Viatris Inc quarterly report, Q1 FY2022

Viatris Inc. 2022 Q1 Form 10-Q Summary

Business context and reporting period

Viatris is a global pharmaceutical company formed from the combination of Mylan and Pfizer’s Upjohn Business. It markets branded, generic, complex generic and biosimilar products in more than 165 countries and territories through four segments: Developed Markets, Greater China, JANZ, and Emerging Markets. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.

Key financial metrics

Metric	Q1 2022	Q1 2021	Change
Total revenues	$4,191.7 million	$4,430.3 million	Down 5%
Net sales	$4,178.2 million	$4,400.1 million	Down 5%
Gross profit	$1,771.2 million	$1,127.3 million	Up 57%
GAAP gross margin	42%	25%	Up 17 percentage points
Adjusted gross margin	59%	60%	Down 1 percentage point
Earnings from operations	$707.4 million	Loss of $266.2 million	Improved $973.6 million
Net earnings	$399.2 million	Loss of $1,037.6 million	Improved $1,436.8 million
Diluted EPS	$0.33	$(0.86)	Improved $1.19
Adjusted net earnings	$1,125.3 million	$1,116.4 million	Up 1%
Adjusted EBITDA	$1,586.3 million	$1,636.6 million	Down 3%
Net cash from operations	$1,138.5 million	$848.8 million	Up $289.7 million

GAAP gross profit benefited substantially from lower purchase-accounting amortization, inventory step-up costs, restructuring costs and other special items compared with the prior-year quarter. GAAP cost of sales declined to $2,420.5 million from $3,303.0 million.

Liquidity, cash flow and debt

Cash and cash equivalents were $752.4 million at March 31, 2022, compared with $701.2 million at December 31, 2021.
Total cash, cash equivalents and restricted cash increased to $757.4 million from $706.2 million at year-end.
Operating cash flow was $1.14 billion. Capital expenditures were $64.5 million, and management expected full-year 2022 capital expenditures of approximately $525 million to $675 million.
Financing cash outflows were $1.01 billion, including $837.9 million of net short-term borrowing repayments and $145.1 million of dividends paid.
Short-term borrowings declined to $655.4 million from $1.49 billion at December 31, 2021. Long-term debt was $18.76 billion, and current long-term debt and other obligations were $2.61 billion.
The company had access to a $4.0 billion revolving facility, with no borrowings outstanding under it at March 31, 2022. Commercial paper borrowings were $328.5 million and Receivables Facility borrowings were $325.5 million.
Management stated that the company was in compliance with debt covenants and expected to remain compliant for the next twelve months.

Material changes versus the prior comparable period

Revenue declined 5% as lower pricing and volumes on existing products exceeded approximately $120 million of new product sales. Foreign currency translation reduced net sales by approximately $170.3 million; constant-currency net sales declined 1%.
Developed Markets sales declined 4%, Greater China declined 3%, JANZ declined 12%, and Emerging Markets declined 7% on a reported basis. On a constant-currency basis, Developed Markets declined less than 1%, Greater China declined 5%, JANZ declined 4%, and Emerging Markets increased less than 1%.
Research and development expense declined $41.8 million to $142.3 million, primarily from lower development costs and synergies.
Selling, general and administrative expense declined $271.2 million to $915.3 million, mainly due to lower restructuring costs and synergies.
Interest expense declined $22.8 million to $146.2 million, primarily reflecting debt repayments.
Other expense, net increased to $33.7 million from $6.1 million, mainly because of higher foreign exchange costs.
Foreign currency translation produced a $469.2 million other comprehensive loss, contributing to accumulated other comprehensive loss of $2.06 billion at March 31, 2022.

Guidance, outlook, commentary and unusual items

Viatris entered into an agreement to contribute its biosimilars portfolio to Biocon Biologics. Expected consideration includes $2.0 billion of upfront cash, at least 12.9% ownership of Biocon Biologics through convertible preferred equity, and $335 million of additional cash payments expected in 2024. Closing was expected in the second half of 2022, subject to regulatory and other conditions.
The biosimilars portfolio was classified as held for sale at March 31, 2022, with $1.34 billion of assets and $277.7 million of liabilities classified as held for sale. The company expected to recognize a gain upon closing, although the filing does not provide a clear estimated gain amount.
The company authorized a share repurchase program of up to $1.0 billion, but no shares had been repurchased as of March 31, 2022. The quarterly dividend was $0.12 per share, and the board declared another $0.12 per share dividend payable in June 2022.
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. Management estimates potential annual savings of up to approximately $900 million when fully implemented.
Viatris classified Turkey as highly inflationary effective April 1, 2022 and will use the U.S. dollar as Turkey’s functional currency beginning in the second quarter. Turkey represented less than 1% of consolidated first-quarter sales and total assets.
Russia and Ukraine together represented less than 1% of consolidated first-quarter revenue. The company reported no material first-quarter impact but warned that sanctions, trade controls, supply chain issues and escalation of the conflict could affect future results.
The company reported that manufacturing facilities and key partners remained operational and that it was not experiencing significant COVID-19-related disruptions, while continuing to identify pandemic-related supply chain and demand risks.
Interim goodwill testing did not result in an impairment charge. The Europe and JANZ reporting units had relatively limited excess fair value over carrying value, approximately 5.3% and 7.4%, respectively, making them sensitive to adverse changes in discount rates or terminal growth assumptions.
Legal contingencies accrued at March 31, 2022 totaled approximately $590.9 million. Notable accruals included approximately $269.0 million for EpiPen-related matters, $75.3 million for product liability matters and $211.8 million for intellectual-property matters. The company stated that additional losses could be material but generally could not be estimated.
Potential maximum development milestones not accrued for totaled approximately $338 million, with approximately $10 million expected to be paid through the end of 2022. Sales-based milestones, royalties and profit shares were not included because amounts were not reasonably estimable.
Management stated that disclosure controls and procedures were effective. The company continued transitioning support services to a new ERP system, with related internal-control changes expected through the end of 2022.

Most important facts for investors to verify

Whether the Biocon Biologics transaction closes on schedule, the final consideration received, and the resulting gain or loss.
Whether reported revenue trends improve after adjusting for foreign exchange, pricing pressure, competition and government-mandated price reductions.
The sustainability of adjusted EBITDA, operating cash flow and the company’s targeted restructuring savings.
Debt maturities, refinancing needs and continued compliance with financial covenants, particularly given substantial 2022–2026 maturities.
The outcome and potential cash impact of EpiPen, generic-drug pricing, opioid, product-liability, intellectual-property and tax proceedings.
Potential goodwill impairment in Europe and JANZ if operating forecasts, discount rates or terminal growth assumptions deteriorate.
The effect of the Russia-Ukraine conflict, Turkey’s highly inflationary accounting treatment, COVID-19 conditions and global supply-chain disruption on future results.