Viatris Inc. Form 10-Q Summary
Business Context and Reporting Period
Viatris is a global pharmaceutical company supplying branded, generic and complex medicines in more than 165 countries and territories. The company reports four segments: Developed Markets, Greater China, Japan/Australia/New Zealand (JANZ), and Emerging Markets. This unaudited Form 10-Q covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenues | $3,663.4 million | $3,729.1 million | Down $65.7 million, or 2% |
| Net sales | $3,653.5 million | $3,719.1 million | Down 2% |
| Gross profit | $1,504.0 million | $1,542.2 million | Down $38.2 million |
| Gross margin | Approximately 41% | Approximately 41% | Stable |
| Earnings from operations | $203.9 million | $399.8 million | Down $195.9 million |
| Operating margin | Approximately 5.6% | Approximately 10.7% | Down approximately 5.1 percentage points |
| Net earnings | $113.9 million | $224.7 million | Down $110.8 million |
| Diluted EPS | $0.09 | $0.19 | Down $0.10 |
| Adjusted net earnings | $812.7 million | $932.9 million | Down $120.2 million |
| Adjusted diluted EPS | $0.67 | $0.77 | Down $0.10 |
| Adjusted EBITDA | $1,193.4 million | $1,340.9 million | Down $147.5 million |
| Adjusted EBITDA margin | Approximately 32.6% | Approximately 36.0% | Down approximately 3.4 percentage points |
Net sales at constant currency were approximately flat overall. Excluding businesses divested in 2023 and 2024, constant-currency sales increased approximately 2%, reflecting approximately $154.5 million of new-product sales, partly offset by approximately $97.3 million of base-business erosion.
- Developed Markets sales were essentially flat; new products, including Breyna, offset lower EpiPen and Lyrica sales.
- Greater China sales decreased 4% as reported but were essentially flat at constant currency.
- JANZ sales decreased 7% as reported but increased approximately 2% at constant currency.
- Emerging Markets sales decreased 2% as reported but increased approximately 8% at constant currency for the remaining business.
Cash Flow, Balance Sheet, Debt and Liquidity
- Net cash provided by operating activities was $614.6 million, down from $971.2 million in Q1 2023, primarily due to lower operating earnings, divestitures and timing of cash payments and collections.
- Net cash used in investing activities was $154.3 million. Major items included $350.0 million paid for the Idorsia transaction, $240.6 million of proceeds from the women’s healthcare divestiture and $49.8 million of capital expenditures.
- Net cash used in financing activities was $425.6 million, including $250.0 million of share repurchases and $142.8 million of cash dividends.
- Cash, cash equivalents and restricted cash totaled $1,015.9 million at March 31, 2024, compared with $993.6 million at December 31, 2023.
- Total debt, based on current and long-term debt reported on the balance sheet, was approximately $17.96 billion. Mandatory remaining principal repayments totaled approximately $17.47 billion, including $1.89 billion in 2024 and $1.29 billion in 2025.
- The company had no borrowings outstanding under its $4.0 billion revolving facility, $1.65 billion commercial paper program, $400 million receivables facility or $200 million note securitization facility at March 31, 2024.
- Management stated that available liquidity and operating cash flow should fund foreseeable working capital, capital expenditures, debt service, dividends and repurchases. The company was in compliance with its debt covenants and expected to remain compliant for the next twelve months.
- Capital expenditures for full-year 2024 are expected to be approximately $350 million to $450 million.
Material Changes Versus the Prior Comparable Period
- Operating earnings fell substantially because of higher litigation settlements and other contingencies, higher R&D and SG&A costs, and transaction-related items.
- Litigation settlements and other contingencies increased to $76.8 million from $0.6 million.
- R&D expense increased to $199.7 million from $182.9 million, reflecting continued pipeline investment. SG&A increased to $1,017.5 million from $958.9 million.
- Interest expense declined to $138.4 million from $147.0 million, primarily due to the impact of debt repayments.
- Other income, net increased to $139.1 million from $69.9 million, primarily due to an $80.8 million gain on the women’s healthcare divestiture and a $46.9 million gain from remeasuring the Biocon Biologics preferred shares.
- Inventory increased to $3.82 billion from $3.47 billion at December 31, 2023, while accounts payable increased to $2.20 billion from $1.94 billion.
- Accumulated other comprehensive loss increased to $2.94 billion from $2.75 billion, primarily due to a $342.5 million unfavorable foreign currency translation adjustment before tax.
Strategic Transactions, Outlook and Unusual Items
- On March 15, 2024, Viatris acquired Phase 3 development programs for selatogrel and cenerimod from Idorsia for $350 million upfront. The transaction also includes potential development and regulatory milestones of $300 million, potential tiered sales milestones of up to $2.1 billion and contingent royalties. The preliminary purchase price allocation included $675 million of acquired IPR&D and $345 million of contingent consideration.
- The women’s healthcare divestiture closed in March 2024 and generated an approximately $80.8 million pretax gain. The API business divestiture was expected to close imminently.
- The OTC transaction remained subject to regulatory approvals, required consents and other conditions, with closing expected by mid-2024. Assets held for sale totaled $2.52 billion at March 31, 2024.
- The share repurchase authorization was increased to $2.0 billion. Viatris repurchased approximately 19.2 million shares for $250 million during the quarter; $500 million had been repurchased under the program as of March 31, 2024. The quarterly dividend remained $0.12 per share.
- Management reported adjusted gross margin of approximately 59%, compared with 60% in the prior-year quarter. Non-GAAP results exclude substantial purchase accounting amortization, litigation, restructuring, acquisition and divestiture costs, share-based compensation and other special items.
- Mapi received an FDA Complete Response Letter for the GA Depot 40 mg NDA during the quarter. Viatris and Mapi were reviewing the letter and determining next steps.
Risks, Contingencies and Other Matters
- Legal contingencies accrued at March 31, 2024 totaled approximately $246.3 million. The company stated that adverse outcomes could materially affect financial condition, cash flows, dividends or stock price.
- Accruals included approximately $150.7 million for opioid-related matters, $65.3 million for product liability matters, approximately $5.1 million for intellectual property matters, and approximately $5.5 million for EpiPen litigation.
- The company faces ongoing generic drug pricing and antitrust litigation, securities litigation, patent challenges, product liability claims and regulatory inquiries. The company generally cannot estimate reasonably possible losses above recorded accruals for these matters.
- Potential maximum development milestones not accrued at March 31, 2024 totaled approximately $409 million, with estimated payments of approximately $18 million through the end of 2024. Sales-based milestones, royalties and profit-share obligations are not included because they cannot be reasonably estimated.
- Key operating risks include generic competition, loss of market exclusivity, government price reductions and tender systems, regulatory approval delays, manufacturing and supply-chain issues, foreign currency volatility, geopolitical conditions, tax audits and execution risk related to acquisitions and divestitures.
- The Swedish Administrative Court of Appeals issued an unfavorable tax decision in April 2024 involving approximately $19.0 million including interest and penalties; Viatris plans to seek review. The company also disclosed ongoing tax audits and a $281.8 million reserve for uncertain tax positions at March 31, 2024.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2024 and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Progress, approval status, development costs and milestone exposure for the Idorsia selatogrel and cenerimod programs.
- Timing and proceeds of the OTC and API divestitures, including any purchase-price adjustments, stranded costs or additional impairment charges.
- Underlying operating performance excluding divested businesses and the sustainability of new-product sales versus base-business erosion.
- Debt maturities beginning in 2024, refinancing plans and continued compliance with the 3.75-to-1.00 maximum leverage covenant.
- Inventory growth, working-capital requirements and the significant decline in operating cash flow.
- Potential additional losses from opioid, antitrust, securities, product liability, intellectual property and tax matters beyond recorded accruals.
- Regulatory developments concerning GA Depot and patent challenges involving Yupelri, Tyrvaya and Amitiza.
- Non-GAAP reconciliations and the extent to which adjusted earnings depend on recurring restructuring, acquisition, divestiture and purchase-accounting adjustments.