Viatris Inc. (NASDAQ:VTRS) Q1 2024 Earnings Call Transcript

Viatris Inc. (NASDAQ:VTRS) Q1 2024 Earnings Call Transcript May 9, 2024

Viatris Inc. misses on earnings expectations. Reported EPS is $0.09417 EPS, expectations were $0.68. VTRS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to Viatris Q1 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that today’s event is being recorded. I would now like to turn the conference over to Bill, Viatris Head of Capital Markets. Please go-ahead, sir.

Bill Szablewski: Good morning, everyone. Welcome to our Q1 2024 earnings call. With us today is our CEO, Scott Smith; CFO, Doretta Mistras; and Chief R&D Officer, Philippe Martin. 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 risks 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-GAAP measures to most directly comparable GAAP measures. When discussing 2024 actual results, we will be making certain comparisons to 2023 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 ’24 and ’23 from the 2023 period.

When discussing our expectations for 2024, we will be making certain comparisons to 2024 results on a divestiture adjusted operational basis, which excludes the impact of foreign currency rates and also excludes from guidance the forecasted results from the date of closing until the end of the period for the divestitures that closed in 2024. With that, I’ll hand the call over to our CEO, Scott Smith.

Scott Smith: Good morning. Our first-quarter financial results demonstrate continued execution against our business fundamentals, which includes maintaining base business stability while driving new product revenue and executing on our vision for future growth. We are making progress on all our key priorities, including completing planned divestitures, continuing to pay down debt, increasing shareholder return, fueling our base business, and importantly, making strategic investments in future growth. Since last quarter’s call, we closed our transaction with Idorsia and held a successful R&D event in which we reviewed key elements of our base business pipeline and did a deep-dive into our newest assets, selatogrel and cenerimod.

Our focus for the event was outlining how we are continuing to evolve our R&D strategy and deliver on our goal of assembling a more durable, high-margin portfolio of patented innovation on the foundation of our strong base business. We were joined by two key opinion leaders, Dr. Deepak Bhatt, Director of the Mount Sinai Fuster Heart Hospital and a widely recognized cardiology expert in Dr. Anca Askanase, Founder and Clinical Director of Columbia University’s Lupus Center. Dr Bhatt and Dr. Askanase discussed challenges in treating acute MI and lupus, highlighting the need for highly innovative novel products that have the potential for meaningful patient impact that address significant unmet need in these two areas. We also reviewed the study designs for the Phase 3 SOS-AMI study for selatogrel and the Phase 3 OPUS studies for cenerimod.

I’m pleased to say that since we closed the transaction, we are already leveraging our own existing infrastructure and experience to expand and accelerate the development plans for both assets. Turning to the first quarter, we delivered total revenue of approximately $3.7 billion, adjusted EBITDA of approximately $1.2 billion, adjusted EPS of $0.67 per share and free cash flow of approximately $565 million. We have now closed our women’s healthcare business divestiture. We expect to close our API divestiture imminently. We are on track to close the OTC divestiture by midyear, subject to receipt of certain regulatory approvals and consents. Today, we are reaffirming our 2024 financial guidance after adjusting the ranges solely to reflect the impact of divestitures and acquired IP R&D.

We are also reaffirming our 2024 new product revenue range of $450 million to $550 million. From a capital allocation perspective, we continue to focus on delivering strong total shareholder return. In the first quarter, we returned $393 million to shareholders in dividends and share buybacks and our Board of Directors has declared another quarterly dividend of $0.12 a share for this quarter. We also continue to pay down our debt and we are continuing our efforts to identify, vet and secure additional best-in-class patented assets that have the potential to contribute to our future revenue growth. Before we move on, I want to talk about the executive leadership team we’ve put in place since our last call to deliver on our strategy. Executing on our base business while also pursuing opportunities for innovation and growth will be key to our future success.

With these two priorities in mind, we have built a leadership team that is a balance between the talented group of leaders we already have within Viatris with some new faces who add new skill, new capabilities and new areas of expertise. The most recent addition to the team is Corinne Le Goff, who joined us as Chief Commercial Officer. In addition to bringing a wealth of experience from serving in executive leadership roles at companies across the biotech and pharmaceutical industries, Corinne has also lived, worked, and studied around the world, bringing a global perspective that is important to a company like Viatris that reaches patients in more than 165 countries. I’m very pleased to have Corinne on board. I look forward to working with her and all of the members of the executive leadership team as we continue to build the truly unique company that we have envisioned.

Now let me turn it over to Philippe Martin to discuss progress on our pipeline. Philippe?

Philippe Martin: Thank you, Scott. I’d also like to welcome Corinne to Viatris and I look forward to working with her. Since our last earning call, we held an R&D event to discuss key elements of our pipeline as well as details about the collaboration with Idorsia, including the two potential blockbuster assets, selatogrel and cenerimod. As we said, we have built a strong foundation. Our base business pipeline and portfolio is expected to keep delivering consistent results, currently reaching more than 1 billion patients a year. Our new partnership with Idorsia has the potential to broaden that reach. We are very excited about selatogrel and cenerimod. They are highly innovative products that have the potential to deliver meaningful patient impact and significantly advanced treatment in areas of high unmet medical need.

The deal closed on March 15 and since then we have brought on-board approximately 80 Idorsia employees, ensuring no interruption in program continuity. They are a team of talented drug developers who are fully dedicated to driving forward the development programs for both assets. For selatogrel and cenerimod, we are focused on expanding and accelerating enrollment of the Phase 3 SOS-AMI study and Phase 3 OPUS studies, respectively. We are adding approximately 250 sites to each program and we are expanding into additional regions, leveraging the strength of Viatris’ global reach. We have initiated the development of lifecycle strategies for both assets looking to maximize these opportunities by developing additional indications or expanding into broader patients’ populations as well as optimizing labeling and launch sequencing globally.

Finally, we will have an oral presentation at EULAR in June focused on cenerimod’s effect on biomarker of inflammation in SLE. Looking at our eye care pipeline, we launched Ryzumvi in the US for the reversal of pharmacologically induced mydriasis on April 1st. We are actively enrolling Phase 3 studies for MR-139 for the treatment of blepharitis and MR-142 for the treatment of dim light or night vision disturbances. For MR-146, our gene therapy for neurotrophic keratopathy, we are targeting an IND submission in the second-half of this year. Looking at our base business pipeline, we have more than 25 products in our novel portfolio. Of those, I’d like to highlight three particular projects. For GA Depot, as you know, our partner Mapi received the CRO back in March.

We are working with Mapi to respond to comments received from the FDA and intend to seek a meeting with the FDA in the next few months. We will determine the next step after that meeting. Phase 3 studies for meloxicam fast acting, a potential opioid-sparing treatment in post-surgery pain are well underway. The Phase 3 study for Xulane low dose for use in contraception has completed enrollment. With our complex injectable pipeline alone, we have more than 50 products in total, 15 products currently under FDA review. Nine of these represent potential first-to-market opportunities. Finally, our core generic pipeline is progressing well with submissions continuing at a steady pace, in line with expectations. In summary, we are making progress on key elements of our pipeline.

We have an incredibly talented team and we have clear plans to deliver on our key R&D objectives to support Viatris’ overall growth. Now, I will turn the call over to Doretta to walk through the quarterly results.

Doretta Mistras: Thank you, Philippe, and good morning, everyone. It’s great to be here to discuss our Q1 performance. As Scott highlighted, we are off to a strong start to the year with our fourth consecutive quarter of top line growth. We continue to execute against our growth plan, which includes maintaining our base business stability and driving new product revenue. Our globally diverse platform is generating growth from our base business in emerging markets in Europe and from higher-than-expected new product revenue. In the quarter, we made great progress on our strategic initiatives. We closed the Women’s Healthcare business divestiture, completed the Idorsia transaction and expect to close the divestiture of the API business imminently.

I will provide an update on these items as it relates to guidance in a bit. And I echo Scott’s comments as it relates to Corinne. I look forward to working closely with her as we continue to drive growth and unlock value from our platform. Turning to first quarter performance, we delivered 2% year-over-year operational growth, which was in line with our expectations. This excludes the impact of foreign exchange, which was approximately 2%. This marks the fourth consecutive quarter of top-line growth and once again highlights the power of our well-diversified global platform. The growth was driven by strength in emerging markets, Europe, and JANZ and by better-than-expected new product revenue of $154 million in the quarter. Moving to our commercial segment, for developed markets, Europe delivered another strong quarter, growing approximately 2% versus the prior year.

We saw growth across our broad portfolio of brands, generics in key markets such as Italy and France, and the positive benefit from new product launches. Our North America business declined approximately 3% year-over-year as a result of channel dynamics and customer formulary changes in our brand portfolio. This was partially offset by approximately 18% net sales growth in Yupelri and continued uptake in Tyrvaya versus Q1 of 2023. Generics performed better-than-expected, driven by new product launches, including Breyna as well as strong performance in base business complex products such as Wixela. Emerging markets had another strong quarter, delivering approximately 9% year-over-year operational growth. This performance was driven by strong results in the MENA and Eurasia regions as well as key countries like Thailand and Malaysia.

Generics grew approximately 10% due to ARV phasing benefits and strength across our broad portfolio. And brands were up approximately 8%, more than expected, driven by key products such as Lipitor, Elidel, and Xalabrands. JANZ grew approximately 2% over the prior year, driven by expansion of business activities in Australia. This helped to more than offset the expected declines due to government price regulations in Japan and Australia. And lastly, in Greater China, our results were flat versus Q1 2023. We continue to focus on the retail segment and on growing the self-paid patient base, while navigating the evolving policy environment. Now, I’ll walk you through the remainder of the P&L and the drivers of adjusted EBITDA and adjusted EPS. Adjusted gross margin of approximately 59% in the quarter was ahead of our expectations and was driven by positive portfolio and segment mix.

As anticipated, adjusted gross margin declined versus the prior year due to price regulations in Japan and the increase in COGS. As expected, first quarter operating expenses increased due to SG&A investments in the eye care franchise, new product launches and progress in key R&D programs. Free cash flow for the quarter met expectations and versus prior year was driven by lower adjusted EBITDA, the closing of divestitures and the timing of working capital. Excluding transaction costs and taxes from the divestitures, free cash flow would have been $648 million. It is important to note that related taxes and transaction costs associated with the divestitures will continue to impact cash flow from operating activities. The proceeds received from the divestitures will benefit cash flow from investing activities.

Moving to the balance sheet and capital allocation, we ended the quarter with approximately $1 billion in cash and cash equivalents on hand. We continue to execute on our balanced capital allocation framework and returned $393 million of capital to shareholders in Q1 in the form of both dividends and share repurchases. Now, I’ll walk you through the details of our financial guidance for the rest of the year. We are reaffirming our 2024 financial guidance after adjusting the ranges solely due to divestitures and acquired IP R&D. These adjustments represent approximately $270 million in revenue, $86 million in adjusted EBITDA and $0.04 in adjusted EPS for the remainder of 2024. The underlying fundamentals for 2024 total revenue guidance include no change to the base business growth of approximately 2% operationally versus 2023 and continued confidence in meeting our new product revenue range of $450 million to $550 million due to the strong uptake of Breyna and the breadth of our new product launches.

Lastly, if April foreign-exchange rates hold for the rest of the year, there could be a headwind of approximately 2% on full-year revenue. Now a few comments about anticipated phasing for the rest of the year. Total revenue is expected to be modestly higher in the second half, mainly due to normal product seasonality. New product revenue is expected to be higher in the first half driven by Breyna, which is treated as new product revenue through July. Adjusted gross margin is expected to be higher in the first half versus second-half due to product and segment mix. We expect operating expenses to be relatively evenly phased between the first half and the second half. Taking these factors into consideration, adjusted EBITDA and adjusted EPS are expected to be slightly higher in the second half.

Free cash flow is also expected to be more weighted to the second half. As a reminder, free cash flow tends to be lower in Q2 and Q4 due to timing of semi-annual interest payments. Based on the strong fundamentals of our business and our progress to date against our objectives, we believe we are well-positioned to meet our expectations for the remainder of this year. And with that, I’ll hand it back over to the operator to begin the Q&A.

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Q&A Session

Operator: [Operator Instructions] And the first question comes from Nathan Rich with Goldman Sachs.

Nathan Rich: Great. Good morning and thanks so much for the questions. Maybe a couple of product questions to start. First, I guess Doretta, you mentioned the North America softness in brands. Could you elaborate on the channel and formulary dynamics that you saw? How much of that was different than your expectations? And is there anything you can do to improve access there? And then with respect to GA Depot, in the expected meeting with the FDA in the third quarter, I think you had previously talked about kind of site inspection that needed to be done as well as some questions on the Phase 3 study. I guess, as you had a little bit more time to talk to Mapi, what is the current kind of timeline for remediation that you see and when that product could potentially get approval and launch?

Scott Smith: So, Scott Smith here. Thank you, Nate, and good morning to you. I’m going to kick it over to Doretta to answer the product-specific question and Philippe will address the GA Depot. So, Doretta?

Doretta Mistras: Great. Thank you. Specifically, I would say in North America, as mentioned, as you noted, we were impacted by two items. The first was a formulary change and the second was channel dynamics. The formulary change really impacted EpiPen. The change in channel dynamics in Q1, we saw slightly higher-than-expected utilization in certain kind of legacy brands and that was really due to kind of higher utilization in those non-commercial channels. I would say kind of over the course of the year, we do expect those impacts to be offset by growth in other brands. So we saw 18% in Yupelri growth, Tyrvaya growth. These are factors that we’re all kind of monitoring in Q1. I would say we were kind of — it was a disproportionate impact than what we kind of originally anticipated. But I think as we go through the course of the year, we expect these to be offset.

Scott Smith: And, Nate, just a couple comments before I turn it over to Philippe. Q1 for brands in the US is always a little bit choppy. Again, as Doretta said, we expect to have good full-year performance. And I would just like to say overall, the business is performing as expected globally. It’s a very large and diverse business. There’s lots of puts and takes, but we’re very happy with the overall global performance this quarter.

Philippe Martin: Thanks, Scott. And so with regard to Mapi and GA Depot, we are working with them to address comments that we received from the FDA, as I mentioned, and seeking a meeting in the next few months. Once we have that meeting, we’ll have clarity on — more clarity on the timeline and what to expect, so we’ll be sharing that with you once available.

Operator: Thank you. And the next question comes from Jason Gerberry with Bank of America.

Bhavin Patel: Hey, guys. This is Bhavin Patel on for Jason. For us, I just want to focus on, I guess, Tyrvaya. The product appears to be about $80 million product with moderate growth. So maybe can you just help us form the bridge to the $1 billion in ophthalmology sales that you’re expecting by 2028 between Oyster and Famy Care assets? I believe the recently launched Ryzumvi was framed as a sort of commercially niche product. So is the key seeing in inflection in Tyrvaya in the remainder of 2024? And then second, on free cash flow, longer-term, do you continue to see the floor as being $2.3 billion unchanged post divestitures, which would be 2025 onwards? Thank you.

Scott Smith: Thank you very much for the question. Tyrvaya, we’re seeing positive trends. We’re seeing continued uptake with Tyrvaya. It performed in line with our expectations in Q1. We’re very hopeful on the trajectory of Tyrvaya. We just started the DTC in Q4 and we’ll see where it goes. That $1 billion that you’re talking about over the next four, five, six years is relative to the whole pipeline of products, right? Definitely, Ryzumvi is a little bit of a niche product that’s complementary to what we’re doing with Tyrvaya in terms of sales call dynamics and things, but we’re continuing to be very, very hopeful relative to the ophthalmology business and we’ve got a number of products in the pipeline.

Doretta Mistras: And specifically to free cash flow, the short answer is, yes, with respect to your question around $2.3 billion kind of — we feel that even post the divestitures kind of as we look into 2025 and beyond, just given the diversity of our business, the portfolio and the stability of the base business as well as some of the kind of broader objectives and cash optimization kind of initiatives we’ve put in place, our business should be able to generate at least $2.3 billion in free cash on an ongoing basis.

Operator: Thank you. And the next question comes from Glen Santangelo with Jefferies.

Glen Santangelo: Yeah, good morning and thanks. Hey, Scott, in your prepared remarks, I mean, you obviously made the comment that API is expected to sort of close imminently. And I didn’t hear clearly what you said on OTC. Is that still expected to close by June 30, I think was the previous timing. Is that still fair?

Scott Smith: Yeah, I think what we talked about in the last time was close by mid-year. I’m not sure if it’s going to be June or a little bit later than that, but we’re expecting to close at midyear. It’s obviously subject to certain regulatory approvals and consents, which are a little bit out of our control, but that continues to track very well. We’re pleased with our progress there. We should be closing that transaction by mid-year.

Operator: Thank you. And the next question comes from Ash Verma with UBS.

Ash Verma: Hi, good morning. Thanks for taking our questions. I had two. So just on JANZ maybe, can you elaborate the business dynamics here? It seems like the business has been facing some headwinds. I mean, currently you were up 2% on an operational basis, but not a relatively easy comp. And what sort of should be the go-forward trajectory here? And then second, on the new product revenue, good to see the $154 million, how much of that is driven by Tyrvaya? And can you get to your — this year guide for $450 million, $550 million without CapEx on once monthly? Thanks.

Scott Smith: Yeah, Doretta can answer the first part on JANZ and I’ll take the new product question afterwards.