Q3 2023 Viatris Inc Earnings Call

Speaker 1: Our focus on returning capital shareholders and on investing in our business will be important levers to put the company on the path to achieve our long-term goals of revenue and earnings per share growth.

Speaker 1: two measures that we believe will be critical to valuing our company in the future.

Speaker 1: We plan to make investments both in our base business and in business development activities to give us the greatest potential for growth.

Speaker 1: patient impact and shareholder value.

Speaker 1: From a business development perspective, I am optimistic that we will be able to execute high quality agreements that will capitalize on the strengths of our global platform.

Speaker 1: We are focusing our efforts on M&A, strategic licensing, and partnerships.

Speaker 1: We are looking for innovative, high growth assets, focused on areas of unmet medical need that meet our vision of addressing global healthcare needs and bringing access to high quality medicines to more patients worldwide. We are looking for innovative, high quality medicines to more patients worldwide.

Speaker 1: Before I turn the call over to Rajeev to provide you with an update on our operations and our pipeline, I want to acknowledge the recent announcement that Rajeev will be retiring as the executive of the company next April .

Speaker 1: It has been a privilege to get to know and to work with Rajeev during this past year. I could not have asked for a better partner during my onboarding at the company. I wish him nothing but the best in his eventual retirement.

Speaker 1: I look forward to working closely together in the months ahead as we complete our planned divestitures and prepare the organization for the future.

Speaker 1: and to this continued partnership as a member of the Board of Directors.

Speaker 1: And now let's turn it over to my sheep.

Speaker 2: Thanks for watching

Speaker 3: I appreciate it and look forward to working with you to ensure a smooth transition while continuing to support you as we look out into the future but in a different capacity.

Speaker 3: I also want to take the opportunity to thank all of our employees who have helped us build this strong global platform.

Speaker 3: I am very pleased with where we are today in Vyath's journey and the strength as well as stability of our core business which is now nicely set up for the continued growth from here onwards.

Speaker 3: Moving to our commercial segment results, we have delivered a second consecutive quarter of year-over-year operational top-line growth as we predicted, which further reforms that we are standing strong and set up for the future.

Speaker 3: This quarter, we recorded 1% year-over-year operational growth and are well positioned to end the full year in line with our expectations.

Speaker 3: Our well-balanced business of developed markets delivered another strong quarter, growing 2% year-over-year operationally.

Speaker 3: Europe grew 1% versus the prior year on an operational basis, making it the seventh consecutive quarter of year over year growth.

Speaker 3: France and Italy led the growth in the region.

Speaker 3: A solid performance of generics in the Europe was another contributing factor.

Speaker 3: Our North America business was up 4% year over year on an operational basis in line with our expectations.

Speaker 3: Our generics portfolio performed better than expected driven by new launches such as Brena, the generic for semicort, lysed-exopretamine and the continued contribution of lenalidomide.

Speaker 3: Also, some other key products including lettermark acetate, vancomycin and Zoolene perform better than expectations.

Speaker 3: Our brand business was supported by strong demand in uphellery, which grew 9% this quarter over the last year, and in the epinephrine market.

Speaker 3: Overall, we remain confident that the developed market segment will meet a full year expectations.

Speaker 3: Emerging market said another strong quarter and delivered two percent year-to-year operational growth led by strength across our broader generic portfolio and stronger than expected performance from brands like Lerica, Zollock and EiffelxR.

Speaker 3: Emerging Asia and Turkey were solid performing geographies.

Speaker 3: This segment is well positioned to deliver mid single digit year-over-year growth.

Speaker 3: Moving to Jansks, your brands performed in line with our expectations, while generics were slightly below expectations, primarily due to customer buying patterns.

Speaker 3: We continue to be on track to deliver full year expectations.

Speaker 3: Greater China experienced another solid quarter primarily driven by strong performance of retail channel in China

Speaker 3: Greater China was flat to the prior year, in line with our expectations.

Speaker 3: We believe that this segment will perform slightly better than our expectations for the full year.

Speaker 3: I'm also happy to report study progress we made on our pipeline in this region.

Speaker 3: We recently received positive top-line result for our Phase III clinical trials of UPELRI in China, which is consistent with our U.S. clinical data and will look forward to submitting our NDA mid-24.

Speaker 3: We currently have 10 other products under Health Authority Review in China.

Speaker 3: Moving to the iK vision.

Speaker 3: As a bridge program sunset, we saw almost 9% non bridge prescration growth in this quarter.

Speaker 3: We continue to focus on Prescription growth in quarter four and into the future.

Speaker 3: supported by our first direct-to-consumer marketing campaign for Truvia, which we launched in early October .

Speaker 3: We have recorded 345 million dollars in new product revenue.

Speaker 3: Year-to-date and our own track to deliver more than $450 million of revenue from new product launches for the full year.

Speaker 3: Let me now discuss some key updates for our R&D pipeline.

Speaker 3: We are excited by the continued progress of our IKR pipeline, which is aimed at addressing a range of vision-related disorders.

Speaker 3: All the IK development programs remain on track.

Speaker 3: and we are pleased that we received FDA approval for Ryze Zumwie.

Speaker 3: for the reversal of pharmacologically induced mitreases and are looking forward to a commercial launch in the US in the first half of 2024.

Speaker 3: switching to other pipeline updates.

Speaker 3: beginning with blood tremor acetate depot.

Speaker 3: As you recall, the FDA had accepted for review our NDA and assigned a PDUFA date of March 8, 2024.

Speaker 3: While we continue to make steady progress regarding the FDA review of our NDA, we are saddened by the tragic situation in Israel and we are working very closely with our partner MAPI who remains fully operational.

Speaker 3: We have recently submitted our registration in Europe and are excited about the potential opportunity to bring this product to patients in Europe .

Speaker 3: Our Botox Biosimilar program is progressing well from the development, characterization, and validation of drug substance and drug product perspectives.

Speaker 3: We recently completed the manufacturing of our IND enabling drug substance batches and are well on our way to complete the drug product manufacturing.

Speaker 3: We remain on track to file our IND by the end of this year.

Speaker 3: We expect to initiate the pivotal clinical studies for this program in the first half of 2024. We expect to initiate the pivotal clinical studies for this program in the first half

Speaker 3: Our Phase III study for our Zulin low dose program in the US remains on track and we have benefited from an acceleration in the enrollment rate for this study.

Speaker 3: We now expect to enroll our last patient this December .

Speaker 3: Also, we are closely interacting with FDA to initiate the Phase III program for our opioid-sparing naloxone novel product in late December .

Speaker 3: Our Phase 3 study for effects or generalized anxiety disorder in Japan continues to progress according to our schedule and we remain on target to submit the NDF filing in the first graphicfor aki

Speaker 3: Finally.

Speaker 3: All of our complex injectable programs are moving ahead as planned and we continue to be very excited about the potential of this important potential 1 billion dollar franchise.

Speaker 4: with that I will hand the car over to Sanji.

Speaker 5: Thank you and hello everyone.

Speaker 5: Before I begin, I would also like to extend my congratulations to Rajeev.

Speaker 5: It has been a great partnership over past three years and I am proud of what we've accomplished together.

Speaker 5: We at risk our colleagues and patients all over the world have benefited from your leadership, expertise, and dedication to our business.

Speaker 5: Turning to our outlook, I want to reiterate my confidence in the strength of our unique global platform in the continued durability of our significant free cashflow generation.

Speaker 5: Well, please with the outcome of our announcement of the vestiture.

Speaker 5: which, upon closing, will bring the successful conclusion to our Phase I commitments.

Speaker 5: As we work to finalize the plan for next year, and although we are not providing guidance at this time, we continue to expect at least 2.3 billion in free cash flow in 2024, even when taking into consideration inflation and foreign exchange advance to date.

Speaker 5: This excludes any taxes and transaction costs associated with the vestiture.

Speaker 5: For the second consecutive quarter, the business delivered total operational revenue growth versus prior year.

Speaker 5: The performance was diversified across regions and categories.

Speaker 5: The positive mix of brand and new product drove strong gross margins.

Speaker 5: From a regional perspective, we saw 2% growth in net sales from developed and emerging markets.

Speaker 5: The growth included the benefit from brands, genetics and new launches.

Speaker 5: Net sales for the quarter were in line with the expectation and grew 1% versus the prior year.

Speaker 5: The diverse portfolio of growth driver included brand performance in emerging markets, Europe and greater China.

Speaker 5: These revenue trends and positive momentum are expected to continue as we exit the year driven by brand, strength of our global generic portfolio and new products.

Speaker 5: New product revenue in the Code Mad Expectation and included the first Code of Brena.

Speaker 5: Adjusted gross margin was approximately 59% in the quarter and was ahead of our expectation.

Speaker 5: We continue to see the positive impact from Portfolio Decision Driving favorable mix.

Speaker 5: We reported strong adjusted EBITDA, which included investment in SG&A and R&D to advance key programs across eye care, injectable and complex products.

Speaker 5: As a result of strong adjusted EBITDA and improved cache conversion.

Speaker 5: We had an excellent quarter of free cash flow of 786 million excluding the impact of transaction costs.

Speaker 5: which represents growth of 3% on a reported year-on-year basis.

Speaker 5: The continued strong and durable free cash flow is enabling us to deliver on our capital allocation priority. Our factory-wide

Speaker 5: which has served to further strengthen an already strong balance sheet position and help us maintain our investment grade rating.

Speaker 5: Over the last 11 quarters, we have generated over $7.2 billion of free cash flow and as a result, we have been able to pay down approximately $6.1 billion of debt during the same period.

Speaker 5: And we will pay down the 500 million maturity in Q4 from cash on hand.

Additionally, this quarter we returned approximately $144 million of capital to our shareholders, totaling approximately $700 million so far this year.

Let me talk about guidance for the rest of the year.

The business continues to perform well operationally as evidenced by results to date and the momentum we see in Q4. The business continues to perform well operationally as evidenced by results to date and the momentum we see in Q4.

As I highlighted during our Q2 call and what we have seen over past few months, the dollar continues to strengthen against the euro, Japanese yen and the Chinese RMB.

As a result, solely due to foreign exchange, we are adjusting the full year guidance range of tour revenue by approximately 2% based on October rates.

We expect to absorb this potential FX impact and still be at the midpoint of the ranges for adjusted the beta and free cash flow.

Now a few updates to our expected key metrics and outlook.

Based on the strength of our gross margin to date, we're raising our matrix range to 58.5 to 59%.

We continue to expect adjusted EBITDA to be lower in Q4 than prior quarters driven by two factors.

First, low gross margin due to less favorable portfolio and segment mix.

Second, SG&E to increase, driven by investment in the tier via direct-to-consumer campaign and other areas to drive future growth.

We anticipate free cash flow in Q4 to be impacted by lower adjusted EBITDA, higher capital expenditure, and timing of biannual interest payments.

As a reminder, our free cash flow guidance does not include any transaction costs and taxes associated with biosimilar divestments, the i-CARE acquisition or the planned divestiture.

Additionally, our adjusted EBITDA and free cash flow guidance excludes any acquired IPR&D for unsigned deals.

In closing, based on the continued strong underlying fundamentals of our business, we are well positioned for the remainder of the year and the outlook for 2024 continues to be positive.

With that, I would like to hand it back to the operator to begin taking your questions. Thank you.

Okay, going off of you.

At this time, if you would like to ask a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star 2. We remind you, please pick up your handset and please limit yourself to one question.

Our first question comes from Chris Schott, JP Morgan.

Great, thanks so much for the question. My question here was on how you are envisioning capital deployment and specifically business development now that we have some of the divestiture announcements behind us. So just elaborate a little bit more on potential timing, size, and are you still kind of targeting those three kind of verticals that you talked about in the past? I'm just trying to get my hands around, is this something that you are actively looking at this point, or we need to wait for the transactions to close and the sense of being more kind of 2025 and beyond kind of event that we think about kind of the redeployment of some of the cash coming in the door, or just any color you can find there would be much appreciated. Thanks so much.

Yes, thank you, Chris. Thank you very much for the question. Yeah, we're looking for innovative, high growth assets that bring in predictable, durable revenue streams. Good fit for our business. The weekend leverage with the strong global infrastructure we have, you know, you asked about the verticals. We're definitely looking at things in the verticals. We're also gonna be a little bit agnostic. And if there's a good opportunity to live outside of those verticals, we will look to, we will look to, we will look at that very, very closely as well. The important thing for me is whatever we do, we want to leverage the global strength that we have as a company. And, you know, in terms of, you know, business development, I look at it in sort of in three buckets.

Not M&A, of course, but also licensing. It's very, very important, and partnership is very, very important. Some of them are more capital intensive than others. And you know, in terms of speculating on timing, I don't think, again, I won't speculate on timing at this point. I think we're looking at things very actively right now, and we'll see where we get. The work site about the opportunities that are out there. I think there's a lot of opportunities that fit where we're going and what we're doing. So I appreciate the question.

Our next question comes from Nathan Ritt, Go on Sacks.

Great, good afternoon and thanks for the question. I wanted to, you know,

Ask on the the kind of transition to phase two and you know you gave some details around the the 2022 EBITDA of the announced the vestitures now I know you don't want to give EBITDA guidance for 2024, but you know any color you can provide on how those businesses have trended over the past year and any other Considerations from a cost standpoint that we should think about and then you know as we think about the transformation You know of the business and acceleration of top-line growth. Can you maybe think about like Help us walk through what the the building blocks are to you know eventually getting the the business to that kind of you know 3% revenue CAGR that you're targeting in phase 2

Yes, so first of all, yes, with 24, I feel great about where we're going in 24. We've had now two consecutive quarters of operational growth and we believe we'll finish 23 strong. I think it will set us up very, very nicely for 24.

We have full confidence that we're on track to meet our previously stated long-term goals.

I guess really importantly we expect to have at least $2.3 billion in free cash flow and $24 billion and beyond even when you take into consideration inflation, FX headwinds, etc. I think there's a very, very strong base to the business and we expect to grow just with the base business. As you mentioned, the 3% range just off the base of the business that we have is very stable, growing, strong globally right now but we hope to even have significantly higher growth rate than that from a revenue perspective as we start to invest in business development and other businesses and bring other assets in that can complement the organization that we have in place. I think there was a question around that last year.

Yeah, look.

But for the specific question, can you repeat on temperature?

I.

We told them 2022 how those businesses were trending. First of all, from the Bora business point of view, as well as in between two services, all our businesses are performing.

as we anticipated or better than anticipated including

Whether it's the geographic or whether it's the brand, generics and those categories.

That holds basically true for also the businesses which we have identified and which are going through the divestiture. But also Scott, your point that 3%

which we have indicated, just to add on to that, that included our base business, what we have in pipeline for today. That didn't include any more deployment of the capital deployment, which may come from 24 onwards. That will be on top of that. So I just wanted to also build upon that.

And one other thing to keep in mind, the businesses that we're divesting.

their margins are generally less than the company average. So what we expect post divestment, companies margin like gross margin to be stable. From that perspective, that's an important thing to keep in mind as well. I also wanna piggyback off what Rajiv said, and as we start to really pivot to real growth from revenue perspective, and given our capital allocation plan and our desire to buy back shares, we can move the story to a long-term adjusted DPS growth story, which we're very excited to move into that E-box.

Our next question comes from Amir Raffet.

Evercore?

I guess thanks for taking my question. I wanted to focus on China business for a second and it looks like your China business is holding in broadly fairly stable except for FX. And it appears to be quite different in performance versus what some of your repair companies also with meaningful China businesses have reported. And I kind of see that not just on the emerging markets sales reported, sorry, greater China sales reported, but also in the product level breakout. So I'm just curious, what do you think is tracking different and or is there some timing of revenue recognition that is playing out and maybe we do see some weakness in 4Q because it does seem like it's a little more industry wide. Thank you.

I can't speak about our peers, I can speak about our China business which right from ever since, you know, we have gone through this evolution around the policy dynamics and all that lived through our 95% business has gone through the BBT.

We had gone through the cycles of VBP and we have taken this time to reorient and shift our distance both words up.

private pay channel and that's what we have seen. We have found that equilibrium between the hospital and private pay channel and we have been trying to invest more around that and investing in the pipeline, for example, even this quarter, you know, just getting the Uppalri positive data with the Uppalri dementia performance now going through the whole channel that also the pipeline.

We cannot be more excited about what we are seeing in the underlying business or the fundamentals of our China business. We are extending that to emerging markets.

We have taken our time to figure out how to manage this.

You know, the hybrid business we have between the brands as well as the generics and we have found that sweet spot and you see emerging markets business, the brands performing better than expected, generics performing better than expected. So I can speak about our business, we seem very confident and optimistic about this business and that's what is rendering the stability to the base and coupled with the new launches, new launch revenue, I think that's what is driving the base growth of 1% year over year, 1% which you will see in that.

else in California that it was perfect. Our next question comes from Gwen Santangelo.

Jeffries?

Thanks for taking my question. I just wanted to follow up, Rajeev, on some of the comments you were just talking about that the generics business was performing better than expected. Could you maybe talk about the pricing environment in terms of what you saw in the quarter and if there's any discernible trends that are worth sort of calling out and any sort of comments around the sustainability of that recent trend would be helpful. Thanks. Thank you.

Then after several quarters I can say that we have seen perhaps a longer stretch of stability.

Oh.

chouche provinces

So many years I would say and I don't see any trend at the moment because it's a generic business as planned. You know it's about demand and supply and at this point of time, you know, it's both that we see some supply disruptions going on on some key molecules and key products.

and it's about your own portfolio, your own ability to supply and

Basically, the flexibility in this supply to sometimes respond to the market need and that's what I think we have set for ourselves and that's what giving us the stability and I don't see at the moment in the environment some more trends which we should be concerned about.

Our next question comes from Jason Gerber, Bank of America.

Thanks for taking my question. I just wanted to inquire about the inflationary pressures on cost of goods that was flagged last quarter. It appears like...

Either that was maybe not realized this quarter because of mix or perhaps there were some other offsets. Really curious more so just to think about how those inflationary pressures, do you feel like you may see those manifest in 4Q or into next year? That would be helpful. Just some of your peers have flagged inflationary pressures as well and cost of goods. So just wondering if you can level set. Thanks. Thanks.

Thank you.

So, Jason, thank you for the question. So we had anticipated.

inflation pressure and we kind of talked about that when we made our plan and gave the guidance to that. We're managing our cost very well. So the impact is still there for inflation and in this quarter we have an inflation impact but it is less than what we had anticipated. So clearly our teams are doing a great job in managing the cost and you can see that reflected in our gross margin which is coming better than the expected and we've actually raised the full year metrics to 58.75% on the strength of MIX and us managing the cost including inflation better than what we'd anticipated.

I.

Our next question comes from Ash Verma, UBS.

So, on emerging markets, can you elaborate the dynamic here a little bit? You mentioned customer buying patterns impacting 3Q. And I didn't hear you saying that you were going to expect to get to the outlook that you had for the emerging market, although I heard that for other geographies. And second one, I just wanted to understand the effects impact. So, 3Q revenue saw 7 million headwind, but you're lowering your 2023 midpoint by 250 million. Is this all concentrated in just 4Q alone? Thanks.

I think on the emerging market some of our key brands, LERICA, Zoloft, Efraxor, Acropa, some of the brands have been performing pretty well.

Turkey and also emerging Asia we call it. This is the geography like Thailand and Malaysia and all those countries put together. They are performed above expectations.

I see this trend continue. I see emerging markets well on the track for mid-single digit growth, year over year growth, given the strength of their portfolio, diversity and markets where we are.

Seeing that confidence.

So, Ash, on the FX, a couple of comments.

So what's going on in the three currencies? So 70% of our business is non-US dollar denominated.

50% comes from three currencies, which is the Euro, Japanese Yen and Chinese RMB. What was going on till about September ?

A dollar had sent in against the Chinese RMB and Japanese Yen and then Euro was favorable to what we had assumed. But September onwards, the Euro started weakening with all the Fed action that was going on. So whatever the offset that we were seeing in the first half of the year went away, so you see the impact is much bigger now starting September in fourth quarter than we had anticipated and that's what we are reflecting in our full year guidance assuming the October 8th stand. So it's all three currencies, it's all FX and operationally exactly in line with what we had anticipated and you saw that we reaffirmed our guidance on EBITDA and free cash flow absorbing the FX impact.

That.

Our next question comes from Balaji Prasad, Barclays.

Hi everyone, this is Michaela Ansar-Balaji. Thanks for taking our questions. Just wondering if you guys have any thoughts on today's move by the FTC to challenge more than 100 improper patents listed in the FDA's orange book and wondering if this will have any impact to the atrias. Okay, take it away.

So this is Brian Roman, the General Counsel. Thanks for the question. Our company has been an industry leader in challenging improper orange book listings for many years. This is an issue that we understand well, take seriously, and frankly like to see the issue getting some attention.

F2C hasn't shared with us what concern they have about these particular patents, but I'd add that there already has been for years significant generic competition for our epinephrine auto injectors.

Thank you. Our next question comes from David Anselman.

Piper Sandler.

Hey, thanks. So, just a couple of product specific questions. Can you talk about how are you thinking about the generic SimbaCourt contribution next year? I know you talked about.

revenue being a little below expectations and develop market because of phasing of that product. So just talk about where that product is heading. Then any update on iron sucrose, that would be helpful. And then another question on business development. And I'm sorry if I missed this. I think you had targeted initially these three therapeutic verticals, gastroderm and ophthalmology. What's your willingness to...

and move away from that or look at other therapeutic silos. Thanks.

So I'll answer this sort of last part of the question first and you know as I said earlier that those three verticals we think you know very highly of in terms of the type of assets that are there our ability to leverage assets that are in those three therapeutic areas but we'll keep our minds open. We will be somewhat agnostic to opportunities that are out there that can help us really move the company forward in a good way. Again what we're really looking to do is to leverage the strength of the company globally and if there are assets outside of those three areas that we find that can really help us secure our our growth in phase two we'll definitely look at them.

Thank David on launch of brain-art that's generic to the semicore. We couldn't be more pleased to launch another complex hard to make product

and bring access to this affordable alternative to the market.

We are performing exactly how we have anticipated. Every week we are looking at the take-up of the market share. Now, IQVR doesn't capture all of our customers. For example, we can be selling to some comment entities, veterans, or issues like Kaiser. So it doesn't capture – it's exactly how we model. It's going to be a significant contributor because we don't see a competition on the horizon at this point of time for the next year. It's going to be a meaningful contributor to that. And the myth – and I won't call – first of all, we are very happy to have more than 450 million. We have already captured 345 million on the new launches. And we are well on track to do more than 450.

And whatever you call it, it's a timing issue. And the timing is one of the products which you mentioned, iron sucrose, which was pushed out to most likely the launch being early the first quarter of the next year. And.

Nothing has changed otherwise. We are exactly on track. We delivered exactly how we planned.

Are there any more questions in the line?

No sir, I'll now turn call back over to Scott Smith CEO to make a few closing remarks.

Thank you very much and thank you to everybody on the call. In summary, I'm very, very pleased with the overall execution and momentum, and the momentum that we have as we bring phase one of our strategic plan to successful conclusion.

I'm very much looking forward to moving into phase two of our strategic plan, and I fully believe in the future trajectory of interest, and I'm very excited for what's to come.

Thank you all again for your attention.

This does conclude today's VITA23 third quarter earnings call and webcast. Please disconnect your line at this time and have a wonderful day.

I.

I told for for my better I.

What.