XWELL Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2021

There are 16 speakers on the call.

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 Beatrice 20 21 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.

Operator

In the interest of time, we ask that you please limit yourself to one question. If you need to ask further questions, you may reenter the queue. Lastly. Thank you. I will now turn the call over to Melissa Trombetta, Head of Global Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone. Welcome to Q3 2021 Earnings Conference Call. Joining me on this call are Viatris' Chief Executive Officer, Michael Gettler President, Rajeev Malik Chief Financial Officer, Sanjeev Narula Chief Accounting Officer and Controller, Paul Campbell and Head of Capital Markets, Bill Ciebliewski. While some of us are in remote locations, I would ask for your patience should we encounter any technical difficulties.

Speaker 1

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 ks 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. Veatrice.com.

Speaker 1

Viatrist 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, Reg FD. Conference call. We also will be referring to certain non GAAP financial measures, including free cash flow and adjusted EBITDA. Who will reference such measures in order to supplement your understanding and assessment of our Q3 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.

Speaker 1

Conference call. The most directly comparable GAAP measures as well as reconciliations of the non GAAP measures to those GAAP measures are available in our Q3 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 segment of our Q3 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 Q3 of 2020, including combined results of legacy Mylan and the Upjohn business with indicated adjustments, which do not reflect pro form a results in accordance with ASC 805 or Article 11 of Regulation S X. Call. Such measures do not reflect the effect of any purchase accounting adjustments.

Speaker 1

Let me also remind you that the information discussed during this call, except for the participant questions is the property of Beatrice and cannot be recorded or rebroadcast without Beatrice's express written permission. And 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.

Speaker 2

Thank you, Melissa, and good morning and thank you for joining us on our 3rd 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 Beatrice with the vision to assemble best in class capabilities across commercial, manufacturing, R and 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 team, our testament to that vision and to the execution of our colleagues around the world whose shared dedication to patients and shareholders drives our strong business results and we believe is putting Beatrice on a path for an even stronger future. I could not be prouder of all that we have accomplished together.

Speaker 2

Now here are some highlights. In the Q3, we reported total revenues of US4.54 billion dollars adjusted EBITDA of US1.7 billion dollars and free cash flow of $965,000,000 Year to date, that is quarter 1 through quarter 3 combined, We have generated approximately $2,200,000,000 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 result of our expected continued strong performance, a reduction in onetime cost and continued improvements in cash flow conversion. Team. In North America, we are preparing for the imminent launch of Semglee, which, as most of you know, received this Tauric approval from the FDA for the industry's first ever interchangeable biosimilar designation in the U.

Speaker 2

S. In July. Team. 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 United States. Rajeev will later provide more details on the progress we're making in that regard.

Speaker 2

In addition, at the end of October, we filed a BLA for a biosimilar to EYLEA with the FDA as planned. Team. We believe this is the 1st biosimilar registration of this important medicine to treat age related macular degeneration. And looking further into the future, we're excited about the potential to be first to market for our BOTOX biosimilar. Overall, we generated $158,000,000 in new product revenue in the Q3, dollars 557,000,000 year to date.

Speaker 2

And we're therefore well on track for approximately $690,000,000 in new product revenue for the full year. Team. Importantly, our strong performance enables us to continue to execute on Phase 1 of our strategic road map, which is expected to be completed by the end of 2023. During this time, we are 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.

Speaker 2

On the last quarter's earnings call, we said we would reevaluate our 2021 financial guidance at the end of the Q3. 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 team 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 in our 2 phase strategic road map, including for the rest of Phase 1, that is the years 20222023, we'll be providing specific financial guidance, targets and metrics to complete this phase.

Speaker 2

We'll 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 end of repaying $6,500,000,000 of debt. And with that said, we continue to remain confident that $6,200,000,000 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 space in order to maximize and further unlock shareholder value during this period. Will also be giving specific details of our own organic opportunities by discussing our own pipeline at length, and we will be providing the inorganic business development priorities that we'll be focusing on through our Global Healthcare Gateway.

Speaker 2

Before I close, I'd be remiss to not call out that Beatrice 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 is just one example of how corporate social responsibility is deeply embedded mission and our operating model. And in addition, we 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'll turn it over to Rajeev for more details. Rajiv?

Speaker 3

Thank you, Michael, and good morning, everyone. Before I get into the quarter at hand, conference call. I would like to echo Michael's excitement about our upcoming investor event. What you can expect to hear from me with a comprehensive review of the significant value and the depth of our pipeline in clinical programs, including biosimilars, complex generics in novel medicines that we have been strategically building over many years. Team.

Speaker 3

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 one 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 Unified 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 categories.

Speaker 3

I will be making certain comparisons to combined LOE adjusted 3rd quarter 2020 results on a constant currency basis as well as comparisons versus our expectations as included in our guidance back in August. Beginning on Slide 7, overall, business performed strongly across all of our segments versus our expectations. Conference call. When excluding

Speaker 2

the impact of Japan's Lyrica

Speaker 3

and Celebrex LOEs, 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 results. Our brand business performed better than our expectations, primarily driven by Lipitor, Viagra, Influac 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 generics products. Lastly, our global generics category also performed in line with our expectations, reflecting mid single digit decline compared to the prior year.

Speaker 3

Turning to Slide 8. Team. 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 Influvac, Lipitor and Dimista as well as the strong performance of our thrombosis portfolio. Biosimilars in Europe grew by over 50%, led by our strong position of Polio in Germany.

Speaker 3

Moving to North America, team. We are very pleased with our overall performance. Our branded segment performed strongly driven by EpiPen, and UPELRI and a better than expected performance of Performist. These results were partially offset by Myakelson, which experienced 1 Antispeptics Competition. Complex generics and biosimilars in North America was better than our expectations with strong performance in biosimilars, which helped to absorb the competitive impact on Bixela and XULAY.

Speaker 3

I would also like to make a few comments on U. S. Generics business and pricing. Team. 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, dermatologicals, patches and drug device combinations, while pruning certain commodity products at the same time.

Speaker 3

Team. We believe we now have a very diversified generics 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 thymethyl fumarate with Xela and Xulay, Our price erosion for this quarter is mid single digit and very much in line with our expectations.

Speaker 3

We are also excited about the upcoming launch of our branded product, Senegli injection and unbranded insulin glargine injection. Both products will be available in pen and vial presentations and are interchangeable for the reference brand 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 assembly on Express Scripts National Preferred Formulary as well as on Prime Therapeutics National Formularies. We expect that the products will be available in pharmacies before the end of the year.

Speaker 3

To ensure that as many patients as possible will benefit Fit from these products, we will provide co pay assistance, a patient assistance program and cash pay alternatives. Team. In addition, beginning in 2022, we will be a participant in the CMS Medicare Part B senior savings model, which limits certain patients' out of pocket costs to no more than $1.35 for 1 month supply. Moving to the next slide. Our Emerging Markets segment also performed in line with our expectations this quarter.

Speaker 3

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 complex generics and biosimilars category performed below our expectations due to the COVID-nineteen 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 sales of remdesivir and AmbiSom this quarter that helped offset the lower ARV volume. Team.

Speaker 3

We expect that the demand for COVID-nineteen related products to taper off in quarter 4. The next slide shows our Jazz segment. We are pleased with this quarter's performance across our product categories with brands and generics performing better than expectations. Amitiza, Lyrica and Creon drove strong brand results and our authorized generics to Lyrica and Norvasc continue to contribute growth. Biosimilars were in line with expectations with continued strong performance from Hulio in Japan.

Speaker 3

Greater China is our last segment slide and the business had another strong quarter, delivering results that were better than our expectations. Team. This performance was primarily driven by retail channel growth of 20% and better than expected performance in the hospital channel. Segment. The segment benefited from some phasing of customer buying patterns this quarter that we expect to normalize in quarter 4.

Speaker 3

Team. 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.

Speaker 3

Regarding our BOTOX biosimilar development program, we met with FDA in early September and aligned on analytical, non clinical data as well as the clinical program expectations and have a clear path forward. At this juncture, we do not expect Revance 483 and a complete response letter related to their DAXI product to impact our submission timing for this program, which is scheduled 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 part, FDA completed a pre approval inspection of Biocon's manufacturing facility in Malaysia.

Speaker 3

Presentation. It resulted in a few minor 483 observations and Biocon has provided Complete and comprehensive response to FTX-four eighty three. 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 Avesty, our U. S.

Speaker 3

Approval continues to be impacted by the delay of a pre approval inspection. Presentation. As previously mentioned, we have no open scientific questions with FDA. Team. In our complex product pipeline, we have initiated our Zulane low dose Phase 3 clinical trial and are actively screening and enrolling patients.

Speaker 3

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 ocularotide TETATE injection and have demonstrated that our product is bioclonal to Sandostatin. Our Peridone permitted 3 months ANDA for 4 10 milligram and 2 73 milligram strengths have now been accepted for filing, and we believe that we are the first to file for all strengths of the paliperidone 3 month EPO injection that are equivalent to INVEGA TRINZA. We have also successfully completed our pivotal PK study for aripiprazole modified release injection, which is our generic equivalent for Abilify MNTENA.

Speaker 3

Before I hand it over to Sanjeev, I'll quickly address our ongoing integration and restructuring activities. We are coming up on our 1 year anniversary and our initiatives are progressing as planned. We continue to remain on track to realize $500,000,000 of cost synergies this year and are confident in our overall plans to achieve at least $1,000,000,000 of cost synergies by 2023. Let me now turn the call over to Sanjeev. Thank you.

Speaker 4

Thank you, and good morning, everyone. Team. As Michael and Rajeev 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. Conference.

Speaker 4

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. Conference call. On Slide 17, we have summarized our results versus prior year on a reported basis, which reflects Mylan's standalone results for Q3 2020. Moving to Slide 18. This is a comparison of combined adjusted Q3 2020 results, which includes Mylan's standalone results and Upjohn's carve out financials for a period of July 1, 2020 to September 30, 2020, adjusted for certain LOEs and transaction related items, including divested products in connection with the combination.

Speaker 4

Beginning with LOEs. As we've seen throughout the year, commercial teams have continued to manage the rate of erosion of Lyrica and Celebrex in Japan. Team. As a result, generic penetration levels have commenced slightly better than our expectations. Adjusting for these LOEs, Total reported net sales in the quarter were essentially flat to prior year.

Speaker 4

In the quarter, our branded business performed solidly, driven by thrombosis and Infloeq in Europe and EpiPen in North America. In China, sales were strong for both Lipitor and Norwasc in the hospital channel and Ygrene, the retail channel. 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 biosimilar sales grew 14%. Segment.

Speaker 4

Base business erosion includes price and volume decline in our North America generics business, including competition across complex products such as Wixela, Xulane, Mycalcin and our generic for TECFIDERA, coupled with declines in our ARV business in emerging market. On balance, these items are tracking in line with our expectation and full year assumption is Exchange at approximately 4%. We're seeing a gradual recovery from COVID in emerging markets, North America and Europe. Team. Lastly, with respect to foreign exchange, the weaker dollar relative to key currencies such as euro provided an approximately 1% tailwind compared to our combined adjusted 2020 revenue results.

Speaker 4

Moving to Slide 19, which bridges adjusted EBITDA. Conference call. 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 and A was in line with expectations. Turning to Slide 20.

Speaker 4

Free cash flow of $965,000,000 exceeded our expectation due to strong operational performance and cash flow improvement initiatives. One time costs were lower due to timing of activities between quarter 3 quarter 4 and capital expenditure came in below our expectation, partially due to COVID related global supply chain delays. As a result of strong year to date free cash flow of approximately $2,200,000,000 We've been able to repay $1,900,000,000 of debt year to date, including $730,000,000 in quarter 3. We've also returned $266,000,000 in dividends to our shareholders. Team.

Speaker 4

These actions are consistent with our Phase 1 capital allocation priorities of repaying $6,500,000,000 of debt by 2023 and returning capital through 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, phasing of one time cash costs, semiannual interest payments and ramp up of capital expenditure. 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 $17,800,000,000 an increase of $100,000,000 versus prior guidance.

Speaker 4

The increased 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 Influg volumes in Europe. Partially offsetting these positive trends, including generic erosion in competition of key products in North America and lower ARV volumes in emerging markets. The midpoint of an increased adjusted EBITDA guidance is now at $6,400,000,000 also up $100,000,000 versus prior guidance. The increase is primarily driven by higher forecasted total revenue in addition to our expectation that gross adjusted gross margin would land closer to the high end of our range at 58% to 59% for 2021.

Speaker 4

For adjusted SG and A, we expect a sequential increase in Q4 with the resumption of activities due to COVID recovery in various market, bringing our full year range of this key measure 21% to 22 percent of total revenue. The midpoint of free cash flow guidance is increasing to $2,500,000,000 which is $200,000,000 higher than previous guidance. This reflects capital expenditure of approximately 500,000,000 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, lower sales of EpiPen in developed market and lower sales of remdesivir and Ambisome in emerging markets.

Speaker 5

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 one time cash cost. We're highly confident on our clear pathway to generate an aggregate of over $8,000,000,000 of free cash flow from 2021 to 2023 that will satisfy our Phase 1 capital allocation priorities.

Speaker 4

Team. The underlying strength and momentum we see in the business position us for a solid starting point heading into 2022, and we look forward to sharing more about 2 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 Trombera 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 Ciebluski, Head of Capital Market and Louis Sena, Director of Investor Relations, will be the main contact for the investor community.

Speaker 4

With that, let me open the call for Q and A. Operator?

Operator

Thank you. We'll take our first question from Chris Schott of JPMorgan.

Speaker 6

Great. Thanks so much for the questions. I know you're targeting a January 7 Analyst Meeting, but do appreciate the comment on I think it was $6,200,000,000 in EBITDA as a floor for the business. I guess my question here was, I think in the past you've talked about 2021 as a trough number. I know you've raised the guidance a few times, gone through this year.

Speaker 6

So let me just understand a little bit what's going on here. Some of the upside we're seeing, I guess, more one time in nature this year? Or are there any other factors that contribute to that dynamic? I'm just trying to kind of between, I guess, a new midpoint of $6,400,000,000 versus that floor $6,200,000,000 If I can slip a really quick second question in, I guess my question is, as you think about like capital deployment and where your stock is right now. Where does repo share repo fit into the mix?

Speaker 6

And if there's been a lot of discussion around like BD and or around dividends, but trying to get a sense of is share repos something that you're considering as well? Thanks so much.

Speaker 2

Hi. Good morning, Chris, and thanks for the question. Let me start with your second question on the share buybacks. Just to go back, I mean, For us, as part of our TSR framework, from the beginning, we always contemplated both dividends and share repurchases, right? That was always part of our thinking.

Speaker 2

I think we've been very, very clear about what our priorities are for Phase 1, which is the year 2021, 2022 and 2023. And that's the debt pay down, dollars 6,500,000,000 returning capital through dividend and then growing the dividend annually, right? If there are additional opportunities, obviously, we'll consider it. Share buybacks will always be the benchmark for any kind of major BD investments that we do. And then just one other factor 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.

Speaker 2

As part of the tax free spin of Upjohn from Pfizer and then the combination with Mylan. And there are certain limitations and conditions on share buybacks in the 1st 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 made very clear, but also our capital deployment priorities for Phase 2, how we do that and how we maximize shareholder value and unlock further shareholder value in Phase 2. So that's forthcoming and please join us in the January meeting. On the EBITDA question you have, clearly, we're not giving guidance today.

Speaker 2

We're very, very pleased with the performance that we have now 3 consecutive quarters. We strongly feel that we stabilized this 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're reconfirming again what we said before, the 6.2% is the floor.

Speaker 2

That means floor, Doesn't mean mid part of the guidance, it's a floor. But that's a floor that's very, very important because that drives how we can deliver on Phase 1, Right. We laid out our clear priorities, what we need to do. EBITDA drives cash flow. It's not the only thing that drives cash flow.

Speaker 2

It's one of the things driving cash flow. And remain confident that the EBITDA combined with, and you can easily do the math yourself, dollars 8,000,000,000 or more in cash flow over those 3 years set us up to deliver on our Phase 1 commitments. We remain confident we can do so. And look just at this year, dollars 2,500,000,000 midpoint already. And that sets us up really for a very successful Phase 2 with a much stronger balance sheet, much more increased Flexibility and Firepower and I look forward to telling you more about that at our Investor Day.

Speaker 2

Next question please. Team.

Operator

We'll take our next question from Umer Raffat of Evercore.

Speaker 7

Hi, guys. I'll also ask one question, which is two 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 biosimilar a little better.

Speaker 7

I know you were scheduled to have conversations with FDA in September is what he had said last time. You also just said that the Revance complete response on manufacturing deficiencies 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 Revance.

Speaker 7

Thank you.

Speaker 2

Okay. I'll start with the dividend and then Rajiv, you can answer the second question. Umer, thanks for the question. Dividend is obviously a 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.

Speaker 2

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 7 event. And I think we can be confident 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.

Speaker 3

And thanks, Omar, for your question. Regarding Botox, you're right. We met with FDA in early September and have a clear alignment on their expectations about biosimilarity, analytical, nonclinical 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 this at this place several times.

Speaker 3

And most important thing is to get a firm alignment with FDA. And when I say form 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 Revance, yes, Revance is our development as well as manufacturing partner, and we share the facility, show, which is our bank facility for taxi. And getting a 483 out of complete response letter It's not a new thing when you are evolving or developing a product.

Speaker 3

Towards the end of 2024, that's what we have our filing date. We have a lot of time. And we said as we have been giving you complete transparency, we'll keep you guys updated as it evolves. But at this juncture, I don't see that CRL is going to impact our development program timing.

Operator

We'll take our next question from Elliot Wilbur of Raymond James.

Speaker 8

Thanks. Good morning. I wanted to ask a question around synergy realization over the course of the year. And I apologize if the lines were cut off. I may have missed this during Rajeev's prepared commentary, but just wanted to get an update on where you were in terms of realizing the $500,000,000 in targeted synergies, which buckets are overperforming or underperforming versus original expectations.

Speaker 8

And then just looking at the numbers in terms of SG and A and R and 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 towards that ultimate target of $1,000,000,000 in synergies. Thanks.

Speaker 2

Okay. So thank you, Elliot. Quick answer on the synergies. We're absolutely on track for the $500,000,000 and we're confident the $1,000,000,000 for the 3 years. And I'll give it to Rajeev to give a more nuanced answer and then the SG and A, R and D and COGS question maybe between you.

Speaker 3

Yes, Marco, you said everything which we have laid out, Bilbao, different buckets, whether it was cost avoidance from the cost of goods, from the SG and A, everything is on track. I don't see any we are right on track as far as our 2021 target is concerned. We have a great plan for 2022 and 2023, And we remain committed to beat or meet and beat this $1,000,000,000 target as we go along.

Speaker 4

Rajiv, you uncovered that very well. So, Alej, just one other thing to keep in mind, the synergy, as Rajiv pointed out, is covering all line items. And that's where it is going to reflect. What you should expect when we provide the guidance, the absolute dollar for SG and 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 7.

Speaker 2

Next question please.

Operator

We'll take our next question from Jason Gerberry of Bank of America.

Speaker 9

Hey, guys. Thanks for taking my question. My question is on China and just as we think about the $300,000,000 headwind that talked about heading into the year. It looks like it's unimpacted. The URP price impact probably pushed out next year arguably, which is probably the big swing factor with the floor, EBITDA floor as we think about that next year.

Speaker 9

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 2021 is sustainable. And if I could just squeeze in a point of clarification, there was mention 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 So what look like on a Semglee versus an established brand that would be helpful. Thanks.

Speaker 2

Steve, I think you can answer both questions.

Speaker 10

Okay.

Speaker 3

So Jason, on China, we could not be more pleased with the performance and how China team or management team over China is evolving and navigating through the evolving very fast evolving policy environment. Yes, we have done a the team has done a great job of for shifting the maximizing what they have in the hospital channel. We are doing better than our expectations in the hospital channel. I've left the growth in the retail channel, and this is where the focus for the future is that we continue to shift our focus and build our momentum around the retail channel, which is growing. This quarter also, it was 20% -plus growth.

Speaker 3

But as China evolves, we always said that although we are 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 URP. In fact, recently, there has been some updates on the at the policy level in China. Where we are pleased that in a perverse way, it has provided us now very clear clarity about the timing and extent, and we see this bottoming out of the China business, the hospital business by 2024, 2025. That gives us a great runway to continue to implement our business and move the business where we need to move and focus and build the portfolio around the retail. So that's about China.

Speaker 3

And as well as Assembly, I think the launch of the 2 products, the dual product launch is intended to ensure that this interchangeable product can reach as many patients as possible regardless of financial circumstances, insurance or channel. And We just want to be at par or not any of the patients should be going back from the pharmacy point or dispensing point because they don't have a ePlant co pay assistant or patient assistance program or a 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 a Sanofi product.

Speaker 2

Thank you. Next question please.

Operator

Our next question is from Balaji Prasad of Barclays.

Speaker 11

Hi, good morning and congratulations on the results. Just following up on the biosimilars and the interchangeability part, I would like to get your thoughts on how relevant you think interchangeability would be for the biosimilar, Umera landscape. And on the same subject with Semglee, market experts that we spoke to believe that Semglee can potentially increase its volumes by 4x to 5x. Again, don't want to steal your thunder from your Jan event, but curious to hear your thoughts on it. Thanks.

Speaker 3

Yes. So Balaji, interchangeability if I could characterize 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 that advantage of interchangeability as Amgen or the number 2 player will not have interchangeably at that point of time. But more importantly, the difference between 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 controlled and interaction between the doctor and the patient, so ongoing interaction. At the same time also, today.

Speaker 3

Nobody will have an interchangeability for all the presentation, the low concentration, the high concentration, the pen versus a preferred strain. So there will be somebody will have it, maybe Boehringer has one for the strain for the lower concentration, but not for all. So you know and even if it's a, let's say, nice to have, you can expect us that it's such an important product. By the time the first exclusivity expires, the interchangeability exclusively expires, which will be somewhere in the 24 order, We might have. We will be having that interchangeability.

Speaker 3

We'll go after and complete that interchangeability work.

Operator

Our next question is from Greg Fraser of Truist Securities.

Speaker 10

Good morning folks. Thanks for taking the question. You mentioned discussing the potential of your global healthcare gateway for Phase 2 on the strategic roadmap. Should we think about inorganic growth driven by the gateway as more of a longer term opportunity or will the gateway be open for business before then? Thanks.

Speaker 2

Okay. Thank you, Greg. Look, I think we said it clearly that the gateway is open for business. We have, I think, unique opportunity here of having this really amazing platform that makes us a partner of choice, both in what we build commercially, operationally, R and D, regulatory, etcetera, with the scale, we have the reach, and we can offer that to partners and 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.

Speaker 2

But should the right opportunity present itself, we're to be able to execute on it. And we're going to give you more guidance in terms of what we what the priorities are for business development, the Global Health Gateway for Phase 2 and our January 7 event. Thank you for the question. Next question please.

Operator

Our next question is from Navane Thi of Citigroup.

Speaker 12

Hi, good morning. Can you give us more details on what drove the better free cash flow full year guidance. And maybe if you could discuss the improvement the cash improvement initiatives and shall we expect a higher free cash flow growth in 2022 above the reduction in onetime costs? And then I just have a follow-up on China. Do you expect a more benign URP impact or just a postponement of the reform?

Speaker 12

Thank you.

Speaker 2

Okay. So Sujiva, let me take a quick cash flow question.

Speaker 4

Sure. Sure. Yes. Navan, we're 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 are looking at kind of the opportunity.

Speaker 4

So first is obviously the operational rhythm of the business is better as Michael and Rajeev pointed out. So that's obviously helping on that. But on top of that, As a company, we've implemented a very comprehensive cash optimization program. As we brought the 2 companies together, So we looked at every element of the balance sheet as you would expect that. We looked at where net working capital is deployed, whether it's accounts receivable, accounts payable and Inventory and Other Working Capital.

Speaker 4

We looked at that. We looked at the best practices in the both company and obviously trying to gravitate towards the best practice. And we're looking at the industry as well. So we came up with a program that we are kind of implementing it 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.

Speaker 4

The bottom line of this is, this is a very sustainable program, at the grassroots levels in the organization. Not only I see Navan the benefit this year, But I see the benefit getting into next year and 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, ICF cash flow free cash flow to improve next year and the year after that. And that will then satisfy we'll have enough cash flow of $8,000,000,000 to satisfy Phase 1 commitment of debt paydown and paying and growing dividends subject to Board approval.

Speaker 2

Okay. And maybe on China, Navan, I think you clearly should expect further step downs. We always said that. We always anticipated that. We always factored that in.

Speaker 2

What was always unclear is the speed and timing of that, because that's subject to further clarification on rules and how they are rolled out, etcetera. I think we have more clarity on that now. Obviously, we're offsetting that by other factors that we have, whether it's our retail business, whether it's our future pipeline, etcetera. And we'll give guidance on that again at the January 7 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.

Speaker 13

Thanks. Good morning. In terms of the competitive dynamics for some key complex generics, is this in 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 Q3.

Speaker 13

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.

Speaker 3

Patients and as well as the market dynamics or the complex products are exactly in line how we have anticipated. Of course, market. The market has evolved when we talked about these products maybe 6, 7, 8 years back to what we are, but we always expected slower ramp and the longer annuity. And I will be so I'm looking forward to walk you through how this new algorithm and the great return on investment on this bucket, whether it's a Vexela or a Copaxone or a Seratide, you can walk through we will walk through those models. So we are very, in fact, excited and feeling bullish about this segment, and that's why we have been investing in this segment over the years.

Speaker 3

Sanjeev, do you

Operator

want to cross parts and go ahead?

Speaker 4

Sure. So Gary, gross margin in quarter 3 came in ahead of our expectations, clearly driven by strong brand performance, including Greater China Region. And then we had onetime 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 some of those onetime items in Q4. But overall, for the year, we expect to end at the high end of our range of 58% to 59%.

Speaker 4

Going forward in 2022, again, we'll provide the specific guidance in January. 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 further guidance on January 7.

Speaker 2

Next question please.

Operator

Next question is from Nathan Rich of Goldman Sachs.

Speaker 14

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 it seems like EpiPen sales might have been pulled forward a little bit. But 4th quarter is normally a seasonally strong quarter.

Speaker 14

So I'd just like to get a little bit more color on sort of the cadence for the final quarter of the year and kind of 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 2022 and 2023 ahead of the Analyst Day? Thank you.

Speaker 4

So Nathan, let me take the first one on the Q4. As you know, Viatrist is The different company has got a different profile of revenue. And what we're sharing with you in terms of portfolio. So at this let me add to the outset. 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.

Speaker 4

So on the all the items that I talked about in my prepared remarks had commentary on that. Specifically for the EBITDA, That's the question that you asked. If you look at the kind of the step down in the revenue, which is all due to the expected events that I explained that. There is a flow through of the EBITDA going down. There is a gross margin pressure.

Speaker 4

I talked about that because of the evolving product mix and then you 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 the step up in the SG and A line. As we are seeing the world recovering from COVID, there is going to be step up in the SG and 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's nothing that is of concern to me About what's happening in Q4, for that matter.

Speaker 2

And maybe on the pushes and pulls, Nate. Look, Here's what I feel very strongly about. We now have 3 quarters of very strong performance. We have a good handle on this business. You remember, we brought 2 big companies together.

Speaker 2

We had to learn the business, understand the business. I think we have a very good handle on it. We're near completion of a very rigorous, very thorough, high quality, bottom up strategic planning process. And that really gives us increased confidence and understanding all the pushes, of course, of that business. And you know what them all, right?

Speaker 2

They're not the secret. The China business, it's the base business erosion. That's part of the nature of our business. It's the LOEs that we know and expect. And on the upside, it is the pipeline, the upcoming launches.

Speaker 2

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. So we're confident in our ability to deliver on all of our Phase 1 commitments that we laid out and it gives us going to give us a great start Phase 2 and look forward to telling you about Phase 2 when it comes to the investor event. Next question please.

Operator

Our next question is from Ronny Gal of Bernstein.

Speaker 10

Good morning and thank you for squeezing me in. A couple of actually really small points. First, your EYLEA IPR was supposed to have been answered by the 5th November. It seems to be delayed somewhat. Can you give and update what's happening there.

Speaker 10

And second, I noticed the Orencia biosimilar that you're disclosing. A few other companies have tried that and found it's very card to keep Orencia stable in storage, just the way the molecule is made. And I kind of wonder if you're over that hump and find a way to resolve it or is it still ahead of you?

Speaker 3

Thanks. And regarding, Ronny, about IDEA, you're right. It's It's been delayed and we'll know in another couple of weeks where we stand for the institution of the IPR, okay? You're correct, it's been delayed. And the second on Orangeia.

Speaker 3

Yes, it's in development. It's challenging. It's hard. We had we tried it 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.

Speaker 2

Okay. Next question please.

Operator

Our next question is from David Amsellem of Piper Sandler.

Speaker 15

Thanks. So 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.

Speaker 15

And then in light of how your business is formed 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.

Speaker 15

Small molecule retail presence over time, particularly the more commodity end of the business. Can you just talk to how you're thinking about that philosophically? Thanks.

Speaker 2

Sure. I'll make you very happy to explain that, Rajit.

Speaker 3

Yes. So David, Yes. U. S. Has been one of our core business and we have lived through the various cycles over the years.

Speaker 3

And for me, the cycles continue and there's nothing new. For the last few years, we knew how this business was evolving. There was a commodity bucket and there was still a bucket of hard to make and complex products. From science perspective, we continue to invest for several years to going up the value chain. So that's paying off.

Speaker 3

And the commodities where we saw that there's a power of the vertical integration, we still retain those. Where we see a huge competition and commodity mix actually turning out a commodity with a 15 pair market. We who took the opportunity to prune that portfolio. And if we now pull together, we have a well diversified generics portfolio, which is being which is performing very well and as we expected. We have a strong customer service level, Given what we are doing with the rationalization of facility or in the COVID, we have not missed a beat.

Speaker 3

We have very strong service level. So that puts us in a great position to manage the challenges as well as grab the opportunity. So we couldn't I think we feel good how we are always right about this business. And if we normalize the onetime events like TECFIDERA's alloy of our loss of that exclusivity, our Wickesaland's Lane. We are right at where we forecasted mid single digit, mid single digit price, Orion.

Speaker 3

So thanks for your question.

Speaker 2

Yes. Clearly, we've done the work ahead of other companies. Thank you very much everybody for the question. Unfortunately, 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 7.

Speaker 2

Thank you very much.

Operator

This does conclude today's Beatrice 2021 Third Quarter Earnings Call and Webcast. Please disconnect your line at this time and have a wonderful day.

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XWELL Q3 2021
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