Viatris Inc. 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 filing covers the three and six months ended June 30, 2021. Comparisons with 2020 are not fully like-for-like because pre-November 16, 2020 historical results represent Mylan only, while 2021 includes the combined company.
The company sells branded, generic, complex generic and biosimilar medicines in more than 165 countries and territories. Reportable segments are Developed Markets, Greater China, JANZ, and Emerging Markets.
Financial performance and liquidity
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Total revenues | $4,577.8 million | $2,731.2 million | $9,008.1 million | $5,350.4 million |
| Gross profit | $1,327.7 million | $1,025.7 million | $2,455.0 million | $1,931.8 million |
| GAAP gross margin | 29% | 38% | 27% | 36% |
| Operating income (loss) | $(47.8) million | $134.2 million | $(314.0) million | $318.9 million |
| Net income (loss) | $(279.2) million | $39.4 million | $(1,316.8) million | $60.2 million |
| Diluted EPS | $(0.23) | $0.08 | $(1.09) | $0.12 |
| Adjusted gross margin | 58% | 54% | 59% | 54% |
| Adjusted net earnings | $1,180.6 million | $574.3 million | $2,297.0 million | $1,041.5 million |
| Adjusted EBITDA | $1,675.4 million | $878.6 million | $3,312.0 million | $1,629.3 million |
Second-quarter total revenue increased 68%, and six-month revenue increased 68%, primarily because 2021 included Upjohn revenue of $1.63 billion in the quarter and $3.35 billion year to date. New product sales also contributed, while existing-product revenue declined because of lower pricing and, to a lesser extent, lower volumes. Constant-currency net sales increased 64% in both the quarter and six-month period.
GAAP profitability was reduced by purchase-accounting effects, including intangible-asset amortization and inventory step-up amortization. Purchase-accounting-related amortization included in cost of sales was $1,169.8 million in the quarter and $2,424.8 million for the six months. The company recorded $477.3 million and $953.7 million, respectively, of inventory step-up amortization.
Operating expenses increased substantially, including SG&A of $1,204.8 million in the quarter and $2,391.3 million year to date. Restructuring charges were $251.9 million in the quarter and $565.5 million year to date. Interest expense was $167.1 million in the quarter and $336.1 million year to date.
Net cash provided by operating activities was $1,408.2 million for the six months, compared with $670.6 million in the prior-year period. Investing activities provided $219.5 million, including $277.0 million of cash received from acquisitions and $83.4 million from asset sales, offset by $138.8 million of capital expenditures. Financing activities used $1,785.3 million, including $2,250.7 million of long-term debt repayments, $133.0 million of dividends, and $456.0 million of non-contingent product-rights payments.
Cash and cash equivalents were $673.9 million at June 30, 2021, compared with $844.4 million at December 31, 2020. Total long-term debt, including the current portion, was approximately $23.1 billion, compared with $24.7 billion at year-end. Short-term borrowings were $1.30 billion, consisting primarily of commercial paper, the Receivables Facility, and the Note Securitization Facility.
Material changes versus the prior comparable period
- Revenue growth primarily reflects inclusion of the Upjohn Business following the November 2020 combination, new product launches, and favorable currency effects.
- GAAP operating results deteriorated from income to loss despite higher gross profit because of purchase-accounting amortization, restructuring, acquisition-related costs, and higher SG&A.
- GAAP gross margin declined to 29% for the quarter and 27% year to date, while adjusted gross margin increased to 58% and 59%, respectively, after excluding purchase-accounting and other special items.
- Net loss included a $656.4 million income tax provision for the six-month period, compared with a $9.5 million tax benefit in 2020. The provision was affected by tax rates applied to the reversal of an intercompany inventory-profit reserve and jurisdictional earnings mix.
- Long-term debt declined following repayment of the 2021 Senior Notes, while interest expense increased because of debt assumed in the combination.
- The company began paying a quarterly dividend of $0.11 per share. The board declared a second $0.11 dividend in August 2021.
Guidance, outlook, commentary, risks and unusual items
- The company expects 2021 capital expenditures of approximately $500 million to $650 million.
- The global restructuring program is expected to generate total pre-tax 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. Management expects eventual annual savings of $700 million to $900 million. Up to 15 manufacturing facilities may be closed, downsized or divested, and up to 20% of the global workforce may be affected.
- Management states that liquidity is sufficient for foreseeable needs, supported by operating cash flow, cash, short-term facilities, commercial paper and the revolving facility. In July 2021, the company entered a new $4.0 billion revolving facility and a ¥40 billion term loan, both maturing in July 2026, and used them to refinance the prior revolving facility and USD term loan.
- The company expects to launch interchangeable SEMGLEE before the end of 2021 and transition the existing product to the interchangeable version. It expects 12 months of exclusivity before another interchangeable biosimilar to Lantus may be approved.
- COVID-19 continued to create volatility in demand and operating conditions. Management reported no significant supply-chain disruption at filing and estimated that COVID-19 positively affected second-quarter net sales by approximately 4% and six-month net sales by approximately 1% versus the prior-year periods.
- Key risks include integration and restructuring execution, generic pricing and competition, loss of market exclusivity, regulatory and manufacturing issues, supply-chain disruption, COVID-19, foreign exchange, tax audits, and substantial litigation exposure.
- Legal contingencies accrued at June 30, 2021 totaled approximately $455.6 million. Notable matters include EpiPen and generic-drug antitrust litigation, opioid litigation, product-liability claims, intellectual-property disputes, and tax assessments. The company states that additional losses could be material but generally cannot be estimated.
- Goodwill impairment testing identified limited excess fair value over carrying value for Europe and JANZ. The Europe reporting unit had approximately $0.91 billion, or 5.8%, of excess fair value; the JANZ reporting unit had approximately $0.23 billion, or 7.0%. Changes in discount rates or terminal growth assumptions could result in impairment charges.
Most important facts for investors to verify
- Whether revenue growth and adjusted profitability remain sustainable after the Upjohn combination effects, COVID-related demand changes, and new product contributions normalize.
- The reconciliation of GAAP losses to adjusted net earnings and adjusted EBITDA, particularly the recurring nature of purchase-accounting amortization and restructuring exclusions.
- Progress, total cost, timing and realized savings from the global restructuring program.
- Debt repayment capacity, leverage-covenant compliance, refinancing needs and availability under the new revolving facility.
- Exposure to generic pricing pressure, competition, tender systems and the expected decline of Lyrica revenue in Japan.
- Potential cash requirements from antitrust, product-liability, intellectual-property, tax and other legal matters beyond recorded reserves.
- The sensitivity of Europe and JANZ goodwill valuations to discount rates, terminal growth rates and operating forecasts.
- Future dividend sustainability given GAAP losses, leverage, restructuring cash costs and capital-allocation priorities.