Viatris Inc. Form 10-Q Summary
Business Context and Reporting Period
Viatris is a global pharmaceutical company operating in more than 165 countries and territories, with a portfolio of branded, generic and complex generic medicines. Its four reportable segments are Developed Markets, Greater China, JANZ, and Emerging Markets. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the prior-year periods.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Total revenues | $3,918.6 million | $4,116.8 million | $7,647.7 million | $8,308.5 million |
| Gross profit | $1,608.6 million | $1,703.3 million | $3,150.8 million | $3,474.5 million |
| GAAP gross margin | 41% | 41% | 41% | 42% |
| Earnings from operations | $369.2 million | $548.7 million | $769.0 million | $1,256.1 million |
| Net earnings | $264.0 million | $313.9 million | $488.7 million | $713.1 million |
| Diluted EPS | $0.22 | $0.26 | $0.41 | $0.59 |
| Adjusted gross margin | 60% | 59% | 60% | 59% |
| Adjusted EBITDA | $1,305.7 million | $1,482.1 million | $2,646.6 million | $3,068.4 million |
| Operating cash flow | Not separately provided | Not separately provided | $1,486.1 million | $1,941.0 million |
Q2 total revenues declined 5%; six-month revenues declined 8%. Q2 net sales were $3,909.5 million and six-month net sales were $7,628.6 million. The filing attributes the six-month decline primarily to unfavorable foreign exchange of approximately $288.7 million and the prior-year inclusion of $326.6 million of biosimilars sales subsequently contributed to Biocon Biologics.
Interest expense was $143.7 million in Q2 and $290.7 million for the six months, broadly flat year over year. Other income was $107.5 million in Q2 and $177.4 million for the six months, driven by Biocon transition-services income and fair-value gains on investments, including Mapi and Biocon Biologics securities.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $629.2 million at June 30, 2023, down from $1,259.9 million at December 31, 2022. Cash, cash equivalents and restricted cash totaled $631.4 million.
- Total debt was approximately $18.6 billion, comprising $1.3 billion of current debt and $17.2 billion of long-term debt. Mandatory minimum debt repayments total $18.0 billion, including $500 million in 2023, $1.9 billion in 2024 and $1.3 billion in 2025.
- Viatris had no borrowings under its $4.0 billion revolving facility, $1.65 billion commercial paper program, $400 million receivables facility or $200 million note securitization facility at June 30, 2023.
- The company reported compliance with its debt covenants, including a maximum leverage ratio of 3.75 to 1.00, and expects to remain compliant for the next twelve months.
- Six-month investing cash outflow was $826.1 million, including $667.7 million for acquisitions and $115.6 million of capital expenditures. Full-year 2023 capital expenditures are expected to be approximately $400 million to $500 million.
- Six-month financing cash outflow was $1.28 billion, including $750.1 million of debt repayment, $250.0 million of share repurchases and $287.7 million of dividends paid. The quarterly dividend was $0.12 per share.
Material Changes Versus the Prior Comparable Period
- Reported revenue and earnings decreased, but the comparison was affected by the November 2022 divestiture of the biosimilars business and foreign exchange.
- On a constant-currency basis, Q2 net sales from the remaining business increased approximately 1%, supported by $123.8 million of new-product sales, partly offset by $76.5 million of base-business erosion. For the six months, remaining-business constant-currency net sales declined approximately 1%.
- Developed Markets and JANZ were pressured by pricing, competition and government price reductions. Greater China and Emerging Markets delivered constant-currency growth.
- R&D increased by $45.7 million in Q2 and $86.3 million for the six months, partly reflecting investment in the ophthalmology portfolio. SG&A increased by $50.8 million in Q2 and $94.4 million for the six months.
- Viatris acquired Oyster Point and Famy Life Sciences during the first quarter of 2023 to build an ophthalmology franchise. The acquisitions generated $16.5 million of revenue and an $85.8 million net loss from Oyster Point from acquisition through June 30, including purchase-accounting and acquisition costs.
- Six-month operating cash flow decreased $454.9 million, primarily because of lower operating earnings and the biosimilars divestiture.
Guidance, Outlook, Risks and Unusual Items
- The 2020 restructuring program is expected to be substantially completed in 2023. Total pre-tax charges could reach approximately $1.4 billion, with potential annual savings of up to approximately $900 million once fully implemented. Remaining restructuring reserves were $108.7 million at June 30, 2023.
- Businesses identified for potential divestiture include OTC, API, certain women’s healthcare products and Upjohn Distributor Markets. The Upjohn Distributor Markets could require additional write-offs and other costs exceeding $250 million if transactions are not completed.
- Goodwill impairment testing was sensitive to higher discount rates, foreign exchange movements and revised operating forecasts. Europe, JANZ and Emerging Markets had relatively limited valuation cushions; modest adverse changes in assumptions could result in impairment charges.
- Viatris recorded $180.7 million of accrued legal contingencies. Material litigation, opioid claims, generic-drug antitrust matters, product liability claims, intellectual-property disputes and tax examinations could produce additional losses that cannot currently be estimated.
- Tax authorities continue to examine multiple jurisdictions. The company had a $281.3 million reserve for uncertain tax positions at June 30, 2023 and noted that losses above the reserve remain possible.
- Unaccrued potential development milestones under licensing arrangements totaled approximately $416 million, excluding sales-based milestones, royalties and profit-share obligations.
- Key operating risks include generic competition and price erosion, government pricing and tender systems, regulatory and clinical uncertainty, manufacturing and supply-chain disruptions, foreign exchange volatility, geopolitical conditions, cybersecurity, intellectual-property challenges and acquisition or divestiture execution.
- The filing does not provide a specific full-year revenue, earnings or adjusted EBITDA forecast.
Most Important Facts for Investors to Verify
- Reconcile reported revenue trends for the biosimilars divestiture and foreign-exchange effects with underlying constant-currency performance.
- Assess the sustainability of earnings given substantial debt, scheduled maturities and declining operating cash flow.
- Review the valuation assumptions and sensitivity of Europe, JANZ and Emerging Markets goodwill.
- Track execution and cash costs of the restructuring program and proposed divestitures, particularly Upjohn Distributor Markets.
- Separate recurring operating performance from fair-value gains, Biocon transition-services income, purchase-accounting amortization and other special items.
- Monitor legal, tax, product-liability and intellectual-property exposures for potential losses above recorded accruals.
- Confirm the progress and commercial performance of the Oyster Point and Famy ophthalmology strategy, including Tyrvaya and pipeline programs.