Viatris Inc.

Good morning. My name is Laurie and I will be your conference operator today. At this time, I would like to welcome everyone to the Vietris first quarter 2021 earnings call-in webcast. All participant lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your touchtone phone. In the interest of time, we ask that you please limit yourself to one question. If you need to ask further questions, you may re-enter the queue. Lastly, if you should need operator assistance, please press star zero. Thank you. I will now turn the call over to Melissa Trombetta, Head of Global Investor Relations. Please go ahead.

Thank you, Lori. Good morning, everyone. Welcome to Beatrice's first quarter 2021 earnings conference call. Joining me on this call are VHRC's Chief Executive Officer, Michael Gettler, President, Rajiv Malik, Chief Financial Officer, Sanjeev Narula, Chief Accounting Officer and Controller, Paul Campbell, and Bill Cebulski, Head of Capital Markets. While some of us are in remote locations, I would ask for your patience should we encounter any technical difficulties. During today's call, we'll be making forward-looking statements on a number of matters, including our financial guidance for 2021. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's projections. Please refer to the earnings release that we furnished to the SEC on Form 8K earlier today for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. We also posted supplemental slides on our website at investor.veitris.com. Veitris routinely posts information that may be important to investors on this website, And we use this website address as a means of disclosing material information to the public in a broad, non-exclusionary manner for purposes of the SEC's regulation fair disclosure. We also will be referring to certain non-GAAP financial measures, including free cash flow and adjusted EBITDA. We will reference such measures in order to supplement your understanding and assessment of our first quarter 2021 financial results and financial guidance for 2021. Non-GAAP measures should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP. The most directly comparable GAAP measures, as well as reconciliations of the non-GAAP measures to those GAAP measures, are available in our first quarter 2021 earnings release and supplemental earnings slides, as well as in the . In addition, solely to supplement your understanding and assessment of our first quarter 2021 financial performance We have provided in our earnings release and supplemental slides and will discuss during today's call certain financial measures relating to the first quarter of 2020, including combined results of Legacy Mylan and the Upjohn business with indicated adjustments which do not reflect pro forma results in accordance with ASC 805 or Article 11 of Regulation SX. Such measures do not reflect the effect of any purchase accounting adjustments. Let me also remind you that the information discussed during this call, except for the participants' questions, is the property of Beatrice and cannot be recorded or rebroadcast without Beatrice's express written permission. An archived copy of today's call will be available on our website and will remain available for a limited time. With that, I'd like to turn the call over to Michael.

Thank you, Melissa, and good morning. And thanks for joining us for our first quarterly earnings call as Beatrice. I'm pleased to say that we're off to a strong start with high quality first quarter results across the board. And this strong performance comes at a time when the COVID-19 global pandemic continues to evolve, taking different courses across the many geographies in which Viatris operates. We're grateful to our colleagues around the world who continue to put patients first, ensuring stable access to needed medicines, particularly in India and parts of Latin America, where significant resurgence has impacted our teams there. The health and safety of our colleagues and their families is our highest priority, and we're supporting the continually evolving situation around the globe with urgency, with care, and with compassion. And for our patients, we're working diligently to bring the medicines they need including ramping up the production of antiviral medicines remdesivir in India and closely partnering with the government there to ensure access to this critical medicine. Back when we launched Viatris in November 2020, our vision was to build a new kind of healthcare company differentiated by a global operating platform with significant scale and commercial capabilities and expertise across science, manufacturing, legal, and IP. a broad, diverse product portfolio that includes brands, complex generics and biosimilars, and generics, and is agnostic to therapeutic categories, dosage forms, and delivery mechanisms, and a strong R&D platform that is well-positioned to deliver a broad pipeline of complex and novel products, including late-stage biosimilar programs. Our strong first quarter results validate the success of a diversified and robust business that can absorb headwinds in any individual part of the business while seizing market opportunities where and when they present themselves. In the first quarter, we reported net sales of $4.4 billion, adjusted EBITDA of $1.6 billion, and free cash flow of $799 million, which were above our original expectations. These results reflect the strength of our business And we're also partially helped by favorable timing of some revenue and expenses and by favorable FX. Now, let me give you some key highlights for the quarter. The strength of our business was driven by solid performance across all four of our commercial segments, developed markets, greater China, emerging market, and JANs, which is Japan, Australia, and New Zealand. Excluding the effects of LOEs or loss of exclusivity, of Lyrica in Japan and Celebrex in Japan, this quarter we would have reported 3% growth on an actual exchange rate basis or 2% decline on a constant currency basis as compared to the combined LOE adjusted quarter one 2020 results. Lyrica Japan is our last major LOE and we see no further significant LOEs impacting our business in the coming years. This quarter, we generated $163 million in new product revenue to partially offset inherent product erosion and we're on track to achieve $690 million in new product revenue for the full year. We're continuing to shift to a more differentiated and sustainable portfolio with strong growth in complex generics and biosimilars and growth of our recently acquired Thrombosis franchise in Europe. Regarding our pipeline, This quarter we received notable approvals in Europe for Insulin Aspart and Bevacizumab, and we made significant progress on many key pipeline projects, which Rajiv will discuss later in more detail. With regard to the integration of our two legacy companies, we are pleased to say our plans are progressing smoothly. This quarter I also had the opportunity to meet remotely with hundreds of colleagues around the world, and I continue to be impressed with the talent, the passion, and the engagement that we have at Viatris. We are well on our way to forming as one team and making our performance-driven, highly engaging, and inclusive culture a reality. And for our shareholders, we're delivering on our commitments. The Viatris board has declared inaugural quarterly dividend of 11 cents a share consistent with 25% of the midpoint of the 2021 full-year free cash flow guidance. We are on track to achieve $500 million in synergies this year. We are on plan and continue to target $6.5 billion in debt repayment by 2023. And we're reporting our first quarter results with the enhanced disclosures and transparency that we previously committed to. We're also aware of the interest by our shareholders in the sustainability of our business and our commitment to corporate social responsibility. And sustainability is fundamental to our mission and embedded in everything we do. And I'm pleased to share that we published our inaugural sustainability report at Viatris. More details on that can be found on our website, including a deeper look at Viatris' role in the important fight against COVID-19. In closing, we're proud to report a very strong and high-quality first quarter. we're seeing underlying strength in our business. And we are reaffirming our full-year financial guidance for 2021, which incorporates the known potential headwinds and tailwinds for the remainder of the year. At the conclusion of the second quarter, we will be reassessing whether to update guidance for the full year. And while we're not giving long-term guidance at this time, we continue to feel strongly that 2021 is our trough year as defined by the midpoint of our guidance of $6.2 billion adjusted EBITDA. And we believe that that $6.2 billion is the true floor of our business, not just for this year, but also for future years. Now, with that, let me turn it over to Rajiv to give you more details about our segment results, pipeline progress, and restructuring and integration efforts. Rajiv?

Thank you, Michael, and good morning, everyone. I would like to say hello to our employees around the world and thank them for all of their hard work and commitment to Beatrice. I would especially like to recognize my colleagues and friends in India and express my deepest sympathy to everyone who is enduring a very difficult situation as the pandemic resurges in the parts of the world. Earlier this year, we shared with you our approach to execute our 21 plan. minimizing the base basin erosion, executing the new launches, and integrate and synergize. I'm very pleased to inform you that we are off to a great start. I'll be making certain comparisons to combined alloy-adjusted Q1 2020 reserves on a constant currency basis, as well as comparisons versus our expectations as included in our full-year guidance. Beginning on slide 10, our business performed better than expectations, but was down 2% in this quarter as compared to combined LOE-adjusted quarter one 2020 results. Our brand business performed better than our expectations, driven by products such as EpiPen, Ametiza, Lipitor, and Viagra. Our complex genetics and biosimilar business grew by 27% largely driven by biosimilars. And our global generic business performed in line with our expectations. We delivered $163 million for the new launches and remain on track to meet our $690 million target for the year. We continue to expect normalized base business erosion of 3% to 4% for the year. Our developed market segment performed better than our expectations this quarter. Our brand portfolio performance was driven by higher EpiPen sales in the U.S., largely due to vaccination-related buying. Upelri, our first nebulized llama, performed in line with our expectations, and we are well positioned to expand this market. Our European brand business was helped by Creon, Dimesta, as well as our Thrombosis portfolio acquired from Aspen, highlighting our ability to effectively manage our portfolio of established brands. Our complex generics and biosimilars portfolio grew by 27% in developed markets, largely driven by Pacfulic Rastim, Trastuzumab, as well as Adalimumab biosimilars. Our generics portfolio performed in line with our expectations once adjusted for COVID surge buying in the first quarter of 2020. which accounts for half of the year-over-year decline. I would like to provide a bit more color around our U.S. generics business, which is approximately 11% of our total business now. Our current generics portfolio is now a combination of diversified product forms, including extended release oral solids, injectables, transformers, and topicals. We implemented our disciplined approach to resource allocation and portfolio management, including the rationalization of negative margin products. We believe that extending this approach to our overall business will help us manage our base business more effectively. Looking ahead, we have assumed increased competition for our complex products like Zulane, Vixella, Glytramine Acetate, in addition to the loss of exclusivity of performance. Moving to the next slide, our emerging market segment performed in line with expectations. Our business was affected by the negative impact of COVID on our lifestyle brands, as well as a one-time impact of change in go-to-market strategy in Vietnam. We see our complex generics and biosimilar business growing over the year. driven by a number of new launches in multiple countries. Our generic business was roughly flat and in line with expectations. Our JAN segment grew 14% as we adjusted for one-time Lyrica Celebrex alloys. Our brand portfolio in Japan had a strong performance driven by Ameteza, Lipitor, and Creon. Lyrica Alloy is performing to our expectations. We also launched the first adalimumab biosimilar in Japan. Our generic business performed strongly. Now to slide 14. Our greater China segment performed strongly and grew by 9%. This was primarily driven by 30% growth of our retail channel, better than expected hospital channel performance, as well as the benefits from the COVID recovery. Our retail channel now represents 40% of our China business. We have assumed the full impact of VVP for 21, as well as media implementation of URP in certain regions. As already mentioned on our guidance call, the trough of our China business will be determined by the timing of the full implementation of URP. We see continued momentum and we look forward to investing in our pipeline in this region. Out of 25 products we identified for Greater China, we are well positioned to file six regulatory submissions in 21. Now, switching to providing more details around the impact of the COVID-19. India is currently going through its worst pandemic phase, and we are doing everything possible to protect the health and safety of our employees in India. We are also working closely with the health authorities to maintain supply of Remdesivir. We have a broad, diverse, and resilient global manufacturing and supply chain footprint. We are not depending on any one country or a site. Even in India, our manufacturing footprint is spread over five different states, which mitigates the risk of disruption in any given part of the country. As we address Our reliance on India as a supply hub has relatively come down as compared to legacy Milan. The diversity of our network helped us achieve an approximately 95% customer service level across the globe last year. We are continuously monitoring our inventories and currently are in a strong position from a supply point of view to meet our customer needs across the globe. I would now like to share some key updates on our pipeline shared with you on investor day. I'll start with our biosimilar franchise on slide 17. Our 351K insulin glargine for interchangeability is on track for a July FDA goal date. Our insulin as part is also tracking towards its FDA goal date in July and is expected to include interchangeability. We are making steady progress for our biosimilar to Botox and recently submitted our briefing package to FDA for agreement on phase three. We have just received top line results for our clinical phase three study for our biosimilar to ILEA and are pleased to report that we have met the primary endpoint for this study. We received European approval for the biosimilar to Avastin and insulin as part. While we no longer have any open scientific questions with FDA, our U.S. approval of biosimilar to Avacyn has been impacted by the delay in a pre-approval inspection due to COVID travel restrictions. The next slide shows our complex product pipeline. For our glatamer acetate once monthly, we have dosed more than 900 patients and are on track for our submission at the end of 2022. We also achieved positive results in phase two trial for meloxicam, which was designed as a proof of concept study for a quicker onset of acute pain relief as an alternative to opioids. We are excited that we have advanced a new low dose formulation of Zulane, which we formally called MR100. We are expecting this product to be one of the smallest low dose batches in its class and our phase three clinical trial has been initiated. The next slide shows our continued progress in our complex injectable pipeline. Our Octreotide MR injection clinical study is well underway to support our US submission. Clinical study for EU TRNSA are on track for quarter two 2021. We are also in the process of initiating clinical studies for amphotericin B previously called MR118. I'll finish with an update on our integration and restructuring program. As you can see on slide 21, we remain on track to realize $500 million of cost synergies this year. Our workforce actions are well underway, including a recently announced voluntary retirement program in Japan, which is on schedule. As we announced earlier this year, the rationalization of 13 manufacturing sites have been identified and closure or divestiture activities are in process. We are working very closely with regulators and our customers to avoid any supply disruptions and are building appropriate safety stocks. With all of these actions underway, we remain confident that we will exceed our target of $1 billion in cumulative cost savings by 2023. Let me now turn the call over to Sanjeev. Thank you.

Thank you, and good morning, everyone. As Michael and Rajeev mentioned, we're off to a strong start, and I'll walk you through the key drivers and how we see certain trends shaping up for the rest of the year. As you will see in coming slides, I'll make comparison to prior year Milan standalone, combined adjusted, as well as our 2021 expectations. On slide 23, we have summarized our results versus prior year on a reported basis, which reflects Milan standalone results for quarter one 2020. Adjusted gross margin and adjusted EBITDA benefited from contributions of Abjan branded products and the strength of China which was driven by stable sales and hospital business and retail growth including COVID recovery. In total, these factors led to a significant increase in financial strength including profitability and cash flow generation. Moving to slide 24, I have highlighted the drivers in the quarter compared to combined adjusted Q1 2020 results. As a reminder, This chart reflects the sum of Marlin's standalone results and Abhijan Karwat financial for a period of January 1st, 2020 to March 31st, 2020. Adjusted for certain transaction related items including divested products in connection with combination. A few key comments on this chart. Beginning with LOEs, as Rajiv mentioned, genetic penetration is tracking in line with our expectation and year-on-year Lyrica and Celebrex in Japan are down by $206 million. COVID continues to negatively impact our business as a result of lower volumes across many of key markets, particularly Europe, where we saw pre-COVID surge buying last year and to a lesser extent in the U.S. In China, we saw favorable impacts due to COVID recovery. While we're still anticipating a gradual recovery beginning in the second half, the recovery is likely to be slower across some emerging markets. Base business erosion was driven by normal price erosion and volume declines in U.S., Europe, and emerging markets. And for the rest of the year, we still forecast erosion of about 3% to 4%. We're off to a good start with new products. Revenue was primarily driven by European thrombosis business, which grew versus prior year and additional uptake of complex generic and biosimilars. Lastly, with respect to foreign exchange, it's important to remember approximately 70% of our business is outside the US. In the quarter, the weaker dollars relative to key currencies, such as Euro, Chinese RMB, provided approximately 5% tailwind compared to our combined adjusted 2020 revenue results. Moving forward, if rate remains at the current level, we expect a continued tailwind from foreign exchange consistent with full year guidance, though not to the level realized in Cordova. Moving to slide 25, which bridges adjusted EBITDA. The year-on-year margin is declining because of item listed on the bridge. As you will recall from our 2021 financial guidance bridge, we were impacted by low depreciation and amortization associated with FISA TSA, which negatively impacts EBITDA. Turning to slide 26, Free cash flow came in above our expectations, driven by strong operating performance, benefits from working capital improvement initiatives, and timing of one-time cost and capex. For the quarter, one-time cash costs were approximately $340 million, primarily related to integration cost and TSA startup. For quarter two, we expect both to increase over Q1 levels. With respect to cash flow phasing, We expect Q2 cash flow to be significantly reduced versus Q1 and expect it to be our lowest for the year. The decline is driven by expected increase in one-time cash cost, interest payments, which occur semi-annually in Q2 and Q4, and increase in capital expenditure. Turning to our balance sheet, strong cash flow allowed us to pay down approximately $1 billion in short-term debt. We anticipate that Q2 short-term debt will increase as a result of June maturity of $2.25 billion final payment of European thrombosis business, and the quarterly dividend. From a capital deployment standpoint, we declared our first quarterly dividend, which is consistent with our guidance framework. We do not expect the 11 cents per share amount to change for subsequent quarters in 2021, but all future dividend declarations are subject to board approval. Overall, we remain on track with our 2021 free cash flow guidance of 2 to 2.3 billion. Moving to slide 28, as you heard from Michael earlier, we are reaffirming our full year 2021 guidance ranges based on a strong start we saw in Q1, balanced by expected headwinds for the remainder of the year. In terms of revenue phasing, we expect Q2 2021 to be roughly in line with Q1 2021 due to modest recovery from COVID in Europe, continued strong performance in China, offset by expected negative impact of LOEs, competition and more normalized EpiPen sales. Going forward, these items will pressure our gross margin to be more in line with our guidance range. As we look out to Q2, we expect SG&A to be in line with Q1 on an absolute basis. On a full year basis, we expect SG&A to be within our previously indicated range of 20.5 to 21.5%. Given these dynamics, it is likely that Q1 will be highest adjusted EBITDA quarter. Overall, I'm really pleased with the execution in this quarter and the commitment we delivered against, including the initiation of dividend. With that, let me open the call to Q&A operator.

Thank you. At this time, if you would like to ask a question, please press star one on your touchtone phone. If you wish to remove yourself from the queue, you may do so by pressing the pound key. We remind you to please pick up your handset and please limit yourself to one question. Our first question comes from the line of Elliot Wilbur of Raymond James.

Thanks. Good morning. And first question will be for Sanjeev. Could you just maybe talk a little bit more in detail about some of the working capital initiatives that you've undertaken, how they impacted first quarter results, and then maybe just a little bit of color commentary on how working capital trends performed in the quarter versus your expectation. And just a quick clarification. You highlight $315 million in restructuring costs in the deck, and I think the guidance was originally for $450 million for the full year. Just want to make sure that the remaining cash flow drag related to restructuring is only $135 million for the balance of the year. I'm not sure if there's other items that I should be thinking about, but just some clarification on that item. Thanks.

Elliot, thank you for your question. So there are a couple of questions in that, so let me take them one by one. So first of all, very pleased with the cash flow generation in the business. Specifically talking about networking capital, there are two things going on. One is on the positive side, which is the initiative we are taking as a company when you bring two companies together, managing our receivables, our payables, and inventory. So that created an upside. of roughly about $65 million in this quarter, and we're going to continue to build on that. So that's clearly a positive. On the other side, on the net working capital from operations, we did have a timing benefit. We were able to accelerate certain collections in Europe in this quarter, which actually helped us and will have an impact on the second quarter. But overall, we're very pleased, and I expect the net working capital improvement initiative to continue to help us for the rest of the year. Coming to the kind of phasing, as I mentioned about, on the cash flow, second quarter, as I said, would be significantly lower. Our net working capital requirement for second quarter will go up, Elliot, because a couple of things going on, particularly about our interest and debt. It's about $200 million we'll be paying in second quarter, which is only paid in second and fourth quarter. So there is a quarter-to-quarter variation that is happening, but we are very pleased with that. In with regard to your second questions about $350 million as we have in our disclosures is combination of two items. One is the restructuring which is related to the unabsorbed overhead of the 13 plants that we've gotten announced, including Morgantown. Then the second part of that is about this severance that's across the board based on the initiative that we've taken on the synergy part. So that's in line with our expectation. And then the comment that you made about $400 million, that was on the one time cost as part of the $1.5 billion. So all in line, what you see in this quarter is in line with what was $5 billion. And then it's combination of two items, which is the severance cost and the restructuring cost, which is all part of $1.5 billion.

And if I can just add one thing, Ellie, the 350 is expense, not cash. So when we're talking about the cash impact of the restructuring, you know, that phases over time. the charge in the quarter from an expense perspective is the $300 million number you're referring to. Thanks. Thanks, Paul. Operator, next question?

Our next question comes from the line of Umar Rafat of Evercore.

Hi, thanks so much for taking my question. And I just wanted to start by saying this has to be the first time I've seen this level of visibility into your product revenue, so appreciate that very much. I had two quick ones, if I may. The China retail business is up 30% year over year. And I'm just trying to understand, is that all cash pay? Or if there's payers involved, could they find a way to come back and add in some new price corrections down the road? Just trying to figure out how durable the trends are in Lipitor and Norvax is really what I'm getting at. And one for Rajiv as well. Rajiv, on Botox Biosimilar, I saw that you guys are submitting a briefing package. Does that mean that you've adequately validated and characterized the and figured out all the process scale-up. Is all of that done at this point? Thank you very much.

Umar, let me thank you for your comment on the transparency. That's exactly what we tried to do, and we continue to take your feedback on that. And Rajiv, if you could answer both the China and the Botox question.

Yeah, look, Umar, thank you. First of all, we are very pleased with our performance in China. As you see, retail continues to go strength to strength. We also, you know, see the better than expected management of our hospital business. So there are two things interplaying into this. Now, to your specific question, predominantly retail is cash pay, but there's a little bit of, you know, employer-based sort of healthcare, you know, when you have that healthcare support, that's a little bit of still where the peers are involved. I can give you exactly what percentages of that, but it's predominantly the cash pay. Now the second question on the Botox, our program is, you know, moving on and very well aligned, you know, aligned with our partner, Revanz. We had laid out, we had gone and met FDA a couple of times. We understand their expectations. We have come to a point where we're just seeking the agreement on basically both the possibility as well as the clinical program. So we have enough data now to go back and share with them before we move on. So we are at a critical stage in this, and I'm very optimistic about this program as we go along.

Okay. Operator, next question, please.

Your next question comes from the line of Nathan Rich of Goldman Sachs.

Hi, good morning. Thanks for the questions. I had two on the competitive dynamics and how they're playing out relative to your expectations. First, it looks like on the sales walk, the base business erosion of $111 million in the quarter, that's running kind of well below, I think, the range that you anticipated for the year. I know that the impact may build over the course of the year, but I'd be curious just to get your comments on how that flows through the P&L. And then the second question was related to the Lyrica headwinds. It looks like $206 million in the quarter. That, I think, if we annualize that, would be above the range that you gave back at the analyst day. I know it includes Celebrex now, so any additional color you could provide there in terms of what you're seeing would be helpful. Thank you.

Thank you, Nate. I think we're going to give those questions to Rajiv. And Rajiv, I think Lyrica is Japan specifically.

Yeah, Lyrica specifically, I think that 206 is a combination of Lyrica and Celecoxib. 140 of that is Lyrica and about 65 of that is Celecoxib.

Yeah, actually, Nathan, both are in line. You're referring to the guidance that we gave at the beginning of the year that only had Lyrica identified that. And now we're capturing both. so that the both are tracking in line with what we had assumed in our guidance, as Rajiv pointed out.

And overall on a base business, just also there was a comment on the base business. Underlying business, Ned, I can tell you across the geographies, whether I start with the China, I'll start with the developed markets, North America, Europe, it's strong. The underlying business is strong. The competitive dynamics are exactly what we had And I assume we see that stamp. We, I think that approach we had adopted to manage this space is a key. And we, our focus will be to optimize leverage and minimize the base. So, as we go along, I think it's going to further evolve and we'll keep you posted on that.

Thank you. And I think, I mean, what we said from the beginning, we want to build a new kind of healthcare companies on that's diversified and robust. And we really see this playing out in this quarter with strength and. you know, all four of our regions, all four of our commercial segments, as well as all three of our categories, whether it's generics, complex generics, and biosimilars or brands. So very pleased to see that. Operator, next question, please.

Our next question comes from the line of Chris Schott of J.P. Morgan.

Great. Thanks for the questions. Let me echo Umar's comments earlier about the disclosures being very, very helpful here. Just for me, first on China, any additional clarity certainty on URP and the impact of implemented I know there's some still uncertainty about that the last update and I just want to see if you've there's been any additional learnings since then and the second question I had was just on the developed market complex generics and biosimilars and I guess just trying to get my a little bit of flavor here of any products in particular that are particularly driving the growth that we're seeing and is this level of growth reasonable going forward so I think you are seeing some competitors to some of those products as we think about the next few quarters just a a little bit more color about how to think about that line item evolving as the year progresses. Thanks so much.

Randy, do you want to start with both of these? Yeah. So first was on China.

Yes, URP.

Given the nature of the implementation, Chris, difficult to give us more visibility. As we learned, as it was evolving, the URP was announced. It was announced that it's going to be implemented in the 11 cities. It has obviously a little bit changed. Shandong provision has just implemented in you know recently and we assume we had assumed that as we go in the year as we had predicted five or six other provinces will implement it perhaps not 11 cities so there's a change so we have been you know watching it closely and given the nature of its implementation it's very difficult to give you exact how it's going to evolve and what timing but we one thing we know we'll keep you informed And the bottom-up for China or the, you know, trough of our China business will depend upon the extent and the timing of the implementation of the URP. Now, the second question is about the complex and biosimilars category of the developed markets. The biosimilars are key contributors to this growth. Driven by the launch over the last year, excuse me, year-over-year, trough is a map. Factors graphed in. Julio growing especially in Germany, and us launching these biosimilars also between Australia and Canada and many of these European markets. So that's, I would say, the key driver behind this group, behind this segment.

Next question, please.

Our next question comes from the line of Balaji Prasad of Barclays.

Hi, good morning and congratulations on the quarter. Just a couple of multi-part questions on global generics side. So as I look at developed market generics being down 14%, can you kind of call out the pricing impact on especially North America and its relative importance to you? And also as we look at COVID resurgence in India, and you called out that your supply chain is dealing from this, Can you comment on any impact to supply chain from your partner, Biocon, who is based in Bangalore? That's one of the most impacted cities. Thank you.

Thank you. So on the global generics and specifically the U.S. generics question, I'll ask Rajeev to answer. But just, Rajeev, just to point out again that, you know, this is 11% of our overall business. And, you know, one of the strengths we have is that we have such a diversified portfolio now. Of products, but I think we're also faring very well within the category Rajiv as you can comment on that.

Absolutely The USS Michael said 11% of our total business Diversified mix, you know between the even within the generics if we said left or you know Extended release tablets as I mentioned a lot of injectables a lot of patches and topicals overall Pricing trends are very similar to what we had anticipated, the mid-single digits. If I correct this for COVID, because if you remember, Balaji, last year, Q1 was when the COVID impacted, and there were some last 15 days surge buying on some of the products. If I correct it, U.S. generics are roughly around 4% decline year-over-year, very much in line with what we had expected. And specifically from our U.S. business point of view, We have healthy inventories in the channel. We have strong customer service levels and believe our diversified portfolio and new launches and steady supply is being appreciated by the customer. So we feel very good about this 11% part of the business also. Now coming back to India. Last year was no different, five months almost, Balaji, if you remember, India was under complete lockdown from March onwards to almost up to July or August. There were four or five months of complete lockdown. We clocked about 95, 96% of our customer service level over the period. Specifically regarding to Biocon, we are working very closely with Biocon. And at this point of time where we stand, I don't see any issue. If I forward look, You know, we are keeping our eyes to the ground. We are staying close with our customers. We are working closely with the regulators. We're trying everything to take care of our employees, especially the frontline employees. So, you know, yes, India is important. And at the same point of time, what Milan Legacy, the way Milan Legacy was dependent upon India, I think our dependent as a new company veterans is very different now on India. So I think all in all, you know, it's tough. It's challenging over there, but we feel good where we stand from a supply point of view.

Yeah, nice. Let me underline that. I think the strength of our supply chain, the diversity of our supply chain is very robust and so it gives a lot of confidence. I think as a general comment on COVID, it's obviously still ongoing. We're still very much in the midst of it. What we do see is, from a demand perspective, kind of a divergence in the countries where some countries are clearly improving. In China, for example, it's been actually headwinds because we compared this quarter to a very low first quarter last year because COVID started there first. We see other regions slowly recovering, mostly due to vaccinations. And then we see countries getting worse, like India or Latin America. So I think what we can say overall at this point, we're reaffirming our guidance. We assume a gradual recovery in the second quarter. And we're very confident that the diversity and the robustness that we have, both on the commercial side as well as the supply side, shows the strength of our model. Next question, please.

Our next question comes from the line of Greg Gilbert of Truist Securities.

Thanks. Good day, folks. Just making sure that your comments about potentially updating guidance next quarter comes from a position of strength, just in case there's any investor confusion about why you decided to say it that way. And then, Michael, I think it's a strategic question, perhaps. I think it's pretty clear to investors why companies like Merck and Pfizer and others decide to divest or separate their legacy businesses to reduce complexity, to focus on innovative activities, et cetera. But how would you describe to investors the value proposition of a story like yours? Maybe some angles that the street may not appreciate from your perspective as a long-time operator within one of these companies. Not sort of just we need to beat estimates and maybe get a value re-rate, but what are some of those real value propositions from an operational point of view that you sense folks don't understand. Thank you.

Greg, thanks for both questions. Let me start with the guidance question and the update for the second quarter. Look, I think it's very clear that we are very, very pleased with our quarter one results. We come from a position of strength. There's no other way to say it. I think the results show and really validate, as I said multiple times, the diversified and robust business model that we have that can absorb individual headwinds in one part of the business while really jumping and seizing on opportunities where and when we see them. And I think you saw us do that in quarter one. You also see the strength of quarter one being in all four of our commercial segments and all three of our categories, whether it's brand, generics, or complex generics and biosimilars. And we've been, I think, very transparent what part of that is due to timing, what part of that is due to FX, and what part of it is real underlying business performance. But it's also just one quarter. So what we're saying is at this point, we're reaffirming our guidance for the year. We're very confident in that. that applies to revenue, EBITDA, and cash flow. We're confident that we're delivering on our commitments. And as we would in regular course of business do, and we'll look at it again after the second quarter and then update the guidance at that point. So that's what that comment is. On the question you have on Organon, I think it's very clear that we're very pleased with this because it's a real positive for investors to have another company to add as a comparable to our newly created peer set. But we are obviously focused on running Viatris. We're 100% focused on that, and we're excited about the differentiated platform that we have. And let me give you some of that differentiation. One, we have a truly global operating platform, one that has significant scale, significant commercial capabilities, expertise across science and manufacturing, legal and IP. Very importantly, we've got a broad and diverse product portfolio that includes brands, complex and biosimilars and generics. And that's important. It's agnostic to any particular therapeutic area, to any particular dosage form, any particular delivery mechanism. And that gives us robustness and opportunities going forward. And we're very proud of the strong R&D that we have that really positions us well to deliver a broad pipeline of complex and novel products, including the late-stage biosimilars. And you saw some of the progress we made on the pipeline just this quarter. That's what I would comment there. We're focused on the interest and I think the robustness and diversity of the platform is unique that we have.

Next question comes from the line of David Reisinger of Morgan Stanley.

Yes, thanks very much. So my first question is, could you please discuss organic revenue growth prospects from the 2021 base going into 2022? And then second, could you talk us through your expectations for competition to branded generics, XUS, longer term from pure generic companies? Thank you.

Okay, let's start with the organic rows 21 to 22. Maybe, Sajeev, you can provide some color on that. And then I'm not sure I caught the second question, but maybe, Rajeev, you can. Competition, okay, I'll take that. All right, Sajeev.

yeah so so david um so we as we talked about before in terms of where um we when we gave the guidance that you know we spent time looking at 2021 we brought both companies together and um and and brought that and gave you guidance with the transparency that you saw but right now in the midst of um working on our long-term strategic plan in terms of trying to understand all the levels of our growth in terms of organically where we could see that, whether it's branded, complex generic, biosimilar, and then generic generics. All that is a work in progress right now. We'll come back later in the year to talk to you about where the opportunities are, but I feel very confident of what we see with the first quarter in terms of all the opportunities we have to drive organic growth, whether it's in the branded side, whether it's in the whether it's a generic site, whether it's China, and all the geographies. So feel good about it, but more to come as we come back with our mid-term guidance.

So, David, to your question around the branded generic competition, let me break it into a little bit developed markets and chance and China and give you a little granularity. From the U.S. and Europe, these products are commoditized. They are steady-steady. Whatever is left is steady-steady. These are, for a reason, they are called iconic brands. So there's still brand shares they command in some of these markets. So we have seen over the last three, four, five years, there's pretty steady business, not much erosion there. In marketing markets, there's still iconic brands, and there's a value for these brands. People are looking for these iconic names and these are the branded generic market for say the health care environment as the as a you know, the consumerism is growing as a You know spend on the health care cost is growing We see the opportunity over there many of these markets either mixed back but the growing emerging markets We sometimes call them between us. This is where we see some opportunity over there. You've seen as a jam once, you know, you lose it you you have a LOE and There's a combination of retaining some of the brand business and the AG business. That kicks in for us. We have a pretty effective weapon in terms of authorizing to retain our market share in markets like Japan, especially Japan. And you are already seeing the value of iconic brand and how much equity they can hold in a retail channel like China. So per se, we are not very much, you know, overall, if I have to say, we are not very much concerned about the competition coming in from generics to these brands. I think we have fractured it. The way we are managing this business is at a very granular level, not one global approach, but a country-by-country approach.

And maybe the one thing I would like to add to the question on the organic growth and the rhythm, we're obviously not giving guidance, right? But I just want to point, again, to two comments we made already, which is one is what we disclosed today, the $6.2 billion as a floor on EBITDA going forward. I think that should give a lot of confidence. and then the strong cash flow growth that we see because of EBITDA and because of reducing the one-time expenses. So that should help a little bit until we get further guidance later in the year. Next question.

Our next question comes from the line of Jason Gerberry of Bank of America.

Hey, guys. Thanks for taking my question. So just one follow-up is should investors look at this year's revenue as a trop as well? I know that's one question that... because revenue was omitted. And then on pipeline for 1Q, there's the call out on thrombosis. So just wondering about sort of the more true pipeline versus M&A new product and from like the truer pipeline products baked into guidance, how comfortable are you that you're through the regulatory legal gating factors to really deliver on the full year new product revenue guidance? Thanks.

Okay. Thanks, Jason. What we said is, again, we're not giving guidance at this point, but the 6.2 as a floor we're highly, highly confident in because we know all the levers that we can have. We know the robustness of our business, and at EBITDA you can put many levers. Free cash flow, high confidence again because we clearly see the growth coming driven by EBITDA and lower one-time costs. On revenue, we got a good understanding of the base erosion that we have in the business. We have a good understanding of the new pipeline revenue we can be we can bring. But, you know, if you look at a quarter-on-quarter or even year-on-year, it can be a bit choppy because of things like COVID, for example, or because of Europe-China timing. If that gets further delayed, you know, that would change a little bit how 21 over 22 develops. So we'll give you an update throughout the year on revenue and, again, look for more long-term guidance towards the end of the year on that. Now, on the question of thrombosis business, we can break this out and ask Rajiv maybe to break out the number of the pipeline. The one thing I do want to highlight, though, is The FOMBOSIS business was always part of the number we gave you for the pipeline, so that's in line with expectations. And I think the important thing that I would like to highlight for this quarter is that we are growing that business on a like-to-like basis. So that, I think, shows the strength of what we can bring to business like this that we take over. Rajiv?

Look, yes, and it's a portfolio approach. 690 was around the new product portfolio, we called it. There are many, there are about 200-plus products into this. Now, obviously, when you have a portfolio of products, some products can be a little bit delayed. Some products perform better than expectations. We remain very confident that we're going to achieve $690 million, despite we are seeing a little bit delay in some inspections in India. For example, as Biocon called out, the biosecurity map, which is a Western biosimilar, but it's not going to impact us materially from the numbers point of view. Today morning, sitting over here, we just got approval of a Western biosimilar in Australia. So approvals are taking in from all over the rest of the world. A little bit, you know, here and there, we'll see something, but it's going to not come in the way of achieving 690 million new launch revenue for this year. Thanks, Rajiv. Next question?

Our next question comes from the line of Akash Tiwari of Wolf Research.

Hi. This is Andrew for Akash, and I just had two, if I can. First, on China, how much of the like the revs in the quarter were from FX? And I asked because the pie charts you showed earlier this year kind of implied about 1.75 billion in Chinese revenues this year. And I think like the run right now is a good bit above that. So is this just an FX issue or is this like need to be adjusted downward for additional pressures from like BDP and URP coming in the back half of the year? And then secondly, on EBITDA growth, if I use your starting debt this year, you know, the midpoint of your guide and your debt pay down guidance and your leverage goal, and I put those things together, it kind of implies to me that you're looking at a 2023 EBITDA figure somewhere between like 6.8 and 6.9. Given you're going to get another 500 million in synergies over 22 and 23, that would imply organic EBITDA growth somewhere in the like hundred million to $200 million range. So pretty, pretty flat on that item. Is that the right way to think about it? And are there other levers you can pull to, to, you know, change how this would look in out here? Thanks.

Okay. Thank you, Andrew. Look on, um, on, on China, uh, let me ask the question on China, but on EBITDA growth, let me take that first. We're obviously not giving guidance now for 2023, right? We're not going to do that. We'll, we'll give you a feeling for that later. we said that the 2.5 times leverage is our long-term goal, and that's our long-term goal post-2023. So that hopefully helps you to model that a little bit. On China, clearly we do still expect URP to come in the second half of the year, so take that into account for the rhythm of the numbers. And Sanjeev, maybe you can give some color on the FX comments.

Right, right. So if you look at the slide 14 that we had as part of our presentation, So that kind of breaks it out between effects and the operational growth, what's going on. So I think on both sides, you're absolutely right. FX is a tailwind in China. Chinese RMB, which was, you know, seven RMBs to a dollar is roughly at 6.5 this time. So there is obviously a tailwind coming from the FX. But operationally as well, Greater China has done well. Part of it is driven by the fact last year we were impacted by COVID. Big way, products like Viagra, we're doing better this quarter. But again, operationally, as Rajiv pointed out in his comment, we're doing well. So that's the answer to China question. And things will normalize as COVID impacts, COVID recovery happens in case of China. Okay.

Thank you, Sanjeev. Next question, please.

Our next question comes from the line of Ronnie Gao of Bernstein.

Good morning, everybody, and I appreciate you fitting me in. Two questions, if you don't mind, product-specific. First, about the interchangeability for glodging and aspart. So first, that will obviously be quite an achievement, being the first pair of similars proved as interchangeable. I guess the question I have is about the commercial levers that you can play here. It seems that the payer market is somewhat blocked by the competitors, at least that's what they're suggesting. I was wondering if you do have... some levers in the channel that interchangeability gives you that will allow you to leverage those products. And should we expect that in 21, or is this more for 22, 20, 23 contributor? And second, regarding botulinum toxin biosimilar, the requirements in the guidance talks about characterizing the quadrary structure and the post-translation modification across multiple batches, which seems to be very hard in the case of butylamine toxin. I was kind of wondering if you actually just met those, or is the FDA simply established more functional guidelines for the butylamine toxin, just giving the very small amount of product in every sample? Thank you.

Yeah. First one was on interchangeability, glaging, aspart, and any channel advantage.

First of all, I think that from interchangeability point of view, we obviously have been staying close with FDA on glaging, and we know exactly where we stand. So by September – sorry, our July goal date, we expect to have this behind us and have first interchangeable glaging with both vials as well as banks. You're right about the fear and the debating challenges and all that. And in discussions with many of these customers, we see this as an opportunity to sort of relaunch this product. Once we have an interchangeable spot, once we have an interchangeability around there, it's our opportunity to basically relook into this, the challenges which we have faced so far in picking up the market share, which we have been slowly and steadily picking up. We're standing around 2.5%, but it's not where we want to be. So that's going to give us an opportunity optionality and opportunity to look into this product in a very different way and essentially relaunch the product as we go further. Now, from the Botox point of view, you're right. This is where I think the FDA's guidance and thinking continues to evolve as we keep on sharing with them the information. It's just nothing different than what happened on AdWare. When you continue to interact with FDA from the science point of view, the challenges you have, what's achievable, what's not achievable. And I can tell you, Ronnie, at the moment, we feel very excited and positive about the early science, the data which we have already got, and so far the feedback from FDA which we have been getting.

Thank you, Rajiv. And I think we're a little bit over time, but we want to have time for one more question, please. Operator.

Your final question will come from the line of Gary Nachman of BMO Capital Markets.

Okay. Thanks for getting me in. Good morning. Michael, what do you expect the PACE will be securing partnerships in various regions for the global healthcare gateway? Are there already a lot of discussions ongoing with different parties? How long before you really start to execute on that and in what regions do you think would come first? And then secondly, The $1.5 billion of cost to achieve synergies, is there a chance it'll come below that this year? And how much will those costs come down next year? Just want to get a sense of how everything is going on that front and the impact to cash flow, if you were conservative or if that's really the accurate assessment at this point. Thanks.

Thank you, Gary. So, let me say, on the Global Healthcare Gateway, obviously, this is a very important topic for us. We're constantly looking for opportunities that create value for patients or partners, and especially for our shareholders. and we're going to always apply our disciplined investment criteria and very, very strict due diligence on that. So you can absolutely expect us to be very active in this space, but consistent with our capital allocation priorities. In terms of focus areas, I want to maybe highlight four. One is established brands within our therapeutic categories or established channels that we have that are synergistic to that. You've seen what we can do with the Thrombosis franchise, for example, where we take it and improve on it. Biosimilar is clearly our focus area for us. China is a focus area for us. And then anything that helps us go up the value chain with more differentiation and longer tails. We're looking for long-term, sustainable kind of revenue in these areas. So that's, I would say, these are the areas that I want to focus on. And then on the $1.5 billion, Sanjeev, if you could take that question.

Yes, sure. So obviously, we've got monitoring and managing. the one time spent very closely in this quarter. As I mentioned in my prepared remarks, we had $340 million. So at this point in time where we are, I see we will be in line with our with our expectation of one and a half billion dollars. Clearly the other thing important note is quarter to quarter. There's going to be variability. As I said, quarter two, the one time cost is going to be higher because of, you know, a lot of the tax and legal settlements that are happening in quarter two. But overall for the full year, we expect that to be around $1.5 billion. Going forward, again, not giving the guidance, and I think the simple way to think about this is by the end of third year, I expect the $1.5 billion to be down significantly to the level that legacy Marlin used to be, which was, I think, in 2017, 2018, used to be about $500 million. So you can see the trajectory is going to come down significantly next year, and obviously when we provide the 2022 guidance, we'll let you know about the exact amount.

Thank you, Sanjeev. Unfortunately, we're over time, but let me just summarize. You've seen our first quarter results. They're very strong. We're very confident and proud of them, and they validate the strengths of the diversified and robust business model that we have and that differentiates us as a company. You've seen us meeting our financial commitments. We're going to continue to do that, including declaring a dividend, paying down our debt, and on track to deliver on our synergies. We are reaffirming our full year 2021 guidance and as we said after the end of q2 We're going to look at that again and reassess whether we would update that guidance We continue to remain confident that 21 is our trough year And we gave a definition of that the definition is 6.2 billion dollar in EBITDA as our floor going forward And with that I want to thank you for all the questions and look forward to continue discussion. Thank you

Thank you. This concludes today's VHS first quarter 2021 earnings conference call and webcast. Please disconnect your lines at this time and have a wonderful day.