Viatris Inc. (NASDAQ:VTRS) 41st Annual J.P. Morgan Healthcare Conference January 11, 2023 6:00 PM ET
Michael Goettler – CEO
Rajiv Malik – President
Jeffrey Nau – Head, Eye Care
Conference Call Participants
Chris Schott – JPMorgan
Good afternoon. I’m Chris Schott at JPMorgan, and it’s my pleasure to be introducing Viatris today. From the company, we’ll have a presentation from CEO, Michael Goettler and then we’re going to open up to a Q&A session with the broader management team.
With that, I’m going to turn the stage over to Michael and we’ll be back post the presentation with some Q&A.
Thank you, Chris. Thanks. Thank you. All right. Thank you, Chris and good afternoon everybody. This is actually our first as Viatris, which was started in November 2020, our first in-person JPMorgan meeting. So, it’s really, really nice to be back. And obviously, we are extremely proud in the last two years and a few months of everything that we’ve accomplished to get to this point, but more importantly, excited at the path that we have going forward.
Now, I am obliged to say something about forward-looking statements. Obviously, we will be making forward-looking statements. Those statements have uncertainties and risks with it. And I refer you to the slide deck to read this full disclaimer.
The second thing I want to say is that because we’re in a quiet period, we’ll not be making any comments on quarter four or 2023 outlook. But suffice it to say, we feel very good at where we are. We feel very, very good about 2022.
So, in terms of agenda, what I’d like to do is give a very short strategic overview. As you know, in November, we announced quite a lot of things. And so I give an overview of that and what we’ve accomplished and where we see the strategy going forward.
I’ll then hand it over to Rajiv Malik, the President of Viatris, to talk about the pipeline, which is a very important component of our path to growth going forward, right? So, it’s a very important component. And within that, the newest component is our new Eye Care division from the acquisition of Oyster Point and Famy Care, led by Dr. Jeff Nau, who is also with us and will give you a quick overview of the new eye care division.
So with that, couple of highlights and key accomplishments. In terms of business performance, we now have up to Q3, seven consecutive quarters of solid operational performance and that doesn’t come from just sheer luck, that comes from purpose and strategy. It comes from purposeful, smart investments in our base brands business to stabilize that business going forward. It comes from execution on the pipeline, but it also comes from diversification beyond our core generic business.
Our U.S. generic business now represents only 11% of our overall business and we move up the value chain into more complex products and innovative products and that adds stability and predictability to the business.
We’re also now fully integrated. As you may remember, we were created by the combination of legacy Upjohn division of Pfizer and Mylan Pharmaceuticals. We’re now fully integrate into two businesses. We’re on track to complete $1 billion of cost synergies as promised by the end of 2023.
We have essentially exited all of what was approximately 1,000 transitional service agreements that we still had with Pfizer. That gives us not only the independence and flexibility to do what we need to do, but also substantial cost savings. So, we’re confident in the achievement of the $1 million [ph] in cost synergies.
In terms of pipeline, we continue to add and continued to add to a durable organic pipeline and that’s really two components. One is approximately $500 million in annual new product revenue that comes from our existing pipeline, and that is sufficient to offset the erosion that we have in the base business, actually not only offset, but lead to slight growth.
Within that, we have our complex injectable franchise that’s very differentiated that potentially adds $1 billion in peak net sales by 2027. Within that also is a select novel and other complex product business that also adds approximately $1 billion in net sales by 2028. That leads to the $500 million per year in new product revenue. The new Eye Care division comes on top of that and that will be our third franchise that can potentially add $1 billion in peak net sales by 2028.
So, that’s on the pipeline. Capital deployment, we’re consistent with what we laid out. We’ve always seen Viatris evolving in two phases, a Phase 1 and a Phase 2. Phase 1 was focused on deleveraging and rebasing. We have retired $2.1 billion in debt so far up to the third quarter in 2022. That’s $4.2 billion from 2021 and 2022 and we’re on track to our target of $6.5 billion by the end of this year and reaching a roughly 3.0 leverage target as we laid out.
We also continue to return capital to shareholders through our continued dividends, but now also through share repurchases. We already have an authorization of $1 billion and we’re going to start executing on that in 2023.
And then in November, we laid out a lot of strategic initiatives. Since then, we closed the Biocon transaction that immediately brings in $2 billion capital in gross proceeds to the company and sets the business up for long-term success as a vertically integrated champion.
We’ve established now and are integrating the new Eye Care division, led by Dr. Jeff Nau. We laid out a path to divest certain business, which were the OTC business, the API business, women’s health business, and some select markets. That process has been initiated and we continue to be confident to announce these transactions by the end of the year as well as confident in the valuation ranges that we laid out.
So, that’s on accomplishment. All of what that does is set us up really for Phase 2 2024 and beyond. And we continue to be confident in the direction that we set out and for 2024, what the starting point — what really will be the true starting point.
So, 2023 is kind of the last transition year of Phase 1. It completes the Phase 1, it’s the last transition year and what we want to do in that Phase is we continue to execute on our base business, we continue to deliver on organic pipeline, we have some important launches coming up. We complete the plant divestitures by the end of 2023, as I say, it out.
And then with that completed in 2024 and with the deleveraging target that we have, we essentially have an unencumbered free cash flow 2023 going forward. And we laid out very clearly what our capital allocation priorities for that are. 50% of that very strong free cash flow is going to go to dividends and share buybacks in 2024 moving forward.
So, you put all of that together, you take the strength of the earnings potential, you take the growth opportunities, strength of the pipeline, you take the strength of the balance sheet, right? And you take the capital allocation policy with the share buyback, we think all of that makes for a very compelling adjusted mid-teens earnings per share growth story for 2024 going forward.
And with that, one important component of the growth story is the pipeline. I’d like to hand it over to Rajiv Malik to say a few words on that. Thank you.
Thank you, Michael and good afternoon everybody. Let me take from where Mike left. In fact, we talked a little bit about our pipeline on November 7, Michael a little bit mentioned in this slide. I would like to give you a little more insight and appreciation about some chunky pieces which you can put value to.
And two of those are, of course, our injectable franchise, which we talked about, complex injectables and some other select novel and other complex products. Along with that, I would then have Dr. Jeff Nau talk about a very exciting new Eye Care pipeline.
So, let me start with the components of our pipeline. What you see on this slide is what makes $500 million per year or annual launches, approximately $500 million, that’s what we give a range, $450 million to $550 million.
In addition to a geography-focused pipeline, whether it’s for North America or whether it’s for Europe, we have now a pipeline which is dedicated for China, Japan, and various other markets in our diversified network.
But more importantly, I think there are two chunky pieces. On a risk-adjusted basis, these two buckets of complex injectables and 505(b)(2)s have approximately $1 billion — not less than $1 billion, I would say, by 2027-2028.That’s how we have valued those. And I’ll give you a little more insight into that. What is it made up of?
Now, first of all, with complex injectables. And what — why do we call it complex, either it’s complex drug substances, difficult to synthesize or difficult to characterize or it’s a complex process, difficult process, how to — just setting up the manufacturing train or it’s complex drug devices because most of these injectables are our own drug devices.
So, for example, the Glucagon will fall into category of a peptide, which is a complex substance. Iron complex is complex drug substances. But the paliperidone, the Invega Sustenna or Trinza, they fall in the category of a complex process, which is like microspheres — or nano emulsion, sorry. And Sandostatin like products fall in the category of the microspheres.
So, all of these products have definitely a higher hurdle, either they are difficult to develop or they’re difficult to manufacture or they are just difficult to get over the hurdles of the clinical or bioequivalence and having regulatory pathways, which you have not been very clearly laid out.
But we have now been working on this bucket for the last about seven, eight years very actively and we have 39 products in this pipeline, 10 of which have already been filed and under review by FDA. And well-positioned for seven, we believe, for the first-to-market opportunities. So, pretty exciting bucket.
Now, why it’s exciting because they do fall in the category of the generics, but they have a very different analog. And I think best you can relate to is a COPAXONE analog, which we would say it’s more sustainable, more sticky, more durable. They might have a little bit slower ramp, but also they are sticky, and they stick there for a period of time.
The next bucket of complex products, we call it as 505(b)(2). And the best example I can give you is the [Indiscernible] once monthly. So, instead of biweekly, they are once monthly, we just done with our Phase 3 clinical trial and are looking forward to its submission by the quarter — first quarter.
Now, why it’s important. It’s just not a compliance. I think we’ve got a very solid Phase 3 data, not just meeting the primary endpoint, but several other secondary endpoints, which are exciting and will help us maybe hopefully get a better level.
Meloxicam fast-acting is an opioid sparing, which is very well advancing. And again, I will like to call out BOTOX, which is first — again, we are trying to create the pathway of a first biosimilar BOTOX, very much on the way. And I think with Revance now daxibotul getting approved, it’s the same signs basically from the toxin point of view, we feel we are very much on track to bring this product by 2026 to the market.
So, — and another product which is exciting in this bucket is Xulane Low-Dose, which we are developing it in the Phase 3. So, if I just take these two buckets, they are — they form that bucket of $500 million. It doesn’t include our Eye Care vision, as Michael mentioned. And look, I’m very proud of what we have so far achieved of our track record, but I’m equally confident that the pipeline we have on our hand, we’re going to execute it successfully.
With that, I will invite Dr. Jeff Nau, Jeff?
Thank you, Rajiv. I’m pleased to be able to introduce you to the new Eye Care division at Viatris. And when we talk about what we have built with the acquisition of Oyster Point in bringing the capabilities to the table, I think it’s really important to understand that we have built really a world-class eye division with this acquisition.
So, we have an experienced team that’s in place. We have one of the largest commercial salesforces in the United States for front of the eye with over 146 reps. We have a pipeline that I’m going to talk about with a number of Phase 3-ready assets and some assets that are actually under review at the moment.
But most importantly is we have the global capabilities and the global supply chain to now leverage and take all of these products throughout the world and so that’s really exciting for a company that was in a position where we could really only focus on the United States.
The first commercial product that we’ve brought to market from the team here is Tyrvaya, and you’ll see here, this is the first and only nasal spray for the treatment of dry eye disease, and you’ll see how it fits amongst the other products in the pipeline.
When we look at the pipeline, I think it’s important to not only look at all of the indications that we look to treat, but also the various stages of development. And what you’ll see here is not only do we have products that are Phase 3-ready in a number of them, but in some very big areas where there’s a lot of unmet need.
And we also have some products that are early in development. So, we’re really excited also about the gene therapy platform and that is an expandable platform that we hope to bring to market soon that will change the way we think about treating the front of the eye.
We have products in the presbyopia space that we think are going to be superior than what’s out there at the current moment. We have a blepharitis cream that we’re excited about. And again, these are real close to market, and we’re very excited about the near-term opportunities and being able to build out this Eye Care division. Thank you.
Q – Chris Schott
So, as we move over to the Q&A section. I guess the first place I wanted to start was just maybe some of the key learnings as you set this company up over the past few years. So, I guess maybe what have been some of the positives? And what are some of some of the areas of surprises kind of pulled together the various assets to create Viatris?
Sure. So, I think as I think about the last two years, I think the first thing, honestly, that comes to mind is everything that has been accomplished. I mean we should never forget this company was born in COVID.
We brought two companies together, integrated two large organizations without ever being able to meet in person. And out of that create a very strong performance-oriented company culture, achieve all the targets that we have. So, I think first thing is thanks to all the 37,000 colleagues around the world that got us to this point.
The second thing is as we now have seven quarters of consecutive performance. It gives us the confidence in really making sure we understand this business now. You wouldn’t have seven quarters of consecutive performance and predictability and delivering on that, if you didn’t. That gives us now the conference and you remember on November when we came out with an update on the strategic plan, we had a lot of things that we said there.
And the confidence of that — confidence of being able to say, this is what our true starting point in 2024 is. This is where we can see the CAGR going forward. This is going to be what the cash flow looks like, right?
And then based on that being definitive — very definitive about the capital allocation priorities, we wouldn’t have been able to do that without the learnings and the confidence that we have of being able to stabilize the brand and the base business, the execution that we have on the operational platform, the execution that we have in the pipeline. So, that’s I think top thing that comes for me to mind.
When I — I guess, on that issue of stabilizing the kind of base business, this erosion down to about 2% now versus maybe 4% or 5% you’ve been on, how is — how have you been able to achieve that? So, can you just go into a little bit more detail of what’s changed in terms of the support of those products and the way you think about investing behind them?
Well, certainly, some smart and very disciplined investment, but maybe, Rajiv, if you can comment on that.
Yes. So, let me, Chris, take you back. When we started this, we did have a lot of historical data of these two — we came together, Upjohn had their products, Mylan had their products. So, we took this big — one big component was the branded portfolio. How much of these brands will be declining? And we have so looked at historically Upjohn brands were declining maybe at 5%, 6% there were some LOEs.
We extrapolated that we assumed — we modeled 4% to 5% decline. We knew we could do a better job with that, and we did because legacy Mylan had set up that managing the established brands in an omnichannel way because we can’t afford 25%, 30% SG&A, we have a different way of managing these brands. And I think we did that.
And we see — what we see today after seven to eight quarters, and we didn’t have that data at that time. We are — we have been managing these brands at not 4% to 5%, but 2% to 3% decline. Now, that added — that gave us 200 basis points of improvement in the $9 billion branded bucket.
The second bucket was, the volatility was, of course, the U.S. generics market, which we are still — it is 11% of our total business. But I think that portfolio over the time has moved towards more complex hard to make products and very few commodities. So, the volatility of that is far less than what we had seen in the last few years.
The third bucket of volatility of this decline was China. And for us, at a point in time when we became one, it was the second year of China implementing this healthcare reforms, VBP.
I think after four years; China has done a great job of expanding the access to many of these volume-based products. And we got time to adopt and reorient ourselves because China today is operating very clearly in two segments, public reimbursement segment and private paid segment.
We hardly play in the public reimbursement because we are not a part of VBP, but we definitely reoriented ourselves not just we are a great commercial infrastructure there, but the brand equity of these Lipitor or Norvasc.
And the services we have been able to build about has helped us grow the retail channel. And who would have imagined that two years later, we are flat in that business because everybody has modeled it differently. So, I think you add — take these three components Today, we launch see it as a 4% to 5% decline. We see maybe at best 2% to 3% decline.
Now, you take — if you go forward, $15 billion, $15.5 billion, whatever number you pick up 2% to 3% is about $400 million sort of erosion. And the pipeline I just mentioned, walked you through or annually, if we can have $500 million, that’s more than to offset the decline and bring the base business back to 1% to 2% growth. So, sorry for long answer, but I think–
I guess the question is a follow-up on that. The ability to sustain that kind of more stable performance. I guess, one of the concerns I hear from investors is these businesses maybe a few good years and then something changes some of the markets, a downdraft and then stabilized again, like what — can you just help us get a little more comfortable about the ability to keep that kind of performance going, going forward? I clearly see how you’re building the pipeline out, but more just on the base business side?
In fact, if I have to take that, I think there are no big LOEs in this market. There’s no — we are not dependent upon any one product or one big geography. It’s a very diversified business.
In our — we always said, not all good things happen on the day, not patterns all happen in a day. But I think our comfort comes from — if I just break this geographically Europe, which is a key part of the business, which is about $5 billion to $6 billion business for the last six years, we have seen 1% to 2% erosion. And our own internal growth on our portfolio is about 3% to 4%. So, we have been growing Europe with about2% to 3% growth.
Why I feel more confident but — because many of these markets were not huge markets for us, like China was legacy. We didn’t have a pipeline for China. We didn’t have a pipeline for Japan. We didn’t have a pipeline for rest of the world markets.
Today, going forward, we have a dedicated pipeline I just show, just to offset some of these tribulations. So, in fact, if I am looking forward, I’m looking at us as a much better shape to manage this volatility of these markets or of this business.
Maybe one last one on the base business. With regards to China and VBP, is there anything we need to watch there in terms of any kind of last few products that could be of relevance or are we largely behind — is that behind you?
There are no — any more products to VBP. China is always — what we see going a couple of years further if I have to look for, I would say, this — two years gave us time to build up the pipeline.
I see another couple of years of flat or very minor decline in the hospital segment, which we can say. But we will be now bringing in the pipeline to offset that. So 2024, 2025 onwards, you will see our pipeline taking in to offset any of — any more decline comes this market.
Yes. And Chris, just to emphasize what Rajiv said about the diversity of the business, I think that’s really underappreciated because even in our mind, we’re still used to our legacy, right, and how important the U.S. and the U.S. generic business was. That is now 11% of the total business.
70% of the revenue comes from outside the U.S., right? Over 60% is branded, not generic. So, I mean, you look at all of this, and we can really confidently say now, as he said, something happens in one country, something else happens or another, we were able to offset that.
And I think the seven past quarters have shown that, and it wasn’t an easy environment. I mean you had COVID, you had all kinds of things happening and we delivered quarter-after-quarter. And I think that gives us confidence.
Great. Maybe shifting over to ophthalmology and maybe a first question for Michael. When you were thinking about directions that Viatris could go, what attracted you to this vertical? And how do you see ophthalmology kind of leveraging the company’s broader strengths?
Right. So — and I think Jeff should add to that as well. But look, when we laid out the strategy, and we said we’re interested in — and Eye Care were interested in dermatology, we’re interested in GI. These three areas had a common denominator, if you will. And the common denominator is that these are not necessarily areas — first of all, we see a high level of innovation, right?
Then innovation is often not our but the risk, right? So, it’s development risk, it’s existing molecules being repurposed or from formulation, et cetera. So, it is not this heavy binary risk because we’re not a research-driven organization, we develop and driven organization fits us.
Number two, they are specialty driven, which means you don’t need to build a 5,000 people, GP sales force to promote it. You heard Jeff, 140 people and it’s a top sales force in the United States. So that’s another one.
It’s — a lot of the innovation comes from smaller players, not from the big pharma players. We’re actually not competing directly with big pharma. And we’re not necessarily going after the $2 billion blockbuster products. We’re going after — there’s a sweet spot there. And so really on many criteria fits our platform, fits our capabilities.
And I think we’ve shown now with the Oyster Point and Famy Care acquisition together, it’s a very nice combination. We always talk about we want to have an anchor asset, right? You build a portfolio; you build a franchise around anchor assets.
Oyster Point, Tyrvaya and the capabilities that come with it, the 140 sales force, the medical affair staff, the connections to the community and just the knowledge that access. And you combine that and the pipeline that we bring in to Famy Care, which, as you saw, multiple early stage, but also multiple Phase 3 ready or already in Phase 3 assets, so relatively near-term.
And you combine that with our capabilities of a global regulatory platform, the supply chain that we have, the legal team that we have, the commercial presence that we have in all the countries, I think it really is clearly synergistic and we can take this to a whole other level. And Jeff, do you want to talk more about this?
Yes, I think as you look at the capabilities in that slide that I presented, I think what’s really important is to understand there really is no global leader in pharmaceutical development in eye care. There are people who play in eye care, but they are often very much focused in other parts of medicine. And I think building out a franchise that is purely focused in eye care.
And many of the folks from our team come from both retina and front of the eye. So, we have those capabilities. We have the knowledge. Many of us built out big products like Lucentis. And so we’re excited to be able to now not only be able to leverage all of this infrastructure that we’re able to bring to the table and really become a product that we can bring direct-to-consumer marketing. We can enhance our regulatory reach across the globe, and there is a lot of innovation that goes on in ophthalmology.
I mean there is no lack of start-up companies and small companies out there, and they also need for the sort of universe here to have big leaders in that space to be able to operate well as well. So, we’re really excited to be that leader and to step into what we think is a really incredible void in this therapeutic area.
I mean just to follow up. Can you just elaborate on the path to that $1 billion target by 2028? If I remember correctly, the $1 billion target is certainly well above where consensus was for Oyster Point. So, maybe just elaborate how much is U.S.? How much is ex-U.S.? How much is Tyrvaya, how much is the Famy Life portfolio?
Sure. If you look at the pipeline about $500 million a little bit more comes from those dry eye assets roughly and then the rest would come from the other assets. About two-third of that revenue would come from the U.S. with about one-third outside the United States.
And so I think that when you look at that pipeline, you see that it’s going to build. I mean one of the nice things about ophthalmology and eye care is that these are not trials that last for years. These are quick development programs. If you look at what we did at Oyster Point, we filed our IND in 2019. And by 2021, we were approved and on the market.
Many of these products are that far along that we’re going to be able to execute and really bring something to the table. But I think it’s a great question. Most of the revenue is going to come from that dry eye side.
Great. Very helpful. On divestiture process, can we just get an update of how that’s progressing? Anything to report in terms of–?
Yes. And just to reiterate, the divestitures is the OTC business, mostly European OTC business. We call the women’s health care business, it’s the API business and then some select markets. And Biocon is closed, right? So, that chapter is done and completed and the cash came in that relates to them.
And so on those four remaining products, divestitures, the process has been initiated. We’re actively out there. We’re having discussions. We continue to be confident in our ability to be able to make announcements in 2023, and we’ll also continue to be confident in the valuation ranges that we originally indicated. And then we’ll update you as we go along in the year.
So, just in terms of how you selected the assets that went into that process. So, how did you land at these kind of four or five divisions that were maybe not as core as they may be once we’re to the organization? Can I just get a little more detail there?
But it really goes together with the strategy they were laid out, we said, who do we want to be in the future? What kind of — what Viatris should be focusing on. And then you look at which of these businesses, which of these assets are core and essential to their future of Viatris and which ones are not. It does not mean they’re bad business.
They are very good businesses, right? So, there’s also — there’s no pressure, rights, from our side. They’re very good businesses, but we believe business that are better in somebody else’s hand, and that’s a filter we applied.
Can I also just — you mentioned the valuation ranges hold. I guess how is the current interest rate environment? Has that affected the type of players or any of the valuations we think about?
Well, there are multiple players when you have strategics, you have nonstrategic, you have multiple potential players out there and some are more influenced or less influenced by that. So, at this point, we keep looking at it constantly. We’re still confident in the ranges.
Okay. And maybe one other question is just how much of a distraction has this process been to the broader organization? Are these fairly kind of insulated businesses? Or I guess how entrenched or how standalone are these franchises versus the broader organization?
Yes. So, the first thing I would say is like seven quarters of consecutive performance, we feel good about 2022. So, it hasn’t been distracting. It hasn’t been distracting us from achieving what we need to achieve. We’ve been able to do acquisitions. We’ve been able to do all these things. And I think that’s one of the strengths that Viatris has that we can have multiple balls in the air and execute very well on them.
The businesses are — I think it depends, some are very integrated and we’ll need to go through a process to kind of clearly carve them out. Others are easier to separate. But we learned a lot from the Biocon transaction as well and can apply that going forward. We’re much more experienced historically in acquiring rather than divesting. But with Biocon, we obviously learned a lot and applied that learning to the future divestitures as well.
One question, I guess we get is how to think about the base 2024 EBITDA. So, can you just maybe talk about how bridge from, I guess, the $6 billion or so of 2022 EBITDA out to 2024. So, how should we account for those divested assets? I think there’s some higher R&D expense sort of to think about as well?
Rajiv, do you want to take that?
Unidentified Company Representative
Yes. Sure. So Chris, I think the starting point is we very feel good about where 2022 is ending. That’s important because that’s kind of the exit point, shaping up to be to be great.
So, as you pointed out, there are a lot of things going on in 2023, and kind of we talked about that. So, biosimilar business, done. Transaction is done. That needs to come out. So, we talked about a step-up in the R&D right? That’s just a function of three or four things that are going on.
So, first is the IP R&D rule that SEC changed, there’s no cash impact, but geographies P&L will take a bigger load of some of the milestone payments that we do.
Second is the Eye Care portfolio that Jeff talked about it, that’s going to have an impact on that. And that our own organic pipeline that Rajiv talked about, there’s got a big payback, but that’s got an impact on the R&D line. So, that’s the second piece.
The third piece is the SG&A cost coming from Oyster Point, right? So, we got — talked about the field force and the marketing. So, that’s going to have an impact on our SG&A.
And the last item, which is, again, as the divestments happen, that will have an impact on the EBITDA. But it’s, again, all been calibrated and reflected. I think the important thing to note is 2024, when we talked about the long-term targets, these are all reflective of those long-term terms.
And can you just help me think about the margins once we kind of factor these all in, kind of what’s our baseline margin for the business look? And how does that trend in that, I guess 2024 through 2028 plan?
Unidentified Company Representative
So, again, margins, again, if I look at both parts, both the gross margin and the operating margin. So, again, gross margin function of the mix. As we move up the value chain, as we look at novel and complex product, that gross margin is going to be stable and steady post 2024, and we talked about that. So, clearly, that’s the direction of the travel as for that is concerned.
On the operating margin, there are a couple of things that we need to keep in mind. So, SG&A. Clearly, as you divest these businesses, the SG&A line will be a step down in the absolute dollars. And we’ve guided that over a period of time with all the operating leverage, SG&A will be high teens towards the 2026, 2027.
R&D, a little bit of a step-up as we talked about it. but it’s going to stabilize at about 6% on the R&D line from — as a percentage of revenue.
The last item, which is equally important is the interest cost. As we paid down significant debt, we’ll see the interest cost coming down and that’s going to help us maintain an operating margin.
Great. Can I talk about capital deployment next? I think you’ll have roughly $5 billion or $6 billion of capital to redeploy post this process you’re about to go through. I guess maybe, first of all, how much of that needs to go towards debt pay down? And how should we think about prioritizing the remaining proceeds? Is that–?
Great question. So, if you think about it in terms of what we talked about, the gross proceeds of $8.3 billion to $9.3 billion. Net of taxes, one-time cost and the Oyster acquisition, we talk about $4.9 billion to $6.1 billion. That money is available for three things: debt pay down and share buyback and investing in the business. How much debt pay down will be dependent on the EBITDA that is going to go away with this business.
What we’re committed is to maintaining the investment-grade rating. And we’ll do as much debt as we require to pay down to get to our long-term target of three times the ratio. And the — but there will be plenty of that cash left for share buyback and business development.
You’ve commented over time kind of this 50% mix of BD, 50% capital return. If I kind of think about whatever is left to over post the debt pay down, is that a reasonable way to think about the remaining kind of slug of cash comes in with the divestitures? Or should we think about that maybe being more heavily skewed towards business development as you look to kind of reposition the company? Or is it too early to comment on?
I think it’s early.
Too early? Okay. So, we’ll see as we go along. Priorities for BD going forward. What are you most focused on at this point?
I think we continue to be focused on exactly what we laid out, right? We have the three areas of focus, which is Eye Care, GI and derm. And — but we’re also sensitive to the needs of the remaining business, whether it’s regional opportunities that exist, et cetera.
But I think overall, what you will see is continued disciplined in our investments. I think you’ve seen us over the last three years being very disciplined, right? And really jumping opportunities that are standing out like Oyster Point and Famy Care was. And it’s going to be continued tuck-ins and bolt-ons. That’s the focus going forward.
So, I guess maybe thinking about size and scope of something like Oyster Point, is that a good proxy of the type of–?
I think it’s a good template strategically, what we want to do because, again, it comes with anchor assets and in-line asset accounts with capabilities and pipeline. Whether we can always do this in one deal, like there’s a one combined deal? I don’t know, but I think it’s a strategic template that makes a lot of sense.
In terms of the ability to go larger, is that something that makes sense or is it going to skew smaller?
Look, we’re going to continue to focus on being investment grade, we’re going to be disciplined and as I said, tuck-in and bolt-on is in focus.
On the 50% free cash flow return starting in 2024, help me think about how much of that’s going to be dividend versus how much is repo as you think about kind of the dividend payout and where that could go over time?
We — that’s kind of a decision going to be taken by the Board. But I think it’s safe to say that dividend is an important part of return on capital, but the distinction between dividend and share buyback will be handled at appropriate time.
Okay. And maybe a final question for me is I know 2023 feels like more of a transition year. I know you’re not giving guidance today, but can you just think of some of the pushes and pulls we should be kind of thinking about as we head into this year?
Yes, I mentioned that a little bit. So, again, as I said, again, worth repeating is we’re ending 2022 exactly where we thought, it’s shaping out to be great here. So, that’s giving us a little bit of a momentum as we go into this year.
But with all the changes that are going on, Biocon business out, that’s going to have an impact. Divestments as we announced that’s going to be out. And then you have the step-up in the R&D, that’s the other thing that — we need to look at that. And then the SG&A impact of the Oyster Point, all that will be reflected in the guidance that we talk about that, and then we will share with you end of February, beginning of March.
I think the other thing important to note that is, what we guided that once all said and done, all these divestments, the base business will generate again significant and steady cash flow. And we guided towards that, that it’s going to be at least $2.3 billion of free cash flow in 2024 from the base business before any taxes for divestments and other things like that.
Right. I think we’re just out of time. I really appreciate the time, guys and obviously, a pretty exciting time ahead. So, look forward to the progress.