Viatris Inc. (NASDAQ:VTRS) Goldman Sachs 43rd Annual Global Healthcare Conference June 14, 2022 4:20 PM ET
Company Participants
Bill Szablewsk – Head, Capital Markets and IR
Rajiv Malik – President
Sanjeev Narula – CFO
Conference Call Participants
Nathan Rich – Goldman Sachs
Nathan Rich
Hi everyone. Welcome to the afternoon sessions at our conference. My name’s Nathan Rich, and I cover the U.S. generic space at Goldman. I’m going back to my colleague. We’re very pleased to welcome Viatris for our next session.
We’re joined by the Company’s President, Rajiv Malik; CFO, Sanjeev Narula, and Bill Szablewsk who runs Capital Markets and Investment Relations. Good to see all of you. I’m sorry that it had to be virtually. I’m sorry, Michael wasn’t able to make it as well. There’s always next year, right?
So, why don’t we jump in to the Q&A if that’s okay. And I wanted to start maybe Rajiv with you, a high level one on the strategy. At the analyst day earlier this year, you announced the divesture of your biosimilar business, as well as some other asset sales that you plan to do, kind of reprioritize capital deployment towards share repurchases and shifted focus to new therapeutic areas with some 505(b)2 opportunities. But throughout the day, I kind of want to get into each of those separately. It seemed to be like a pretty meaningful change in terms of what you laid out maybe a year prior, immediately following the close of Upjohn. So, if we look out over the next three or five years, can you talk about why these changes that you announced kind of position the Company better and how you see it kind of fitting into the industry, maybe differently going forward than you did previously?
Rajiv Malik
Yes. Thank you. Thanks Nate. And
Bill Szablewsk
Rajiv, just real quick. Nate, just to cover off the disclosure here.
Rajiv Malik
I’m sorry.
Bill Szablewsk
That’s okay. Thank you. During today’s discussion, we may make forward-looking statements on a number of matters. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today’s projections.
Please refer to our SEC filings for a full explanation of those risks and uncertainties and the limits applicable to forward-looking statements. Also during today’s discussion, we will not be providing any updates to our 2022 guidance or discussing Q2 2022 or year-to-date results. Thank you. Back to you Rajiv.
Question-and-Answer Session
A – Rajiv Malik
Yes. Thanks Bill. So Nate, thank you for having us. It is great to be out there in person. Let me start with that.
Now, I think you have a lot in your first questions loaded, and let me break it into two, three parts. The one is, I think, you would appreciate when we — company was born, we had about 45 days to come out and give our first guidance, which was in ‘21 February, or sometime around that. And we didn’t have enough time to take a deep dive and appreciate what we had pulled together and understand the assets we have, understand the geographical spread of the — our markets and strengths of those markets. So, once we did that — we did that work in 2021 — throughout the 2021. We took a deep dive on every aspect, how do they fit in today as we go along.
We had four — I think there are four criterias we had. Can we unlock a trap value? Can we free up the capital? Can we simplify the Company? And do we have assets which are perhaps better in the hands of another focus player than one of the assets in our hand? So, these were the criteria which we evaluated — just to evaluate every asset. And these are all well for forming assets, Nate. And they have served their purpose, and they’re serving their purpose. So, we took this dive. And I think we came up with a portfolio of assets and the Biocon Biologics transaction was the first of its kind. And it’s where — everybody knows where we trade at. And unlocking the value at 16.5 times multiple, and then trying to — because one of the phase 1 commitment was all around the capital allocation and total shareholder return.
So, I think what we have done, we had enhanced, we have basically given ourselves more optionality now. We have a strong operational performance behind us in the four quarters. We all know that cash flow has been — free cash flow is our North Star. We have strong cash flow generation, $1 billion in the Q1. So, building upon that and having additional capital gives us additional optionality. That was one piece of your, I think question.
The second question was about the therapeutic area and where the Company is going. And I would I think like to also talk a little bit about R&D, because on February 28th, when we spoke about this overall strategy, there were three components. There was a component about divestitures. There was a component about R&D step-up, and there was a component about three therapeutic areas.
Now, we gave a directional number of 9%, and I think it was a little bit out of context because what we spent today is well known. It is about 4% of our revenue we spent in R&D, which is roughly $650 million or something around in that range. And if you have tracked us for the last four or five years or six years, that’s what we have been spending, $600 million, $700 million in R&D and we have been getting $600 million, $700 million in annual launches. So, it’s a pretty good 1:1 payback if you spend over there.
Legacy Mylan was spending about 6%, when we brought Upjohn together. Upjohn, as all you know, Upjohn didn’t have any R&D. So, overall spend came down to 4%. So, if we are looking something, there are markets, which are — where we have a lot of opportunities to spend, the markets like China, the markets like Japan, or rest of world. Maybe once we — if we are looking at it, we will gradually and diligently step up our R&D. And I’m not giving any guidance over here. I’m just giving you directly what makes sense for the business to bring it back to where business needs to be.
From R&D strategy point of view, nothing has changed. We always said going up the value chain from the science perspective, complexity perspective, and as well as the margins perspective. So, our journey where we started with the commodity generics, then it went to the complex generics. And we are a development house, not a research company. And our capabilities are well proven. Whether, if you see our track record, which I don’t need to again, whether it’s a Wixela, Copaxone or the biosimilars, we have been there.
So our, I think strategy has been always going up the value chain. And one of the focus area over the next few years is to further go up that path, bring in — you see Yupelri is a good example. It’s a NCE in a very space where we are good at. Let’s just take that as an example. And can we identify two or three therapeutic areas, where we don’t want to compete with the GP sort of — or a big pharma, or we don’t need to be a GP oriented products, specialty sales force. Can we identify few more Yupelris, few more 505(b)2? And these are our strengths. We are playing to our strengths? This is where we have done well. This is where we have a lot of opportunity to go up the value chain. And this is where we see us going as we move on.
So I’ve tried to, Nate, answer your question from why restructuring, why stepping up R&D makes sense, and why these three therapeutic areas.
Sanjeev Narula
Nate, if I could just punctuate kind of little bit of financial profile behind what Rajiv just talked about kind of in the context. So, if you think about just the Biocon transaction, start with that. That transaction is margin accretive, because of the profit share the Biocon gross margins are lower than the Company average of — our guidance is 58 points. So, [Technical Difficulty] the transaction that’s margin accretive. The rest of the items we’re looking at to divest that gently align with the Company averages, we provided a pro forma illustrative financial profile of the remaining Company. So, you can probably see that. But I think important thing, qualitatively, if you look at it. As far as the margins are concerned, because of what Rajiv just mentioned about focusing on moving up the value chain 505(b)2s, NCEs, we expect the gross margin to stabilize.
Second is because of all the work that has happened on these synergies, both in ‘21, ‘22 and ‘23 we expect SG&A line to get the benefit of that and will stabilize at about 20%. And then finally, if you look at the cash flow coming out of that, you would expect a sustainable and a strong cash flow as our onetime time costs are coming down over a period of time. So, you would see through this reshipping initiative a company which will continue to generate a strong cash flow. And on top of that, the cash flow — the proceeds that we will get $4 billion net of tax and net that pay down from these divested assets will provide us enough fire power for share buyback, additional BD — develop BD and investing organically in the Company.
Nathan Rich
And I guess the other question we get is how do you replace the growth that biosimilar was going to deliver? And Rajiv, you started to get into that, but I wonder if we could maybe dive a little bit deeper into sort of the new areas of focus, whether it be those three therapeutic areas that you highlighted at the analyst day, I think ophthalmology, GI, and dermatology. Do you see those in particular as having synergies with your existing business that if you can add on an asset or two, you can kind of really accelerate what those therapeutic areas could become?
Rajiv Malik
Nate, we have a lot to work to when — let’s just say, once biosimilars are done, we are still a broad portfolio of 3,000-plus products, 30,000 SKUs across multiple geographies, a broad portfolio of generics across these geographies. We are therapeutic agnostic. We are perhaps in 10 plus therapeutic areas where we have the brands, some of the established brands, but also the iconic brands, like Lipitor and all that. So, that’s not changing. When we are going up the value chain, I think that’s what I tried to say that we are trying to play towards strengths. One, our development capabilities, which we believe in these areas, whether it’s ophthalmics or dermatology or GI, we have enough over there to work on.
So, for us to find a 505(b)2 or ANC opportunities, a sweet spot over here, because you don’t need a large clinical study, outcome-based clinical studies over here. You don’t need — we have a proven track record of taking a Phase 2 and executing it, bringing it to the market. So, we believe in this space, whether it’s ophthalmics or dermatology or GI. And they also align well with our commercial strengths. For example, the GI where I think Europe is one of — key area for us is gastroenterology with the Creon, Amitiza for Japan. So there are products which — these are the areas where these play to our commercial stance also as well as scientific. And whole idea is to get more of 505(b2) or NCEs in this space and go up the value chain.
Now, other than biosimilars, I just want to mention, I think we have a very solid portfolio of complex injectables, which I’m very optimistic about. Partially, I’m very optimistic that that’s a great portfolio to have for the next few years, number one. Number two, we have a host of 505(b)2 programs, like Copaxone once a month, or Xulane low dose, or just a lifecycle management on Effexor we are doing and meloxicam product we have. So we have quite a few products and we continue to identify more to add into this bucket, so that we don’t lose our therapeutic agnostic face to the customer. But at the same time, we concentrate on these therapeutic areas to go off the value chain.
Nathan Rich
And do you feel like these areas can be developed and kind of further strengthened through internal R&D? And does this become part of that $600 million to $700 million that you plan to spend or do you see — do you think you may need to look externally to kind of continue to build out kind of whatever kind of therapeutic areas you end up wanting to build around?
Sanjeev Narula
So we have fairly good internal capabilities and we have never hesitated to bring on more capabilities if we believe that we are getting into a space and we need to get more. And we are absolutely open to looking out there that if there are opportunities available, which can be brought in as a tuck-ins or we can take the science or some anchor assets, so we will definitely looking into all three.
Nathan Rich
Okay. And then, I guess, could you maybe — I think it’d be helpful to try to crystallize this, as in an example. I don’t know whether it’s derm or GI, but like — and you touched on it maybe a little bit with Yupelri. But could you kind of walk us through sort of, how you see like one of these therapeutic areas kind of coming together, what type of assets that are involved? Will they mainly be generics or complex generics, or could you see some kind of — some specialty brands as part of this? So, if you could maybe just walk us through one of the examples, it could just kind of help crystallize this for people.
Rajiv Malik
Absolutely. Look, it’ll not be generics. I’m not talking about generics over here. I’m talking of either 505(b) — because take an example. Like, can we have a transformer patch of a Parkinson’s — in this, let’s say — stay over here in these therapeutic areas. And can we have a transformer patch as a 505(b)2 in one [Technical Difficulty].
Sanjeev Narula
Yes. So on — as far as the valuation is concerned, Nate, we remain confident in terms of the ranges that we provided. And we have obviously been in constant touch, as Rajiv talked about, with the bankers and we remain confident. There is a range that we provided. These are all attractive assets in the hands of the right people. And we remain confident, even under the current market situation.
The second point about the investible proceeds of $4 billion, I mean, that’s the work that is going on right now. And we are kind of laying out the priorities. But Rajiv talked about in terms of where we want to focus on. Obviously, our priorities looking at share buyback, considering where the share price is and we believe we are highly undervalued from that perspective. So, clearly that is a priority. Investing organically, you see how productive our organic investments are. We will obviously continue to invest there. And then looking at inorganic opportunities. Again, looking at those high value NCEs in the areas that Rajiv just talked about. All that work is going on right now, but we remain committed and diligent in executing on the strategy.
Rajiv Malik
And your first part of the question was, what is it? I can tell you that what it is not. We are not walking away from geography. We are not walking away from a business segment. These are the parts of the business, which were yesterday, perhaps where we were must have. Today, they are nice to have. They are well performing assets, and they fit in one of those four criteria, which I outlined.
Nathan Rich
And Sanjeev, on the free cash flow outlook, could you talk to us about how we should think about what the kind of go-forward run rate of free cash flow will be following the divestiture, both of obviously the biosimilar business, as well as these other planned assets. But then also, I would think an offset to that is, step-down in some of these one-time cash costs. So, when you put that together, kind of, how should we think about the run rate going forward?
Rajiv Malik
Sure, sure. So clearly, cash flow, as Rajiv mentioned at the beginning is the financial North Star for the Company. You saw a performance last year, very strong cash flow performance. We have said on our phase 1 commitment, we will generate over $8 billion of cash flow in three years. That was ‘21 to ‘23. So, we delivered $2.5 billion last year. Our guidance for this still is $2.7 billion, and we are well on way for that $8 billion free cash flow before any of these divestments take into account. And that will allow us to pay down on our commitment of $6.5 billion of debt, and then returning capital to the shareholders, which we did last year with the initiation of dividend and then we actually grew the dividend at the beginning of the year. So, we are on track with that.
Clearly, as we divest some of these assets, there is going to be some step-down in the EBITDA, but not significant from that perspective. Now take it to the next level as we divest these assets. And I mentioned about with — starting with Biocon, and then you put all the assets together. You have $4 billion of additional investible cash proceeds that you will have that will be again put to use from organically and share buyback and all the other items. What you should also see at the end of the day, the remainco will continue to drive significant cash flow as the one-time cash costs keep coming down. We’re expecting beyond 2023, the one-time cash cost to be in the range of 500 to $700 million. And remember this year as per our guidance, that cost is about $1.3 billion. So, you would see remaining company will have significant cash flow, improvement in cash flow conversion, lower one-time cash cost, and then you have the investible proceeds from all the reshipping initiative.
Nathan Rich
Okay, great. I have one more, then maybe I’ll pause and just see if there are any questions from the audience. Bill, I know that you mentioned that there’s not going to be a discussion around guidance. But if I could ask a clarification just on the guidance update that you gave with 1Q, you didn’t update for FX headwinds. I think you called them out as a 2% headwind as of April. I guess, are you planning to update the annual guidance for FX with the 2Q update? And I guess, all else equal, simplistically, would that mean the guidance comes down by 2%? I obviously understand things have changed since then. And I don’t know if you can kind of comment on FX moves in the interim and maybe what that would mean. But I just wanted to ask a clarification just in terms of what investors can expect the update to be with 2Q?
A – Sanjeev Narula
So, Nate, first, I think it’s very important to kind of mention, as we said on the first quarter call. Operationally, FX aside, we are performing in line with our expectation, in line with our guidance. So, I think that’s the first point of note. Clearly, as we pointed out, FX is a headwind and we mentioned that if the April spot rates were to hold for rest of the year, there is going to be a 2% impact on the top line and EBITDA. You also know, with everything that is going on in the world, dollar has further strengthened in the last two months against all the major currencies, like euro and Chinese RMB. 70% of our business is international business. So, we look at all of that, and then we will look at second quarter call and keep provide you an update. Clearly FX is the headwind, but I think an important note, we’ve been very transparent and we will continue to be transparent. But there’s so much moving going on right now, I think you will hear more from us at the second quarter call.
Nathan Rich
Okay, great. Why don’t I stop there and see if there’s any questions from the audience.
Unidentified Analyst
Great. Are there any questions at this time, and thank you all again for coming out to California. We’re really thrilled to have Viatris here today. Nate, maybe I’ll turn it right back to you. There are no questions at this time. Maybe we’ll try again after.
Nathan Rich
No problem. Rajiv, I wanted to maybe move into some specific product questions. First on Symbicort you obviously got the tentative approval. I think the hearing in court was last month. I guess now that that proceeding has closed, I understand the decision probably won’t come for another several months, but I guess, do you have any view on the outcome of that trial, and then potentially launching at risk based on how that court proceeding played out?
Rajiv Malik
Nate, first, we are very pleased that we will be again bringing the first sort of drug device and hard to make Symbicort to the market. We are following litigation, as you would expect us, very closely. And we are very pleased with how it’s progressing. From the point of view that — of launch, we continue to be in state of readiness if an opportunity comes our way. But just to reconfirm, this is not in our 2022 guidance. If this will be, this will be above and beyond that. This will be a nice opportunity if we end there.
Nathan Rich
Okay, great. And then, you did keep the rights to biosimilar Botox. I guess, how do you see that kind of fitting into the derm strategy overall? And do you see this sort of as an opportunity across both, the medical and aesthetic indications? And maybe just kind of what you see as the go-to-market strategy at this point for that product? Work to be done, but…
Rajiv Malik
Yes. I think Botox — first thing is, we are at this moment — as you know, Nate, it’s a highly complex product, first of its kind. And we are excited to the progress we have made so far. We are at this point nailing down the signs, nailing down our FDA’s expectation and how are we going to execute to those expectations. And I’m very excited that I see FDA being motivated to bring a biosimilar to a product like Botox to the market, because they are also working very proactively with us. So that’s one part.
So, our next two years’ effort will be now, how do we execute to that plan and bring this product to the filing? And this will be not just USA, we will file this globally. And at that point of time, I can tell you, once you have a first biosimilar nailed down, the optionality belong to us, whether we are going to have a just medical, which is a considerable, almost 55% of the business are aesthetics. And if we believe that somewhere it is not playing to our strength, we will partner. So I take Botox as a holistic opportunity and not just a piece of the business.
Nathan Rich
Great. Makes sense. And then, Restasis, I think was another big opportunity, this year in particular. Could you maybe update us on the competitive dynamics, now that there are multiple players out in the market? And it certainly seems like, you stated you are happy with how the launch is playing out. I think, at least the IQVIA data we can see certainly supports that. How do you see the dynamics of the market changing, now that it’s maybe becoming a bit more competitive?
Rajiv Malik
Again, Nate, Restasis is another good example. We are the only one who have approval at this point of time. The other three are the authorized generics. I think the Lupin was the last to enter. We have, Apotex, KVK and Lupin was the last to enter the market, I think last week only. I see market becoming more competitive as more AGs launch. I don’t know what’s holding these authorized generics back at this point of time. Maybe it’s the supply from AbbVie or not. We are very excited with the progress we have made and what we had planned and what we have got out of this product. This is going to be important contributor for this year for us in helping us deliver $600 million of the new launch revenue, which we have set up for us.
Nathan Rich
And I wanted to ask on China too. Obviously, a number of moving pieces in that market. I think revenue came in a bit higher in the first quarter. You kind of highlighted the COVID impact on retail was maybe offset by strength in the hospital channel. I think you specifically called out Lipitor and Norvasc. I think the lockdowns obviously have kind of extended longer than we had anticipated, but are maybe starting to ease. I mean, how does that impact the dynamics in the retail channel and I guess, also maybe potentially the hospital channel as well? If you could maybe just — do you kind of expect a kind of similar dynamic in the second quarter as what you saw in the first given that I guess kind of the lockdowns maybe accelerated as we got into the heart of April and May?
Rajiv Malik
Look, China has been a pleasant surprise for us from overall performance point of view. We are very confident about — and one of the differences, I think the sales force, the highly trained and qualified sales force, and they’re — how they’re penetrated the hospitals and all that, that — and that is now showing that when you are in a COVID sort of situation, I don’t think our business has missed a beat. And we don’t see as we go along in the year and where we stand today, I don’t see, we are going to miss that — miss a beat on that business, just because of the COVID. Now, what had happened is, as you will expect, there will be a little bit shift from one channel to another channel. You will see a little bit more strength in the hospital channel as compared to the retail channel, just because the retail is impacted, as you are in the lockdowns and all that. So, a product like Viagra, which is in retail channel, you will see a little bit softer than what we had expected, but then you will see the hospital is going to make it up for that. And we’ve been very confident about China’s business.
Nathan Rich
Great. And maybe just last one in the minute we have left, just on the cost inflation. That’s obviously been an issue for a number of companies. I mean, I think in pharma, it’s maybe a little bit different. I think you’d initially guided to $200 million of input cost inflation for the year. I think, more recently, we’ve actually seen some API pricing decline out of China. I just wonder if you could maybe comment on what you’re seeing — and are you seeing any of that price pressure ease as maybe China opens back up a little bit?
Sanjeev Narula
Yes. So, Nate, I think what I’d say, we called it out the first one, when we gave out our guidance in terms of the inflation pressure. And we estimated it right. Right now, we are tracking in line with what we had called out as the inflation impact. There may be quarter-to-quarter variation, but we’ll provide that. But overall we are in line and we don’t expect inflation to have any more impact more than what we have included in our guidance.
Nathan Rich
Okay, great. Well, I think we’re out of time. So why don’t we end it there. Rajiv, Sanjeev, Bill, great to see you. Thanks very much for the time this afternoon. Sorry, I couldn’t be there, but I appreciate all the comments.
Rajiv Malik
Thank you very much.
Sanjeev Narula
Thank you for having us.
Nathan Rich
Thank you. Bye.
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