Viatris Inc. Form 10-Q Summary
Business Context and Reporting Period
Viatris is a global pharmaceutical company formed in November 2020, with approximately 37,000 employees, operations in more than 165 countries and territories, and a portfolio of branded, generic, complex generic and biosimilar medicines. Reportable segments are Developed Markets, Greater China, JANZ, and Emerging Markets. This unaudited filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenues | $4.12 billion, down 10% | $8.31 billion, down 8% |
| Net sales | $4.11 billion, down 10% | $8.28 billion, down 8% |
| Gross profit | $1.70 billion; 41% GAAP margin | $3.47 billion; 42% GAAP margin |
| Adjusted gross margin | 59% | 59% |
| Earnings from operations | $548.7 million | $1.26 billion |
| Net earnings | $313.9 million; diluted EPS $0.26 | $713.1 million; diluted EPS $0.59 |
| Adjusted net earnings | $1.07 billion | $2.19 billion |
| Adjusted EBITDA | $1.48 billion | $3.07 billion |
| Operating cash flow | Not separately disclosed for the quarter | $1.94 billion |
GAAP net earnings improved from a loss of $279.2 million in the second quarter of 2021 and a loss of $1.32 billion in the first six months of 2021. The improvement primarily reflected substantially lower purchase-accounting amortization, restructuring and other special items, together with lower selling, general and administrative expenses and interest expense.
At June 30, 2022, cash and cash equivalents were $664.7 million, compared with $701.2 million at December 31, 2021. Total current assets were $11.18 billion and current liabilities were $7.68 billion. Short-term borrowings were $1.02 billion, while long-term debt was $19.21 billion. Mandatory long-term debt repayments totaled $1.25 billion in 2023, $1.84 billion in 2024, $1.27 billion in 2025, $3.34 billion in 2026 and $11.69 billion thereafter.
Viatris generated $1.94 billion of operating cash flow in the first six months, used $149.0 million in investing activities and used $1.79 billion in financing activities. Financing uses included $1.79 billion of long-term debt repayments, $473.5 million of net short-term borrowing repayments and $290.6 million of dividends. Capital expenditures were $148.4 million; management expected full-year 2022 capital expenditures of approximately $425 million to $575 million.
Material Changes Versus the Prior Comparable Period
- Total revenues declined primarily because of unfavorable foreign-currency translation of approximately $305.7 million in the quarter and $476.0 million year to date. On a constant-currency basis, net sales declined approximately 3% in the quarter and 2% year to date.
- Constant-currency sales were pressured by competition on certain U.S. products, base-business erosion, lower COVID-19-related product sales in India, lower ARV sales, Japanese price reductions and additional competition. New product sales partly offset these effects.
- Developed Markets constant-currency sales increased approximately 1% in the quarter and were approximately flat year to date. Greater China increased 1% in the quarter but declined 2% year to date. JANZ declined 2% in the quarter and 3% year to date, while Emerging Markets declined 19% and 10%, respectively.
- GAAP gross margin increased from 29% to 41% in the quarter and from 27% to 42% year to date, mainly because 2021 included significant purchase-accounting inventory step-up amortization and higher restructuring and special-item costs. Adjusted gross margin remained approximately 59% in both periods.
- SG&A declined by $223.7 million in the quarter and $494.9 million year to date, primarily due to lower restructuring costs and synergies. R&D declined $26.9 million year to date.
- Interest expense declined $21.2 million in the quarter and $44.0 million year to date following debt repayments. The 0.816% Euro Senior Notes and 1.125% Senior Notes due in 2022 were repaid during the second quarter.
- Other comprehensive loss was $838.2 million in the quarter and $1.15 billion year to date, largely due to foreign-currency translation losses. Accumulated other comprehensive loss increased to $2.90 billion from $1.74 billion at year-end 2021.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management stated that operating cash flow, cash balances and available borrowing capacity should be sufficient to fund foreseeable working capital, capital expenditures, debt service and dividends. The Company was in compliance with its debt covenants at June 30, 2022 and expected to remain compliant for the following twelve months. Available facilities included a $4.0 billion revolving facility, a $400 million receivables facility and a $200 million note securitization facility; outstanding borrowings were $795.0 million, $198.7 million and $200.0 million, respectively, at June 30, 2022.
Viatris expected the Biocon Biologics transaction to close in the second half of 2022, subject to regulatory and other conditions. The transaction involves contribution of the biosimilars portfolio in exchange for $2.0 billion of upfront cash, at least 12.9% ownership of Biocon Biologics and expected additional cash payments of $335 million in 2024. The related assets and liabilities, including $1.47 billion of assets held for sale and $285.1 million of liabilities held for sale, were classified as held for sale at June 30, 2022. The Company expects to recognize a gain at closing, but the amount was not provided.
The 2020 restructuring program carries expected total pre-tax charges of up to approximately $1.4 billion, including up to $950 million of cash costs and up to $450 million of non-cash costs. Management estimated potential annual savings of up to approximately $900 million once fully implemented. The restructuring reserve was $186.3 million at June 30, 2022.
Significant risks include generic and branded competition, pricing and reimbursement pressure, regulatory actions, product launches and patent litigation, manufacturing and supply-chain disruptions, foreign-exchange volatility, inflation, COVID-19, the Russia-Ukraine conflict, tax audits, legal proceedings, information-technology risks and execution of the Biocon transaction and restructuring program. Turkey was classified as highly inflationary beginning April 1, 2022, although the filing states that the second-quarter impact was not material.
The Company had approximately $570.3 million accrued for legal contingencies at June 30, 2022. It also reported accruals of approximately $73.9 million for product liability matters, $192.7 million for intellectual-property matters and $299.9 million for uncertain international tax positions. The EpiPen litigation settlement was $264 million; the remaining settlement amount was paid in July 2022 and the related accrual was subsequently reduced.
Management reported effective disclosure controls and procedures. The Company continued transitioning support services and financial processes to a new ERP system, with related internal-control modifications expected through the end of 2022.
Investor Verification Checklist
- Verify the timing, regulatory approvals, consideration adjustments and actual gain from the Biocon Biologics transaction.
- Assess whether constant-currency revenue pressure, product competition and Emerging Markets weakness persist.
- Reconcile GAAP results with adjusted net earnings, adjusted gross margin and adjusted EBITDA, including the substantial excluded items.
- Monitor debt maturities, refinancing needs, revolving-facility usage and compliance with leverage and other covenants.
- Evaluate progress, remaining cash costs and realized savings from the 2020 restructuring program.
- Track legal, tax, opioid, generic-drug pricing, intellectual-property and product-liability matters beyond recorded accruals.
- Consider the sensitivity of goodwill, particularly Europe and JANZ, to discount rates, terminal growth assumptions and operating forecasts.
- Confirm the impact of foreign exchange, inflation, Turkey’s highly inflationary classification and the Russia-Ukraine conflict on future results.