Viatris Inc. (VTRS) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viatris 2021 Second Quarter Earnings Call and Webcast. All participant lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I will now turn the call over to Melissa Trombetta, Head of Global Investor Relations. Please go ahead.
Melissa Trombetta: Thank you, operator. Good morning, everyone. Welcome to Viatris's second quarter 2021 earnings conference call. Joining me on this call are Viatris's Chief Executive Officer, Michael Goettler; President, Rajiv Malik; Chief Financial Officer, Sanjeev Narula; Chief Accounting Officer and Controller, Paul Campbell; and Head of Capital Markets, Bill Szablewski. 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 will 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 8-K 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.viatris.com. Viatris 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 second 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 second quarter 2021 earnings release and supplemental earnings slides, as well as in the Investors section of our website. In addition, solely to supplement your understanding and assessment of our second 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 result 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 S-X. Such measures also 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 Viatris, and cannot be recorded or rebroadcast without Viatris's expressed 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.
Michael Goettler: Thank you, Melissa. And good morning, and thank you all for joining us on our second quarterly earnings call as Viatris. I'm pleased to say that the strong execution we showed in the first quarter has continued into the second quarter. We are performing at or above the upper end of our own expectations across the entire business. All four of our commercial segments, all three of our product categories, our manufacturing operations, our R&D and our enabling function, and thereby laying a solid foundation for future performance. Today's strong results are not only a testament to the flawless execution of our colleagues who quickly come together as one Viatris team, but also validate the vision and the strategy we had in combining the two legacy organizations. The combination brought together to highly-complementary high-quality investment grade companies, creating an even stronger, more powerful unique and differentiated global platform focused on empowering people worldwide to live healthier at every stage of life by ensuring patient access to safe, effective, and high quality medicines. Mylan brought Viatris portfolio diversity, a rich R&D pipeline, strong internal scientific capabilities and proven integration expertise, an option provided strong iconic brands, a global commercial engine and scale in critical markets. The result is an even stronger future-ready and resilient platform with enhanced global scale and geographic reach, a sustainable, diverse and differentiated portfolio and pipeline, a powerful operating platform and strong commercial capabilities with significant future potential and the power to generate strong and sustainable cash flows. And today marks the second consecutive quarter in which we've demonstrated our ability to drive the value of this combination and we remain confident in our outlook. Now let me dive into the quarter. In the second quarter, we reported total revenue of $4.58 billion, adjusted EBITDA of $1.68 billion and free cash flow of $470 million. For the first half of the year, meaning quarter one and quarter two combined, we have generated $1.27 billion in free cash flow more than half of our initial guidance for the full year. Free cash flow generation continues to be our North Star. Our unique global platform has the ability to consistently generate substantial free cash flows, and we anticipate significant increases in the coming years, driven by continued strong performance, a reduction in one-time cost and continued improvement in cash flow conversion. And given how critical cash flow is to our long-term financials, our strategy and commitment to shareholders the Board has also made it one of the key metrics of managing short and long-term compensation. While performance extends not only to our commercial segments, but also to our operations. Even in the midst of COVID-19 pandemic and our ongoing supply network optimization efforts, we've seen customer service levels that are at or above historic peaks. And I continue to be impressed with our internal R&D engine scientific capabilities. In July, we received a historic approval from the U.S. Food and Drug Administration for the industry's first ever interchangeable biosimilar product in the U.S., Semglee, our insulin Glargine. We're extremely proud of this achievement, which will help broaden access to these important diabetes medicines for patients, for physicians, for payers and for providers. And as you know, from what set by FDA and policymakers throughout the government, there is significant interest in this approval and what it can mean for patients and the healthcare system overall, both now and in the future. The interchangeable Semglee product, which will allow for substitution for the reference product at the pharmacy counter will be introduced before the end of the year. But Semglee is not the only advancement in our pipeline this quarter, with regard to a biosimilar and complex products pipeline, we're making steady progress across multiple programs which Rajiv will discuss in more detail. Overall, we generated $224 million in new product revenue and we continue to be on track for $690 million in new product revenue for the full year. This high level of performance enables us to continue to deliver on our commitments. We paid down $1.15 billion in debt year-to-date and we are well on track to achieve $6.5 billion in debt repayment by 2023. In June, we returned value to shareholders by paying our first quarterly dividend of $0.11 per share and the Viatris Board has declared another $0.11 per share dividend for the next quarter. And we are on track to achieve $500 million in synergies this year and on track for at least $1 billion by the end of 2023. On last quarter's earnings call, I said that we would reassess guidance for the full year. Based on our strong first and second quarter performance, I'm pleased to report that we are raising our guidance across revenue, adjusted EBITDA and free cash flow which Sanjeev will discuss in more detail. We have strong momentum going through the second half of the year and we will be once again open to reassessing financial guidance at the end of the third quarter. Also, on last earnings call, I stated that we see $6.2 billion in adjusted EBITDA as a true floor of our business going forward and with the momentum we have, this is now clearer than ever. We also continue to make good progress in our rigorous bottom-up strategic planning effort. By better understanding how our portfolio will evolve over the next several years, and looking at all the strategic levers at our disposal, we will be better able to serve patients, provide increased access to medicine and unlock value for our shareholders and that work will complete towards the end of the year. Lastly, and as I've already mentioned, I cannot emphasize enough the impressive R&D engine and scientific capabilities that we have. As we prepare to deliver our strategic plan, you can fully expect that we'll continue to add high-value assets to our pipeline and further leverage our scientific expertise and R&D platform. With that said, now let me turn it over to Rajiv for more details about our segment results, pipeline progress, and restructuring and integration efforts. Rajiv?
Rajiv Malik: Thank you, Michael, and good morning, everyone. We had another strong quarter and are very pleased with the positive momentum across our entire business driven by strong commercial performance supported by excellent customer service levels, continued scientific execution of our diversified pipeline, including a historic first approval of an interchangeable biosimilar to Insulin Glargine. This was achieved while we continue to successfully integrate, restructure and navigate the COVID-19 pandemic. Our performance would not be possible without the dedication of our global workforce, and I would like to thank them for their continued commitment. Over the next several slides, I will walk you through the performance in each of our segments and product categories. I will be making certain comparisons to the combined LOE adjusted second quarter 2020 results on a constant currency basis, as well as comparisons versus our expectations as included in our initial guidance. Beginning on Slide 6, each of our segments and product categories delivered a strong performance. When excluding the impact of Japan's Lyrica and Celebrex LOEs, as seen on the bottom left-hand side of the slide, net sales were up 4% this quarter as compared to the combined LOE adjusted quarter two 2020 results. Our brand business grew by 3% year-over-year and performed better than our expectations. We're pleased to report that our global biosimilar portfolio grew by 40% this quarter, while our overall complex generics and biosimilar category declined by 8% year-over-year mainly due to anticipated competition on certain products in our complex generics portfolio. Our global generic business grew by 8% year-over-year and performed better than our expectations. We delivered $224 million for new launches in the second quarter and as we look ahead, we remain on track to meet our $690 million target in 2021. We believe that the diversity of our portfolio and commercial reach, positions as well to balance the impact of any changes in the market and eliminates our reliance on any one product or geography. Accordingly, we expect our base business to continue to perform strongly. Turning to Slide 7, our Developed Market segment grew by 2% year-over-year. This was primarily driven by brands like Yupelri, Dymista and Creon. Our Thrombosis portfolio also performed better than expected, which continues to highlight our ability to effectively manage and grow established brands and expand our presence in the hospital segment. Our biosimilars performed strongly with 47% growth this quarter, which helped offset the negative impact of the previously anticipated competition to Wixela and Xulane. Our generics portfolio also performed better than our expectations, primarily driven by our U.S. injectables portfolio as well as favorable COVID-related buying patterns in Europe. Having said that, we see our biosimilars portfolio driving continued growth while offsetting anticipated competition in our complex generic space. Moving to the next Slide. Our Emerging Market segment delivered 12% year-over-year growth and performed better than our expectations. Brands like Viagra and Lyrica drove strong performance as certain countries started recovering from COVID. Our better than expected results of our generic business was helped by certain COVID related products. The next slide shows that our JANZ segment grew 6% year-over-year and performed in line with our expectations. Our brand portfolio of products like Lyrica and EpiPen, primarily contributed to the strong performance of Japan. We continue to be pleased with the growth of our generics business in JANZ. Especially, the contribution from our expanded authorized generics offering including authorized generics to Lyrica and Celebrex. It should be noted that approximately half of the overall generics growth, is due to the termination of our collaboration with Pfizer from the prior year. The next slide is our last segment slide and shows that our Greater China business once again delivered a strong performance which was better than our expectations. Our retail channel showed double-digit growth and our hospital channel performed better than our expectations, while managing the impact of VBP and URP. The 3% year-over-year decline was driven by anticipated VBP implementation of Celebrex and Zoloft. As we look at the rest of the year, we anticipate the full year to be better than our original expectations. Although, we see the second half being softer than the first because of the implementation of URP. Now turning to Slide 12, which highlights our proven track record of introducing several first-to-market complex products. Breaking down barriers goes beyond best-in-class signs and right from day one, our cross functional team of R&D, regulatory, legal, medical and policy experts work diligently and collaboratively with regulators, partners and other stakeholders to seek and create pathways to clear hurdles that enables access. It can take on an average seven to nine years from development to regulatory approval given the highly complex nature of these molecules. Getting to the finished line requires tremendous perseverance, tenacity and an unwavement to patients. The success stories of receiving the first approval for our Copaxone 40 milligram Advair, Neulasta, Herceptin, Symbicort and most recently, the first interchangeable biosimilar to the Lantus, give us great confidence that we are well-positioned to deliver on our pipeline. We intend to leverage our deep scientific capabilities to further expand access to the complex products for patients. I will now walk you through some key pipeline updates starting on Slide 13. As it relates to our biosimilars key pipeline, I would like to take a moment to echo Michael's remarks and applaud the efforts of so many Viatris colleagues, who played a huge role in achieving this historic FDA approval of the first interchangeable biosimilar Semglee. We look forward to launch this exciting opportunity before the end of the year. Moving to Fbat a pre-approval inspection from FDA, a Biocon manufacturing facility in Malaysia is now scheduled for the end of this quarter. Scientifically, we believe we are on track to achieve interchangeability for Fbat, which should further expand our portfolio of interchangeable insulin. We remain on schedule for a submission in quarter four of this year for Eylea. Our program for Botox is progressing well and we have a meeting scheduled with the FDA in September of this year to align on our path forward. Moving to biosimilar to Avastin. While we have no open scientific questions with FDA, our U.S. approval has been impacted by the delay in a pre-approval inspection due to COVID travel restrictions. The same product has been approved by EEA, MHRA and several other regulators. As you will see on the next slide, we continue to make steady progress on our complex product program and have some important upcoming milestones. We submitted our 505b2 application to FDA for our Levothyroxine Oral Solution in June as planned. For our Meloxicam, we expect an IND submission with Phase 2b study planned for quarter four this year. We're excited with the progress of our new low-dose formulation of Xulane and we plan to initiate our clinical dosing for our Phase 3 program in September. We also continue to make comprehensive progress on our complex injectables pipeline. We are happy to report that we are first to file on Paliperidone once three-month product, equivalent to Invega Trinza on the 546 milligram and 829 milligram trend. The remaining trend of 410 and 273 milligram have already been submitted and are pending acceptance from FDA. Before I conclude, I would like to touch upon our integration and deep structuring activities. Since closing the transaction almost nine months ago, our teams have been hard at work to ensure no business disruption. We remain on track to realize $500 million of cost synergies this year and confident in our overall plans to achieve at least $1 billion of cost synergies by 2023. Let me now turn the call over to Sanjeev. Thank you.
Sanjeev Narula: Thank you, and good morning, everyone. As Michael and Rajiv mentioned, we had another strong quarter with better than expected revenue, adjusted EBITDA and cash flow generation. These results demonstrate the underlying strength of our business and the momentum we have going into the rest of the year. In slides ahead, I will make comparison to prior year Mylan standalone, combined adjusted for Viatris, and the factors that are leading to an increase in our 2021 guidance. On Slide 17, we have summarized our results versus prior year on a reported basis, which reflects Mylan standalone results for quarter two, 2020. Moving to Slide 18, we've highlighted the drivers in the quarter compared to combined adjusted Q2 2020 results. This chart reflects the sum of Mylan's standalone results and Upjohn's carve-out financials for a period of April 1, 2020 to June 30, 2020, adjusted for certain LOEs and transaction-related items including divested products in connection with the combination. A few key comments on the slide, beginning with Lyrica and Celebrex, LOE. While we continue to see anticipated decline versus last year, our commercial teams have done a nice job in managing rate of erosion, as the generic penetration levels have come in better than our expectations. Adjusting for LOEs operationally, total net sales in the quarter were up 4%. This growth was driven by strong demand across Yupelri, Dymista, the Thrombosis portfolio, Viagra and the new product revenue. Base business erosion was driven by price declines in our generic business and was in line with our expectation and also anticipated competition across three of our complex products. For example, competition in Wixela, Xulane and Perforomist contributed to base erosion in the quarter. This erosion was partially offset by 40% growth of our global biosimilar portfolio. For the year, we continue to expect base business erosion to be approximately 3% to 4%. As compared to Q2 2020, COVID had a positive impact in the quarter primarily due to full recovery in China and partial recovery in emerging market and Europe. Given the evolving COVID situation, for the remainder of the year, we currently expect a slower recovery than originally anticipated across key markets. Lastly, with respect to foreign exchange, the weaker dollar relative to key currencies such as Euro and Chinese RMB provided an approximately 4% tailwind compared to our combined adjusted 2020 results. Moving to Slide 19 which bridges adjusted EBITDA. In the quarter, we had a higher run rate of inventory write-off which had a negative impact on our gross margin. We don't expect this level of write-offs to continue in the subsequent quarters. As mentioned previously and as expected, base business erosion was predominantly driven by competitive pressure on high margin complex products and to a lesser extent anticipated price decline across rest of the portfolio in North America and Europe. As you look at gross margin, it is down slightly on a sequential basis. This is primarily driven by anticipated product mix and the higher inventory write-offs. Integration and restructuring activities remain on track and SG&A was in line with our expectations. Turning to Slide 20. For quarter two 2021, free cash flow generation was strong and better than expected at $470 million. As I highlighted during quarter one, free cash flow decline versus quarter one due to increased onetime cash cost, interest payment in Q2 and increased operational working capital and CapEx. I'm encouraged by higher than expected adjusted EBITDA to cash flow conversion and year-to-date cash flow of approximately $1.3 billion. This is net of approximately $800 million in one-time cost. The results reflect the organization focus and company's commitment to cash flow and we are seeing an early benefit from cash flow improvement initiatives. Turning to balance sheet, year-to-date we have reduced our debt by approximately $1.2 billion, which reflects a repayment of June $2.2 billion maturity, partially offset by lower than anticipated increase in our Q2 short-term balance. In the quarter, cash was used for the European Thrombosis transaction and dividend payment to the shareholders. We also extended our $4 billion revolving credit facility to a five-year term and for the first time incorporated the option to include sustainability metrics consistent with our future corporate ESC goals. Moving to Slide 22, based on underlying strength of our business, we're raising our full-year 2021 guidance for total revenue, adjusted EBITDA and free cash flow. The expected increase in revenue was driven by stronger performance in the underlying business. This includes the lower than previously anticipated full year impact of URP in the Greater China region, year-to-date tailwind from foreign exchange rate, lower generic penetration for Lyrica in Japan, and sustained strength from brand. Partially offsetting these positive trends include anticipated competition in North America, lower generic volume in emerging market and slower COVID recovery. As a result of increased topline expectation and margin pull-through on these items, we are also raising our adjusted EBITDA guidance. This includes SG&A investment that is now expected to bring us to the high end of the range of 20.5% to 21.5% as a percentage of total revenue. Free cash flow guidance has also been increased as a result of higher adjusted EBITDA, lower cash taxes and continued cash flow improvement initiatives. With respect to key metrics, underlying our financial guidance which are largely unchanged we have lowered our adjusted effective tax rate to be in the range of 17% to 18% due to the favorable mix of income across our tax jurisdiction. Now with a few comments on second half phasing. We now expect second half revenue to be slightly lower than first half. This is primarily driven by anticipated competition in select brands and complex generics and expected lower sales of COVID-related products. With respect to Greater China, we anticipate slightly low revenue as a result of VBP and URP timing. Moving to adjusted EBITDA, while the strength in the base business continues, we also expect competition to negatively impact gross margin slightly in the second half of the year. In addition, we are assuming R&D and SG investment to sequentially pickup, which we expect will help fuel long-term sustainability and growth for the business. We're also expecting the second half free cash flow phasing will be impacted by timing of capital expenditure. The underlying strength and momentum we see in business and solid execution gives us confidence in the outlook for the back half of 2021 and I believe positions us for a solid starting point heading into 2022. As we mentioned previously, we expect one-time cash costs to decrease significantly over next two years to historical minor level of approximately $500 million. With the momentum we have built and what we can see to-date, our three-year cash outlook makes us highly confident that we will meet our stated objectives of potential dividend growth, $6.5 billion of debt pay down by 2023, and increased financial flexibility for the company going forward. Overall, I'm very pleased with the execution I've seen and our ability to deliver on our commitments. With that, let me open the call for Q&A. Operator?
Operator: We'll take our first question from Chris Schott of JPMorgan.
Chris Schott: Great, thanks so much for the question. I guess my question was just on the branded performance. It looks like you've had a couple of quarters now of stronger than expected results. I'm trying to get my hands - around, is this a situation where if the guidance was conservative and you're seeing later than expected competitive pressures or you actually seeing improving fundamentals in some of these assets? I was trying to get my hands around this kind of a near-term phenomenon or something we should be kind of anticipating could persist longer-term with actually some of these underlying assets are outperforming our expectations? Thanks so much.
Michael Goettler: Thank you, Chris. And I think I'll pass the question to Rajiv.
Rajiv Malik: So, Chris, it's a great question and thanks for that. I think our - you see our confidence in the underlying business as we put our arms around the business, as the new team has taken over the new country manager and the regional head. We definitely see the momentum. We definitely see we can do more with - as I said, we are taking everything into consideration while we are looking into our long-term strat plan. That what - how best we can leverage our capabilities now as we - two teams have come together and get more out of these assets, there are some bright spots. And the pandemic has also played some role. So I think I don't want to jump ahead. But I see wind behind this year, I see the momentum and I think when we come to you with our strat plan, we'll be able to give you a better appreciation about what we can get out of this branded portfolio. But we are very excited how this - so far this has played out.
Michael Goettler: Yes and Chris, the only thing I would add is, this performance is no accident, right. This is executing by the team at the highest level. You see better performance on some of the key brands like Viagra, Dymista, the thrombosis business that we took over from Aspen, where we're growing it actually. And you see very good execution against our strategy in China and much better results there than we had originally expected. So it's not an accidental result.
Operator: Your next question is from Elliot Wilbur of Raymond James.
Elliot Wilbur: Question for Michael and for Sanjeev as well. Could you just maybe given - I guess, given all the different moving parts here and the complexities of combining two businesses. Could you just maybe walk us through the top three to four items that led to the upward revision in operating cash flow and your free cash flow outlook for the year?
Michael Goettler: Sure and look, let me just make a general comment and pass it over to Sanjeev to walk you through the details. We're - have two quarters on our belt now, we continue to manage this business and we're getting more and more confident actually in our ability not only to deliver against the plan, but also improved free cash flow conversion. In addition to the strengths you get from the underlying business going forward, the reduction in one-time costs of the piece was very good about our ability to generate cash flow and to grow that over the coming years. Sanjeev do you want to add more on the quarter?
Sanjeev Narula: Sure Elliot, thank you for the question. So, couple of things are going on obviously as you pointed out, the cash flow from operations is improving because we have improved our adjusted EBITDA guidance. So that clearly is helping on that. The second big part is, which is all the effort that we began as we brought the companies together is, working on all the working capital improvement initiatives. We're looking at all the elements in the balance sheet, ARAP inventory and those are beginning to contribute in that. The third aspect is the modest benefit because of the lower cash tax that we see for the remaining - in the year. So overall, those three items are contributing to our increase in free cash flow, not only for rest of the year, but I see that momentum exiting into next year. As Michael pointed out, that as we look at three-year cash flow horizon, as the one-time costs come down, as the strength of base business continues and we continue to work on cash improvement opportunities. I feel highly confident in our ability to pay $6.5 billion of debt and continue to grow the dividend.
Operator: Your next question is from Umer Raffat with Evercore.
Umer Raffat: Thanks so much for taking my question and congrats on all the progress to-date. I wanted to focus on one of your key growth drivers going forward and you've mentioned EYLEA biosimilar - your expectation is you could be on the market and first to launch in 2024. If I think about the IP estate what that basically means is? You're assuming EYLEA's composition plan expires late 2023, plus the pediatric exclusivity which means you basically launch right after the composition patents with pediatric exclusivity. How confident are you that their non-composition patents won't be relevant to your launch? And can you speak to that?
Michael Goettler: Okay. So, I'll let Rajiv comment on the overall entry and if you want to comment on the IP situation, but Umer, let me just back up and make a general comment here is that, EYLEA to me this - the interchangeability on Lantus, I mean these are all proof points I think that we have that our biosimilar portfolio is strong, is going to be a driver of growth for us going forward and something to be very proud of right. The approval of Semglee interchangeable is historic and EYLEA look, there is a number of competitors going to it, we are leading right now and we're the first one to finish clinical trial and so we're very proud about this. Rajiv, if you want to give some more details?
Rajiv Malik: Yes Umer, thanks for your question. Umer, if I have to pass your question when it comes to the biosimilar space and EYLEA falls right there. There are three buckets. One is science, which I think we are very proud of and very confident of navigating it successfully. Second is integrate, very integral to that is our IP legal strategy which I'm so proud of, that if I look back into the biosimilars and which we never knew. That when we were five, seven years back when we were planning, we had a - we saw this most of the patents around here, because of patent linkages. We saw - the whole thing was evolving around the patent dance and all that. But I look into the performance, how we have performed whether it was insulin, whether it's HERCEPTIN, NEULASTA, Hulio, Avastin. And I believe - I know and similarly you as we are doing EYLEA. Our IP strategy is evolving simultaneously, approach our combining and deploying and IPR strategy or how to do - manage the patent dance that is evolving and it will continue to evolve. But that gives us the confidence that backed by the science and our IP legal strategy, we'll be there to open the market in the first wave if not the first, we are very confident and very bullish on this product.
Operator: Your next question is from Balaji Prasad of Barclays.
Balaji Prasad: Maybe just following up on biosimilar Avastin, you called out the delay in pre-approval restrictions delayed, because of delayed travel. Since you're expecting Aspart inspection for the end of this quarter, I imagine this is an Indian facility that you are expecting approval from. So, are there any of the key approvals that your anticipating from yours of Biocon facilities in India that could be delayed?
Michael Goettler: Rajiv?
Rajiv Malik: Yes thanks, Michael. Balaji, Aspart is not from Indian location, Aspart is from Malaysia and this pre-approval inspection is already delayed - sorry already scheduled in the next few weeks we'll be having that, that's one product. I think Avastin is the only product from the Biocon which has been impacted and we continue to work closely with Biocon and - FDA to act you know, how expeditiously we can get it scheduled.
Operator: Your next question is from Jason Gerberry of Bank of America.
Jason Gerberry: Good morning, thanks for taking my questions. First, can you confirm now you're at the - beyond the five-year stash limitation on the generic drug price-fixing subpoena which has more than five years out, but I know it can be tolling agreements and COVID-related delays that could extend upon that? So, just curious if you could confirm - you're out of the woods with the price-fixing matters and issues for other generic suppliers. And then just on China and URP, can you help dimensionalize a little bit what's going on there, like the proportion of your 500 million plus revenue per quarter run rate right now that is potentially exposed to URP versus the proportion of that perhaps growing due to this retail market growth dynamic? Thanks.
Michael Goettler: Sure. Jason, thanks for the question. Look, on the price-fixing, our position hasn't changed at all. We believe that the claims against are without merit and we're going to continue to defend them vigorously as we have, so there's really no change there. On the URP question with China, maybe Rajiv, if you can give a little bit more color to the composition of the revenue that Jason is asking for?
Rajiv Malik: Instead of right there, I'd just want to go back and complement the China team for the strong performance. They done a great job in managing the VBP, the whole strategy how to manage VBP and shift the business and how VBP and URP has been now deployed has given us enough time to implement our own strategy and that's why you will see our business performing better than our expectations over a year and we will be definitely starting from its greater base as we go into '22 in healthcare consumerism, evaluation of private insurance, private hospitals and also the market expansion we are seeing and the other drivers behind that. So as we now dimensionalize the URP as we have already you said repeatedly that URP - the decline of China business will be determined by how far and extent of URP implementation, which has been varying from province to province and all that, we definitely see this decline. But maybe much different or lesser rate than what we saw earlier anticipated.
Sanjeev Narula: And Jason, one other point just kind of for you to understand the phasing of this business into this year. We obviously as both Michael and Rajiv pointed out, are performing better than expected both in hospital and retail channel. The second half of this year, we're going to see a step down in the revenue, starting with third quarter for Greater China region because of the timing of VBP. So that's all anticipated in the guidance, reflected in the guidance, it is doing better than what we had originally anticipated. But you will see a step down in the second half versus first half.
Michael Goettler: And we are starting of a higher base as we go into '22. Next question, please?
Operator: Your next question is from Nathan Rich of Goldman Sachs.
Nathan Rich: Sanjeev, maybe just following up on your previous comments in the last question, it seems like the performance so far were kind of putting you on track to kind of be above that EBITDA range, I know you guys made comments about phasing with respect to competition in China URP and also COVID. But it seems like, I guess in total those headwinds where they had to amount to something like $400 million to get you kind of back to the midpoint of your full-year guidance. So I was wondering if you could maybe just comment on some of those moving pieces for the back half as we think about sizing them as we do our models for the year? Thank you.
Sanjeev Narula: Yes. So listen, there are a lot of other things going on. We're very, very pleased with the performance, strength of the business, all segments, all product grouping and the momentum we are getting into the second half. So there are a couple of things that are going on, and I'll walk you through both on the revenue and EBITDA lines. So revenue line, starting with that. So we talked about China, again performing better than our expectation, but will expect us a step down in the second half, because of the timing and COVID and VBP. The second part, we have is, the anticipated competition in the products like Wixela, Xulane, Perforomist, all reflected in the - in our guidance, but that will have an impact in the second half versus first half. And that will have an impact on our gross margin as well. And then you have - to a lesser extent, you have some of the COVID related buying that happened in quarter two, that's going to step down in quarter three, quarter four. Put all those things together, you will see roughly second half revenue to be lower than the first half, though the underlying strength of the business continues. Now taking the EBITDA, exactly some of these elements that I mentioned will have a flow-through impact on the gross margin even though I expect the gross margin for full year to be in the range of 58% to 59%. The other important item that's having an effect on the EBITDA is the pickup sequentially on SG&A and R&D expenses, and that's all again reflected in the guidance. We are expecting the SG&A and R&D to pick up part of it is COVID, but part of it is deliberate design of investing into the business, so that we have not only achieve objective for this year, but have a stronger momentum getting into next year. All those are reflecting in the EBITDA for the second half to be slightly lower, but again the strong. And then the cash flow, again the performance strength and everything continues that I mentioned about it, the working capital improvement initiatives, better cash flow from operations and the higher - the only offsetting on the cash flow side is the higher CapEx that we expect in the second half versus the first half which is on the timing of that. So that kind of gives you a sense of the rhythm of all three items.
Michael Goettler: I will be reassessing again. As we see the quarter evolve, whether we need to give further updates to the guidance or not. So, thank you. Next question, please?
Operator: Your next question is from Greg Fraser of Truist.
Greg Fraser: Thanks for taking the question. On China, can you comment on your expectations for new product introductions from the legacy Mylan portfolio? How should we think about the timeline for product submissions and potential approvals? Thank you.
Michael Goettler: Yes. Rajiv, can you comment on the submissions we already made and what's to come?
Rajiv Malik: Yes. I think there are two components to that. One is our existing business in China, especially the strength of Upjohn, legacy Upjohn business, we will be able to get more out of the Mylan legacy portfolio than what Mylan was doing with their limited presence, that's one piece. The second piece is the new products, which without losing our time, we have - as we said, we have identified about 30 products now, six of them are scheduled for filing over this year, three have already been filed. So we are very much on the track and I think from a regulatory point of view, it takes about two to three years to get these products over the finish line when it comes from China.
Operator: Thank you. Your next question is from Gary Nachman of BMO Capital Markets.
Gary Nachman: On the interchangeability approval for Semglee, just talk about the challenges getting that done? How difficult for other companies to potentially get that interchangeability as well for insulin? So what are sort of the barriers to entry there that will be helpful and then just talk about the plans for the launch later this year? So how are you thinking about pricing dynamics and formulary acceptance and potential share capture? And how much is factored in the $690 million guidance for new products for Semglee? Is there anything meaningful in there? Thank you.
Michael Goettler: Gary, thank you. Before I hand it over to Rajiv, let me just add a few - I would say a little bit of color to this and what this means, because this is really historic first approval of interchangeability for any biosimilar in the U.S. In the past that is not always a straight one, the regulatory landscape has to evolve, we've evolved with it and I think we should be so proud of what we have done as a team in enabling this. And being tenacious enough to evolve with it and sticking to it and actually getting this done. There is significant interest as you know from policymakers, from advocacy groups, et cetera on what this potentially can mean for access - for patients and it's - to be honest, meaningful for me on a personal level, because 20 years ago, I led the global marketing effort for Hoechst. So, I know what this product can do, how good is for patients, we're excited about scientifically what this means and we're excited what this potentially means for patients. And I want to ask Rajiv, to comment on the commercial potential and the timeline also that we see in rolling this out.
Rajiv Malik: Yes, and one of the question was about how difficult is the interchangeability and I would say look Gary, the ideally suited product for interchangeability of the chronically administered biosimilars, where disease needs to be relatively stable and with a limited chance of rapid decline. And it's a case-by-case and it does include the current guidance across for the biosimilars and interchangeability includes pharmacokinetics experience after three stages of test reference, test versus the reference sort of. So they're - there is a decent work and science involved. Now coming back to the launch, very excited and very proud of this achievement, it's a new level with the new NDC code and FDA has agreed with us the framework - to transition in the interchangeable product while transitioning out the non-interchangeable. And we had agreed also with the timeframe of a period of about six months to manage this which aligns well with ramping up our supply interchangeable market from commercial point of view. If anybody knows this market, this market is not just a commercial driven by the just formularies or PBM. This made up of Medicare Part D, the second one controlled by the PBM. The third one managed Medicaid, the government VA hospital corrections, cash pay and FFL. And every market channel segment has its own dynamics and nuances. So there is no one silver bullet or one strategy to commercialize. Our goal will be to basically drive the access and we believe that the substitution at the pharmacy level will help us drive that. And we see - from timing perspective, we see some - you will see some uptick in the market share around quarter four. But the actual and the decent impact of interchangeability to the market share perspective and access will be seen over the next year. For us, I see this as a long-term opportunity with a long tail. And - just one thing I missed, I think on your question around how long. We do have 12-month exclusivity for any other interchangeable product to come. So I think I have answered most of your questions.
Sanjeev Narula: Gary, one other thing, this has got no bearing on $690 million for this year, that's - this is going to be as Rajiv pointed out bigger impact next year.
Operator: Your next question is from Navann Ty of Citi.
Navann Ty: Just a follow-up on URP and thanks for the color you just provided. Do you still expect URP to limit reimbursement to VBP pricing? And can you comment on the early impact or any qualitative comments that you can make for 2022? Thank you.
Michael Goettler: Yes so, let me take the 2022 question and let Rajiv, talk about the URP and how we see that rolling out. It's heterogeneous as province-by-province and we're getting more and more clarity on that. But on the 2022 question, let me just re-emphasize again what I also said in my prepared remark, is that we really see the $6.2 billion in EBITDA as the true floor for this business. I think with the performance we have under belt now from both the first and the second quarter. It's more, clear than ever to us that's the case. We've really strong momentum coming from those two quarters and we feel good about where we are, that's for EBITDA. If you're looking at cash flow, clearly we see cash flow growing, strongly growing in the coming years and that's because of the continued performance and where we see EBITDA is from reduction in one-time cost and Sanjeev was very clear about where we see this evolving to basically legacy Mylan levels by the end of 2023. So you see the improvement that can come from just that factor and then as we've seen in this quarter, continued improvement in working capital and cash flow conversion. So that drives cash flow very strongly. And then if you ask about revenue, we're not really talking about revenue yet. I mean we are completing the strategy through the plan that we're doing that will be completed towards the end of the year. That gives us - we'll be able to give you much more clarity on the trajectory. But in summary, we feel good about where we are - Rajiv do you want to comment on the URP question?
Rajiv Malik: Yes, I think VBP or URP from the policy point of view is absolutely out and is being gradually implemented. And Michael said it right it's heterogeneous and it's also evolving. There are couple of provinces where they have taken it all to way to the VBP price. But the big provinces like Shanghai and Beijing is where they are doing it in a gradual way of maybe, there are some provinces are doing reducing the price to the 50% of the VBP price, and others we are seeing 30%. So it's, evolving and it's heterogeneous.
Operator: Your next question is from David Amsellem of Piper Sandler.
David Amsellem: Thanks so, sorry to miss this. But can you just talk about how you're thinking about the trajectory of EpiPen beyond this year, particularly with the sort of uptick in the market as a result of mass vaccination where just in part of and Part D for that. Just give us your general thoughts on trajectory of that franchise? And then just a couple of other product specific questions, any color on how you're thinking about launch timing or approval timing for Iron Sucrose and also injectafer that would be helpful? Thanks.
Michael Goettler: Okay. I think Rajiv I give that straight to you EpiPen, little bit rhythm of the numbers there and then anything on pipeline launches?
Rajiv Malik: Yes, no, EpiPen has been and will continue to be a meaningful product from our global business point of view. It's just not the U.S. market, because even in USA, we have been holding on to about mid 30s of the market share despite this being a multiplayer market, now between Teva's and it will continue to be a meaningful product. Actually, we're more excited how the traction and the market share or the excitement we're seeing in Europe, and many other emerging markets. So as we expand, as we further build upon this franchise, this is one of the product which will be taking it across the other geographies and expanding it globally.
Michael Goettler: And one had the question on Iron Sucrose.
Rajiv Malik: So yes, Iron Sucrose and Venofer is most likely - going to be a 2022 launch.
Michael Goettler: Okay thank you Rajiv. Operator last question please.
Operator: And that was our final question. I will now turn the call back over to Michael Goettler, CEO to make a few closing remarks.
Michael Goettler: Well, thank you for the question. And look in summary, I just want to say again, we're performing at/or above the upper end of our own expectation across the business, we feel good where we are. We are meeting our financial commitments that, includes the dividends that includes the debt pay down. We're on track on synergies and we're delivering very strong and sustainable free cash flow generation, I think that this quarter has made it very visible. We'll continue to make good progress on our pipeline, and Rajiv highlighted a few of those including the historic approval of Semglee interchangeability, we've raised the guidance for 2021. And I want to reiterate, again $6.2 billion is the true floor of this business in terms of adjusted EBITDA and that's more clear than ever. We think we can definitely be at or above that level going forward. And lastly, we've embarked on a robust bottom-up strategic planning effort that work will complete by the end of the year. We - look really forward to communicating that with you when it's completed. So, thank you very much and that concludes the call for today. Thank you.
