Viatris Inc. Form 10-Q Summary
Business context and reporting period
Viatris is a global pharmaceutical company with approximately 37,000 employees, more than 1,400 approved molecules, and operations in over 165 countries and territories. Its portfolio includes branded, generic, complex generic, and biosimilar products. The filing covers the unaudited three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Reportable segments are Developed Markets, Greater China, JANZ, and Emerging Markets. The company classified Turkey as highly inflationary beginning April 1, 2022; the reported impact was not material.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenues | $4,078.2 million | $4,536.6 million | $12,386.7 million | $13,544.7 million |
| Net sales | $4,067.4 million | $4,520.5 million | $12,351.0 million | $13,482.3 million |
| Gross profit | $1,748.4 million | $1,574.1 million | $5,222.9 million | $4,029.1 million |
| GAAP gross margin | 43% | 35% | 42% | 30% |
| Adjusted gross margin | 61% | 60% | 60% | 59% |
| Earnings from operations | $560.1 million | $357.6 million | $1,816.2 million | $43.6 million |
| Net earnings/(loss) | $354.3 million | $311.5 million | $1,067.4 million | $(1,005.3) million |
| Diluted EPS | $0.29 | $0.26 | $0.88 | $(0.83) |
| Adjusted EBITDA | $1,497.8 million | $1,698.3 million | $4,566.2 million | $5,010.3 million |
Q3 revenue declined 10% year over year, but constant-currency revenue declined approximately 1%. For the nine-month period, reported revenue declined 9% and constant-currency revenue declined approximately 2%. Foreign currency translation reduced Q3 net sales by approximately $396.3 million and nine-month net sales by approximately $872.3 million.
Net cash provided by operating activities was $2,810.0 million for the first nine months, compared with $2,493.8 million in 2021. Capital expenditures were $252.3 million, and net cash used in investing activities was $264.0 million. Net cash used in financing activities was $2,547.3 million, including $2,961.9 million of long-term debt repayments and $436.1 million of dividends paid. Cash, cash equivalents, and restricted cash were $650.4 million at September 30, 2022, compared with $706.2 million at December 31, 2021.
Total debt consisted of $500.4 million of short-term borrowings, $763.8 million of current long-term debt and other obligations, and $18,724.5 million of long-term debt. Mandatory long-term debt repayments are $1.25 billion in 2023, $1.715 billion in 2024, $1.24 billion in 2025, $3.226 billion in 2026, and $11.493 billion thereafter. Viatris had $700.0 million outstanding under its $4.0 billion revolving facility, $300.4 million under its commercial paper program, and $200.0 million under its note securitization facility. Management stated that the company was in compliance with debt covenants and expected to remain compliant for the next 12 months.
Material changes versus the prior comparable period
- Revenue weakness was primarily attributable to unfavorable foreign exchange, base-business erosion, competition on selected U.S. products, government price reductions in Japan, and lower COVID-19-related and ARV product sales in Emerging Markets.
- New product sales partially offset declines from existing products, totaling approximately $144.0 million in Q3 and $349.9 million for the nine-month period.
- GAAP gross margin improved mainly because 2021 included substantial purchase-accounting amortization, inventory step-up, restructuring, and other special costs. Adjusted gross margin improved modestly.
- Nine-month operating earnings benefited from lower restructuring and transaction-related costs, lower intangible amortization, and lower interest expense. Adjusted EBITDA nevertheless declined 9% year over year.
- SG&A declined $37.7 million in Q3 and $532.6 million for the nine-month period, reflecting synergies and lower restructuring costs, partly offset by higher Pfizer transition and integration costs.
- Other comprehensive loss increased substantially, primarily because of foreign currency translation losses. Nine-month comprehensive loss was $947.4 million versus a $1,619.2 million loss in 2021.
- Short-term borrowings declined from $1.493 billion at year-end 2021 to $500.4 million at September 30, 2022, while the company used $2.55 billion of financing cash flow for debt reduction and dividends.
Guidance, outlook, commentary, and unusual items
- Viatris expects 2022 capital expenditures of approximately $425 million to $575 million.
- The 2020 restructuring program is expected to generate up to approximately $900 million of annual savings once fully implemented. Total pre-tax restructuring charges are expected to reach up to approximately $1.4 billion, including up to $950 million of cash costs.
- The pending Biocon Biologics transaction involves contribution of the biosimilars portfolio in exchange for approximately $2.0 billion of upfront cash, at least 12.9% ownership of Biocon Biologics, and $335 million of additional cash payments expected in 2024. Closing was expected by the end of 2022, subject to regulatory and other conditions. The related assets and liabilities were classified as held for sale.
- On November 7, 2022, Viatris agreed to acquire Oyster Point Pharma and Famy Life Sciences for an aggregate purchase price of approximately $700 million to $750 million, funded with cash on hand. Closing was expected in the first quarter of 2023, subject to customary conditions.
- The company declared a quarterly dividend of $0.12 per share payable December 16, 2022. A $1.0 billion share repurchase authorization remained unused at September 30, 2022.
- Legal contingencies totaled approximately $290 million at September 30, 2022. Separate disclosed accruals included approximately $64.9 million for product liability matters and $183.0 million for intellectual property matters. The company stated that additional losses could be material but could not be reasonably estimated.
- Material litigation and regulatory risks include generic-drug pricing investigations and lawsuits, opioid claims, EpiPen-related matters, securities litigation, product liability, patent disputes, and tax audits. The company had approximately $288.2 million reserved for uncertain international tax positions.
- Management reported effective disclosure controls. ERP and Pfizer support-service transitions continued through the quarter, with related internal-control changes expected through the end of 2022.
Most important facts for investors to verify
- Whether the Biocon Biologics transaction closed as expected and the amount and timing of proceeds, equity consideration, and any resulting gain.
- Progress toward restructuring savings and the remaining cash restructuring obligations.
- Constant-currency revenue trends, particularly in JANZ and Emerging Markets, and the sustainability of new-product growth.
- Debt maturities beginning in 2023, variable-rate exposure, covenant compliance, and liquidity after the planned ophthalmology acquisitions.
- Actual 2022 capital expenditures versus the $425 million to $575 million expectation.
- Developments in generic-drug pricing investigations, opioid and product-liability claims, intellectual-property litigation, tax audits, and related accruals.
- The effect of foreign exchange, inflation, government pricing actions, competition, and potential loss of market exclusivity on future margins and cash flow.