Viatris Inc. (VTRS) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning. My name is Leo and I will be your conference Operator today. At this time, I would like to welcome everyone to the Viatris 2021 Third 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. In the interest of time, we ask that you please limit yourself to 1 question. If you need to ask further questions, you may reenter the queue. 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' Third Quarter 2021 Earnings Conference call. Joining me on this call are Viatris ' Chief Executive Officer, Michael Goettler, President, Rajiv Malik, Chief Financial Officer, Sanjeev Narula, Chief Accounting Officer and Controller, Paul Campbell, and Head of Capital Market, 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 can 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 further 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 post 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, Reg FD. 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 third 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 third 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 third quarter 2021 financial performance, we have provided in our earnings release and supplemental slides, and we'll discuss during today's call, certain financial measures relating to the third quarter of 2020, including combined results of legacy Mylan and the Upjohn business with indicated adjustments which do not reflect proforma results in accordance with ASC 805 or Article 11 of Regulation S-X. 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 participant questions is the property of Viatris, and cannot be recorded or rebroadcast without Viatris' 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 for joining us on our third quarter earnings call. I'm pleased to say that we have, again, reported another strong quarter generating robust free cash flow, delivering on our financial commitments, and building a strong foundation for our future. Nearly 1 year ago today, we formed Viatris with the vision to assemble best-in-class capabilities across commercial, manufacturing, R&D, and enabling function in pursuit of removing barriers and expanding access for patients we serve while also returning value to shareholders. Today's continued strong results are testament to that vision and to the execution of our colleagues around the world who share dedication to patients and shareholders, drives our strong business results, and we believe is putting Viatris on a path for an even stronger future. I could not be proud of all that we have accomplished together. Now here are some highlights. In the third quarter, we reported total revenues of $4.54 billion, adjusted EBITDA of $1.7 billion, and free cash flow of $965 million. Year-to-date, that is quarter 1 to quarter 3 combined, we have generated approximately $2.2 billion in free cash flow, already exceeding the lower end of our most recent guidance for the full year. Optimizing cash flow generation will continue to be our financial North Star and we anticipate cash flow to grow in the coming years, as a result of our expected continued strong performance, a reduction in one-time costs, and continued improvements in cash flow conversion. In North America, we're preparing for the imminent launch of Semglee, which as most of you know received the historic approval from the FDA for the industry's first-ever interchangeable biosimilar designation in the U.S. in July. We expect that Semglee will be available in pharmacies before the end of the year, and we believe this is an important milestone to help increase access to Insulin for those living with diabetes in the U.S. Rajiv will later provide more details on the progress we're making in that regard. In addition, at the end of October, we found that BLA for our biosimilar to Eylea with the FDA F plant. We believe this is the first biosimilar registration of this important medicine to treat age-related macular degeneration. And looking further into the future, we are excited about the potential to be first-to-market for our Botox biosimilar. Overall, we generated $158 million in new product revenue in the third quarter, $557 million year-to-date. We're therefore well on track for approximately $690 million in new product revenue for the full-year. Importantly, our strong performance enables us to continue to execute on Phase 1 of our strategic roadmap, which is expected to be completed by the end of 2023. During this time, we're focused on strengthening our Balance Sheet, returning capital to shareholders in form of a dividend, and building a strong foundation for the future. We're now 1 year into that 3-year effort, and we continue to deliver on our financial commitments for debt repayment, dividend, and synergies. On the last quarter's earnings call, we said we would reevaluate our 2021 financial guidance at the end of the third quarter. Based on our strong performance to-date, we are again raising our financial guidance across total revenue, adjusted EBITDA, and free cash flow, which Sanjeev will discuss in more detail later. I'm also pleased to say that we're near completion of our rigorous bottom-up strategic planning effort. We look forward to sharing the results of these plans with the investment community at a Virtual Investor event. now scheduled for the morning of January 7, 2022. And on that day, we provide additional details on our 2 Phase strategic roadmap, including for the rest of Phase 1, that is the year of 2022 and 2023, will be providing specific financial guidance, targets, and metrics to complete this phase. We will also be discussing the substantial free cash flow that we will be generating over this period to satisfy our Phase 1 capital allocation priorities of returning capital to shareholders and of repaying $6.5 billion of debt. And with that said, we continue to remain confident that $6.2 billion of adjusted EBITDA is the true floor of our business. For Phase 2 of our roadmap at 2024 and beyond, we will provide an overview of the catalyst that we expect will drive future growth, including laying out our capital allocation priorities for the in order to maximize and further unlock shareholder value during this period. We'll also be giving specific details of our own organic opportunities for discussing our own pipeline at length, and will be providing the inorganic business development priorities that we'll be focusing on through our global healthcare gateway. Before I close, I'd be remiss to not call out that Viatris was recently recognized as a top 5 Company on a prestigious Fortune Change the World list. This recognition is a testament to the hard work and dedication of our colleagues to stem the tide of HIV AIDS over the course of more than 10 years, and it's just 1 example of how corporate social responsibility is deeply embedded in our mission and our operating model. And in addition, we're recognized on the Forbes 2021 world's best employers list, underscoring our success in laying the foundation for the kind of Company we want to be. And with that, I will turn it over to Rajiv for more details. Rajiv?
Rajiv Malik : Thank you, Michael, and good morning, everyone. Before I get into the quarter at hand, I would like to echo Michael 's excitement about our upcoming investor event. What you can expect to hear from me is a comprehensive review of the significant value and the depth of our pipeline and clinical programs, including biosimilars, complex genetics, and all medicines that we have been strategically building over many years. These development programs are expected to play a significant role in our ability to drive organic growth over time, especially as our cost synergies roll off at the end of 2023. Once laid out in January, we believe our pipeline will be recognized as 1 of the Company's most underappreciated assets that will enable us to continue to deliver value while fulfilling our mission of expanding access and addressing patient needs. Now, let's get into our results. I'm pleased to report that we have executed 3 strong quarters, which is a testament to our diversified and differentiated commercial and operations platform but more importantly, the dedication of our workforce. As I walk you through the performance in each of our segments and product category, I will be making certain comparison to combined LOE adjusted third quarter 2020 results on a constant-currency basis, as less competitors versus our expectations as included in our guidance back in August. Beginning on slide 7, overall, the business performed strongly across all of our segments versus our expectations. When excluding the impact of Japan 's Lyrica and Celebrex, LOE s, as seen on the bottom left hand side of the slide, total net sales were down 1% as compared to combined LOE adjusted quarter 3, 2020 Our brand business performed better than our expectations, primarily driven by Lipitor, Viagra, Influvac, and EpiPen. Our complex generics and biosimilar category performed in line with our expectations. We are pleased with the continued growth of our global biosimilars portfolio this quarter, which grew by 14% and helped to offset anticipated competition related to select complex generic products. Lastly, our global generic category also performed in line with our expectations, reflecting mid-single-digit decline compared to the prior year. Turning to Slide 8, our developed market performance was slightly above our expectations for the quarter. Europe continues to perform very well, generating 10% year-over-year growth in net sales driven by strong performance by brands like IMPROVAC, Lipitor, and Dymista, as well as strong performance of our Thrombosis portfolio. Biosimilars in Europe grew by over 50%, led by our strong position of Hulio in Germany. Moving to North America, we are very pleased with our overall performance. Our branded segment performed strongly driven by EpiPen, Yupelri, and a better-than-expected performance of Perforomist. These were partially offset by which experienced unanticipated competition. Complex generics and biosimilars in North America was better than our expectations with strong performance in biosimilar, which helped to absorb the complicated impact on Wixela and Xulane. I would also like to make a few comments on U.S. generics business and pricing. For the last few years, we have continued to work on our portfolio by investing in science and difficult to make dosage forms like injectables, dermatological s, patches, and drug device combinations. while certain commodity products at the same time. We believe we now have a very diversified genetics portfolio, which is being very well supported by our strong customer service levels. This is what differentiates our ability to effectively manage this business. Accordingly, as we normalize this quarter for exceptional one-time events like dimetapp fumarate, Seller and Xulane. Our price erosion for this quarter is mid single-digit and very much in line with our expectations. We are also excited about the upcoming launch of our branded product. Semglee injection unbranded Insulin Glargine injection. Both products will be available in pen and while presentations and are interchangeable funded referenced Lantus. This dual-product approach is intended to ensure that this interchangeable biosimilar insulin can reach as many patients as possible, regardless of financial circumstances, insurance, or channel. We are pleased with some recent formulary wins that go into effect on January 1, 2022, including the inclusion of our interchangeable biosimilar Semglee on Express Scripts National Preferred Formulary as less on Prime Therapeutics national formularies. We expect that the products will be available in pharmacies before the end of the year. To ensure that as many patients as possible will benefit from these products, we will provide co-pay assistance, a patient assistance program, and cash pay alternatives. In addition, beginning in '22, we will be a participant in the CMS Medicare Part D Senior Savings model which limits certain patient's out-of-pocket costs to no more than $1.25 for 1 month supply. Moving to the next slide, our matching market segment also performed in line with our expectations this quarter. Our branded business, primarily driven by Viagra and Lipitor continues to perform strongly in these countries that have begun to recover from COVID. In this quarter, our complexionaries and biosimilars category performed below our expectations due to the COVID-19 related regulatory delays, which we expect to overcome as we close out the year. Our generics business was in line with our expectations. We had higher than anticipated sale of Remdisivir and this quarter that helped offset the lower volume. We expect that the demand for COVID-19 related products to taper off in quarter 4. The next slide shows our chance segment. We are pleased with this quarter's performance across our product categories with brands and generics performing better than expectations. AMITIZA, Lyrica and , drove strong brand results and our authorized generics to Lyrica and NORAD, continued contribute growth. Biosimilars were in line with expectations, with continued strong performance from Hulio in Japan. Greater China is our last segment slide and the business had another strong quarter, delivering results that were better than our expectations. This performance was primarily driven by retail channel growth of 20% and better than expected performance in the hospital channel. The segment benefited from some phasing of customer buying patterns this quarter that we expect to normalize in quarter 4. Overall, we are very pleased with how the business is navigating the evolving policy environment. With our new launches performing to our expectations and our base business anticipated to be in line with our expectations of approximately a 4% base business erosion for the year, I feel very strong about the underlying building blocks of this business. Now, turning to the pipeline update. Regarding our Botox biosimilar development program, we met with FDA in early September and aligned on analytical, non-clinical data, as well as clinical program expectations, and have a clear path forward. At this juncture, we do not expect revamped 43 and a complete response letter related to their taxi product to impact our submission timing for this program, which is a newer to be filed by the end of 2024. We will provide an additional update when we have more information. Additionally, we recently submitted to FDA, what we believe is potentially the first Eylea biosimilar. Moving to Insulin as FDA completing their pre -approval inspection of manufacturing facility in Malaysia. It resulted in a few minor observations. And has provided a complete and comprehensive response to FDA 's . We are confident that we will hear soon from the agency as this is the last remaining element needed for approval of another potentially interchangeable insulin product. Regarding , our U.S. approval continues to be impacted by the delay of a pre -approval inspection. As previously mentioned, we have no open scientific questions with FDA. In our complex product pipeline, we have initiated our Xulane lower-dose phase 3 clinical trial and are actively screening and enrolling patients. We are also happy that our Levothyroxine Oral Solution was accepted for filing with FDA. This quarter we made good progress in our complex injectables portfolio. We successfully completed pivotal pharmacokinetic studies for our long - acting injection and have demonstrated that our product is to Our paliperidone permitted three months in the 410 milligram and 273 milligram strength have now been accepted for filing. And we believe that we are the first to file for all strength of the paliperidone 3-month injection that equivalent to INVEGA TRINZA. We have also successfully completed our for aripiprazole modified injection, which is our genetically influence for ABILIFY MAINTENA. Before I hand it over to Sanjeev, I'll quickly address our ongoing integration and restructuring activities. We're coming up on our 1-year anniversary and our initiative are progressing as planned. We continue to remain on track to realize $400 million of costs in our early this year, and are 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 excellent quarter and I'm really pleased with the focus and execution exemplified by our team, especially the financial results. The results demonstrate the financial strength and the nature of our global diversified platform. In the slides ahead, I'll provide drivers for Q3 and expectations for Q4 that are leading to an increase in our current year financial guidance. On Slide 17, we have summarized our results versus prior year on a reported basis, which reflects Mylan 's standalone results for third quarter 2020. Moving to slide 18, this is a comparison of combined adjusted Q3 2020 results, which includes Mylan 's standalone results and Upjohn carve-out financials for a period of July 1, 2020 to September 30, 2020. Adjusted for certain LOE s and transaction-related items, including divested products in connection with the combination. Beginning with LOE s. As we've seen throughout the year, commercial teams have continued to manage the rate of erosion of Lyrica and Celebrex in Japan. As a result, genetic penetration levels have come in slightly better than our expectations. Adjusting for these alloys, total reported net sales in the quarter were essentially flat to prior year. In the quarter, our branded business performed solidly driven by Thrombosis and Influvac in Europe, and EpiPen in North America. In China, sales were strong for both Lipitor and Norvasc in the hospital channel and wider in the retail channels. Our team continues to navigate the policy environment and erosion from VBP was in line with expectations. New product revenue was in line with expectation and our global Biosimilars sales grew 14%. Base business erosion includes price and volume decline in our North America Generics business, including competition across complex products such as Wixela, Mike Helsing, and our generic for tech for data. Uh, coupled with declines in our business in emerging market. On balance, these items are tracking in line with our expectation and full-year assumption is unchanged at approximately 4%. We're seeing a gradual recovery from COVID in emerging markets, North America and Europe. Lastly, with respect to foreign exchange, the weaker dollar relative to key currencies such as euro provide an approximately 1% tailwind compared to our combined adjusted 2020 revenue results. Moving to Slide 19, which bridges adjusted EBITDA. In the quarter, adjusted gross margin of approximately 60% came in ahead of expectation and were driven by brand performance and favorable cost of goods. Integration and restructuring activities remain on track, and SG&A was in line with expectations. Turning to Slide 20. Free cash flow of $965 million exceeded our expectation due to strong operational performance and cash flow improvement initiatives. One-time costs were lower due to timing effectivities between quarter 3 and quarter 4, and capital expenditure came in below our expectation, harshly due to COVID -related global supply chain delays. As a result of strong year-to-date, free cash flow of approximately $2.2 billion, we've been able to repay $1.9 billion of debt year-to-date, including $730 million in quarter 3. We've also returned $266 million in dividends to our shareholders. These actions are consistent with our Phase 1 capital allocation of repaying $6.5 billion of debt by 2023 and returning capital through our dividend, which we expect to grow in future, subject to board approval. As we look to Q4, we expect free cash flow to be significantly reduced from Q3 levels due to lower adjusted EBITDA facing of onetime cash cost, semi-annual interest payments and ramp up of capital expenditures. Moving to slide 22 based on the underlying strength in the business, we're raising the guidance for total revenue, adjusted EBITDA and free cash flow. The midpoint of increased total revenue guidance is now $17.8 billion, an increase of $100 million versus prior guidance. The increase outlook of revenue reflects the continued strength in our China business driven by pull-through of retail convergence strategy. Performance in developed markets benefited from strong EpiPen back-to-school season, and in fluid volumes in Europe. Partially offsetting these positive trends including generic erosion and competition of key products in North America, and lower ERV volumes in emerging markets. The midpoint of an increase adjusted EBITDA guidance is now at $6.4 billion also up $100 million versus prior guidance. The increase is primarily driven by higher forecasted total revenue in addition to our expectation that adjusted gross margin when land closer to the high-end of our range at 58% to 59% for 2021. For adjusted SG&A, we expect a sequential increase in fourth quarter with the resumption of activities due to COVID recovery in various market bringing our full-year range of this key measure to 21% to 22% of total revenue. The mid-part of free cash flow guidance is increasing to $2.5 billion, which is $200 million higher than previous guidance. This reflects capital expenditure of approximately $500 million lower cash tax and cash improvement initiatives that we expect to continue to benefit us in 2022 and beyond. And a few comments on Q4, for revenue, we expect a sequential decline due to customer buying pattern that benefited in Q3. Low sales of EpiPen in developed market and low sales of them that's severe and AmBisome in emerging markets. For adjusted gross margin, we also expect a sequential step-down from Q3 to Q4, from 60% to approximately 58% due to the evolution of our product portfolio mix. I'm extremely pleased with our ability to generate substantial free cash flows and we fully expect our operational momentum exiting 2021 will carry into next year. Based on additional cash flow improvement initiatives and the expected reduction in onetime cash costs, was highly confident on our clear pathway to generate an aggregate of over $8 billion of free cash flow from '21 to '23 that will satisfy our Phase 1 capital allocation priorities. The underlying strength and momentum we see in business position us for a solid starting point heading into 2022. And we look forward to sharing more about two phase strategic roadmap in early January. Before I turn the call over to the Operator, I'd like to announce that our Head of Investor Relations, Melissa Trombetta, is moving to a broader leadership role in our office of business performance. We sincerely appreciate all her contribution over past 4.5 years, leading the IR function. Going forward, Bill Szablewski, Head of Capital Markets, and Luis Sanay, Director of Investor Relations will be the main contact for the investor community. With that, let me open the call for Q&As. Operator.
Operator: Thank you. . We'll take our first question from Chris Schott of JPMorgan.
Chris Schott : Great. Thanks so much for the questions. I know you're targeting a January 7th Analyst Meeting, but do appreciate the comment on, I think it was $6.2 billion in EBITDA as a fore for the business. I guess my question here was, in the past you've talked about 2021 as a trough number. I know you've raised the guidance a few times foregone through this year. So, let me just understand a little bit what's going on here. Some of the upside we're seeing, more one-time in nature this year, or are there any other factors that contribute to that dynamic? I'm just trying to bridge between a new midpoint of $6.4 billion versus that floor $6.2 billion. And if I can slip a really quick second question in. My question is, do you think about capital deployment and where your stock is right now, where does repo -- share repo fit into the mix? And if -- there's been a lot of discussion around BD alone, dividends, but trying to sense -- get a sense of the -- is share repo something that you're considering as well. Thanks so much.
Michael Goettler: Good morning, Chris. And thanks for the question. Let me start with your second question on the share buybacks. And just to go back, I mean, for us as part of offering and book. From the beginning, we always contemplate at both dividends and share repurchases. That was always part of our thinking. I think we've been very, very clear about what our priorities are for Phase 1, which is the S21, 22, and 23. And that's the debt pay down $6.5 billion returning capital suite dividend and then growing the dividend annually, right? If there are additional opportunities, obviously we'll consider it. Share buybacks will obviously be the benchmark for any kind of major . Investments that we do and then just one of the fact that you may not be aware of, that we have to consider is, there is a tax matters agreement that we entered into with Pfizer as part of the tax-free spin of Upjohn from Pfizer and then the combination with Mylan. And there's certain limitations and conditions on share buybacks in the first 2 years that we need to take into consideration. But I look forward to telling you more, not only about the Phase 1 commitment we've made very clear, but also our capital improvement priorities for Phase 2, how we do that, and how we maximize shareholder value, and unblock further share value in Phase 2. So that's forthcoming, and please join us in the January meeting. And on the EBITDA question, we have enough given guidance today. We're very, very pleased with the performance that we have, now 3 consecutive quarters. We strongly feel that we stabilizes business. We get a good handle on the business. We now finished or almost finished the bottom -up rigorous strategic planning process. And with that, we are reconfirming again what we said before, the $6.2 is the floor. That means floor, doesn't mean midpoint of the guidance, it's the floor. But that's a floor that's very, very important because that drives all we can deliver on Phase 1, right? We laid out our clear priorities, what we need to do. EBITDA drives cash flow is not the only thing driving cash flow, is one of the things driving cash flow. And remain confident that the EBITDA combined with, and you can easily do the math yourself, $8 billion or more in cash flow over those 3 years, sets us up to deliver on our Phase 1 commitments. We remain confident we can do so and look just at this year $2.5 billion midpoint already. And that sets us up way for very successful Phase 2 with a much stronger Balance Sheet, much more increased financial flexibility and firepower and I look forward to telling you more about that at our investor event. Next question, please.
Operator: We'll take our next question from Umer Raffat of Evercore.
Umer Raffat : Hi guys. I'll also ask 1 question which is 2 questions. Michael, I know there's been a lot of investor questions and confusion around dividend payout. And I'm curious if we should expect a more definitive number. Let's say a 20% payout or something as we go to January 7th Investor Day. And then Rajiv, I'm trying to understand some of your comments around Botox. Somewhere a little better. I know you were scheduled to have conversations with FDA in September is what you had said last time. You also just said that the revamps lead response on manufacturing efficiencies should not impact your 2024 timing. So I'm just trying to put those two things together. I guess what specifically was FDA focused on when you sat down with them in September. And is your manufacturing process and manufacturing location for biosimilar Botox shared with rebound? Thank you.
Michael Goettler: I'll start with the dividend , you can answer the second question. Umer, thanks for the question. Dividend is obviously key component of our TSR story going forward. And what you should expect from us is a growing dividend in absolute dollars subject to board approval of course. But I don't want to get ahead of the board of directors here, but my hope is that we will be able to declare our 2022 dividend framework in time or at the January 7th event. And I think we can be confident in that again do the math around cash flow, whether we have sufficient cash to pay down the debt and grow the dividend. And we'll tell you more about that later.
Rajiv Malik : And tax, Umer, part of your question regarding Botox, you're right. We've met with FDA in early September and have a clear alignment on their expectations about biosimilarity, analytical, non-clinical data, as well as the clinical program expectations. So once you have that clarity and we have a clear path forward, it's all about execution. And we have been on debt at displays several times that most important thing is to get it from alignment with FDA. And I'm -- then I said, from alignment, yes, these things evolve. But at this moment, they have given us a very clear understanding and they are motivated to see a biosimilar product come through in the market. Regarding the , yes, we have asked is our developer debt-less manufacturing partner and we shared the facility with which is the advanced for . And getting afforded 3 out of a complete response letter. Is that a new thing when you are evolving or developing a product towards the end of '24, that's what we have of filing that we have a lot of time. And we said as we have been giving you a complete transparency, we'll keep you guys updated as it evolves. But at this juncture, I don't see that is going to impact our development program timing.
Operator: We'll take our next question from Elliot Wilbur of Raymond James.
Elliot Wilbur : Thanks. Good morning. Wanted to ask a question around synergy realization over the course of the year and I apologize for the lines were cut off they made me miss this during Rajiv's prepared commentary, but just wanted to get an update on where you were in terms of realizing the $500 million in targeted synergies, which buckets are over-performing or underperforming versus original expectations. And then just looking at the numbers in terms of SG&A and R&D, targeted spend percentages and those numbers on an absolute basis, as well as COGS. They're not really moving lower. So, how should we think about the progression of those numbers kind of on an absolute basis as we move toward that ultimate target of $1 billion in synergies. Thanks.
Michael Goettler: So, thank you Elliot. Quick ounce on the synergies, we're absolutely on track for the $500 million and we're confident that $1 billion for the 3 years. I'll will give it to Rajiv maybe to give a more nuanced answer. And then the SG&A and R&D and COGS question maybe between you guys.
Rajiv Malik : Michael, you said everything which we have laid out, Wilbur, the different buckets, whether it was cost of widens from the cost of goods, from the SG&A, everything is on track. I don't see any -- we are right on track as far as 2021 target is concerned, we have a great plan for '22 and '23 and we remain committed to beat or meet --meet and beat this one billion target as we go along.
Sanjeev Narula : It's not as if you hadn't covered that very well. So mainly just one other thing to keep in mind, the synergies that you pointed out is covering all line items. And that's fairly going to reflect what you should expect when we provide the guidance. The absolute dollar for SG&A will come down next year based on the flow-through of the synergy and we'll provide more clarity and detail when we meet on January 7th.
Michael Goettler: Next question, please.
Operator: We'll take our next question from Jason Gerberry of Bank of America.
Jason Gerberry: Hey guys. Thanks for taking my question. My question is on China and just as we think about this $300 million headwind that was talked about heading into the year. It looks like it's un -impacted. The URP price impact probably pushed out to next year, arguably which is probably the big swing factor with the floor -- EBITDA floor as we think about that next year. So I'm just curious, are you seeing anything on the China retail side which has been a growth story that suggests some of this upside that you're seeing in China in '21 is sustainable? And if I could just squeeze in a point of clarification, there was mentioned about out-of-pocket assistance on Semglee, which I would think of as a generic having negligible patient out-of-pocket costs. So, if you could just provide some clarity on what the co-pay differential would looked like on a Semglee versus an established brand that'd be helpful. Thanks.
Michael Goettler: I think Rajiv can answer both questions.
Rajiv Malik : Okay. So just on China, we could not be more pleased with our performance and how China, China team or management team or China is evolving a navigating through overall being very thoughtful evolving policy environment. Yes. So we have done it. The team has done a great job of -- for shifting up, maximizing what they have on the hospital channel. We're doing better than our expectations in the hospitals channel as less the growth in the retail channel. And this is where the focus on the future is that we continue to shift our focus, and bury our momentum around the retail channel, which is growing. This quarter also, it was 20% plus growth. But to add, China evolves, we always said that -- although we're not providing guidance, but we knew that China is going to be a step-down, whether it's a year, 1 or 2, given the implementation of . In fact, recently there has been some updates at the policy level in China. We're pleased that in a perverse way, it has brought us some very clarity about the timing and extent and we see this bottoming out of the China business, a hospital business by '24 to '25. That gives us a great runway to continue to implement our business. And move the business -- there we need to move and focus and build up portfolio around the retail. So that's about China and Semglee. I think the launch of the two products, the dual product launches intended to ensure that these interchangeable products can reach as many patients as possible regardless of financial circumstances, insurance, or channel. And we just want to be a part or not -- not any of the patient should be going back from the pharmacy point or dispensing point, because they don't have a cost basis and/or patient assistance program or cash pay alternative. So we are trying to match every -- get every map, every patient, and provide them whatever we can provide or whatever they are getting today from product.
Michael Goettler: Thank you. Next question, please.
Melissa Trombetta: Our next question is from Balaji Prasad of Barclays.
Balaji Prasad : Hi, good morning and congratulations on the results. Just for following up on the biosimilars and interchangeable depart, I would like to your digit thoughts on how relevant you think interchange they will be for the , you might landscape. And on the same subject with Semglee, market experts that this book to believe that Semglee can potentially increase its volumes by 4X to 5X. Again, don't want to steal thunder from your but curious to your thoughts on that. Thanks.
Rajiv Malik: Balaji, interchangeability of -- if I characterize the interchangeability of Humira, I will put it in a nice-to-have bucket rather than a must-have bucket, for a number of reasons. So first of all, as you know, as the market formation happens, nobody will have the advantage of interchangeability as MG&R, the #2 player, will not have interchangeability at that point of time, but more importantly is the difference between an Insulin as part and Humira is about Insulin is a pharmacy product whereas Humira is a specialty pharmacy product where the point of dispensing, you have a lot better control and interaction between the doctor and the patients, ongoing interaction. At the same time also, today, nobody will have interchangeability for all the presentation. The low concentration, the high-concentration, the versus a preferred strange. So, there will be -- somebody will have it maybe Boehringer has a 1, 1 for the say for the lower concentration, but not for all. So, even if let's say, nice to have, you can expect us that it's such an important product. By the time the foot exclusivity expires, the interchangeability exclusively expires, which will be somewhere in the 24 or that. We might have -- we will be having that interchangeability. We will go out and complete that interchangeability.
Michael Goettler: Great .
Rajiv Malik: Yeah.
Michael Goettler: Do you have more to say?
Rajiv Malik : No.
Michael Goettler: Okay. Next question please.
Operator: Our next question is from Greg Fraser of Truist securities.
Greg Fraser: Thanks for taking the question. You mentioned discussing the potential of Global Healthcare gateway for Phase 2 on the strategic road maps, should we think about inorganic growth driven by the gateway is more of a longer term opportunity or will the gateway be open for business before then? Thanks.
Michael Goettler: Okay. Thank you, Greg. Look, I think we said that clearly the gateway is open for business. We have unique opportunity here of having this really amazing platform that makes us the partner of choice. Both more rebuilds commercially, operationally, R&D regulatory, etc. With the scale we have to reach. And we can offer that to partners who have ready access. We also said that we're very clear about our capital allocation priorities, that we're going to be very disciplined in the way we do that. But should the right opportunity presents itself, we are absolutely able to execute on that, and we're going to give you more guidance in terms of what we -- what the priorities are for business development of Global has gained for Phase 2 in our January 7th event. Thank you for the question. Next question, please.
Operator: Our next question is from Navann Ty of Citigroup.
Navann Ty: Hi, good morning. Can you give us more details on what drove the better free cash flow for your guidance. And maybe if you could discuss the improvement, the cash improvement initiatives and so we expect a higher free cash flow growth in 2022 above the reduction in 1-time costs. And then a follow-up on China, do you expect a more benign impact or just a postponement of the reform. Thank you.
Michael Goettler: So Sanjeev already taken the casual question.
Sanjeev Narula : Very pleased with the cash flow generation in the Company and all the effort and the focus that we have on the cash flow in terms of that. So what's going on in terms of where we're looking at the opportunity. So first is obviously, the operational rhythm of the business is better as Michael and Rajiv pointed out, so that's obviously helping on that. Then on top of that, as a Company, we've implemented at a very comprehensive capture cash optimization program. As you brought the 2 companies together, we looked at every element of the Balance Sheet as you would expect that. We looked at where networking capital is deployed, whether it's accounts receivable or accounts payable, and an inventory and other working capital. We looked at that, we looked at the best practices in the both companies, and obviously trying to guide them towards the best practice. And we're looking at the industry as well. So we came up with the program that we are kind of implemented right now. We also did is we looked at the operational metrics and had each of the asset owner, start driving those that we can see the benefit on that. The bottom line of this is a very sustainable program at the grassroots levels in the organization. Not only I've seen the under benefit this year, but I see the benefit getting into next year and the year after that. And as the one-time costs come down, which we're expecting that to come down next year and year after that, I see cash flow, free cash flow to improve. Next year and the year after that, and that will then satisfy -- will have enough cash flow, over $8 billion to satisfy Phase 1 commitment of debt pay-down and paying growing dividend subject to board approval.
Michael Goettler: Okay. And maybe on China, Navann, I think you clearly should expect further step downs. We always said that, we always anticipated that, we always that in. What was always unclear is the speed and timing of that because that's subject to further clarification on rules and how they're rolled out, etc. I think we have more clarity on that now, obviously, but offsetting the other factors that we have, whether it's our retail business, whether it's our future pipeline, etc. And we'll give guidance on that again at the January 7th event, but we always anticipated a step down and we have good certainty around the timing of that now. Next question, please.
Operator: Our next question is from Gary Nachman of BMO Capital Markets.
Gary Nachman: Thanks. Good morning. In terms of the competitive dynamics for some key complex generics, is this thin line better or worse than what you've been expecting? I'm curious if you're getting the returns on your complex generics that you expected a couple of years ago, given competitive dynamics there. And then just gross margin, it showed good improvement relative to our expectations in the third quarter. So how should we think about that trending going forward? It will be down a little bit in 4Q, but what are some of the pushes and pulls there maybe going into next year? Thank you.
Michael Goettler: Leave this one on Rajiv.
Rajiv Malik : Yeah, no. The margin expectations and as well as the market dynamics or the complex products are exactly in line how we have anticipated, a force up market as market has walls. Then we talked about these products, maybe 6, 7, 8 years back to what we have, but we always expected slower ramp and the longer annuity. And I will be so -- I'm so far looking forward to walk you through how this new logarithm and a great return on investment on this bucket, whether it's Excella or a Copaxone, or Ceretide. You can walk through and we've a walked through those models. So we're very, in fact excited and feeling bullish about this segment. And that's why we have been investing in the segment over the years. Sanjeev on across continual
Sanjeev Narula : Sure, sure. So Gary gross margin in quarter three came in ahead of our expectations, clearly driven by strong brand performance including greater China region. And then we had one time items in our cost of goods line. Going forward in Q4, I expect a step down. That is expected because of the evolving product mix that we have and the non-repeat of one time items in Q4. But overall for the year, we expect to end it behind the far range of 50% to 59%. Going forward in 2022, again we'll provide the specific guidance in January. What we should think about and expect that the gross margin will continue to evolve. There's going to be slight pressure because of the evolving product mix that we have. And that's all expected. And we'll obviously provide for the guidance on January 7th.
Michael Goettler: Okay. Next question, please.
Operator: Next question is from Nathan Rich of Goldman Sachs.
Nathan Rich: Good morning. Thanks for the questions. Sanjeev, maybe just on the cadence of earnings into 4Q, can you maybe talk about what drives the step-down in EBITDA. I know you talked about China as well as this seems like EpiPen sales might have been pulled forward a little bit. But fourth quarter is normally a seasonally strong quarter, so I just like to get a little bit more color on the cadence for the final quarter of the year. And what gets you to the low versus the high end of the range. And then at a high level, are you kind of willing to maybe preview some of the key like tailwinds and headwinds that we should have in mind for '22 and '23 ahead of the analyst day? Thank you.
Sanjeev Narula : So Nathan, let me take the first one on the Q4. As you know, Viatris is a different Company, it's got a different profile of revenue. And what we're sharing with you in terms of the full-year guidance is reflective of Viatris ' portfolio. So at this -- let me the. I mean, there is nothing I see that concerns me regarding the underlying fundamentals of the business getting into Q4 or for that matter, exiting this year into beginning of next year. So, on the -- all the items that I talked about in my prepared remarks had commentary on that, specifically for the EBITDA that the question that you asked. If we look at the kind of the step-down in the revenue, which is all due to the expected events that explain that. There is a flow-through of the EBITDA going down. There is a gross margin pressure. I talked about that because of the evolving product mix and many have, some onetime events on the COGS line. The other thing that's also happening in Q4, which is obviously impacting the EBITDA level, is this step-up in the SG&A line. As we are seeing the world recovering from COVID, there is going to be step-up in the SG&A expenses, which actually helps us positioned well, not only this year but sets up well for the next year. So all that is planned and expected but bottom line, there is nothing that is of concern to me about what's happening in Q4 for that matter.
Michael Goettler: And maybe on the pushes and pulls, Nate, look, here's what I feel very strongly about. We now have three quarters of very strong performance. We have a good handle on this business. You remember we brought 2 big companies together. We had to learn the business, understand the business. I think we have a very good tattle on it. When near completion of a very rigorous, very thorough, high-quality, bottom up strategic planning process. And then we take, gives us increased confidence and understanding all the pushes and pulls out of this business, and you know what are them all, right? And they not secrets, the China business as the base business erosion that's part of the nature of our business, the LOE that we know and expect. And on the upside to this, the pipeline, the upcoming launches, I think we're going to lay out to you on Investor Day how the pipeline is really one of the most underappreciated assets that we have and our ability to generate really, really strong cash flow. We're confident in our ability to deliver on all of our Phase 1 commitments that we laid out and it gives us a great start in Phase 2, and look forward to telling you about Phase 2 when it come to the Investor event. Next question, please.
Operator: Our next question is from Ronny Gal of Bernstein.
Ronny Gal: Good morning And thank you for squeezing me in. A couple of actually really small points. First, your Eylea IPR was supposed to have an answer by the 5th of November. It seems to be delayed somewhat. Can you give us an update, what's happening there? And second, I noticed the Orencia biosimilar that you're disclosing. A few other companies have tried that and found it's very hard to keep Orencia stable in storage, just the way the molecules made. And I kind of wonder if you over that hump and find a way to resolve it or is it still ahead of you?
Rajiv Malik : Thanks. And regarding -- Ronny about idea, you're right. It's been delayed and we will know in another couple of weeks where we stand with the institution of the IPO. Okay. That you're correct, it's been delayed. And the second on Orencia. Yeah. It's in development. It's challenging, it's hard. We tried a couple of years back. We had obviously the challenges like everybody else is having and we are seeing some light at the end of the tunnel and we continue to build the momentum on that program.
Michael Goettler: Okay. Next question please.
Operator: Our next question is from David Amsellem of Piper Sandler.
David Amsellem: Thanks. I wanted to ask a high-level question, just in light of what Novartis commented regarding Sandoz and particularly their challenges with their U.S. business, and then in light of how your business is form and is evolving. Can you give us some color as to how you're thinking about your base -- U.S. generics business and just your overall U.S. small molecule retail presence over time, particularly the more commodity into the business? Can you just talk to how you're thinking about that philosophically? Thanks.
Michael Goettler: Sure. Makes you very happy to explain this, really?
Rajiv Malik : So, David -- Yes, U.S. has been one of our core business and we have lived through the various cycles over the years. And for me it cycles continue and that's nothing new. For the last few years, we knew how -- how this business is evolving. There was a commodity bucket and there was a stellar bucket of hard to make and complex for us from science perspective, we continue to invest for several years to bring up the value chain. So that's being off on a commodity is where we saw that there's a follower of the vertical integration. We still retain those where we see a huge competition and commodity means actually turning out the commodity with the 15 term market. We took the opportunity to prune that portfolio and if we're not pull together, we have a well diversified generic portfolio which is performing very well and as we expected. We have a strong customer service level, given what we're doing with the rationalization of facility in the COVID, we have not miss a beat. We have very strong service levels, so that puts us on the great position to manage the challenges as less grabbed opportunity. So, we couldn't -- I think we feel good how we all heard about this business and if we normalize the one-time events like , LOE of -- or lose a lot of that exclusivity. Are we then we have righted where we forecasted mid single-digit -- mid-single-digit price erosion. So thanks for your question.
Michael Goettler: Clearly, we've done the work ahead of other companies. All right, thank you very much, everybody for the question. Unfortunately, we're out of time. Let me just say we're pleased with yet again another very, very strong quarter and we look forward to seeing you at our Virtual Investor event on January 7th. Thank you very much.
Operator: This does conclude today's Viatris 2021 third quarter earnings call and webcast. Please disconnect your line at this time and have a wonderful day.
