Viatris Inc. 2021 Third-Quarter Form 10-Q Summary
Business context and reporting period
Viatris is a global pharmaceutical company formed in November 2020 through the combination of Mylan and Pfizer’s Upjohn Business. The company markets branded, generic, complex generic and biosimilar medicines in more than 165 countries and territories. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021. Comparisons with 2020 are not fully comparable because pre-November 16, 2020 historical results represent Mylan only, while 2021 includes the combined business.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenues | $4,536.6 million | $2,972.1 million | $13,544.7 million | $8,322.5 million |
| Net sales | $4,520.5 million | $2,948.1 million | $13,482.3 million | $8,232.2 million |
| Gross profit | $1,574.1 million | $1,158.5 million | $4,029.1 million | $3,090.3 million |
| Gross margin | 34.7% | 39.0% | 29.7% | 37.1% |
| Earnings from operations | $357.6 million | $351.4 million | $43.6 million | $670.3 million |
| Net earnings/(loss) | $311.5 million | $185.7 million | $(1,005.3) million | $245.9 million |
| Diluted EPS | $0.26 | $0.36 | $(0.83) | $0.48 |
| Adjusted EBITDA | $1,698.3 million | $1,009.7 million | $5,010.3 million | $2,639.0 million |
Q3 operating margin was approximately 7.9% and net margin was approximately 6.9%. Nine-month operating margin was approximately 0.3% and net margin was approximately negative 7.4%. Reported results were significantly affected by purchase-accounting amortization, inventory step-up amortization, restructuring, acquisition-related costs and other special items. Adjusted gross margin was 60% in Q3 and 59% for the nine months, compared with 55% and 54%, respectively, in the prior-year periods.
- Q3 revenue increased 53%; nine-month revenue increased 63%. The increases primarily reflected $1.62 billion of Q3 and $4.97 billion of nine-month sales from the Upjohn Business, new products and partial recovery from COVID-19-related demand disruption.
- Existing-product sales declined by approximately $223.5 million in Q3 and $566.1 million for the nine months, primarily because of lower pricing and, to a lesser extent, lower volumes.
- Net cash provided by operating activities was $2,493.8 million for the nine months, versus $1,195.6 million in 2020.
- Capital expenditures were $259.8 million for the nine months. Cash flow from investing activities was positive $101.3 million, while financing activities used $2,662.8 million.
- Cash and cash equivalents were $756.6 million at September 30, 2021; cash, cash equivalents and restricted cash totaled $761.7 million.
- Long-term debt, including the current portion, was approximately $21.74 billion, down from $24.69 billion at December 31, 2020. Short-term borrowings were $1,706.9 million, compared with $1,100.9 million at year-end.
- The company had access to a $4.0 billion revolving facility maturing in July 2026, with no borrowings outstanding under that facility at September 30. Commercial paper borrowings were $1,132.4 million, receivables-facility borrowings were $374.5 million and note-securitization borrowings were $200.0 million.
Material changes versus the prior comparable period
- The Upjohn combination materially increased revenue, operating scale, debt, shares outstanding and reported expenses. Weighted average shares increased to approximately 1,209 million from 517 million in Q3 2020.
- Reported gross margin fell because of purchase-accounting effects, including $919.9 million of Q3 purchase-accounting-related amortization and $3,344.7 million for the nine months.
- SG&A increased to $1,055.0 million in Q3 and $3,446.3 million for the nine months, primarily due to Upjohn-related costs and restructuring.
- Interest expense increased to $151.9 million in Q3 and $488.0 million for the nine months, reflecting debt assumed in the combination, partially offset by debt repayments and debt-premium amortization.
- The company recorded a $544.8 million income-tax provision for the nine months, compared with $46.4 million in 2020, contributing to the year-to-date net loss. Q3 included a $111.6 million tax benefit.
- Accumulated other comprehensive loss increased to $1,471.9 million from $858.0 million at year-end, mainly because of foreign-currency translation losses.
Guidance, outlook, commentary and risks
- Management expects total restructuring charges of $1.1 billion to $1.4 billion, including $350 million to $450 million of non-cash charges and $750 million to $950 million of cash costs. Expected annual savings from committed actions are $700 million to $900 million once fully implemented.
- The company recorded restructuring charges of $172.8 million in Q3 and $738.3 million for the nine months. The program may affect up to 20% of the global workforce and involve closing, downsizing or divesting up to 15 manufacturing facilities.
- Capital expenditures for calendar 2021 were expected to be approximately $450 million to $550 million.
- Management stated that it expected operating cash flow and available borrowing capacity to satisfy foreseeable liquidity needs and reported compliance with debt covenants at September 30, 2021. The principal maximum leverage ratio is 4.25-to-1 through June 30, 2022, declining to 3.75-to-1 thereafter, subject to facility terms.
- SEMGLEE interchangeable biosimilar insulin glargine was approved by the FDA in July 2021 and was expected to launch before year-end 2021, with potential 12-month exclusivity before another interchangeable biosimilar could be approved.
- Key risks include generic price and volume erosion, loss of market exclusivity, government price reductions and tender systems, product and regulatory risks, manufacturing and supply-chain issues, COVID-19 uncertainty, foreign-exchange volatility, integration and restructuring execution, cybersecurity, tax disputes and extensive litigation.
- Legal contingencies accrued at September 30, 2021 totaled approximately $451.3 million. Notable matters include EpiPen antitrust litigation, generic-drug pricing investigations and litigation, opioid claims, product-liability claims and intellectual-property disputes. Plaintiffs in remaining EpiPen indirect-purchaser claims asserted approximately $1.0 billion of damages, subject to potential multipliers.
- Unaccrued potential development milestones under collaboration and licensing agreements totaled approximately $341 million, with approximately $13 million expected to be payable through the end of 2021; future sales-based milestones, royalties and profit shares are not included.
- The company began transitioning certain subsidiaries to a new ERP system during the quarter. Implementation is expected to continue through the end of 2022 and creates risks to internal controls during the transition, although management concluded disclosure controls were effective as of September 30, 2021.
Most important facts for investors to verify
- Assess sustainable earnings and cash generation separately from reported results, given the substantial purchase-accounting, restructuring, acquisition and other special-item adjustments.
- Reconcile the $5.01 billion of nine-month adjusted EBITDA to U.S. GAAP net loss and evaluate which excluded costs are recurring or cash costs.
- Monitor debt reduction, short-term borrowings, leverage-covenant headroom and the company’s ability to refinance or repay substantial maturities, including approximately $1.87 billion due in 2022 and $14.61 billion thereafter.
- Verify progress, cash costs, facility actions and realized savings under the global restructuring program.
- Evaluate the durability of revenue growth after removing Upjohn contribution, new-product launches, COVID-19 effects and favorable currency movements, while monitoring continuing pricing and competitive pressure on existing products.
- Track material litigation, tax examinations and intellectual-property matters because the filing states that additional losses could materially affect results, cash flows, dividends or stock price.