Viatris Inc.'s (VTRS) CEO Michael Goettler Presents at 4th Annual Evercore ISI HealthCONx Virtual Brokers Conference (Transcript)
Viatris Inc. (NASDAQ:VTRS) 4th Annual Evercore ISI HealthCONx Virtual Conference December 1, 2021 7:30 AM ET
Company Participants
Bill Szablewski - Head of Capital Market
Michael Goettler - Chief Executive Officer
Rajiv Malik - President
Sanjeev Narula - Chief Financial Officer
Conference Call Participants
Umer Raffat - Evercore
Umer Raffat
Excellent. Listen, thank you, guys, for joining here. Pleasure to have Viatris management join us. There's a lot to discuss, but let me turn it over to Bill to introduce the management perhaps and share some opening comments from Michael.
Bill Szablewski
Yeah, thank you, Umer, and really pleasure to be here. Today, we have our CEO, Michael Goettler; our President, Rajiv Malik; and our Chief Financial Officer, Sanjeev Narula.
Before we get started for today's discussion, a quick forward-looking statement from the company. 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 these 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 2021 guidance. We're discussing Q4 2021, our full year results. 2021. Thank you very much.
Umer Raffat
Excellent…
Bill Szablewski
Back to you, Umer.
Umer Raffat
Okay, excellent. Well, I know there's so much to discuss. And I think we have until 8 o'clock. So we're going to be very judicious with time. Maybe just at a high level for you, Michael, Rajiv, Sanjeev, all three of you perhaps. There's a lot of buzz out there right now around another large - one of the big three generics business potentially getting spun out of Novartis. And there was an interview last night with Novartis Chairman, where they were asked if there's any possibility of a combination with one of the large players like a Teva or Mylan, Viatris.
I guess, how do you guys think about something like that? Is that even something you guys are even contemplating? Plus, wouldn't there be some massive antitrust problems with anything like that in the first place?
Michael Goettler
Yeah. So, I can comment on that. I think our strategy has been very clear, we laid it out, right? We break it into two phases, what we call the Phase I with year ’21, ’22, ‘23. And what we want to focus on there is on delevering, on paying back our debts, on growing the dividend and delivering on the integration and the synergies, we're well on track for that and we're strongly committed to that.
Phase II is about our catalysts to growth. It’s new capital allocation priorities, unlocking more value for shareholders, and delivering on our pipeline and moving up the value chain to more sustainable longer life cycle type of products. We look forward to sharing details on that with you on our Investor event on January 6.
So all I can say is we also read the report this morning of what Joerg Reinhardt commented, I can say we haven't had any discussions on the topic. Of course, if there's a possibility to create more shareholder value, we consider it, but it's not something we're actively considering at this point.
Umer Raffat
Got it. Okay, got it. Maybe I'll just leave it there. But I do recall a lot of antitrust issues that Teva ran into with Actavis. Rajiv is shaking his head, yes. So I think the practical limitations, perhaps, also maybe even beyond the business considerations. Okay, got it, though. Maybe turning a little more specific than I know, from a business perspective, the Street expectations on your business are sort of in two phases right now. There's a near-term phase where business is being modeled to be flattish. And then there's a post ‘23 phase when some of the investments historically from the R&D organization in the biosimilar starts to set the case for growth.
Is that consistent with how you guys think about it? And how does that translate from an EBITDA perspective near-term versus post ‘23?
Michael Goettler
Yeah. So look, I mean, I think you're looking at it right. We think of it also in two phases, we look at into Phase I where our commitments are very, very clear, and then a Phase II. We're not giving guidance today, obviously, we're going to lay out on our Investor Day exactly how we deliver on our commitments for Phase I. And then we're going to give you the catalyst for the growth in Phase II and the catalyst are our pipeline, which we think is underappreciated. We've got some very strong investments in biosimilars in complex generics that will drive it. We're going to talk about our capital allocation priorities for that time and how we unlock value for shareholders.
But I think the pipeline is really key.
And maybe, Rajiv, you can give a couple of pointers on the pipeline.
Rajiv Malik
No. Thanks, Michael. And I think the Phase II, and as, Umer, you said, pipeline, the complexity and all that elements which we have been building in, I think there are two elements which are underappreciated. One is the - what is the new model or algorithm of a complex product. And we are getting more and more data points, and it's about the sustainability and the durability of this pipeline.
And if you see like go back, right from ‘18 to ‘19, or ‘20, there's been one or two anchor launches, like it was Copaxone in ’18; ‘19, it was Wixela: ‘20, it was Herceptin and Fulphila. And then this year is going to SEMGLEE and as part next year. As we go into ’23, ’24, it's more than one over there, whether it's a GA once a month, whether it's BOTOX coming in ’25, ’26, whether it's coming to EYLEA.
So those launches, I think, the concentration of those complex launches starts building up. And also, you would see the contribution of ’23 - ’22, ‘23 launches is not going to fade out. So I'm very excited to share with you guys on our Investor Day, what are the catalysts for Phase II and how they're going to contribute to the - and it's going to - my y feel is, once we do all that math, it’s going to make our base business relatively more durable than it was yesterday or it today.
Umer Raffat
Rajiv, can I just - two quick follow-ups on that. Hey, I noticed you didn't mention, EYLEA in the growth drivers you just mentioned because I want to put those into…
Rajiv Malik
I thought I mentioned it. I thought…
Umer Raffat
Okay, okay.
Rajiv Malik
There are too many – Umer, there are too many of them, I might…
Umer Raffat
Excellent, fantastic. And then also, Rajiv, maybe 2022 growth drivers, what are those?
Rajiv Malik
I think 2022 is going to be at our SEMGLEE interchangeable launch, for us is going to be a new driver, number one. As part is going to be a second one. Hopefully we'll be able to get AVASTIN very soon. And I'll tell you first time we are seeing the European launches picking up in ’22, it’s whether [indiscernible] Praxbind [ph]. These products are now kicking in. Zytiga in Europe is kicking in.
So European launches are also - generally, European launches are not more than 15%, 20%. But I think Europe is gathering momentum or European business is perhaps the largest business in the segments now. And it's contributing, and it's a - it has a different profile. So I think European contribution is going to get enhanced as we go further.
Michael Goettler
And Umer, as you were thinking about next year, I think I'm sure you're watching that as well as we're watching it is the foreign exchange. As you've seen compared to the first half of the year, dollar strengthened and a large part of our business comes from international affiliate, because of the strengthening of dollar, that's going probably may have some impact on 2022, as we look at our business. So I think that's the other thing that we’re monitoring closely.
Umer Raffat
Makes sense. But Sanjiv, maybe just to pick off of that point, and maybe, Rajiv, if you want to jump in on this, too. I remember speaking to - I remember speaking to a couple of folks who had very large API businesses in India, I'm not going to get more specific, Rajiv probably knows them.
But I remember speaking to a couple of those folks. And the feedback that was very consistent from both of them was that key starting materials that they buy from China, the prices are at an all-time high. And they said this to me four weeks ago. So my sense is the starting material prices probably got higher.
So the way I've thought about it is when I cover a company, like a branded big pharma company like Bill's prior company, when the gross margins are 80%-plus, plus minus 200 bps doesn't move around a whole lot, which is technically a 10% move on the COGS as a percentage of revenue.
But when we're talking about COGS, which is 50% of revenues are in that ballpark, up 10% swing back and forth could move around your gross margins quite substantially. I guess, how should we think about the impact of inflation on raw material prices heading into 2022?
Sanjeev Narula
Yeah. It's a two-part answer. Let me take the first one and then Rajiv can absolutely cover the input cost parts. So first part is obviously on the gross margin is the product portfolio mix. Umer, as we mentioned, I mentioned that in the Q3 call, the evolving product mix, the way we have is going to have a slight negative gross margin pressure on next year and the year after that.
What's happening here? Is it a simple function of our evolving product mix? The revenue or the gross margin that we're gaining from new product launches is less than the revenue we're losing on our base business and some of the competition of complex products. The function of that is going to have a slight gross margin pressure, which you fully anticipate into next year. And then obviously, the input costs, Rajiv, you can speak to that.
Rajiv Malik
Yes. I know, I think you're - sorry, Umer, you're right. You're right about your point about some increase, which we're seeing, especially from the key starting materials, some of the components, especially around the APR business. And we see that and we're seeing this across the sector, and in other verticals also. And other verticals also sometimes impact because we get components and so many other things from the - not just the raw materials, but so many other things to package a product.
So we’ve seen that. And in our industry, again, it's not that as we get this increase, yes, it's a pressure on the gross margins and we – we can’t easily pass it on to our customers because of the highly competitive nature of this business. So yes, we even expect to see some gross margin pressure also because of this like what Sanjeev said, one is evolving mix and second is this inflation.
Sanjeev Narula
Umer, if I may, I think with all the different pushes and poles some of that you mentioned some that weren't mentioned, right? I mean, obviously, we have got the natural erosion. We got the pipeline that Rajiv mentioned. We've got inflationary pressures. We’ve got the FX. We’ve got all these things. But taking all of them into account, what I can say, and again, we're not giving guidance, the guidance will come on January 7.
But we remain confident that the $6.2 billion we put out there as a floor, continues to be the floor. And that's really for EBITDA, adjusted EBITDA. And that's really an important number because that floor of adjusted EBITDA allows us to live on our commitment, allows us to generate $8 billion or more in cash flow over the three years with that, pay down the debt and grow the dividend, which is the commitment that we had for the Phase I.
So I think that's the bottom line picture here. There are lots of pushes and pulls on that, but we are very confident in delivering of that.
Umer Raffat
Got it. Maybe and just to pin it down just a bit more, Michael, and maybe for you, Sanjiv as well, the business is tracking somewhere, at least, by sell-side numbers, somewhere between $17.5 billion and $18 billion in revenue, somewhere in that range. And consensus is modeling, high 50s in gross margin and basically holding it steady year-over-year.
So my take away from sort of looking at numbers being flat year-over-year on gross margin, but then looking at these raw material prices, there must be 100 to 200 bps of sort of gross margin that should be lower on a year-over-year basis, which could even perhaps drive EBITDA to fade just a little bit or how should I think about that?
Michael Goettler
There's certainly pressure on gross margin. Sanjiv, can you elaborate a little bit on that?
Sanjeev Narula
Yeah. So Umer, there is clearly going to be a gross margin, I mean, that we fully expect that and we've been very clear about that. We expect that to happen, both from the evolving gross margin mix and then the inflation we talked about that.
Now, the impact on EBITDA, obviously, we'll talk about that on January 7, but we also have the synergy flow through that - that's going to happen this year, next year and year after that. So obviously, you got to keep that in mind. To figure it out, as Michael pointed out, I think the key thing to note about it is the $6.2 billion is the floor. And rest of all that what the number comes out is probably something that we'll talk about at the Investor Day on n January 7.
Umer Raffat
Got it. So it sounds like there's enough levers in the business to pull to ensure the EBITDA strength, EBITDA momentum continues, even while absorbing impact from gross margin pressure, am I hearing that right?
Sanjeev Narula
Yes, go ahead, Michael.
Michael Goettler
Yes. We're not giving guidance, but the $6.2 billion is the floor and we're confident in that.
Umer Raffat
Okay, excellent, excellent. On free cash flow, I know I've brought it up a couple of times in the past as well. But every time I look at the $6.5 billion debt pay down by 2023, and I sort of add in the impact of dividends, et cetera. It looks like a $3 billion free cash flow for 2022 is not outside the realm of possibilities. I guess how would you speak to that?
Sanjeev Narula
And Umer, again I'd say that, we're not giving guidance, but your math is not far from what our internal expectations are. And I'll tell you it's a - it's kind of a function of couple of things, if you just kind of step back. So we raised our guidance on free cash flow this year. Right now, the midpoint is 2.5%. There are two factors you think in - on top of that, which makes me highly confident of step up and cash flow next year and year after that.
So one is obviously the continued focus of the organization on cash optimization activity, the whole organization focused on looking at networking capital, looking at all aspects where we're investing and how we're investing and continue to optimize. That's number one.
And then second, as I said that in the Q2 call was the reduction in the one-time cash cost to achieve synergy. As those two things happen, the - there will be a step up in free cash flow next year.
Umer Raffat
Got it. Maybe this is a bigger picture. But Michael, as I think about growth kicking in, in the post 2023 timeframe with the biosimilar launches, et cetera, and new products, should we expect over time, and again, not looking for guidance, but over time, the free cash flow to grow over time?
Michael Goettler
I think certainly, we expect free cash flow to growth over the Phase I periods, right? That's for the drivers that Sanjiv gave you, which is, it just take out the reduction in one-time cost that alone would make the cash flow growth and then we have active cash flow improvement activities, what we tried to do with EBITDA, et cetera.
So that all will lead to significant growing cash flow, which makes us confident to deliver at least $8 billion in those three years. We’re not giving guidance for the later years and we'll lay out some of the key drivers for that when we have our Investor Day.
Sanjeev Narula
And Umer, that clearly lays out that over a billion dollars of cash flows, as you did, you can do the math very clearly. Not only allows us to pay down our $6.5 billion of debt we said, will allow us to pay dividend and can grow dividend over this three-year period. So I think that's kind of what we are looking at and we feel very good about our clear path to achieving that in the Phase I.
Umer Raffat
Got it. Okay, fantastic. As I think about the tax matters agreement, which I clearly didn't read on time. One of the things I'm finding is, you guys were held back on the ability to purchase shares, which my understanding is the ability to be able to repurchase shares kicks in November next year onward.
But I guess one of the questions I've had is, is there considerations on the - at the Board level to potentially put out an announcement that's sort of ahead of that November timeframe? Because I feel like there could be a sort of stock impact to a potential announcement like that, too?
Rajiv Malik
Yeah. So well, let me maybe give a little bit more background on the text matters again, because not everybody may be as familiar as you are with it. You know, this relates to the tax free spin that option from Pfizer, and then the subsequent combination with Viatris. And as a result of that, we entered into this Tax Matters Agreement with Pfizer. And that Tax Matters Agreement has certain conditions, limitations on the number of things we can do including share buybacks, right, and that is for the first two years after closing, which means as you pointed out, it sunsets in November 22, so November 22., you know, at the latest, we will be able to consider doing share repurchases, but that may not be the only time.
In addition, Pfizer received a supplemental tax ruling from the IRS which further specifies some of the conditions, so that that's just for background. And look, our TSR framework always contemplated both share repurchases and dividends as waste returning capital shareholders.
A share repurchase program authorization is the topic of active and ongoing discussions at the moment and, you know, the board of directors will consider implementing such a program at the appropriate time.
Umer Raffat
Got it? Got it. Got it. I guess it's a too premature Michael, to get into a potential repurchase announcement as a percentage of free cash flow. Could it be worth one year free cash flow? Is that too premature?
Michael Goettler
It is premature, Umer.
Umer Raffat
Got it? Okay. Makes sense. And maybe also, Michael, from all the time you got spent in China, just your overall take on, are we at a bit of a normalization in China? Or do you expect further fade? Because it looks like the retail business that is holding in quite well, but is Chinese government really just focused on their government dollars? Or are they focused on any dollars?
Michael Goettler
Yeah. So obviously, we're very proud of the performance that we have in China in ‘21. I think we would expect a further evolution of their business driven by DDT and European ‘'22 and beyond. And, Rajiv, maybe you can comment on the retail question specifically.
Rajiv Malik
China, I didn't have good policy continues to evolve, as you're seeing, and the focus out there has good policies to use the BMI or the state dollars to cover as many people and mostly focused on the state, you know, hospital system and that so there. But having said that, I think the healthcare consumerism has been what it has, you know, has been driving the retail, the cash pay, and you know, the contribution of the cash pay - the cash pay, whether it's the, you know, pharmaceuticals or even in the hospitals in the prior adopt, you know, uptick in private hospitals and private insurance you've seen, that's the segment which is contributing to the growth of retail, that's our focus.
I think team had done a good job of transitioning our business more from the hospital into the retail, it's more 40%, 45% of our business product business order. And we continue to focus on that and execute on that path.
Umer Raffat
Got it. Any thoughts, maybe there's a question for the broader panel. Any thoughts on you guys potentially exploring, given all your presence in China, you guys potentially exploring some of the approved branded products in China and launching them in non-China markets? Basically sort of the opposite of just bringing your existing products into China, because it's a strategy that's resonating quite well in the marketplace for several companies now increasingly?
Rajiv Malik
Yeah, look, Umer, I think we're open to all kinds of possibilities. And you know, one of the - I think we'll assets that we have as a company as what we call our global healthcare gateway, right? The infrastructure to bring products to more patients all over the world, right there ready infrastructure, regulatory, manufacturing, marketing, sales, legal development, et cetera.
And it's one of the things we can offer to, you know, midsize companies, small companies all over the world, including companies in China. Yes.
Michael Goettler
And China is a good market to source and [indiscernible] a China is a very - a lot of opportunities are coming up. So, yes, so are given our presence over there and knowledge of that market, I think China will be one key market from the sourcing point of view, where we can source such opportunities and take it to the other markets, emerging markets and European markets.
Umer Raffat
Rajiv, one question, I do want to ask this because you have a lot of experience commercializing several products that have come in at a lower price point. And I guess two notable ones that stand out to me are, recall, you had the Truvada equivalent at a cheaper price, the generic Truvada you guys launched, which didn't get much commercial traction in US.
And then perhaps at some level Assembly without the interchangeability, I guess, is there any big takeaways from seeing that and then also, on the flip side, you guys given a new asset of 20%, lower and then started to work? So just curious what the takeaways are on coming in at a cheaper price point in US, and it's a whole different commercial dynamic across those types of markets?
Rajiv Malik
Yeah, now look, it's the healthcare system over here, if you take Assembly as an example, about 30% of market is commercial, which is a PBMs with PBMs, control it 35% is Medicare Part D, and then you have the hospital or, you know, FFS is about 7%, government is about 17%. If you break that as your any larger pricing strategy need to take into the bushes and polls and dynamics of all these channels and then come up. And that's why you saw an interchangeable product launch, we have a dual launch strategy, the whole focus was that we should be able to, you know, whether it's a product in a patient on a commercial segment or a hospital check or medical party, we should be able to address the needs of those patients. So, anytime you launch a product, you need to understand the market and have a comprehensive launch strategy so that you don't leave any patient un-addressed.
One for example 1% of the - you know, in the Assembly or insulin is about cash pay. So, recent you know, adoption by the Walgreens as well as a good RX is just to address that component.
Umer Raffat
Got it. So, right sorry, just to be clear, then is there segments of the market that are more open to lower priced lower rack in US or?
Rajiv Malik
There are segments, there are segments in the - even in the, you know, institutional channels, there are segments, which you can approach them in a different way.
Umer Raffat
And those are not rebates sensitive?
Rajiv Malik
They are not rebate sensitive, to the extent which PBMs are you know, that Mercer pg channel is.
Umer Raffat
Commercial is not okay. Okay, got it. Okay. Make sense? Maybe in the last few minutes or so it might be helpful if we can just turn to your some of the key pipeline programs. Eric, do you want to kick it off? Yeah, I guess we could start off with biosimilar Eylea. What's your level of confidence, you can have a biosimilar on the market by VRN24?
Michael Goettler
Nope, there are always - that is a science. And then there is the IP and legal strategy. On the science, I think we feel very confident on a scale of 10. We are right up there. Because of our, you know, already BLA being filed. We are in the state of operational readiness. We have a lot of time to make whatever prediction we need to do to be operationally ready for that.
On an IPR, it will - or legal it will continue to evolve. And you see our two of our IPRs have been accepted, instituted. And we can see that that steady continues to evolve, our force focuses, that's ‘23. And the sequence patent expires and some are somewhere right up but that we should be in a state of readiness. And you should expect us to working all the way through the legal strategy to make that happen.
But we'll keep you guys posted as you know, we continue to learn, you know, some events and some hiccups, if there are any that will determine whether it's ’24. ‘25, or what is the launch.
Umer Raffat
Got it. And in terms of the market, what are you seeing in terms of market demand for a higher dose? In other words, eight milligrams versus four milligrams? In terms of dosing frequency as well?
Michael Goettler
Yeah, it's still only - I think they're getting into their Phase III, next year, somewhere in the next year. And always, you know, it's not just if you look into how - what patients are going to benefit from it. You also need to take into the SCP practices, their incentive [indiscernible] is a good example. They're hard those didn't work out, you know, well.
So I think you should look into from this point of view that lifecycle management is a part of this strategy for the big pharma and our strategy is to respond to that. So while they are trying to get move the cheese, we are trying to work, you know, work in the lab at this point of time to catch up with that.
So we'll continue to understand where the where the puck is going, and we'll be doing everything to make sure that we are there. And if the market moves there, we'll be doing everything to do whatever we need to do as a leader in this race project.
Umer Raffat
Rajiv, maybe two quick follow up to that. One, let's say you're Humira, so there's a lot expectation that a biosimilar, Humira even second or third market does north of $500 million in sales. How does that look in year two, year three, year four, should we assume like a biosimilar like corrosion like 20%, 25% erosion from there? How should we think about that?
And then also, where are we with you Eylea and your confidence on when you can come out?
A - Rajiv Malik
On the mater is going to be a little bit more complicated than what you're seeing and the logarithm, Umer, I have to say, logarithm of a generic versus a complex generics for the biosimilar is different on the - from the market uptake. And you will see us when we come out of this, you know, Phase I, Phase II plan, we are hoping that if generics were and if you are on a first way you can get 45%, 50% market share in the complex, you have seen that, you know, 30% Rexella, or 30% - 40%, 45% of the Copaxone has been the sort of our market share or that benchmark over there.
When it comes to the biosimilar. It's not that I think it's around 15%, 16%. That's where the things are settling for every player. Now, for a product like Humana, I think it's more competitive. And when we are modeling, we are not modeling 15%, we are modeling maybe around double digits, you know, 9%,10% is what we are hoping that because it's going to be a highly competitive market, there's going to be eight, nine players out there in the second - second, third year, as you say.
But having said that, market is going to expand, we are seeing this in Europe. Europe, over when it used to, for a new patient to be put on the mirror. It used to be you know, a patient used to be on a therapy, different therapies and it will take them three, four years before they put on Humera.
Now they're putting the patient after five, six months just because of the access and affordability and market will expand. It's a big product. I think there's a room for everybody to grow over here. We expand the market. And we are very encouraged by where we are.
I know interchangeability has been the buzzword. It's a little bit different than insulin. Nobody is going to have an interchangeability for every presentation or every strength. So I think the one year it's [indiscernible] who's your guest, maybe it's boring [ph] there. So you can imagine Amgen, who's the number one launch or Organon, they are not going to have interchangeability market is going to settle without interchangeability.
And by the time interchangeability kicks in, there's going to be enough time for people to catch up and if it's required, people will be able to do the interchangeability and get there.
Umer Raffat
Got it. Excellent. Maybe in the last 30 seconds and anything on Eylea, the exact timing?
A - Rajiv Malik
No, I talked about timing, we addressed that.
Umer Raffat
Okay. Make sense. I know you guys had a hard 8 am hard stops. So I want to be very respectful of that. So thank you so much for making time. This was super helpful and super efficient as well.
A - Rajiv Malik
Thank you, Umer.
Umer Raffat
All right, so much. Thank you.
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