12 months, because I feel like a lot has sorta taken place, and I think that'll sorta level set the conversation.
Good. So thank you very much, Glen, for the time, and thank you everyone for being here. Very nice to be here on a beautiful Wednesday morning. You know, I've been CEO now, I think for roughly eight months, as you mentioned. A lot has happened during that time. You know, I feel extraordinarily fortunate to come into this job. It's not often that you see an opportunity for an external CEO to come in and take over a company that is in such good shape, that the fundamentals are so strong, and so much work's been done to get the company positioned for the future.
You know, during the eight months that I've been here, and I would say during the course of 2023, a lot has been done to really strengthen the company and put us in a great position to move into what we call phase II of the strategic plan, which will start next year. You know, we just reported a very strong Q3. It was our second consecutive quarter of operational revenue growth, which was really nice to see. You know, we had very strong EBITDA, very strong free cash flow. We also announced, as Glen alluded to, the divestiture of a number of businesses that we had planned on divesting.
And the net effect of that is not only, you know, capital coming into us, which helps us pay down debt and do other things to continue to strengthen the company, but also allows us to really strengthen and streamline the company and get us prepared to move into, you know, the second phase of the company's strategic plan, which is really moving towards growth. And just for people that don't know, that phase two of the strategic plan, our capital allocation plan is to, you know, generate at least $2.3 billion in free cash flow every year moving forward.
Using that cash flow to, you know, give back to shareholders in terms of a dividend and share buybacks, importantly, and also invest in the growth businesses, build franchises, and move the company towards some substantial growth. You know, we can see over the next few years from the base business, from the work that Rajiv has done and the teams have done, we can see a 1%-2.5% growth rate over the next little while from a revenue perspective. But then using the capital that we're generating, the free cash flows that we're generating to invest in internal businesses and external businesses, get involved in business development, M&A, partnering, licensing, those such things, we can see, you know, really driving the top-line revenue growth over the next few years.
And that, coupled with the share buybacks that we can do with our free cash flow, I think helps us move over the next little while into an Adjusted EPS growth story, which I think is very, very important for our future. So that's... You know, a lot of work's been done since I've been here to really solidify the company, and, you know, I'm extraordinarily excited about the future.
Okay, perfect. And, Sanjeev, Scott alluded to it a little bit, the 3Q results that we reported last quarter. Maybe if you could just give some of the broad strokes for people, and then we can dive into the individual businesses.
Yeah. I think Scott covered most of that. I think there are a couple of additional points to kind of just highlight. We also did, in Q3, reaffirm our guidance on EBITDA and Free Cash Flow, despite the foreign exchange headwind. So we said we're still gonna be at the midpoint on that. In revenue, we adjusted the guidance because of the foreign exchange part that you're probably all seeing that in terms of what's happening with dollars and euro and some of the other currencies where we operate. The other thing, we also reaffirmed, so to say, our target of minimum cash flow for next year. There's a lot of discussions about what's the starting point for this company.
We said, despite all the foreign exchange headwind thus far, and all the inflation that you see across the world, we still are gonna be generating at least $2.3 billion of cash flow next year. And with that, and with the divestments proceed that are coming in, there's gonna be plenty of firepower for the company to get to our leverage target where we need to be, our dividend that we are committed to, and then obviously invest in the business and buy back shares. There's plenty of cash for that. That's gonna happen for next year.
Okay, perfect. Scott, why don't we dive into the individual three businesses: brands, generics, and complex generics? We'll, we'll maybe take them one at a time. So, you know, I'll throw this to, to both you and Sanjeev. I don't know who wants to take it, but, you know, why, why don't we start with brands? I mean, in the quarter, you know, revs were down slightly, a little bit in Q3. And I'm just kind of curious how you think about this business over the longer term. What are some of the bigger drivers, and, and, and what do you think drives that inflection of back to growth as, as you were just talking about?
Yeah, for me, I'd ask Rajiv to address-
yeah
... some of the sectors and our performance in the different sectors of the business.
Yeah, thanks. In fact, Jeff, we are very pleased with our brand's performance because it's not just quarter-over-quarter. A couple of years back, when we started as Viatris, these brands were declining 4%-5% because these are... A lot of these are the LOEs, like, you know, iconic products like Lipitor, Xanax, and all that. That's one. There's very few products, which is the patent protected, like Yupelri or Temesta or all around the world. But largely, it's these products which have expired, but they have a, you know, high barrier, like Creon and all that.
And we have been able to manage this to bring it to at least around, you know, flattish to 1% sort of decline, which is- that's why you're seeing that stabilization of the base, because we were right at four point 4%- 5%. We saved about 200-250 basis points on that, and it's a 60% of the business. So you take $15 billion, rough and give and take $15 billion, it's about a $10 billion business-
Yeah
... and which we have been able to, you know, offset that decline, and now it's flat or, you know, some countries it's growing. So that's-- That's one of the main reason which is behind the stability of this. And we see this continuing because these brands are, these are not one, two, three products. There are about hundred such products over there, and they are in different, in different markets, and different markets have different, you know, very different appetite for these type of products. So this is one of the pillars of stability.
... Yep. Okay, maybe if we can shift gears and talk about the generics business. Obviously, a lot of different points of view on this. I mean, if you look into the quarter, it was strong. You know, I think the business was up a few percent this quarter. This is a market that clearly seems to be evolving, particularly in the U.S. Maybe we're seeing some,
Yeah
... improvement in pricing in this business. And I'm just kinda curious to get your take on maybe how investors should be thinking about the generics industry. You know, and is the tide turning in this business, or are we seeing some type of sustainable improving trend?
Yeah, I mean, somebody, I think yesterday, you were talking, you said, we are-- We don't have anything in generics. We have 33% of business is generics, which is still about $4 billion-$5 billion business-
Yep
... for us. The U.S. is a important market, but, let's—when we say generics, Europe is a pretty good market. That's... We are in Europe. Why not start with that? Europe business has been steady, steady, one—hardly maybe... It's base is stable, 1% even growth. You add-
Yeah
... about $100 million-$200 million launches every year, you can grow this business well, and that's what we have been doing for the last seven consecutive quarters, European growth from the generics business and the branded business. Coming back to USA, I think, it's about how you want to look at your U.S. business. I would any day launch a generic Advair, a generic Symbicort, a generic, you know, of these complex products than 50 other products over there. But our focus has been, yes, access is driving our focus, highly complex products, where we can work with the FDA to break these barriers of the regulatory barriers and science. And every second year or year, we have been bringing some of these first-to-market opportunities. And our...
You know, if you look into this pipeline we have, which we talk about $450 million-$550 million new launches, it's predominantly made of these complex products, complex injectables and all that. So we are very focused. We see market little stabilizing, sector stabilizing. Why? It's the demand and supply. Generics has always been a demand and supply, and we see there's a disruption out there. We have been-- Our supply network is solid. We have been able to take some of the opportunity-- advantage of some of the opportunities which have come our way. But I'll tell you, the discussion with key of our key partners, key customers, have changed from always price, price, price to the sustainability of the supply and some of those aspects. And that gives me confidence that there's a some sustainable semblance coming to the sector.
Well, well, that's what I was gonna ask: Have you started to see some rationalization of supply among the different manufacturers globally, and maybe that's-
It-
- that's benefiting a company like yours that has that sustainable supply?
It has, because not only us, many other company, big companies like Teva or Sandoz, they also rationalize their commodity portfolio. So, instead of 17 amlodipine or 20 amlodipine, there are not 20 amlodipine anymore. Maybe there are four or five. And there is. You see that. When they see that people dropping out because of that cost, there's been a shift there.
Okay, maybe just lastly, and you touched on it a little bit, is complex generics. I mean, you know, maybe about 5% of your sales, but I mean, 25% growth this quarter, clearly, you know, it's a bright spot in the portfolio. And could you maybe just remind people some of the key products in this segment and what's driving that, you know, significant growth and the sustainability of that trend?
Yeah, I mean, we have been—like I said, generic Advair was the one where we started. That's the first one comes to mind. This year, we launched this. Last quarter, we launched generic Symbicort. That's the first, you know, Symbicort generic in the market, which is going to drive the growth. We don't see these products to be commoditized very soon, J- Glen, because we... Look into Symbicort. I think we might have a one or two-player market for a period of time, and this is going to be continue to be a key growth, sorry, key driver for the revenue growth for the next years. Similarly, we are working on launch of products like Victoza, which is again, a highly complex product to do.
We are working on launch of next year, a Sandostatin LAR, which is again, a very complex product to do. So there are bunch of complex injectables which we are about to launch, which is going to drive this, a $500 million circa basket.
And, Glen, if I can just add to that.
Yep.
As a strength of what Rajiv talked about, brand generics and the complex, the gross margin is something that's remarkably steady as a company, and you saw that this quarter again, we had a very strong gross margin. If you look at on a full year basis, we actually raised our metrics from 58%, by 75 basis points because of the strength of the portfolio and the gross margin from the new product.
Right. So maybe since we're on the topic, let's talk about gross margins. To your point in the high 50s%, and you increased that guidance on this most recent call. Could you sorta talk about that trend? And I think, you know, embedded within the guidance, we sort of assume that maybe gross margins, you know, take a slight step down in the Q4 , if you could sorta comment on that. But, you know, overall, as we think about that trend exiting this year and into 2024.
Sure, sure. So clearly, the strength of the portfolio and the diversity of the portfolio and the new launches, the gross margin that is coming, then how we are managing the base business. Gross margin has been performing remarkably better than our expected for all three quarters, if you see that. And that's kind of what happened in last quarter. We looked at the new products launches, we looked at how the segment and the portfolio mix, and that mix made us confident about where we are, and that's how we raised our mid guidance metrics midpoint from 58%-58.75%. So we feel very good about that. 'Cause it's gonna step down slightly in quarter four, nothing unusual except that it's the portfolio mix that you have.
Like lenalidomide was, you know, in the H1 of the year. It's not in the Q4 . It's no more a new product. So those are the kind of changes that happened, but fundamentally, it is very, very strong. And I expect the trend to continue for next year in terms of a steady and stable gross margin as we go forward.
Okay, perfect. Well, all three of you have touched on it to some extent about the new product growth and the pipeline. And, you know, just to be a little bit more specific about it, you know, the—I think your target is about $500 million, let's call it, of products of sales coming from new products each year. You know, to put that in perspective, on a revenue base of $15.5 billion, roughly, you know, that's 3-3.5 percentage points of growth. And what I was hoping is maybe you could sort of dive into some of the specifics around some of the products that are coming, you know, particularly as we think about the 2024 and 2025 timeframe, so people can sort of put all those pieces together.
So Glen, we have been very transparently putting the key driver. There are hundreds of products-
Yep
... in our pipeline, you can understand. There are geographic focus, like China, we are building together a portfolio of just respiratory products, like, again, Symbicort, Yupelri, which is for COPD, Perforomist, Dymista. But keep that aside, I think we have been trying to put it in three buckets. One is a complex bucket, complex products, like complex injectables, specifically, because we believe that's a huge opportunity. And some of the drivers I just mentioned, of course, we have seven first to market opportunities over there with some paliperidones. I just talked about, you know, Sandostatin and other products out there for the next couple of years, three, four years. So that's one bucket, where we have about strong 40 products at the moment. 10 have already under FDA review and some other regulatory agencies review. So that's one bucket.
The second bucket is eye care. We said that eye care. We didn't do this eye care deal for just one product. We wanted to execute a pipeline around that. So that's the second bucket. And third is this complex 505(b)(2) or some, you know, lifecycle management products, where the products like paliperidone once a month, you take it, or Xulane low dose, which is our—Xulane is our, you know, a hormonal patch. So there are about seven, eight products in that bucket. So there are about $1 billion, sort of plus $1 billion, these opportunities which we are executing, in addition to, you know, for example, next year comes here in U.K., we launched just apixaban.
There's opportunities to launch many of these products which go off the patents across these markets. For me, I've simplified to break it. Europe is a key part of our geography. Can I make sure that we launch $150 million-$200 million of new launch revenue from Europe and another $300 million from the USA? That's all. And everything which comes on the top is gravy.
Okay, maybe let's shift gears for a minute. Let's talk about the balance sheet. Obviously, a lot, lot, lot has been announced this year, and I think it's kind of lost on people, you know, the magnitude of the amounts we're sort of talking about. And so maybe, Sanjeev, could you just sort of remind people sort of what has been announced here in the past few months, the impact that may ultimately have on the company's debt load, the balance sheet, and sort of, you know, and then, Scott, maybe we can shift and talk about capital allocation plans for next year. You know, we'll talk about business development and your focus there.
Maybe just before we get to that, Sanjeev, if we just want to talk about the balance sheet and, you know, the implications of all these transactions that were announced.
Sure, sure. So let me start even before the announcement, Glen. So if you can just look at our cash flow generation and what we've been able to do last three years. We've generated over $7 billion of cash flow till this Q3 , and we paid down over $6.1 billion of debt. If you look at our debt today, 98% of that is fixed interest, and our average coupon is about 3%, 3.25%. If you look at the industry, look at where that is, that is a very, very attractive debt profile that we have in terms of how it helps on the interest cost and prevents us from any volatility that we have. So now, take the divestments announcement into account from that perspective.
Now, that we have sufficient cash flow to kind of meet our obligation, but the announcement actually accelerates that. So what this is actually doing is, by the H1 of next year, we're gonna be getting net proceeds of about $2.5 billion from all these divestments. The gross proceeds are about $3.6 billion. And then we have sufficient organic cash flow. We said our organic cash flow, at minimum, is gonna be about $2.3 billion. So take those two things into account. That gives us sufficient firepower to meet our obligation to get down to three times next year, continue to pay dividend, and have sufficient money for share buyback and investing in the business from M&A and business development. So that's kind of what we're talking about-
Could you just talk about the timing a little bit of that money?
So what we're expecting from the divestments by H1 of next year, it's gonna start trickling in actually quarter four, some smaller deals, but the majority of that is gonna be-
You expect to hit that leverage target in the H1 of next year?
So again, we're kind of working through all the plan-
Okay
... but that's the that's the idea.
All right. Well,
We have sufficient cash flow to be able to do that.
... and do other things from that perspective.
Okay, that cash flow gives us tremendous flexibility, right?
Yep.
The net extra cash flow, plus the free cash flow from operations gives us a lot of flexibility as we go into 2024, committed to pay down any debt and getting to the right leverage target. You know, giving back through dividend, share buybacks, and then, you know, business development and growing the top line. So I think we have a tremendous opportunity with the free cash flow to really transform the business going forward.
And Scott, you've been pretty clear about that up to this point. I think the company's plan was they wanted to get to that three times leverage goal, and then post getting to that goal, the plan was to split the free cash flow 50% between business development and 50% of it returned to shareholders. Is that-
Yeah, I mean, 50%-
Roughly
... is an exact number, right?
Right.
But I think, you know, I mean, some years, we need to be opportunistic. We need to really manage a business here. You know, we're gonna equally divide the cash flows between, from a capital allocation perspective to giving back through dividends and share buybacks and investing in business development. So I wouldn't say it's gonna be exactly 50% every year. We need flexibility.
Right
... to run the business, but the intention is to give back sort of equally in those two ways.
And, Scott, on the business development front, I mean, the company has highlighted ophthalmology, derm, and GI as being the three areas of focus. I don't know how married you are to those three areas of focus. I don't know how you think about, you know, external business development versus sort of some of the internal priorities for investments you need to make to support that new product growth. So how do you think about, you know, those investing those dollars?
So first and foremost, we need to continue to solidify the base of the company and invest in internal research. You know, again, we, you mentioned it. You know, I would say, you know, we plan on launching 400-600 million new products every year. We see some decline in some of the businesses geographically, so that will probably lead us to 1%-2%, you know, maybe even up to 3% growth over time organically. But then we wanna, as well-
Mm-hmm
... continue to invest through business development, and business development being M&A, partnership, licensing, other things, to really start to drive the top line significantly more than we have.
I'm sure you're in the marketplace all the time. I mean, you know, obviously, capital markets have been pretty volatile. You know, when are you seeing any trends in terms of valuations for assets in the marketplace? I mean, do you see opportunities? Is it harder than you thought? I mean, how would you characterize the environment?
I jumped over, sorry, a question that you asked about the three areas that we had previously defined, right? I just wanna go back to that and say, you know, those are areas that we took a look at, and we thought we had the infrastructure, and we could leverage, and we could operationally bring assets in those three areas. I would say I wanna make sure that we're a little bit agnostic, too, right?
Yep.
The hard part of this business is finding real cornerstone assets that can really drive revenue growth over the long term. And so if there's things that aren't necessarily in those three areas, but we think could be, you know, very good revenue-generating, revenue-driving, cornerstone assets, we would take a look at them as well. You know, I think, you know, I've spent some significant time in small biotech myself and taking companies through IPO and done some things that I know it's been a very capital-starved environment over the last three, four, or five years. So there's a lot of good companies out there with good technology, good assets, that are looking for capital. And more than capital, they're also looking for companies that have the kind of infrastructure that we have globally, right?
Yep.
I mean, we're in 165 countries, right? We can offer the opportunity to a biotech to partner with them, take an asset, and be able to commercialize it virtually around the globe. And so, there's a lot of assets out there. I get inbound calls, I would say, every day from companies that are looking for partnership and licensing and other things. And so, we're gonna be smart. We're gonna be thoughtful. You know, we have just sort of done a lot of work to get the company in a really good place going forward, and we wanna, you know, be thoughtful in the moves we do going forward. But there's a lot of companies out there. There's a lot of assets.
I think it's a very good environment right now for big companies with financial strength to be able to partner and license with other companies and take, take good assets forward.
Perfect. We got a few minutes left, and there's a couple more I wanna hit. So, you know, I'm gonna hit these quickly. You know, in the past, you've talked about some of the long-term targets of the company on the revenue side, EBITDA, and earnings side. And this quarter in particular, right, it was your Q2 in a row of operational revenue growth, and so I wanted to just sort of get your take. I appreciate you don't wanna give any forward guidance here, but curious to get your high-level take on how we think - how we should think about that path to sustainable growth, you know, within the context of those long-term revenue targets, you know, you talked about earlier. And maybe, Sanjeev, if you wanna just remind people what some of those long-term targets are.
Do you wanna start? Yeah, just so, maybe I'll make a quick comment, and then over to Sanjeev. You know, I think, again, we're looking to launch 400 million-600 million new products every year.
Yep.
You know, therefore, we see that sort of low single-digit revenue growth from the internal portfolio. We see free cash flow and capital to be able to allocate to get more growth out of there. And also, we've talked about share buybacks as an important part of our capital allocation plan. You know, that, with the revenue growth coupled with that, will help us move to a, to a Adjusted EPS growth story over time. And I think, you know, that, that's an exciting thing for me to, to not only be able to drive revenue but also drive Adjusted EPS growth over time.
And again, it's Scott covered that. I think we should expect, as we grow with the portfolio, we should expect EBITDA growth as well. And that, coupled with share buyback, we should expect a significant EPS growth year on year as we go forward.
Yep. Perfect. Well, listen, I wanna give you guys the last word here, and Scott, maybe sort of get your post-divestiture perspective, right? Because the company has been through a lot of transition, you know, as you wrap up sort of phase one here, with the closing of those transactions. You ultimately, you know, are now starting to report some quarters of sequential growth here. And so how do you think about things? You're gonna be in a sort of a good place, you know, from a leverage perspective in the H1 of next year, you know, generating some significant free cash flow. What message do you wanna leave with investors, you know, as we get ready to embark on 2024?
Yeah, there, there has been, you know, over the past, significant change, significant movement in the company. But there's been a lot of work done, particularly over the last couple years. I've only, you know, been fortunate enough to be involved, you know, sort of through, through 2023, but there's been a lot of work to really get the, the foundation of the company very solid. The balance sheet's rock solid. Our ability to generate free cash flow is very, very strong. The divestitures have allowed us to strengthen and streamline the company. I think we're in great place as we move forward into 2024. With those cash flows, you know, to be able to really, you know, not only move off this very solid base, but really move into a period of significant growth.
Maybe last word on the capital deployment. You said, you know, roughly half the free cash flow will be returned to shareholders in the form of share repurchase and the dividend. You know, the dividend, you know, on any given day, 5.3%-5.4%, I think it may be the, the highest dividend in healthcare that I'm aware of. Seemingly, not, not maybe getting the credit that you would maybe hope in the marketplace, and, you know, that, that cash theoretically on a, on an annual basis, could be used to buy back 5% of the company. And so I'm curious to how you think about that dividend, you know, and, and the sustainability of that dividend, and, and if you feel like you're getting the, the credit for that dividend.
I think we wanna continue to do both, right? I mean-
Yeah
... you know, because of the strong cash flow generation that we have, we're gonna be able to continue to deliver on a dividend and buy back shares over time, and I think we wanna balance it and be able to do both. There's significant number of investors who really value that dividend, and, you know, there's other investors who really value share buybacks, and others that value revenue growth. And I think with the cash flows we're generating, we're gonna be able to accommodate all three.
Okay. Scott, Rajiv, Sanjeev, we're gonna leave it there. Thank you guys very much for your thoughts-
Thank you
... and thank you.