're anticipating in terms of contribution from the new broader portfolio are you simply more optimistic on to avaya than external expectations or am I under appreciating the potential contribution from some of the pipeline assets in that period of time.

Okay.

Our taken maybe later on Jeff can add.

So first let me just break it one is that yes <unk>.

U S expectations and we are talking about the global expectations. When you have to take this billion Dwight out was targeted U S and one third is the death of the waterfront. That's the plus one the second one is most the most and maybe every all of these products will hit within the market within this period of time because.

As you'll see there was some phase III assets and well advanced and it's not it's not a long clinical study over there. So we see more products launched at around $46 27 to add on along with the <unk> and a plan to do it by portfolio I think ill of dry eye will be almost two third again.

One third will be the boroughs the fright us in presbyopia and others.

But maybe Jeff you want to add something to that.

Yes, what I would add is we're really excited about the portfolio thats been created here and as Rajeev said with the two dry eye assets, making up most of the potential.

Shouldn't discount the other products that are in the pipeline. They are exciting markets. This is the leading front of Gi portfolio.

Lots of unmet need here with regards to things like blepharitis and many of these vision disturbance disorders and so we're really excited about the opportunity to go forward and I think what's most exciting about it is you have many phase III ready assets that will drop right into an existing sales force that is there and ready to go.

Next question please.

Our next question comes from <unk> <unk> from Evercore.

Okay.

Uh huh.

EBITDA. So your midpoint of the guidance of $6 billion and Robert I think you mentioned between divestitures.

The SEC accounting as well as additional spend on new tuck in it sounds like there is an additional one to $1 $2 billion worth of.

Headwinds on EBITDA, and that's without sort of the impact of China VIP rollout back on schedule next year. So is it fair to say that the EBITDA in 2024 is trending somewhere between $4 six and $5 billion. That's question number one number two on on Oyster point.

It looks like there.

There is either a bridge program or a major co pay assistance in place and you can kind of see that on the realized pricing per prescription versus whereas I draw and we're restasis track can you speak to the absolute volumes, we're seeing and to the extent, we can scale them up.

And also on Oyster point, the phase two Olympia trial in neurotrophic Keratopathy that was due right around now there is no update on that I'd be curious on that.

And it looks like the <unk> in the bag because the the T. Rx in the sales numbers that were pointed out and it looks like it's trending towards that anyway. So we should assume that oyster point acquisition.

Is $450 million valuation correct, plus the net debt.

So.

Let me go first obviously.

Thanks Ian.

Entire investment community and really all of you for your input.

The management team came forth in February .

Because today, we're able to deliver in much more detail.

Justified on the basis of answering all of your questions quite frankly.

The clarity that we gave you and obviously I want to be clear, we're not giving that kind of the detailed 24 actual.

Financial guidance right now, but we've given you enough Directionally guide, where I will not dispute, let's just say some of the things that youre throwing out because.

I think once again once again do you in your numbers.

You can get to people can see you can get to.

You are I think the most important firmer.

Is.

<unk>.

In my prepared remarks, I've also tried to be clear that we've taken into consideration living out 2023 with the rest of the initiatives that in the actions that we're going to be taken as well as the pushes and pulls that we can see today in order to build that bridge for you to get to 2004 to where you are.

So Jeff you want to take.

His next question, yes, maybe I'll break it down into two parts and we will answer the easier one first so.

As we have earnings coming up this week, what I would say on the Olympia is we're tracking according to schedule.

We'll have an update there and then with regards to tier buyer I think what's really important when looking at this product is obviously first launch into this space. This year. Our goal. This year was really to build prescriber base.

Primarily a commercial.

Prescription product for this year, we still have bridge on as we enter into the fall into 2023.

We intend to pick up additional coverage and at that point in time, we will reassess bridge, but I think that's also a really big opportunity for some marketing during that time. So we want to make sure that we have good coverage on before we really pull the trigger on marketing and as we know this space is highly sensitive to that type of.

Marketing I think when you look at a product like <unk>. There is a really unique opportunity to market to patients as it is the only nasal spray for the treatment of signs and symptoms of dry eye disease.

Next question please.

Next question is from <unk> Prasad from Barclays.

Hi, This is macewen for <unk>. Thank you for taking my question just circling back on the acquisitions. Just wondering if this will be the template for your other two specialties as well and could you provide some more color on when the EPS accretion will start thank you.

So I think okay.

I think as I mentioned in my prepared remarks, yes, we.

This.

Yes.

An excellent example of a very attractive.

The type of targets that we can be highly sensitive while maintaining our investment grade while being sensitive to the.

The increase in R&D.

<unk>.

While we continue to be real sensitive to add it to the growth to the top line, but I think most importantly in terms of an earnings per share accretion I also try to stress given now the clarity.

That we've now delivered to the street or capital allocation.

Cannot ignore a 50% commitment.

Once we're done with phase one.

Hit our gross leverage target of three times, there is a tremendous amount of more capital, we intend to return to shareholders and especially through share buybacks.

So I think that the earnings accretion to adjusted earnings per share growth is really going to be what the story is all about on a going forward basis.

Next question, please and our next.

Next question comes from Chris Schott from Jpmorgan.

Great. Thanks, so much for the questions you've laid out today why ophthalmology is the right vertical for <unk>, but I'm just interested how you compared.

This vertical versus some of the franchises like OTC and Biosimilars, where the company also had an established footprint, but where the company's exiting so I guess, what led you to kind of buildup this direction and exit the others I'm just trying to understand a little bit of kind of the thought process of kind of what's staying in whats going as youre thinking about the portfolio build thanks.

Sure. Thanks, Chris.

I'd say that we made we've done a tremendous amount of work and analysis on where we wanted to take Beatrice we've examined all the things that have worked.

In the past investments made in the past.

And kind of sort of where we are where we want to take I would say that the financial analog.

Our entire business model with what we're being most sensitive to too if you look at our current pipeline portfolio and if you just examined the rotation within our own pipeline portfolio, we've been changing.

Moving up the value chain, we have a complete different product mix today than we did four or five years ago, and we've seen the benefit of that already so continuing to move up the value chain and really for example, the <unk>.

I'll be honest with you is that as a great business it.

It's not a declining business that have very low single digit growth.

In order to even keep that since we're not a consumer oriented company. There was a tremendous amount of investment we would have to make year ending the year at to support even that low double digit growth.

Now as we shift our attention.

Really have identified what we consider to be what was once a core asset no longer to be really a core asset where we want to focus our attention going forward, both the human capital or financial resources. We think that today is a very good example of the opportunity to really once and for all set would be a terrific.

The trajectory of growth.

And do it in a way where we can grow that top line grow the EBITDA.

Continue to generate significant cash flows while returning a substantial amount of back to shareholders and especially through the share repurchases.

Your next question comes from Gary Nachman from BMO capital markets.

Hi, good morning, and thanks for all the updates for the other non core divestitures to get to the 5% to $6 billion of additional proceeds.

That's a lot to get through between now and the end of next year.

How far along are you with those discussions and what's your confidence in getting that done.

With respect to the different areas that you outlined maybe you could walk through some of the opportunities in more detail.

And then just a quick follow up just what caused some of the launch delays, causing new product revenue to be lower than expected and when you think of the annual contribution per year, I think you said $450 to $5 $50 million.

Just talk about your confidence in that risk adjusted that number is given the importance in generating the 3% revenue CAGR in 24 to 28. Thank you.

Let me just just in terms of the let me take the second one rajiv but in terms of the.

We actually did really have a head start we've been working on.

This project for quite some time in terms of.

Identifying these particular assets we have all the right.

Yes.

Advisors on onboard for each one of these so we are well into the process and we see no issue at all by striking.

And executing on each one of these in 2003 and actually expect to even have the proceeds certainly and if not by the end of 'twenty three the proceeds from these initiatives, but very very shortly thereafter Rajiv.

Yes.

<unk>, it's rod.

Albert mentioned about very clearly on rotation.

Pipeline over the several years, we have been moving up the value chain steadily.

<unk> have proven success at Cod.

If you are just tied to that.

What I tried to give you a little bit more granularity about the growth got it got less of this pipeline.

I tried to break it in the bucket of let's just take examples of complex injectables debt how much debt in the first one.

If I break up this five years first two or three years youre going to see a major contribution coming from those injectables. While 25 26 on work 24 hours, but the facts on once a month.

<unk> Meloxicam xul and low dose <unk> five of the first.

Have a great potential just to add 1 billion over there and injectable bucket one.

And then we have a dedicated <unk>.

<unk> pro graph of markets like Europe , and China, and Thats, what the board Mark I said I gave a break up of that China benefiting 'twenty firewall on multiple approximately $100 million every year and Europe getting 100 to 150 million every year. If you add that up 450 declined 50 is a very well thought at risk adjusted rates.

The next question comes from Ashwin <unk> from UBS.

Hi, Thanks.

For the potential divestitures divestitures Kennedy Asa Convention I guess, what im trying to understand is in there.

Collection ability based on whether you think these are quarter non core to your portfolio.

Do you also consider factors like how these divestment will impact remain core revenue a little bit better.

On the profile.

Okay.

Ash obviously.

Obviously, we would've taken all that into consideration.

To be able to come here to deliver to you our outlook.

Outlook. So the answer is yes, we've taken all that into consideration.

Okay.

Our next question comes from Jason <unk> from Bank of America.

Hey, guys good morning, and thanks for taking my questions.

Just on <unk> it looks like that's probably about half the value that's kind of.

Of the $700 million to $750 million. So is there a specific asset that sort of drives the valuation or is it just kind of more broadly dispersed across all of the late stage ready assets and then as you lay out what looks like a leverage for what will be effectively remain co. Just wondering is that.

Sort of what you think is the right amount of leverage for this business to carry longer term and how ambitious you'd be sort of once the dust settles on all of these transactions.

In terms out either more aggressively or more ambitiously building out some of the specialty brand verticals. Thanks.

Let me let me just address.

On the family assets.

I'd like to make a point that we've been around these assets for the last five years.

We set up this company originally.

We have a small 13, 5% stake and we've watched the development of what.

This company has done so.

We have worked very very familiar with these assets.

Be able to find the right frontline.

Asset such as voice there with such a phenomenal leadership team. They are very very much into this community.

This was not this was not by happenstance. This was a very deliberate well targeted.

Opportunity that we saw to create a real thumb ophthalmology.

Ophthalmology franchise.

So yes, we're very very confident Michael do you want to just address some of the actual share opportunities so Jason for the life.

Our life Sciences portfolio, it's really.

Our portfolio is not one single asset that kind of drives the entire value just to give you a little bit more color. The blepharitis asset is the asset if you could talk about a few months ago already we just basically that come from all of US We now got the full rights.

To that then there is the dry eye product that we're quite excited about that's very complementary mechanism of action to avaya and the other three indications presbyopia, mudry ISS and the nicely and Thats actually the same molecule.

Maybe combined with another one for for all these three indications so it's a very balanced portfolio.

Second question on.

Yes, I mean, let me just say that after two years of now.

Operating in this business the only way you really ever know what kind of sort of that sweet spot.

From a leverage ratio perspective is actually living in your business and understanding all these pushes and pulls I would say that the range of about two 8% to three two with three being in the midpoint is that sweet spot range, where you can have that accordion. When you can lever up and very quickly.

Get right back to your target that is.

Our extraordinarily disciplined and focused on that at all.

All activity from here will be.

That will be front and center, because we made some commitments to maintain investment grade and.

What we now see even with that commitment.

Two three times, we actually see through the significant cash flows that we're going to be generating once our phase one commitments are satisfied that we can we.

We can we have enough financial flexibility to fund ourselves, we do not see a real need of outside capital.

That's why I think that the transaction.

But this morning is a perfect example, how we can continue to return significant amount more of capital back to shareholders, especially through share repurchases plan, but as well as invest in our business at the same time. So James do you want to add anything that I would think that you covered deck you covered very well that we will have.

We have not had in phase one.

<unk> cash to invest organically inorganically and that will support that so thats why we are comfortable with the range that we've talked about.

Yeah.

Our next question comes from Glenn Centennial.

Tangelo from Jefferies.

Hi, yes. Thanks for taking my question I just wanted to follow up on some of the pro forma numbers you gave regarding 2024 and the phase two part of the plan I mean, it seems like Youre, assuming that once you get out to 2024 that the erosion on the base business on the revenue line will be about minus 3% and now with the benefit of some of these.

Announcements today I think that the.

The new growth CAGR is going to be plus three sets of <unk>.

6% swing are almost close to $1 billion.

And so I just want to make sure I understand in terms of what youre, seeing where that where that's coming from.

It sounds like you in the past you've been talking about $500 million a year from new product introductions, maybe with the balance coming from the acquisitions and then my follow up to that would be.

Does that 3% CAGR and 24% 28 include any incremental contribution from Gi and derm or could those opportunities.

The augment those growth rates from here. Thanks.

So thank you Glen.

Welcome to our sector.

Let me, let me start by saying I think you can recalibrate, if you get one of the variables and everything that you mentioned.

And that is the <unk>.

Base business from 24, and going on we no longer see it eroding actually we see a and that's why this morning I took the time because I think it was highly critical of that one.

Identify exactly the assets for divestitures to support the economics.

The expected proceeds we are going to get in to what we intend on doing with those proceeds in a very clear and transparent way.

And then through once these assets are no longer with the.

Our core business going forward, what does that base business looked like ex any inorganic activity, including this morning's announcement.

So it's very important that we share with the investment community. What is that current base business that we have right now with all of the assets that we have right now in house.

After these divestitures.

What we outlined this morning in what you heard from Rajiv is what we now forecast given now that we have much more visibility and clarity a 2% to 3% base business erosion, which is naturally inherited in our in our model and we're benefiting from such.

Lower erosion than really most in our industry, because we did diversify ex U S outside the United States as I mentioned I think that could have been one of the maybe sometimes misunderstood we're viewed as a U S in specialty.

Generic company, but we're actually not spent a considerable amount of time to derisk our model not to have such emphasis.

In any one market or in fact, any one country. So I think once you can see the base business only and the strength of that base business.

Only then when you begin to add.

Anything from that point forward can be truly additive. So if you take a look at the 1% that we see in the base business alone and.

Then at the Oyster point asset on top of that that's how you get to the 3%.

Revenue <unk> gone from 24 to 28.

And a 4% to 5% EBIT growth from there and Robert just to further clarify you talked about 2% to 3% base, it'll Ian which is being more than offset by a 450 to 500 $550 million of branches to bring what Robert said the stable base and then overlay on that.

That's all technology.

<unk>, which will bring it back from flat to 1% to 3% growth in the answer to your last point because there was a lot in your question.

Glen.

There is nothing as a matter of fact right now in the current models that we see as a hedge.

We committed we are committing 50% return of capital to shareholders, but right now in our models, we have the other 50% simply accumulating cash.

Our current models.

Did not deploy that cash yet.

For two reasons, one we wanted to hedge.

For any anything that can come our way.

And two we have not really identified at this juncture.

The specific target that we're looking at other than Directionally, given you the kind of assets that we're looking at.

I think that from everything that we see.

It should be noted that.

We are also accumulating cash in our model at a rapid base to be deployed which also really significantly brings our net leverage ratio down even that much more.

Our next question comes from Greg Fraser Jewish Securities.

Good morning, Thanks for taking the question.

I wanted to follow up on capital allocation.

Should investors think about the mix between funding the dividend and share buybacks in 2024 and beyond given that 50% targeted for free cash flow allocation I guess is a material increase in the payout ratio likely thank you.

Okay.

I guess.

I think the most important thing today right now today.

And to be very honest with you I don't know, what what 24 I'm not going to try to predict what 'twenty four would look like I think the most important commitment today is the commitment of 50% of our free cash flows to return to shareholders that is a.

That's our commitment period now.

If it were today.

I have to tell you with our as I mentioned.

I really think with our current PE multiple and where we are it's very difficult very difficult to find a better investment.

And to buy our own shares back I just have to be very honest with you. So I think we want to focus on total shareholder return.

Evidence combined with share buyback, but.

If it were today I would probably strike much more on reinvested in neuro business through the purchase of our own shares because I think what it's going to quickly become the investment community because it's going to I think I think the what.

The interest is going to become very quickly an extraordinarily strong adjusted earnings per share growth story once we begin to execute.

And especially the repurchase of our shares is going to go a long way I think in that story.

The next question comes from Nathan Rich from Goldman Sachs.

Good morning, Thanks for all the details today.

I wanted to ask on free cash flow I guess, how should we be thinking about the baseline for free cash flow kind of understand that youre not planning to give guidance but.

Should we think about sort of the step down in EBITDA similar to what would happen to free cash flow or are there are there other factors to consider as we think about free cash flow in 2023 and beyond and then just a couple of clarification questions. As we think about the target for EPS accretion next year from the deals as well as share repurchases any more.

Detail on how much EBITDA dilution youre expecting from the acquisitions and was the R&D expense step up of $300 million was that inclusive of the two acquisitions as well. Thank you.

The Sanjeev before you answer that question.

I think Nathan.

I think we gave you the starting point of at least $2 3 billion.

And what we see in 2002 as a starting point.

But we absolutely see it grow it from there.

Yeah, So Nathan.

So as Robert pointed out in the in the opening remarks. So you start from where we are this year, which is particularly.

If you take the midpoint, we're about two 7 billion.

There are two adjustments that we're making from there one is the EBITDA loss that is from the.

Divested businesses and the R&D.

So that would have an impact on cash flow.

A high percentage of that goes into the cash flow.

On the positive side, you would see a one time cash cost is coming down.

And then there's going to be a reduction in interest cost as we paid down significant amount of debt next year. So put all those things together and.

And you'll get a number which is close to what Robert talked about again, we're not giving that guidance I think the important thing to think about this is.

<unk> 2000 2045.

Our focus that we have you have seen in last seven quarters in terms of continually growing the cash flow conversion in the company will continue and we continued to add.

And the growth from cash optimization effort and then obviously focusing on our one time cash cost now 2023 is going to be a little bit choppy. If I were going to use the term in terms of the cash flow because of all the transactions that are going to be happening during the year. The base cash flow is going to be very very strong, but as I pointed.

As you divest these assets the taxes of these assets the proceeds and some of the onetime cash costs get recorded in the free cash flow. So we'll provide you all the transparency to you understand that the cash flow is very strong, but the outlook that I gave you for 2024 is a good starting point from that perspective, yes, because I mean, one thing.

We are not able to be able to time exactly so until we actually divest the assets that we've identified we will continue to benefit in 'twenty three from the topline to EBITDA and even its cash flow. So look the beauty about this is that.

We don't have a gun to our head and there is no need to rush in because these assets are all what they are they're contributors, but certainly not where we want to apply our focus thats why we took the two.

Time to build a bridge to get right to 'twenty four with all the activities that are going to be going on in 'twenty three.

So Steve I wanted to ask the RMB questions have decreased $300 million.

<unk>.

The investment.

From the two assets that we did the R&D investment on those pipelines.

Okay.

Our last question comes from David Epsilon from Piper Sandler.

Okay.

So.

Just going back to tier value.

Can you talk about the challenges associated with the payer landscape here bearing in mind there.

Restasis is available as a generic and I know there is some differentiation that you cited but I just wanted to get your thoughts on what you have to do to improve access.

And then related to that as you're thinking broadly about.

Your acquisition strategy are you also willing to look at.

Clinical stage assets in more rare diseases.

Where.

Payer challenges ostensibly would not be.

As much of an issue how do you think about that in your overall strategy in terms of taking on significant R&D risks. Thank you.

Yes, Greg This is Jeff now and thanks for that question, So I think with.

As it pertains to your value as we look at any launch into this space. The commercial opportunity is obviously, the first opportunity that any company would face.

We've been lucky enough that this year, we're tracking at about 19% of our scripts will go to Medicare part D patients as we turned the year into 2023, obviously, we expect those formularies to begin to adopt and we're really excited about the opportunities as we move into that year, we've had great cut.

So far in the commercial side.

As you talk to this as a really well differentiated product our goal in 2023 is adopt that additional coverage and really just drive demand.

Into the year before Robert jumps in one of the things that I will say on the ophthalmology pipeline is keeping in mind. There are a number of products in there, especially on the gene therapy pipeline that are in that rare disease area and so that has already begun but a lot Robert.

Add to the story there.

I would just say that.

Terms of the R&D, David I would guide you more towards the D and not Dr.

Yes.

We will not be a company to be taken the type of binary risk.

<unk>.

Big Pharma takes.

And we're going to be very careful and selective.

And we've also given your targets what we'll be looking for next and the Gi side as well as dermatology.

For mature emphasis because if you now look at our business model work, we're crystal clear basi and therapeutic.

Agnostic.

Our product portfolio with habit products from birth to every stage of life around the globe.

It's very critical going forward in our portfolio.

It's just that the cash flows that we generate off of that portfolio is exactly what is going to be funding the very targeted opportunities.

That we highlighted that we've emphasized ophthalmology.

Ophthalmology Gi and dermatology. So I think you can expect that.

Directionally going forward.

But yes.

Thank you for your question was there any other questions.

No.

And we have reached our allotted time for question and answer session. I will now turn the call back over to Michael <unk> CEO to make a few closing remarks.

Okay. So thank you everybody for the for the.

For the good questions and look as you've seen this as an exciting point in our development for following up on I guess everything we set in terms of.

Returning the company to growth, having a capital allocation debt.

Ability to both return capital to shareholders as well as invest in our business and we're really excited to have Jeff and his team join us and via trust going forward. Thank you very much.

Okay.

This does conclude today's via Trust 2022 third quarter earnings call and webcast. Please disconnect. Your line at this time and have a wonderful day.

Okay.

Yes.

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Yes.

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