Viatris Inc Q3 FY2024 earnings call

• Scott Smith reported an outstanding quarter with sixth consecutive quarter of operational revenue growth, growth in adjusted EBITDA and adjusted earnings per share, and progress in three strategic pillars: diversified and growing base business, financial strength and cash flow, and expanding innovative portfolio.
• Philippe Martin discussed the pipeline, including positive top line results for EFFEXOR in Japan for generalized anxiety disorder, plans for INPEFA leveraging FDA approval in certain ex-U.S. markets, and progress in selatogrel and Cenerimod clinical trials, as well as ophthalmology program advancements.
• Doretta Mistras highlighted base business growth, P&L and cash flow details, debt repayment progress with $1.9 billion repaid, reaffirmed 2024 outlook with base business operational revenue growth of approximately 2% and flat adjusted EBITDA and EPS, and noted fourth quarter sequential phasing impacts on revenue, adjusted EBITDA, and free cash flow.

In the third quarter, Viatris achieved total revenues of $3.8 billion, with operational revenue growth of approximately 3%. Adjusted EBITDA was $1.3 billion, growing approximately 4% from a year ago, and adjusted EPS was $0.75 per share, growing approximately 6%. New product revenues were $133 million in the quarter, with year-to-date total reaching $497 million. On a divestiture adjusted operational basis, the diversified base business grew 3% year-over-year. Brands revenue was up 2%, and Generics revenue was up 4%. In developed markets, net sales grew by approximately 3%. Europe saw durable growth of 6%, North America generics grew 5%, Greater China net sales grew approximately 3%, emerging markets net sales grew 2%, and JANZ grew approximately 8%. Adjusted gross margin was stable at approximately 58.5%, and free cash flow for the quarter, excluding transaction costs and taxes, grew 10%.

• Reaffirmed full year 2024 base business operational revenue growth of approximately 2% and flat adjusted EBITDA and adjusted earnings per share versus 2023, with revisions due to IP R&D related to sotagliflozin licensing agreement.
• Fourth quarter total revenue expected to be lower due to normal product seasonality, phasing of generic products, and generic entrants. Adjusted EBITDA and adjusted earnings per share impacted by step down in adjusted gross margin and increase in adjusted SG&A. Free cash flow in fourth quarter expected to be lower due to divestiture costs, taxes, higher CapEx, and semiannual interest payments.
• Plan to operate within long range target of 2.8 times to 3.2 times gross leverage going forward, with capital allocation balancing shareholder returns and business development.

• Uncertainty regarding investigations in other countries, as mentioned in relation to China.
• Supply chain impacts affecting the ARV generics business in emerging markets, with efforts underway to catch up on backlogs.

Q: A lot of comments around the base business continuing to have strong momentum in 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'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. Is sort of getting the leverage down to 3 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 Viatris trading at only 6 times EBITDA, does that push you one way or another as you move into '25?

A: Scott Smith responded that historically, since 2020, Viatris has generated $450 million to $550 million in new product revenue every year and expects that to continue. On capital allocation, getting to 3 times leverage is important as it will allow using $2.3 billion in free cash flow, half to shareholders and half to business development, and given valuation, might be more aggressive on share buyback side going into '25.

Q: We saw one multinational company operating in China recently get investigated regarding some reimbursement matters. I'm just trying to get a sense from your perspective, that's an isolated incident or if this is part of some broader effort around cracking down on different reimbursement practices. Just it would be helpful if you can just offer any color around that? And then, I didn't -- apologies if I didn't hear this, but were there any updates just thinking about Sandostatin LAR and a potential to get that approved in the near term and status of the GA Depot resubmission.

A: Scott Smith said they don't have direct comment on the China investigation but hold themselves to high standards in China. Philippe Martin said GA Depot has a meeting scheduled with the agency in mid-December and Sandostatin LAR is still in FDA review with expectation to launch next year.

Q: If we look at the deals that you've done this year between the Idorsia and SGLT2 transactions, 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 EBITDA and how we should be thinking about the pushes and pulls there?

A: Scott Smith said the Idorsia transaction was an opportunity deal and they're focused on disciplined business development of end market or near-market assets. Doretta Mistras said they're not providing forward-looking revenue and EBITDA guidance but are focused on adjusting EBITDA stability and balancing growth with investments in R&D and commercial.

Q: Just a capital allocation question. So with bulk of the debt paydown that you were sort of driving towards behind you and the stock trading at like sub-4x run rate EPS? Like, how do you think about balancing business development -- investment and share repurchases? And then secondly, for emerging markets, yeah, I saw this like ARV supply chain impact. I think you 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?

A: Scott Smith said getting debt repayment to the target leverage ratio allows full capital allocation strategy, with half of free cash flow to shareholders and half to business development, and might be more aggressive on share buyback side. Doretta Mistras said regarding ARV business, they're working to catch up on backlogs in ARV and ARB portfolios.

Q: I don't want to belabor 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 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 going forward than there has been historically. So one question I had is you've talked historically about products like Sandostatin LAR. You 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, Venofer, is that going to be a contributor? You talked about glucagon, injectable glucagon in the past. Is that going to be a contributor And then also, one of your competitors, Teva's talked about potentially entering the Symbicort market next year. I'm wondering if you can talk to potential competitive dynamics regarding Symbicort.

A: Scott Smith asked Philippe Martin to comment. Philippe Martin said they're confident about $450 million to $550 million in new product revenue next year including complex products like glucagon, iron sucrose. Corinne Le Goff said Breyna, their complex generic in Symbicort market, is expected to continue delivering growth.

Q: Just a capital allocation question. So with bulk of the debt paydown that you were sort of driving towards behind you and the stock trading at like sub-4x run rate EPS? Like, how do you think about balancing business development -- investment and share repurchases? And then secondly, for emerging markets, yeah, I saw this like ARV supply chain impact. I think you 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?

A: Scott Smith said they've got line of sight on debt repayment to target leverage, allowing full capital allocation with half to shareholders and half to business development, and might be more aggressive on share buyback side. Doretta Mistras said they're working to catch up on ARV and ARB backlogs.

Q: Could you comment about sotagliflozin in terms of the contributions and the number of markets that you plan to launch in the next one to two years and how should we think about modeling this into our thoughts? Secondly, a big picture thematic question. With the new administration, it's likely that we could see a pushback towards making America. I want to understand how could that change your priorities towards the U.S. generics market? Is this something that you will want to refocus or increase in terms of focus and future revenue contributions from this region?

A: Scott Smith said it's too early to understand healthcare implications of new administration. Philippe Martin said they'll leverage U.S. approval to register sota in large emerging markets, Canada, Australia, New Zealand, with start of revenue contribution around 2027. Corinne Le Goff said Sotagliflozin fits with their cardiovascular infrastructure in launch regions.