Viatris Inc. (NASDAQ:VTRS) Q4 2023 Earnings Call Transcript
Viatris Inc. (NASDAQ:VTRS) Q4 2023 Earnings Call Transcript February 28, 2024
Viatris Inc. misses on earnings expectations. Reported EPS is $0.61 EPS, expectations were $0.67. Viatris Inc. 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 the Viatris Q4 and Full Year 2023 Earnings, 2024 Guidance Call. All participants will be in a listen-only mode. [Operator Instructions] Also note, today's event is being recorded. 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 Q4 2023 earnings call. With us today is our CEO, Scott Smith; President, Rajiv Malik; CFO, Sanjeev Narula; and CFO Elect, Doretta Mistras. 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 the most directly comparable GAAP measures. When discussing 2023 actual results, we will be making certain comparisons to 2022 results on a divestiture adjusted operational basis, which excludes the impact of foreign currency rates and also excludes the results from the divested biosimilars business and proportionate results from the divestitures that closed in 2023 from the 2022 period.
When discussing our expectations for 2024, 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 results of the divestitures that closed in 2023 from the 2023 period. With that, I'll hand the call over to our CEO, Scott Smith.
Scott Smith: Good morning, everyone. 2023 was an outstanding year for Viatris in which we delivered strong operational results, streamline the company and finish the year with our third consecutive quarter of operational revenue growth. I am pleased to say that as we begin 2024, I could not be more excited about the future ahead. We are already executing on our vision for our next chapter. We continue to generate strong free cash flows. This provides us with the flexibility to balance returning capital to shareholders through share repurchases and dividends was continuing to fuel our base business and make strategic investments in future growth. As I've said, in addition to continuing to develop the three core therapeutic areas that we previously identified, ophthalmology, dermatology and GI, we are also going to be opportunistic in seeking out assets that fit our company well and have the potential to contribute significantly for our future revenue growth.
Today's announcement that we've entered into a global research and development collaboration with Idorsia is a great example of this approach in action. We are bringing in two late-stage potential blockbuster assets with long-dated patent protection, and we are connecting Idorsia's proven, highly-productive drug development team and innovation engine with our own strong existing infrastructure experience. We believe that together, we will be able to execute on the potential of these global assets and any future assets, as we work to deliver on our goal of building a more durable, predictable portfolio on the foundation of our strong base business. We believe that Selatogrel and Cenerimod can become meaningful components of Viatris' business over the long term.
I'll talk more about the deal in a moment, but first, 2023. We finished the year strong with full year results in line operationally with our 2023 adjusted guidance. Importantly, our fourth quarter results represent our third consecutive quarter of operational revenue growth, giving us good momentum going into the new year. We expect that momentum to continue into 2024 and beyond. In 2023, we delivered total revenues of approximately $15.4 billion, adjusted EBITDA of approximately $5.1 billion, and free cash flow of approximately $2.4 billion. We have already completed certain of our divestitures and are on track to complete all remaining divestitures by mid-year, subject to final regulatory approvals. Turning to 2024. Today, we are sharing our full year guidance ranges for total revenue, adjusted EBITDA, free cash flow and adjusted earnings per share.
Adjusted EPS will increasingly become an important metric to reflect earnings growth and balanced capital allocation for us in '24 and beyond. From a capital allocation perspective, we continue to pay down debt and expect to reach our long-term gross leverage target this year. We are maintaining our dividend for 2024. We completed $250 million share repurposes earlier this year. Our Board of Directors has provided us with an additional $1 billion share repurpose authorization, to use at the appropriate time, bringing our total authorization to $2 billion, of which we have used $500 million and have $1.5 billion in authorization remaining. And earlier today, we announced a significant global research and development collaboration. Diving further into our Idorsia announcement, we are very excited about this new partnership.
The agreement combines Viatris' financial strength and worldwide operational infrastructure, with a portfolio of novel assets that we believe will provide the foundation for accelerated top line growth. Viatris will receive exclusive global development and commercialization rights to two assets, Selatogrel, a potential life-saving self-administered medicine for patients at risk of recurring heart attack, and Cenerimod, a novel immunology asset that has the potential to be a first-in-class oral therapy for the treatment of SLE, with potential broad application across multiple other autoimmune diseases. The global collaboration also includes future optionality to expand the collaboration with additional pipeline assets in a transaction that minimizes near-term P&L impact and provides significant upside following Phase 3 readouts and regulatory approvals.
The addition of Selatogrel builds on Viatris' existing global cardiovascular franchise and our deep knowledge and expertise in self-administered medicines for acute life-threatening conditions. Cenerimod has the potential to be a cornerstone asset in Viatris' immunology platform, an area which I personally and our Chief R&D Officer, Philippe Martin, and others at Viatris have deep development and commercialization expertise. The agreement also highlights Viatris' capability to identify depth and secure high-growth assets in areas of unmet medical need and do it in a way that reinforces our disciplined approach to capital allocation. We will be hosting an R&D event on March 27 in New York City, to discuss the collaboration with Idorsia and other elements of the company's pipeline in more depth.
Before I move on, I want to take this opportunity to welcome Doretta Mistras, who will become our new Chief Financial Officer on March 1. Doretta joined us in January as CFO elect. She has been spending valuable time getting to know the company even better than she already did as a former Deputy Adviser. I'm pleased to have Doretta coming on board for what I expect to be an extremely successful next phase of Viatris. She'll share a few comments later in the call. But now let me turn the call over to Rajiv as we continue our discussion of our strong fourth quarter and full year 2023 results and our expectations for 2024. Rajiv?
Rajiv Malik: Thanks, Scott, and good morning, everyone. As we close Phase 1 of our strategy, I'm incredibly proud of all that we have accomplished. We simplified but more importantly, stabilize the base business. We continue to deliver on our strong pipeline and are in the final stages of reshaping the company with remaining divestitures being on track. We believe that the stability of our core business and our deep pipeline positions the company very well for continued growth into '24 and beyond. Let me talk to you a bit more about what we believe makes our core business stable. It is driven by the consistent and steady performance of our brand business, the sustainability of our generics portfolio and our ability to continue to bring to market our organic pipeline consisting of high-margin, durable and complex products.
Let me further expand this into three elements. First, our Brand business, which makes up about two-thirds of our portfolio, grew 1% in '23, supported by brands like Yupelri and Effexor. We expect our branded portfolio to continue to build upon the success of 2023 and show a moderate growth. Next, is our Generics business, which now also includes our complex generics and makes up the remaining one-third of our revenue. This business was flat in 2023, and is expected to show a slight growth in 2024. The geographic and portfolio diversity, which includes a number of high-value complex products such as Wixela, Breyna and Xulane, rendered this portfolio inherent stability. The third driver of our stable base is our ability to execute on our pipeline.
This is the third consecutive year that Viatris has delivered at least $450 million in new product launches. In 2023, we made significant progress across our complex injectables, select novel and complex products and eye care pipelines. We launched Breyna, the first generic Symbicort and Lisdexamfetamine and several others. FDA accepted our NDA filing application for glatiramer acetate depot injection. We received FDA approval of Ryzumvi, an eye drop for the treatment of pharmacologically-induced mydriasis. And we received positive top line results for our Phase 3 trials of Yupelri in China. We also received positive top line results for our Phase 3 trial of Tyrvaya in China and subsequent NMPA acceptance of our NDA. For 2024, we are excited to continue to deliver on our deep pipeline and execute on several key launches that will expand access to patients.
For example, from our complex injectables portfolio, we expect to be an early entrant with our Sandostatin LAR product, liraglutide, a generic for Victoza as well as iron sucrose, a generic for Venofer. From our eye care pipeline, we expect to launch Ryzumvi. And from our novel and 505(b)(2) pipeline, we are excited to bring to market our once-monthly, glatiramer acetate depot for patients with multiple sclerosis, and we are pleased to present our latest data this week at [indiscernible], a key medical conference. We also continue to be laser focused on progressing our other pipeline assets, many of which are in Phase 3 stages such as Xulane low dose, Meloxicam and Effexor GAD. We are especially excited about advancing our eye care pipeline that has several programs in a Phase 3 aimed at addressing vision-related disorders such as Presbyopia, Night Vision disturbances and Blepharitis.
Let me now turn to the commercial segments and our expectations for 2024. In '24, we expect total revenues to grow approximately 2%, which includes approximately $450 million to $550 million in new product revenue. Starting with Developed Markets. In '23, Developed Markets declined by 1%. Our European business for the third consecutive year demonstrated operational net sales growth led by Italy and Spain, as well as contributions from new product launches. This helped us offset the decline in North America due to the expected impact of increased generic entrance to performance and higher competitive pressures on certain complex products, including Wixela and Xulane in the first half of the year. For 2024, we expect this segment to grow with both Europe and North America expected to grow 3%.
Europe's growth is expected to be led by our strong brand portfolio including Brufen, EpiPen and products from our Thrombosis portfolio. In addition, we anticipate further growth in key markets, including Italy and France, and strong Generics performance aided by new product launches. North America is expected to grow by 3%, driven by the exciting new launches of GA Depot, Liraglutide and Sandostatin LAR. In addition, we expect to further strengthen our position of respiratory products like Wixela and Breyna. Yupelri is expected to continue its growth trajectory and grow by double digits. For the Eye Care portfolio, we expect further gains in 2024, resulting from the continued prescription growth in Tyrvaya as we expand access through patient fulfillment, coupled with the launch of new product, Ryzumvi.
The Tyrvaya TTC campaign launched in October has shown early indications of both increased patient responsiveness and performance as quarter four non-bridge prescriptions were up 18% quarter-over-quarter. Emerging Markets had another strong year, delivering 7% year-over-year operational growth in '23. These better-than-expected results benefited from strength across our broader generics portfolio and stronger-than-expected performance from brands like Dymista and Viagra, led by markets such as Turkey, South Korea and Southeast Asia. Going into 2024, we are projecting this segment to grow by 6% year-over-year, primarily driven by our branded business. Moving to JANZ. Full-year '23 came in below our expectations due to the continued impacts from the government-driven price regulations in this region, which we expect to continue into 2024.
We anticipate to partially offset the pricing dynamics with the ongoing strong volume growth from our three brands, including Amitiza, Creon and Effexor, as well as optimizing our Generics business. This segment is expected to decline by 8% in 2024. Greater China performed ahead of our expectations for the full-year 2023, delivering 2% growth, driven by strong performance of our retail channel in China. This is a result of our ability to adapt our business model to the evolving market dynamics. Going forward, we will leverage our investments to further expand the self-pay patient market and our brand equity in this channel which we expect will help to absorb some of the impacts from the government-implemented health care policy regulations.
With these dynamics in mind, we have modeled a 2% year-over-year decline for 2024. Before I conclude, I want to take the opportunity to thank the management team for their partnership over the years and all our employees who have helped us build a strong global platform. I'm very pleased with where we are today in Viatris' journey, and the strength as well as stability of our core business, which is now nicely set up for continued growth from here onwards. With that, I'll hand the call over to Sanjeev.
Sanjeev Narula: Thank you, Rajiv, and good morning, everyone. 2023 was another strong year across total revenue, adjusted EBITDA and free cash flow. Our results were in line or better than our expectations. We believe that the foundation we built sets the company up to deliver on our strategy and future growth outlook. Our guidance, as updated in November included a full year contribution from the divested businesses. As a result of certain transactions that closed in 2023, we're adjusting our guidance on total revenue and adjusted EBITDA by $35 million and $20 million, respectively. Adjusted EBITDA included $105 million of acquired IP R&D, primarily related to upfront licensing payments. Please note, we do not include acquired IP R&D in guidance for future periods, as it cannot be reasonably forecasted.
Free cash flow was impacted by approximately $235 million associated with the divestitures, including transaction costs and taxes. Excluding this impact, free cash flow would have been $2.64 billion on a full year basis. This was the third consecutive quarter of operational revenue growth, and we continue to see solid performance across Developed Markets, Emerging Markets in our Greater China segment. Excluding the impact of divestitures, revenue grew over 1%. During the last earnings call, we noted that adjusted gross margin would moderate in Q4 due to the timing of segment and product mix. On a full year basis, adjusted gross margin came in at the high end of our expectation at 59.1%, driven by strong brand performance. Adjusted SG&A and R&D included certain investment we made in Q4 to support future revenue growth.
We had another strong year of free cash flow generation, reflecting our underlying operational performance and continued priority on cash optimization initiatives. Free cash flow in the fourth quarter was impacted by transaction costs and taxes related to the divestiture. And excluding these items, would have been $454 million. It is important to reiterate that gross proceeds from the divestiture benefit cash flow from investing activities, while the related taxes and transaction costs are included in cash flow from operating activities. The strong free cash flow generation over the last three years exceeded $7.5 billion, and has enabled us to deliver on our financial commitment. This included debt paydown of greater than $6.6 billion, and a return of approximately $1.8 billion of capital to shareholders.
These positive actions taken by the company reinforce our continuing commitment to an investment-grade rating and an expectation of increasing the return of capital to our shareholders. For 2024, our guidance includes the estimated full year results from the divestitures that have not yet closed. The expected timing of closing of divestitures will impact reported results for the next few quarters. We will provide future adjustment to guidance as remaining divestitures close. The anticipated driver for 2024 total revenue guidance include growth of approximately 2% operationally versus 2023, and expected new product revenue of approximately $450 million to $550 million, and a growth from our Eye Care division. As a reminder, guidance currently includes approximately $1.1 billion of total revenue on a full year basis from the remaining divestitures.
The driver for adjusted EBITDA include contribution from new product launches and revenue growth, moderation in gross margin relative to '23 levels due to anticipated product and segment mix and increased R&D primarily related to Idorsia collaboration. The estimated adjusted EBITDA from the remaining divestiture is approximately $320 million on a full year basis. We expect to generate approximately $2.5 billion in free cash flow in 2024 before any divestiture costs and taxes. Lastly, we're providing adjusted EPS guidance as a measure of our expected earnings growth moving forward. Estimated shares outstanding include the benefit of share buyback executed earlier this month. Now a few comments about anticipated phasing in this year. Total revenue is expected to be higher in the second half due to launch of new products and normal product seasonality.
Taking into account the phasing of revenue, margins and investments, we expect adjusted EBITDA and free cash flow to be evenly phased between first half and second half. And in general, free cash flow tend to be lower in quarter two and quarter four due to timing of semiannual interest payments. In the revenue guidance walk, the 2023 adjusted number of $15.2 billion excludes the result of divestiture that closed in 2023, and includes anticipated foreign exchange headwinds. We expect reported adjusted EBITDA to be impacted by the benefit of approximately 2% total operational revenue growth, estimated impact of foreign exchange, divestitures that closed in 2023, and Idorsia R&D investment and impact of IP R&D. Taken these items into consideration, we expect adjusted EBITDA for the base business to be stable this year.
We have pivoted to a more balanced capital allocation approach. This includes a focus on capital return and business development. The Idorsia R&D collaboration represents a disciplined approach, with a modest upfront payment of approximately $350 million. The license structure serves to minimize and share the future development expenses for the program while providing potentially significant upside economics. The Board has maintained the annual dividend policy of $0.48 per share in 2024. Earlier this month, the company has repurchased approximately $250 million in shares of common stock. The Board of Directors has increased our existing share repurchase authorization by an additional $1 billion. We anticipate excess cash will be used opportunistically for additional buyback in future.
Lastly, we expect to continue to strengthen our balance sheet with debt paydown of approximately $3.5 billion this year to reach our long-term growth leverage target. Before I close, I want to take this opportunity to thank all of our colleagues around the world and a special call out to my finance team for their extraordinary work over the last four years. I'm extremely proud of what we've accomplished together. I would be remiss if I did not acknowledge our management team and the Board of Directors for the opportunity to serve as the Chief Financial Officer of Viatris. Viatris in its strongest financial position here. The foundation is solid and will ensure its ability to make a real difference in patients' lives for many years to come. Now, I'd like to turn it over to Doretta.
Doretta Mistras: Thank you, Sanjeev. It's an honor to be here, and I look forward to working with Scott and the rest of the management team to execute on the company's growth strategy and capital allocation priorities. Prior to joining Viatris, I had the benefit of working with the team as an adviser. I have helped companies across the health care industry drive shareholder returns for the past 20 years. This gives me a strong appreciation for the unique position that Viatris is in today, to create significant value for our shareholders, given the diversity of the business and the stability of the cash flow. With our gross leverage target in sight, I believe the company is striking the right balance with respect to business investment and capital returns.
I expect that with the strong foundation we have coupled with thoughtful capital allocation, we will be a strong adjusted EPS growth story in the future. As Scott mentioned, the Idorsia collaboration is a great example of the kinds of deals we'll continue to evaluate. This collaboration has the potential to enhance our growth profile by delivering a strong portfolio of branded, patent-protected assets targeting significant unmet patient needs, while leveraging our capabilities in therapeutic areas where we have differentiated insights. Additionally, the transaction was structured in a way that deploys capital judiciously and creates the potential for asymmetric returns for our shareholders relative to the quantum of capital deployed. Now, I'd like to turn it back over to the operator for Q&A.
Operator: [Operator Instructions] Our first question today comes from Christopher Schott from JPMorgan.
Christopher Schott: Just had a question on business development, just building on some of the comments from the prepared remarks. Just as you think about business development opportunities, how do you think about balancing I guess, kind of R&D deals that may be come with a bit more risk like we saw today. It could be a nice opportunity upside, but have some risk with them versus maybe more in-market transactions or in-licensing of already approved drugs that maybe have potentially lower returns, but a bit more certainty. I'm just trying to sense, is there a bias one way or the other? Are you seeing more opportunities in one bucket versus the other?
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