Q3 2024 Viatris Inc Earnings Call
Good morning, everyone, and welcome to the Viatris Q3 2024 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on a touch-tone telephone. To withdraw your questions, you may press star and two.
Please also note today's event is being recorded.
Speaker Change: At this time, I'd like to turn the floor over to...
Bill Szablewski, Head of Capital Markets
Please go ahead.
Bill Szablewski: Good morning everyone. Welcome to our Q3 2024 earnings call. With us today is our CEO Scott Smith, CFO Doretta Mistras, Chief R&D Officer Philippe Martin, and Chief Commercial Officer Corinne Goff.
During today's call we will be making forward-looking statements on a number of matters including our financial guidance for 2024 and various strategic initiatives. These statements are subject to risk and uncertainties.
We will also be referring to certain actual and projected non-GAAP financial measures.
Please refer to today's slide presentation and our SEC filings for more information, including reconciliations of those non-GAP measures and most directly comparable GAP measures.
When discussing 2024 actual or reported results, we will be making certain comparisons to 2023 actual or reported results on a divestiture-adjusted operational basis.
which excludes the impact of foreign currency rates and also excludes the proportionate results from the divestitures that closed in 2024 and 2023 from the 2023 period.
When discussing our expectations for 2024, we will be making certain comparisons to 2024 actual or reported results on a divestiture-adjusted operational basis.
which excludes the impact of foreign currency rates.
Bill Szablewski: We may refer to those as changes on an operational basis. With that, I'll hand the call over to our CEO, Scott Smith.
Scott Smith: Good morning everyone and welcome to our third quarter earnings call.
Scott Smith: I'm very pleased to report that we had an outstanding quarter, continuing the strong momentum we've seen all year. We have achieved our sixth consecutive quarter of operational revenue growth, and have delivered growth across adjusted EBITDA and adjusted earnings per share.
Scott Smith: In addition, we made significant strides in all three of our strategic pillars we laid out earlier this year, our diversified and growing-based business, our financial strength and significant cash flow, and our expanding innovative portfolio.
Scott Smith: Beatrice is not only stronger and more streamlined, but more importantly our future direction is now clearer and more focused. We are in a period of consistent base business growth and we expect this momentum to continue into next year.
Scott Smith: I'm happy to report that in the third quarter, we delivered.
Scott Smith: Total revenues of $3.8 billion, which represents operational revenue growth of approximately 3%.
Adjusted EBITDA of $1.3 billion, growing approximately 4% from a year ago.
An adjusted EPS of $0.75 per share, growing approximately 6%.
Scott Smith: We had a very strong quarter of free cash flow generating $866 million excluding the impact of transaction costs and taxes.
Scott Smith: New product revenues were also strong at $133 million in the quarter.
Scott Smith: We delivered our commitment to use the proceeds from our divestitures to pay down debt, repaying approximately $1.9 billion in debt, and putting us firmly on track to achieve our long-term gross leverage target.
Scott Smith: With this milestone, the company is operating from a position of strength and has a clear and focused outlook that centers on capital allocation.
Scott Smith: We believe that how we prioritize capital allocation going forward will be the single most critical factor in optimizing and maximizing shareholder value and in driving future growth.
Scott Smith: Returning value to shareholders through dividends and share repurchases will remain a central element of our plan.
Scott Smith: In 2025, we expect to be more aggressive on share buybacks, given our current valuation level.
Scott Smith: This will be balanced with making disciplined investments in commercialized or late-stage assets through regional and global business development that leverage our unique commercial and R&D infrastructure to drive our future growth.
Scott Smith: We expanded our innovative portfolio of patent-protected assets by entering into an exclusive licensing agreement with Lexicon Pharmaceuticals for SodaVaclozin in all markets outside of the U.S. and Europe.
Scott Smith: With this licensing agreement, we are continuing to build on our strong presence in cardiovascular disease, which already includes approximately $2.5 billion in annual revenue, as well as salatogrel, which we licensed earlier this year.
Scott Smith: This agreement leverages our global healthcare gateway, which provides partners with access to our unique global infrastructure.
Scott Smith: We believe we will be able to leverage our experience in cardiovascular disease and our infrastructure to execute on the potential of soda.
Scott Smith: This quarter is a great demonstration of the power of a stronger, more streamlined Viatris. We are seeing good performance from our base business, as demonstrated by our strong track record of delivering new product revenues and by our operational revenue growth over the past few quarters. We expect this momentum to continue into 2025.
Speaker Change: Now I'd like to turn the call over to Philippe to share an update on our pipeline.
Philippe?
Philippe Martin: Thanks Scott. Our strong track record in delivering on our new product revenue is driven by the reliability of our base business pipeline.
Philippe Martin: This diverse growth engine generates a steady flow of core generics, complex generics, and novel products.
Philippe Martin: Our focused execution on this robust pipeline gives us confidence in our ability to continue to grow our base business and address unmet medical needs.
Philippe Martin: Effexor is a great example. Last month, we announced positive top-line results that demonstrated the efficacy and safety of Effexor for the treatment of generalized anxiety disorder, or GAD, in Japanese patients with moderate to severe disease.
Philippe Martin: We believe this significant life cycle opportunity has the potential to be a meaningful treatment option for patients with GAD, a condition which currently does not have any approved treatment available in Japan.
Philippe Martin: We are targeting to submit our application to the Japanese health authorities in 2025.
Philippe Martin: The growth of our business is critical for us to be able to reinvest in our innovative pipeline as we look for opportunities which can make a meaningful difference in patients' lives.
Philippe Martin: We also have the unique opportunity to leverage our global development expertise and broad commercial infrastructure.
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Philippe Martin: to reduce the risk of cardiovascular death, hospitalization for heart failure.
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Philippe Martin: heart failure visits in adults with heart failure or type 2 diabetes, chronic kidney disease, and other cardiovascular risk factors.
Philippe Martin: We believe that IMPESA is a differentiated asset that offers a broader label compared to SGLT2 inhibitors and a unique mechanism of action with dual SGLT inhibition potentially contributing to the unique safety and efficacy profile of the drug.
Philippe Martin: Our plan is to leverage the FDA approval as a reference.
Philippe Martin: in certain ex-U.S. markets and conduct clinical studies where needed to expand patients' reach.
Philippe Martin: We also believe there is a potential for expansion into further indications, which could include hypertrophic cardiac myopathy.
Philippe Martin: Further, Vietris has a strong legacy in cardiovascular diseases through our portfolio that expands across the overall cardiovascular continuum, from reducing risk factors to improving patient outcomes.
Philippe Martin: with well-known products like Lipitor, Norvask, and Caduwex, in addition to our expertise in the area of thrombosis with products like Arixtarine and Fraxiparin.
Philippe Martin: With this legacy and broad portfolio also comes a very strong relationship with the medical community, which we're tapping into as we progress our cell-ided well program.
Philippe Martin: I've provided details about Thaladogrel and Sinemode on our last call, but let me share a brief status update.
Philippe Martin: Our recruitment efforts for both our ASO and ASMI clinical trials and our OPUS clinical trial are progressing well. The development for each asset is on track and aligned to our previous communicated timelines.
Philippe Martin: In addition, we are working on expanding scenario modifications by initiating a registration program in lupus nephritis.
Philippe Martin: And finally, as part of our innovative pipeline, we are continuing to advance our ophthalmology programs with three key registrational readouts expected in 2025.
Philippe Martin: I'm proud of the work to date across our entire R&D platform and believe we'll continue to make an impact for many years to come by harnessing the combination of both our base business and innovative pipeline. And with that, I'll turn it over to Doretta.
Doretta Mistras: Thank you, Philippe, and good morning, everyone. Building on Scott's earlier comments, this has been an exceptionally strong quarter, and our first full quarter on an ex divestiture basis.
Doretta Mistras: The results of which are highly encouraging and indicative of the strong momentum we anticipate carrying into the new year.
Philippe Martin: We're pleased to report our diversified-based business grew 3% year-over-year, marking our sixth consecutive quarter of operational revenue growth.
Philippe Martin: This performance also carried through to adjusted EBITDA and adjusted earnings per share, which grew approximately 4 and 6 percent respectively.
Philippe Martin: We generated significant free cash flow of $866 million excluding the impact of transaction costs and taxes, which enabled us to continue strengthening the balance sheet by paying down debt.
Philippe Martin: Going forward, we have a strong foundation to execute on our three strategic pillars.
Philippe Martin: As I review the highlights for the quarter, to note, my commentary on segment performance will be on a divestiture-adjusted operational basis.
Philippe Martin: Growth of our base business revenue was up 3% year over year and once again all of our segments grew versus the prior year. We had strong performance from brands up 2% and from generics up 4%.
Philippe Martin: Brand performance included expansion of our cardiovascular portfolio in certain Latin American countries and strong growth in Europe and greater China.
Philippe Martin: Generic's growth was attributable to strength in our broader European portfolio, complex products in North America, and strong volume performance across the JANS region.
Philippe Martin: New product revenue was $133 million for the quarter, bringing the total to $497 million year-to-date. We remain confident we will be at the higher end of our range of $500 to $600 million for the year.
Philippe Martin: In developed markets, net sales grew by approximately 3 percent, driven by robust strength in our generics business.
Philippe Martin: In Europe, we saw another quarter of durable growth across our diversified business, up 6%, driven by contributions from new products and strong generics performance in key countries, including France.
Philippe Martin: In North America, we saw another quarter of growth in generics, up 5%, benefiting from complex products such as Braina and Wixella, as well as from Lisdexamphetamine.
Philippe Martin: Within our brands business, net sales declined from the continued impact of Medicaid utilization in certain non-promoted brands and lower EpiPen volumes resulting from the formulary changes which occurred earlier in the year.
Philippe Martin: In Greater China, net sales grew approximately 3% over the prior year. This was as a result of continued strong volume growth across multiple channels, including e-commerce, retail, and hospitals.
Philippe Martin: In emerging markets, net sales grew 2%, driven by the expansion of our branded cardiovascular portfolio in certain Latin American countries and strength in our MENA and emerging Asia regions.
Philippe Martin: These benefits help to absorb supply chain impacts affecting our ARV generics business.
Philippe Martin: And lastly, Jans grew approximately 8%, benefiting from new products in Australia and volume growth from our promoted brands in Japan.
Turning to the P&L and cash flow.
Philippe Martin: Adjusted gross margin was stable at approximately 58.5%, and operating expenses were roughly flat over the prior year, both in line with our expectations.
Philippe Martin: Free cash flow for the quarter, excluding transaction costs and taxes, grew 10%, driven by higher adjusted EBITDA and lower working capital.
Philippe Martin: This significant free cash flow and cash from divestitures enabled us to continue executing on our debt repayment plan. We repaid $1.9 billion of debt, including the $325 million that was repaid in October.
Philippe Martin: bring our notional debt outstanding below $15 billion and line of sight to below $14 billion by year-end.
Philippe Martin: Following the upcoming repayment of approximately €1 billion at maturity in November,
Philippe Martin: We expect to exit the year at approximately three times gross leverage, and we will have successfully completed our deleveraging efforts and achieved meeting our long-term gross leverage target at year-end.
Philippe Martin: Going forward, we plan to operate within our long-range target of 2.8 to 3.2 times. This positions the company with a meaningfully stronger balance sheet and a continuing investment grade rating, all of which will serve as the foundation of our capital allocation decisions going into next year and beyond.
Philippe Martin: Turning to the remainder of the year, we are reaffirming our outlook with full year 2024 base business operational revenue growth of approximately 2%, and flat adjusted EBITDA and adjusted earnings per share versus last year.
Philippe Martin: We have revised these earnings ranges solely to reflect the impact of IP R&D related to the Sodevka-Flozin licensing agreement incurred in October.
A few comments on sequential phasing for the fourth quarter.
Philippe Martin: Total revenue is expected to be lower for the following reasons.
Philippe Martin: Normal product seasonality in developed markets and greater China region, phasing of certain generic products in North America, and generic entrance in our cardiovascular products in Janss.
Philippe Martin: Adjusted EBITDA and adjusted earnings per share will be impacted by a step-down in adjusted growth margin due to normal product and segment mix, and an increase in adjusted SG&A due to timing and normal cadence of investment.
Philippe Martin: And lastly, pre-cash flow in the fourth quarter is also expected to be lower due to the impact from divestiture costs and taxes, higher CapEx, and semi-annual interest payments.
Philippe Martin: I would note that these trends are all consistent with our expectations and prior periods.
Philippe Martin: In summary, we believe these results demonstrate our encouraging fundamentals from our diversified and growing-based business, which continues to produce significant free cash flow.
Philippe Martin: The prudent work we have done on strengthening the balance sheet provides us with a strong foundation as we pivot to a more balanced capital allocation strategy of funding our vision and returning capital to shareholders.
Philippe Martin: But before I conclude, given the level of investor interest in modeling our Solatogrel and Sonarimod assets,
Philippe Martin: We are providing a workbook as part of our Q3 earnings package that can be found on our investor website. And with that, I'll hand it back to the operator to begin the Q&A.
Speaker Change: Ladies and gentlemen, at this time we will begin the question and answer session. If you would like to ask a question...
Please press star and then 1 using a touch-tone telephone.
To withdraw your questions, you may press star and two.
Speaker Change: Our first question today comes from Glen Santangelo from Jeffries. Please go ahead with your question.
Speaker Change: Yeah, good morning. Thanks for taking my question. Hey, Scott, I have just two quick questions for you.
Philippe Martin: The first one is a lot of comments around, you know, the base business continuing to have strong momentum and that sort of continuing into 25. And I appreciate you don't want to give any forward guidance, but when we look out over the next couple of years, is that sort of $500 million contribution from new product revenues? You know, you're obviously generating a little more than that this year, but is that sort of the right zip code for us to think about as a starting point for the next couple of years? And then secondly, on the capital allocation, the company said repeatedly that you want to use half the free cash flow for business development and the other half.
You want to return to shareholders through repurchases and dividends.
Philippe Martin: It's sort of getting the leverage down to three times by the end of the year. Is that the trigger to start that? And based on what you see in the market with respect to business development versus, you know, Vietras trading at only six times EBITDA, does that push you one way or another as you move into 25?
Speaker Change: Thank you very much for the questions, Glen. So for the first one, yeah, the base business, we're not guiding it to 25, but we see the base business continuing to generate and continuing to have momentum similar to what we have this year.
Philippe Martin: You know, we think we can generate, and we have historically, since 2020, generated $450 to $550 million in new product revenue every year, and we expect that to continue.
Philippe Martin: And, yeah, to your second question on capital allocation, I think getting to three times is very, very important for us. That will allow us to be able to use $2.3 billion in free cash flow at minimum to give half back to shareholders through dividends and share buybacks.
Philippe Martin: We're trying to be more aggressive on share buybacks as we move into 2025 and beyond because we'll be at that desired.
Philippe Martin: Leverage Ratio. And we want to also be doing some disciplined business development focusing on in-market or near-market assets. So, yeah, getting into 25, getting that leverage ratio right really is a springboard for us to be able to execute on our capital allocation strategy in 25 and beyond.
Thank you. Thank you.
Speaker Change: Our next question comes from Jason Gerberry from Bank of America. Please go ahead with your question.
Oh hey guys, thanks for taking my questions.
Speaker Change: A couple for me. We saw one multinational company operating in China recently get investigated regarding some reimbursement.
Speaker Change: matters. I'm just trying to get a sense from your perspective if that's an isolated incident.
Speaker Change: This is part of some broader effort around cracking down on different reimbursement practices. It would be helpful if you could just offer any.
Speaker Change: Color around that, and then I didn't, apologies if I didn't hear this, but were there any updates to thinking about Sanestat and LAR and potential to get that approved in the near term and in status of the GA Depot resubmission. Thanks.
Speaker Change: Thank you, Jason. I'll take the first question on China, and then Philippe can...
Speaker Change: Phil Yuen on your new product question. So, you know, we don't have any direct comment on any investigation that's going on in another country. We as a leadership team were just in China last week.
Speaker Change: meeting with the affiliate there. You know, as an organization, we hold ourselves to the highest standards possible. We've got a strong compliance organization in China.
Speaker Change: We've got strong overall structure in China and a very strong affiliate. We've developed, you know, deep and strong partnerships within the healthcare community there. And we feel very, very strongly about our business in China overall.
Speaker Change: Sandor Staten. Yeah, we are still going through FDA review for this product and we expect we'll be in a position to launch the product next year.
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Speaker Change: Our next question comes from Chris Schott from J.P. Morgan. Please go ahead with your question.
Thank you.
Speaker Change: Hi, this is Ethan on for Chris. Thanks for taking our questions. First off, if we look at the deals that you've done this year between the Adorcia and the SGLT2 transactions,
Speaker Change: Is this the type of deals that we should expect going forward in terms of size and scale? And then secondly, just looking to 2025, any initial color on your 2025 expectations for IWDA and how we should be thinking about the pushes and pulls there? Thank you.
Speaker Change: Yeah, thank you, Ethan, for the question. Good morning. And I'll take the first one, and then I'll push to Doretta to talk to you about EBITDA.
Speaker Change: going forward. You know, the Eidosia transaction was a little bit of a transaction of opportunity.
Speaker Change: It's a little bit of an earlier deal than I think it will be normal for us going forward. These were our products that were in Phase 3 development. I think very, very good positive assets. We felt like we could contribute to the continued development of them. We think they've got the potential to be blockbusters if the data comes.
Speaker Change: Impositive Globally. So that, you know, that was a deal of opportunity for us. I think we're really focused right now on doing disciplined business development.
Speaker Change: We want to really focus on in-market or near-market assets, things with which we can leverage our global healthcare gateway, we've got a very strong global infrastructure, and we want to be able to deliver assets that can drive some revenue in the 2025, 2026, 2027 time frame. And in terms of size of deal, yes, you know, I think that's the type of deal we're looking for. I think we're hoping to add multiple different assets over the next couple of years to the pipeline. So we're focusing on, you know, very disciplined business development with in-market or near-market assets.
Speaker Change: And thanks on 2025 questions, yeah, we're not going to be providing forward-looking revenue and EBITDA guidance, but just to your point, just to give you a sense of some of the...
Pushes and Pulls.
Speaker Change: Scott commented earlier on the momentum that we're continuing to see from the base business on the revenue perspective and how we expect that to continue at the top line.
Speaker Change: From EBITDA and EPS perspective, we are currently working through the adjustments post the divestitures from a stranded cost.
Speaker Change: TSA perspective, but going into next year, we are focused on
Speaker Change: really prioritizing adjusted EBITDA stability and so we're really balancing the growth of the business but making the necessary investments in R&D and commercial that can drive our future growth.
Speaker Change: And I would say we'll continue to work and provide clarity and provide really an apples-to-apples comparison when we provide our 25 guidance.
Speaker Change: But we do see things reasonably calibrated in the models, and we also feel confident in our cash flow of $2.3 billion, and we'll provide more color as we get into next year.
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Speaker Change: And our next question comes from Ash Verma from UBS. Please go ahead with your question.
Speaker Change: Sub4x, Ranger DPS. How do you think about balancing business development, investment and share repurchases?
Speaker Change: And then secondly, for emerging markets, yeah, I saw this like ARV supply chain impact. I think we have talked about this for a little bit of time, just curious like when does this start to lap that we don't see this as a drag on the business going forward. Thanks.
Speaker Change: Thanks, Ash, and good morning. And I'll take your first question again and Doretta can pick up your second question. Yeah, we've got a line of sight on getting our debt repayment rate to the right spot of the target that we have talked about at a leverage ratio of approximately.
Speaker Change: 3.0, and we see that, you know, very, very closely to us, and we've got a great line of sight on that. That definitely then allows us to move into our capital allocation, you know, implementing the full capital allocation strategy.
Speaker Change: Minimum of $2.3 billion in free cash flow, half of that to shareholders in terms of dividend and share buyback.
Speaker Change: The other half in terms of business development and building the pipeline, doing that in a disciplined way.
Speaker Change: There have in terms of business development and building the pipeline doing that in a disciplined way I think given the share price and the valuation of the company right now we might be a little more aggressive on the share buyback side than on the BD side going into 'twenty five, but we're looking at a three or four or five year period, where approximately half going to to return to shareholders and have to be deep.
Speaker Change: I think given the share price and the valuation of the company right now, we might be a little more aggressive on the share buyback side than on the BD side going into 2025, but we're looking at a three-, four-, five-year period where we're approximately half going to return to shareholders and half to BD.
Speaker Change: But I think implicit in your point is this idea of the valuation of the company and given that I think we see a nice opportunity as we move into 'twenty five to be more aggressive in terms of share buybacks.
Speaker Change: You know, I think the implicit in your point is this idea of devaluation of the company, and given that, I think we see a nice opportunity as we move into 2025 to be more aggressive in terms of share buybacks.
Speaker Change: And with respect to the ARB business, historically, we have made comments around just therapy shifts that have been ongoing in the business. However, my comments this quarter were really specific to some delays that we saw in the supply of ARB products. And we are currently working to catch up on those backlogs across our ARB portfolio. And that's what we're working through. Those are what my comments were referring to.
Speaker Change: And with respect to the Arab business. Historically, we have made comments around just therapy shifts that have been ongoing in that and the business. However, my comments. This quarter were really specific to some delays that we saw in the supply.
Speaker Change: I have of AARP AARP products and we are currently working.
Speaker Change: On those backlogs across Arab and.
Speaker Change: Arthur RB portfolio and and that's what we're working through that that's those are my comments were referring to.
Thank you. Thank you.
Speaker Change: Yeah.
© transcript Emily Beynon
Speaker Change: And once again, if you would like to ask a question, please press star and then 1. To withdraw your questions, you may press star and 2. Again, that is star and then 1 to join the question queue.
Speaker Change: And once again, if you would like to ask a question. Please press star and then one to withdraw. Your question you May press star into again that is star and then one to join the question queue.
Speaker Change: Our next question comes from David insulin from Piper Sandler. Please go ahead with your question.
Speaker Change: Our next question comes from David Amsellem from Piper Sandler. Please go ahead with your question.
Speaker Change: Thanks, well I don't want to belabor the topic of new launch contribution for a 25 and I know that you've sounded a note of confidence regarding.
Thanks. Well, I don't want to belabor.
Speaker Change: the topic of new launch contribution for 25 and I know that you've sounded a note of confidence regarding
impact from new launches. I did wanna drill down.
Speaker Change: Impact from from new launches I did want to drill down a little more because it does feel to me that there is less in the way of transparency regarding new products are going forward than there has been historically. So so one question I had is you know you you've talked historically about prana.
Speaker Change: a little more because it does feel to me that there is...
Less in the Way of Transparency regarding new products.
Speaker Change: going forward than there has been historically. So one question I had is, you know, you've talked historically about products like Sandostatin-LAR, you've talked about Victoza as contributors, can you talk to how much products like that are going to be contributors for next year? Other products like Iron Sucrose, Venifer, is that going to be a contributor? You've talked about Glucagon, injectable Glucagon in the past.
Speaker Change: Looks like Sandoz stat in L. A are you talking about Victoza as contributors can you can you talk to how much products like that are going to be contributors for next year. Other products like iron sucrose, Jennifer is that going to be a contributor you've talked about glucagon injectable glucagon in the past.
Speaker Change: Is that going to be a contributor and then also one of your competitors have talked about potentially entering the symbicort market next year I'm wondering if you can talk to potential competitive dynamics regarding symbicort. So I know, there's a there's a lot there on specific products, but hoping to get granularity. Thank you.
Speaker Change: Is that going to be a contributor? And then also, one of your competitors, Tevas, talked about potentially entering the Symbicort market next year. I'm wondering if you can talk to potential competitive dynamics regarding Symbicort. So I know there's a lot there on specific products, but hoping to get granularity. Thank you.
Speaker Change: Thank you David Thank.
Speaker Change: Thank you for the question and good morning, just from a macro level, we feel very good about the new product numbers with traditionally we have if you take a look over the last four or five years, we've delivered $450 million to $550 million in new product revenue every year. This year. We're at the high end of it. We believe we're doing very very well in terms of the number of submissions and the number of products.
Speaker Change: Improved overall, we feel very confident in those numbers going forward to get to your sort of specifics around individual products I'll ask felipe to to comment.