Viatris Inc. Form 10-K Summary
Business context and reporting period
Viatris is a global healthcare company formed in November 2020 through the combination of Mylan and Pfizer’s Upjohn Business. It markets branded, generic and complex generic medicines in more than 165 countries and territories, with approximately 37,000 employees and about 40 manufacturing sites. The filing covers the fiscal year ended December 31, 2022; it does not provide a standalone fourth-quarter income statement.
The Company operates through Developed Markets, Greater China, JANZ and Emerging Markets. Its strategy is shifting toward complex and innovative products, with particular focus on ophthalmology, gastrointestinal and dermatology, while divesting selected non-core businesses.
Financial performance and key metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenues | $16.26 billion | $17.89 billion | Down 9% |
| Net sales | $16.22 billion | $17.81 billion | Down 9% |
| Gross profit | $6.50 billion | $5.58 billion | Up $921.5 million |
| GAAP gross margin | 40% | 31% | Up 9 percentage points |
| Adjusted gross margin | Approximately 59% | Approximately 59% | Flat |
| Earnings from operations | $1.61 billion | $(34.0) million | Improved $1.65 billion |
| Net earnings | $2.08 billion | $(1.27) billion | Improved $3.35 billion |
| Diluted EPS | $1.71 | $(1.05) | Improved $2.76 |
| Adjusted net earnings | $4.08 billion | $4.41 billion | Down 8% |
| Adjusted EBITDA | $5.78 billion | $6.36 billion | Down 9% |
| Cash flow from operations | $2.95 billion | $3.02 billion | Down $64.3 million |
Reported GAAP profitability benefited materially from lower purchase-accounting amortization and special items, as well as a $1.75 billion gain on the Biocon Biologics transaction. The Company’s effective tax rate was 26.1%, compared with a reported negative rate in 2021 because of the prior-year loss.
Net sales declined 2% on a constant-currency basis. Foreign exchange translation reduced reported revenues by approximately $1.24 billion. New product sales of approximately $483.1 million partially offset competition and base-business erosion of approximately $779 million.
Segment and product trends
- Developed Markets sales decreased 6% reported but increased less than 1% at constant currency.
- Greater China sales decreased less than 1% reported and increased 3% at constant currency.
- JANZ sales decreased 19% reported and 8% at constant currency, primarily due to pricing reductions and competition in Japan and lower Australian volumes.
- Emerging Markets sales decreased 17% reported and 8% at constant currency, primarily due to lower COVID-19-related product sales in India and weaker ARV sales.
- Products contributing to growth included lenalidomide, unbranded insulin glargine, Semglee and cyclosporine ophthalmic emulsion in the United States, and Yupelri, which generated $202.1 million of sales versus $161.9 million in 2021.
- The top ten products represented approximately 33% of consolidated net sales in both 2022 and 2021. The top three customers represented approximately 26% of 2022 net sales.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.26 billion at December 31, 2022, compared with $701.2 million at year-end 2021. Most cash was held by non-U.S. subsidiaries.
- Long-term debt was $18.02 billion, compared with $19.72 billion in 2021. The Company had no short-term borrowings at year-end, versus $1.49 billion in 2021.
- Mandatory long-term debt repayments total $18.71 billion, including $1.25 billion in 2023, $1.87 billion in 2024, $1.29 billion in 2025 and $2.56 billion in 2026.
- Viatris had access to a $4.0 billion revolving facility, a $400 million receivables facility and a $200 million note securitization facility; none had borrowings outstanding at year-end.
- The Company was in compliance with debt covenants and expected to remain compliant for the following twelve months. The maximum leverage covenant was 4.0-to-1.0 at December 31, 2022 and becomes 3.75-to-1.0 thereafter, subject to specified exceptions.
- Capital expenditures were $406.0 million in 2022; management expected 2023 capital expenditures of approximately $400 million to $500 million.
- Quarterly dividends increased to $0.12 per share in 2022, with $581.6 million paid during the year. A $1.0 billion share repurchase authorization was approved, but no repurchases occurred in 2022; approximately $250 million of repurchases occurred in January and February 2023.
Material changes and unusual items
- On November 29, 2022, Viatris transferred its biosimilars portfolio to Biocon Biologics for approximately $2 billion in cash, approximately $1 billion of convertible preferred shares representing about 12.9% ownership, and an entitlement to $335 million of additional cash payments in 2024. Viatris recognized a gain of approximately $1.75 billion and stopped recognizing the business’s operating results after closing.
- The Biocon transaction contributed approximately $611.5 million of revenue from January 1 through November 29, 2022. Viatris continues to provide transition and commercialization services, generally for up to two years.
- The Company classified Upjohn Distributor Markets as held for sale in the fourth quarter and recorded total charges of $374.2 million, including $117.0 million of goodwill impairment, $172.9 million of intangible-asset write-downs and $84.3 million of other charges. Failure to complete the divestiture during 2023 could result in additional costs exceeding $300 million.
- The 2020 restructuring program generated approximately $86.5 million of charges in 2022. Total committed pre-tax restructuring charges may reach approximately $1.4 billion, with potential annual savings of up to $900 million once fully implemented.
- Oyster Point and Famy Life Sciences ophthalmology acquisitions closed in the first quarter of 2023 for approximately $425 million and $281 million, respectively, and will affect results beginning in the first quarter of 2023.
Outlook, risks and contingencies
Management expects continued pressure from inflation, higher energy and freight costs, foreign exchange volatility, pricing controls and reimbursement reductions, particularly in China and Japan. The Company is also exposed to loss of exclusivity, generic competition, product-launch execution, regulatory delays, manufacturing and supply-chain disruptions, cybersecurity incidents and international operating risks.
Viatris had approximately $203 million accrued for legal contingencies at December 31, 2022, including approximately $65.3 million for product-liability matters, $107.9 million for intellectual-property matters and $24.5 million for other proceedings. Significant ongoing matters include generic-drug antitrust litigation, opioid claims, EpiPen-related proceedings, tax disputes and patent litigation. The filing states that additional losses may be material but often cannot be reasonably estimated.
Other notable exposures include approximately $347 million of potential unaccrued development milestones, of which approximately $38 million may be payable within twelve months; $375 million of contingent consideration, including $221.2 million related to Biocon; and a $296.7 million reserve for unrecognized tax benefits. The Company also carries substantial goodwill and intangible assets, making future impairment charges a continuing risk.
Management and Deloitte & Touche LLP concluded that internal control over financial reporting was effective as of December 31, 2022, and Deloitte issued an unqualified audit opinion. The Company substantially completed its transition from Pfizer services to a new ERP system, but identified ongoing implementation and control-monitoring risks.
Most important facts for investors to verify
- Whether revenue and adjusted EBITDA stabilize after the biosimilars divestiture, foreign exchange effects and continuing base-business erosion.
- The timing and proceeds of planned divestitures of OTC, API, women’s healthcare and Upjohn Distributor Markets, including the risk of more than $300 million of additional Upjohn Distributor Markets charges.
- Debt maturities, refinancing costs and compliance with the 3.75-to-1.0 maximum leverage covenant after December 31, 2022.
- The realizable value and liquidity of the approximately $1.0 billion Biocon Biologics preferred-share investment and the $335 million 2024 payment entitlement.
- Whether Oyster Point and Famy Life Sciences generate the expected ophthalmology growth and offset erosion in legacy products.
- Potential outcomes and cash requirements from antitrust, opioid, product-liability, intellectual-property and tax proceedings.
- The sensitivity of goodwill, intangible assets, variable consideration reserves and deferred tax assets to changes in forecasts, pricing, competition and regulatory outcomes.