Viatris Inc. Form 10-Q Summary
Business Context and Reporting Period
Viatris filed its unaudited Form 10-Q for the three months ended March 31, 2021. The company was formed on November 16, 2020 through the combination of Mylan and Pfizer’s Upjohn Business. Because Mylan is the accounting acquirer, pre-combination historical results primarily reflect Mylan, while the 2021 quarter includes the combined company. Accordingly, year-over-year comparisons are not fully comparable.
Viatris operates globally across branded, generic, complex generic and biosimilar medicines, with products sold in more than 165 countries and territories. Reportable segments are Developed Markets, Greater China, JANZ and Emerging Markets.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenues | $4,430.3 million | $2,619.2 million | Up 69% |
| Net sales | $4,400.1 million | $2,588.2 million | Up 70%; up 65% constant currency |
| Gross profit | $1,127.3 million | $906.1 million | Up $221.2 million |
| GAAP gross margin | 25% | 35% | Down 10 percentage points |
| Adjusted gross margin | 60% | 53% | Up 7 percentage points |
| Loss from operations | $(266.2) million | $184.7 million | Declined $450.9 million |
| Net loss | $(1,037.6) million | $20.8 million | Declined $1,058.4 million |
| Diluted EPS | $(0.86) | $0.04 | Declined $0.90 |
| Adjusted net earnings | $1,116.4 million | $467.2 million | Up 139% |
| Adjusted EBITDA | $1,636.6 million | $750.7 million | Up 118% |
| Operating cash flow | $848.8 million | $291.1 million | Up $557.7 million |
Revenue growth primarily reflected $1.72 billion of Upjohn Business sales and approximately $163.2 million of new product sales. These benefits were partly offset by approximately $191.5 million of lower sales from existing products due to pricing and volume declines. Management estimated that COVID-19 reduced first-quarter 2021 net sales by approximately 3%.
GAAP earnings were significantly affected by purchase accounting and other special items, including $1,255.0 million of purchase accounting-related amortization, $476.4 million of amortization of the acquired inventory fair-value step-up, $315.4 million of restructuring-related costs, $59.8 million of acquisition-related costs and an $83.4 million intangible asset impairment charge.
Segments and Material Changes
- Developed Markets: Net sales increased 29% to $2,571.6 million, or 25% on a constant-currency basis. Upjohn contributed $533.4 million.
- Greater China: Net sales increased to $591.9 million from $15.1 million, primarily reflecting $592.0 million of Upjohn sales. Existing-product volumes were pressured by competition and volume-based procurement.
- JANZ: Net sales increased 98% to $481.9 million, or 89% constant currency, including $189.6 million from Upjohn.
- Emerging Markets: Net sales increased 120% to $754.7 million, including $406.2 million from Upjohn.
- Cost structure: R&D increased to $184.1 million from $114.2 million. SG&A increased to $1,186.5 million from $605.4 million, driven mainly by Upjohn costs, restructuring and acquisition-related costs.
- Taxes: The $596.3 million income tax provision was unusually high relative to the pretax loss, partly due to tax effects associated with the reversal of intercompany profit in inventory reserves recorded in the Combination.
Cash Flow, Debt and Liquidity
- Cash, cash equivalents and restricted cash were $813.1 million at March 31, 2021, compared with $850.0 million at December 31, 2020.
- Operating cash flow was $848.8 million. Investing activities provided $236.3 million, including $277.0 million of cash received from acquisitions and $49.5 million of capital expenditures.
- Financing activities used $1,099.8 million, primarily because the company repaid $1,063.9 million of short-term borrowings.
- Long-term debt, including the current portion, totaled approximately $24.36 billion at March 31, 2021, compared with $24.69 billion at December 31, 2020. Short-term borrowings declined to $36.9 million from $1.10 billion.
- Viatris had access to a $4.0 billion revolving facility, a $1.65 billion commercial paper program, a $400 million receivables facility and a $200 million note securitization facility. No amounts were outstanding under the receivables facility at quarter-end.
- The company reported compliance with its maximum leverage covenant and expected to remain compliant for the following 12 months. The applicable maximum leverage ratio was 4.25-to-1.00 for the first four full fiscal quarters after the Combination and 3.75-to-1.00 thereafter, subject to specified exceptions.
- Mandatory minimum repayments on outstanding long-term debt totaled $23.663 billion, including $2.250 billion in 2021 and $2.480 billion in 2022.
Guidance, Outlook, Commentary and Risks
- The company expects total 2021 capital expenditures of approximately $500 million to $650 million.
- The global restructuring program is expected to generate total pretax 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. Up to 15 manufacturing facilities may be closed, downsized or divested, and up to 20% of the global workforce may be affected.
- Management estimates potential annual savings of $700 million to $900 million once the committed restructuring actions are fully implemented, with most savings expected to improve operating cash flow.
- COVID-19 continued to create volatility in demand, including lower retail pharmacy demand, fewer non-COVID hospital visits and fewer in-person prescriber interactions. Manufacturing facilities and key partners were operational at the filing date, with no significant supply-chain or customer-service disruptions reported.
- Key commercial risks include generic competition, loss of exclusivity, pricing pressure, government price reductions, tender systems, reimbursement changes and product concentration. The top ten products represented approximately 35% of net sales in Q1 2021.
- Management identified risks related to integrating Mylan and Upjohn, realizing synergies, executing restructuring, transition-service arrangements with Pfizer, regulatory actions, manufacturing and supply-chain execution, intellectual property, litigation, tax audits, foreign exchange and future financing needs.
- The company had approximately $462.2 million accrued for legal contingencies at March 31, 2021. Separately, it disclosed substantial ongoing litigation involving generic drug pricing, EpiPen, opioids, product liability, intellectual property and other matters for which potential additional losses may be material but cannot be reasonably estimated.
- Unaccrued potential development milestones under collaboration and licensing arrangements totaled approximately $381 million, with approximately $20 million estimated to be payable through the end of 2021; sales-based milestones, royalties and profit shares were excluded because they were not reasonably estimable.
- The Board declared a quarterly dividend of $0.11 per share payable June 16, 2021. Future dividends remain subject to Board discretion and financial, legal and regulatory considerations.
Investor Verification Checklist
- Verify the comparability of Q1 2021 and Q1 2020 results given the November 2020 Mylan-Upjohn Combination.
- Reconcile GAAP results with adjusted net earnings and adjusted EBITDA, particularly the large purchase accounting, restructuring, acquisition and impairment adjustments.
- Monitor the timing and cash cost of the $1.1 billion to $1.4 billion restructuring program and whether projected annual savings of $700 million to $900 million are achieved.
- Assess debt maturities, leverage covenant headroom and the company’s ability to fund the $2.25 billion 2021 debt maturity while maintaining dividends and operating investments.
- Evaluate the unusually high income tax provision and the potential effects of uncertain tax positions, ongoing audits and tax litigation.
- Track legal and intellectual-property matters, including generic pricing investigations, EpiPen litigation, opioid claims, product liability and patent disputes.
- Monitor COVID-19 demand effects, competitive pricing, loss of exclusivity and the performance of major Upjohn products, including Lyrica, Lipitor, Norvasc and Viagra.