Viatris Inc. 2023 Q3 Form 10-Q Summary
Business Context and Reporting Period
Viatris is a global pharmaceutical company offering branded, generic and complex generic medicines across more than 165 countries and territories. The filing covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Reportable segments are Developed Markets, Greater China, JANZ and Emerging Markets.
Financial Performance and Position
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenues | $3,941.9 million | $4,078.2 million | $11,589.6 million | $12,386.7 million |
| Gross profit | $1,691.3 million | $1,748.4 million | $4,842.1 million | $5,222.9 million |
| Gross margin | 43% | 43% | 42% | 42% |
| Earnings from operations | $451.7 million | $560.1 million | $1,220.7 million | $1,816.2 million |
| Net earnings | $331.6 million | $354.3 million | $820.3 million | $1,067.4 million |
| Diluted EPS | $0.27 | $0.29 | $0.68 | $0.88 |
| Adjusted EBITDA | $1,360.1 million | $1,497.8 million | $4,006.7 million | $4,566.2 million |
- Q3 adjusted gross margin was 59%, versus 61% in the prior-year quarter; nine-month adjusted gross margin was 60% in both periods.
- Operating cash flow for the first nine months was $2,320.2 million, down from $2,810.0 million in 2022.
- Capital expenditures were $211.5 million, and cash paid for acquisitions was $667.7 million. Management expected 2023 capital expenditures of approximately $400 million to $500 million.
- Cash and cash equivalents were $1,309.6 million at September 30, 2023; cash, cash equivalents and restricted cash totaled $1,311.8 million.
- Long-term debt was $17,076.9 million, with $1,307.4 million of current maturities and other current long-term obligations. Mandatory remaining principal repayments totaled $17,860 million, including $500 million in 2023, $1,850 million in 2024 and $2,518 million in 2026.
- Viatris had no borrowings under its $4.0 billion revolving facility, $1.65 billion commercial paper program, $400 million receivables facility or $200 million note securitization facility at September 30, 2023.
- The company was in compliance with its maximum leverage covenant of 3.75 to 1.00 and expected to remain compliant over the following twelve months.
- The Board declared a quarterly dividend of $0.12 per share. During the nine months, Viatris repurchased approximately 21.2 million shares for $250 million.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 3%, operating earnings declined 19%, and net earnings declined 6%. For the first nine months, revenue declined 6%, operating earnings declined 33%, and net earnings declined 23%.
- Reported sales comparisons were materially affected by the November 2022 contribution of the biosimilars business to Biocon Biologics. The divested business contributed $181.0 million of prior-year Q3 sales and $507.5 million of prior-year nine-month sales.
- Excluding the divested biosimilars business and on a constant-currency basis, remaining-business sales increased approximately 1% in Q3 and were essentially flat for the nine months. New product sales were offset by erosion of existing products.
- Q3 sales were pressured by lower sales in JANZ and foreign exchange effects, while new products including lenalidomide and Breyna helped Developed Markets. Nine-month JANZ sales declined 15%, including government price reductions and competition in Japan.
- Research and development expense increased to $211.2 million in Q3 and $602.4 million for nine months, primarily reflecting pipeline investment and ophthalmology programs. SG&A increased to $1,053.5 million in Q3 and $3,044.3 million for nine months, including acquisition-related expenses.
- Other income increased substantially, including $47.2 million of Biocon transition-services income in Q3 and $139.8 million for nine months, as well as fair-value gains on Biocon, Mapi and Famy investments.
- Operating cash flow decreased primarily because of lower operating earnings and timing of cash collections and payments. Investing cash use increased because of the Oyster Point and Famy acquisitions.
Guidance, Outlook, Commentary and Risks
- Management stated that operating cash flow and available liquidity should fund working capital, capital expenditures, debt service, dividends and planned share repurchases, subject to future operating performance and market conditions.
- The 2020 restructuring program was expected to be substantially completed in 2023. Total committed pre-tax charges were estimated at up to $1.4 billion, with potential annual savings of up to approximately $900 million once fully implemented.
- Oyster Point was acquired for approximately $427.4 million in cash, and Famy Life Sciences was acquired in the first quarter. Oyster Point contributed $26.9 million of revenue but a net loss of approximately $119.8 million from acquisition through September 30, 2023, including purchase-accounting effects and acquisition costs.
- On October 1, 2023, Viatris announced or entered into agreements involving the potential divestiture of substantially all of its OTC business, its women’s healthcare business, two women’s healthcare product rights, its API business in India and Upjohn Distributor Markets commercialization rights. Transactions were expected to close by the end of the first half of 2024, subject to conditions and approvals.
- The OTC transaction was expected to generate gross proceeds of up to approximately $2.17 billion but was also expected to produce a fourth-quarter 2023 pre-tax loss of $600 million to $700 million. Failure to complete remaining Upjohn Distributor Markets transactions could result in additional charges exceeding $150 million.
- Key risks include generic competition and price erosion, government pricing and tender systems, foreign exchange, supply-chain and manufacturing issues, regulatory and intellectual-property challenges, litigation, tax audits, impairment of goodwill and intangible assets, and execution risk associated with acquisitions and divestitures.
- Goodwill impairment sensitivity was significant. At the April 1, 2023 test, estimated fair value cushions were approximately 3.9% for Europe, 5.5% for JANZ and 7.7% for Emerging Markets; modest changes in discount rates or terminal growth assumptions could trigger impairment.
- Viatris reported approximately $134.6 million of accrued legal contingencies. It also disclosed substantial ongoing generic-drug, opioid, product-liability, intellectual-property, tax and securities litigation for which additional losses may be material but cannot generally be estimated.
Most Important Facts for Investors to Verify
- Whether the announced divestitures close on schedule, at expected values and with the anticipated debt-reduction benefits.
- The actual fourth-quarter 2023 OTC divestiture loss and any additional Upjohn Distributor Markets write-offs.
- Trends in constant-currency sales, new-product launches and erosion from existing products, particularly in JANZ and Developed Markets.
- Debt maturities, leverage-covenant compliance and the use of divestiture proceeds relative to dividends and share repurchases.
- Potential goodwill or intangible-asset impairments, especially for Europe, JANZ and Emerging Markets.
- Developments in generic pricing investigations, securities litigation, product-liability claims, tax audits and patent challenges involving Yupelri, Tyrvaya and Amitiza.
- The sustainability of Biocon transition-services income and fair-value gains, which contributed materially to 2023 other income but may not recur at the same level.