Viatris Inc annual report, FY2021

Viatris Inc. 2021 Form 10-K Summary

Business context and reporting period

Viatris is a global healthcare company formed in November 2020 through the combination of Mylan and Pfizer’s Upjohn Business. It markets brands, generics, complex generics, biosimilars and APIs in more than 165 countries and territories, with approximately 37,000 employees and 40 manufacturing sites. The filing covers the fiscal year ended December 31, 2021, not a standalone fourth quarter. Comparability with 2020 is affected because the Upjohn Business was included from November 16, 2020, and Mylan is the accounting acquirer.

Reportable segments are Developed Markets, Greater China, JANZ and Emerging Markets.

Key financial metrics

Metric	2021	2020	Change
Total revenues	$17.89 billion	$11.95 billion	Up 50%
Net sales	$17.81 billion	$11.82 billion	Up 51%
Gross profit	$5.58 billion	$3.80 billion	Up 47%
GAAP gross margin	31%	32%	Down 1 point
Loss from operations	$34.0 million	$210.8 million	Improved $176.8 million
Net loss	$1.27 billion	$669.9 million	Loss increased $599.2 million
Diluted loss per share	$1.05	$1.11	Improved $0.06
Adjusted net earnings	$4.47 billion	$2.37 billion	Up 88%
Adjusted EBITDA	$6.43 billion	$3.65 billion	Up 76%
Operating cash flow	$3.02 billion	$1.23 billion	Up $1.79 billion

GAAP results were heavily affected by purchase-accounting amortization, restructuring, litigation and other special items. Purchase-accounting amortization and related items totaled $4.04 billion, including approximately $1.19 billion of amortization of the Upjohn inventory fair-value step-up. Adjusted gross margin was approximately 59%, compared with 54% in 2020.

Revenue and operating performance

Revenue growth primarily reflected $5.80 billion of incremental Upjohn sales and a favorable foreign-currency impact of approximately $206.4 million. New product sales of $698.7 million were largely offset by $710.9 million of lower sales from existing products due to pricing and volume pressure.
Segment sales increased 23% in Developed Markets, 70% in JANZ and 70% in Emerging Markets. Greater China increased substantially because of the inclusion of Upjohn results; the filing does not present a meaningful percentage comparison for that segment.
Brands generated $10.84 billion of 2021 net sales, generics $5.63 billion, and complex generics and biosimilars $1.34 billion.
R&D expense increased to $751.1 million from $555.1 million. SG&A increased to $4.53 billion from $3.34 billion, partly due to Upjohn costs and restructuring.
Litigation settlements and other contingencies increased to $329.2 million, including a $264.0 million EpiPen-related accrual.
Interest expense increased to $636.2 million from $497.8 million. The 2021 income tax provision was $604.7 million, compared with a $51.3 million benefit in 2020, primarily due to tax effects associated with the Combination and jurisdictional earnings mix.

Cash flow, liquidity and debt

Cash and cash equivalents were $701.2 million at December 31, 2021, compared with $844.4 million at year-end 2020. Cash, cash equivalents and restricted cash totaled $706.2 million.
Capital expenditures were $457.2 million. Management expected 2022 capital expenditures of approximately $525 million to $675 million.
Net cash used in financing activities was $3.01 billion, including $4.20 billion of long-term debt repayments, $399.0 million of dividends and $456.0 million of deferred payments for product rights.
Short-term borrowings were $1.49 billion, including $1.17 billion of commercial paper and $318.5 million under the Receivables Facility. Long-term debt was $19.72 billion, with total debt obligations reflected in the balance sheet of approximately $21.21 billion excluding other obligations.
Viatris had access to a $4.0 billion revolving facility maturing in July 2026; no borrowings were outstanding under that facility at year-end. The company stated that it was in compliance with debt covenants and expected to remain compliant for the next twelve months.
Approximately $1.84 billion of floating-rate debt was outstanding at year-end; a 1 percentage-point increase in average rates would increase annual interest expense by approximately $18.4 million.

Material changes versus the prior comparable period

The first full year of combined Mylan and Upjohn operations materially increased reported revenue, adjusted earnings and operating cash flow, but also increased amortization, interest expense and other integration-related costs.
Reported net loss widened despite improved operating loss and adjusted profitability, principally because of a $656.0 million year-over-year swing in income taxes, higher purchase-accounting amortization and increased litigation and restructuring costs.
The company reduced long-term debt by approximately $2.71 billion from year-end 2020 and replaced the 2020 revolving and USD term-loan facilities with a new $4.0 billion revolving facility and a ¥40 billion term loan.
The company’s top ten products represented approximately 33% of net sales, compared with 23% in 2020, increasing product concentration risk.
Inventory declined to $3.98 billion from $5.47 billion, while inventory reserves increased to $519.0 million from $353.6 million.

Guidance, outlook, management commentary and unusual items

The global restructuring program was expected to generate up to approximately $900 million of annual savings when fully implemented. Total pre-tax charges for committed actions were estimated at up to $1.4 billion, including up to $950 million of cash costs and up to $450 million of non-cash costs.
Management reported that manufacturing facilities and key global partners were operational at the filing date, with no significant COVID-19-related disruptions then being experienced. However, supply-chain, demand, regulatory and workforce impacts remained uncertain.
On February 28, 2022, Viatris agreed to contribute its biosimilars business to Biocon Biologics. Consideration is expected to include $2.0 billion of upfront cash, $1.0 billion of convertible preferred equity and up to $335 million of additional cash payments. Closing was expected in the second half of 2022, subject to regulatory and other conditions.
The Biocon transaction is expected to reduce future revenue and operating cash flow from the divested biosimilars business, while providing proceeds that management expected could support debt reduction and other initiatives.
On February 28, 2022, the board authorized a share repurchase program of up to $1.0 billion; no repurchases had occurred as of the filing.
Viatris declared quarterly dividends of $0.11 per share during 2021 and declared a $0.12 per-share dividend payable in March 2022. Future dividends remain discretionary.

Principal risks and contingencies

Integration of Upjohn and Mylan, execution of restructuring, migration from Pfizer transition services and implementation of a new ERP system through 2022 could cause operational disruption or additional costs.
Pricing controls, tenders, government reimbursement pressure, customer consolidation and generic competition could reduce revenue and margins, particularly in China and other international markets.
Loss of exclusivity and competition affected products including Perforomist, Lyrica, Wixela, Xulane and Miacalcin; future launches and biosimilar approvals remain uncertain.
The company faces extensive patent, antitrust, product-liability, opioid, securities, government-investigation and regulatory matters. Accrued legal contingencies were approximately $609 million at year-end, including approximately $274 million related to EpiPen matters, $226.9 million for intellectual-property matters and $74.8 million for product-liability matters.
The company had approximately $351 million of potential unaccrued development milestones under licensing agreements, with approximately $18 million expected to be payable during the next twelve months, excluding sales-based milestones, royalties and profit shares.
Goodwill and intangible assets are substantial. Europe and JANZ had relatively limited goodwill valuation cushions at the April 1, 2021 impairment test, creating sensitivity to discount rates, growth assumptions and operating performance.
Foreign exchange, interest rates, cybersecurity, data privacy, manufacturing quality, supply concentration, COVID-19, tax audits and pension obligations could adversely affect results, liquidity or shareholder returns.

Important facts for investors to verify

Reconcile reported GAAP loss with adjusted net earnings and adjusted EBITDA, particularly the treatment of purchase accounting, restructuring, litigation and other recurring special items.
Assess the sustainability of revenue and cash-flow growth after separating the Upjohn contribution from underlying volume, price, currency and new-product performance.
Monitor debt maturities, commercial paper refinancing, leverage-covenant headroom, floating-rate exposure and the use of proceeds from the Biocon transaction.
Review the status and ultimate exposure of EpiPen, generic-drug antitrust, opioid, securities, patent and product-liability matters beyond recorded reserves.
Evaluate whether the restructuring savings target can be achieved without impairing manufacturing capacity, product supply, employee retention or regulatory compliance.
Verify the closing conditions, valuation and liquidity of the Biocon Biologics preferred equity consideration and the post-transaction effect on Viatris’s revenue mix and margins.
Review the sensitivity of goodwill, intangible assets, revenue reserves and deferred tax assets to changes in forecasts and assumptions.