Viatris Inc (NASDAQ: VTRS) Q1 2021 Earnings Call dated May. 10, 2021
Corporate Participants:
Melissa Trombetta — Head of Global Investor Relations
Michael Goettler — Chief Executive Officer
Rajiv Malik — President
Sanjeev Narula — Chief Financial Officer
Analysts:
Umer Raffat — Analyst
Chris Schott — Analyst
Gregg Gilbert — Analyst
Elliot Wilbur — Analyst
Randall Stanicky — Analyst
Jason Gerberry — Analyst
Balaji Prasad — Analyst
Nathan Rich — Analyst
David Risinger — Analyst
Akash Tewari — Analyst
Ronny Gal — Analyst
Presentation:
Operator
Good morning. My name is Maria, and I’ll be your conference operator today. At this time, I would like to welcome everyone to Viatris’ 2021 Financial Guidance Call and Webcast. [Operator Instructions]
I will now turn the call over to Melissa Trombetta, Head of Global Investor Relations. Please go ahead.
Melissa Trombetta — Head of Global Investor Relations
Thank you, Maria.
Good morning, everyone. Welcome to Viatris’ 2021 guidance conference call.
As we begin our call today, I would like to note that we are mindful of social distancing guidelines, and as such, I’m dialing to today’s call remotely. Joining me on this call from a separate location are Viatris’ Chief Executive Officer, Michael Goettler; President, Rajiv Malik; Chief Financial Officer, Sanjeev Narula; and Chief Accounting Officer — I’m Sorry — Chief Financial Officer, Sanjeev Narula; Chief Accounting Officer and Controller, Paul Campbell. Also joining us from a remote location is Head of Capital Markets, Bill Szablewski. I would ask for your patience should we encounter any technical difficulties.
During today’s call, we will be making forward-looking statements on a number of matters, including our financial guidance for 2021. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today’s projections. Please refer to the guidance released and slides that we furnished to the SEC on Form 8-K earlier today for a fuller explanation of those risks and uncertainties and the limits applicable to forward-looking statements. The guidance slides also are posted on our website at investor.viatris.com. Viatris routinely posts information that may be important to investors on this website and we use this website address as a means of disclosing material information to the public in a broad, non-exclusionary manner for purposes of the SEC’s Regulation Fair Disclosure or Reg FD.
We will be referring to certain financial metrics of Viatris on an adjusted basis, which are non-GAAP financial measures. We’ll refer to these measures as an adjusted and present them in order to supplement your understanding and assessment of our financial guidance for 2021. Non-GAAP measures should not be considered a substitute for or superior to financial metrics calculated in accordance with GAAP. The most directly comparable GAAP measures as well as reconciliations of the GAAP — non-GAAP measures to those GAAP measures are available in our 2021 guidance release and supplemental earnings slides as well as in the Investor section of our website.
In addition, solely to supplement your understanding and assessment of our financial guidance for 2021, we have provided in the guidance slides and will discuss during today’s call certain preliminary estimated financial measures relating to 2020 which do not reflect final actual results or pro forma results. Such measures also do not reflect the effect of any purchase accounting adjustments. Viatris has not yet finalized or published its financial results for the year ended December 31, 2020. Estimated results are subject to change and actual results may differ materially from the preliminary estimates provided in this presentation. Also, any segment related information discussed today during today’s call is based upon the Company’s preliminary expected determinations which will be finalized upon the filing of the Company’s Form 10-K for the year ended 12/31/2020.
Let me also remind you that the information discussed during this call, except for the participant questions, is the property of Viatris and cannot be recorded or rebroadcast without Viatris’ expressed written permission. An archived copy of today’s call will be available on our website and will remain available for a limited time.
With that, I’d like to turn the call over to Michael.
Michael Goettler — Chief Executive Officer
All right. Thank you, Melissa.
Good morning, everyone, and thank you for joining us for our first ever conference call as Viatris and the first time we’re delivering financial guidance for our new Company. I want to know [Indecipherable] Viatris only came into being approximately 90 days ago, and since then, we have accomplished a lot due to the leadership, collaboration and hard work of our 45,000 employees. We would like to thank for their tireless work to integrate our two companies with no business disruption to ensure patients around the world continue to get the high-quality medicines they need even in the midst of a global pandemic.
Today, we are excited to provide Viatris’ inaugural guidance in keeping with our commitment to see share our starting guidance as soon as available with the investment community. And while today’s call is focused on 2021 guidance, we do look forward to sharing more about our unmatched platform, our regional operations, our pipeline focus and exciting opportunity we see ahead for Viatris during our March 1 Investor Day.
For today, we want to share with you an update on our activities since launch, review some updates to our previously shared roadmap to optimize total shareholder return, provide a preliminary estimate for 2020 full year results and review 2021 guidance, including our capital allocation priorities.
Now, starting with slide number 6, let me start by summarizing where we started and where we are today. In July 2019, we laid out a compelling rationale for combining Mylan and Upjohn to create a new kind of healthcare company with a TSR focused business model that positions us to deliver stable revenue, maintain a strong balance sheet and execute a disciplined capital deployment strategy to drive future growth. We’re now here 19 months later, and that combination is a reality. And while it seems like everything has changed around the world during this global pandemic as it rages on, the compelling investment thesis that brought us together remains strong.
We said this transaction would have transformative global scale, and 90 days into our journey, we’re already starting to see the power of our global footprint. We’re operating in 165 countries and territories, including a strong presence in China and emerging markets. And that means we not only have significant scale, but also we have the diversity to create more stability and resilience against volatility in any one single market. The same holds true for our differentiated portfolio, which consists of more than 1,400 molecules, with only one product representing more than 5% of our revenue. Again, that diversity brings stability and opportunity.
We also have a clear path to delivering strong and sustainable cash flows, and we’re well on our way to achieving and even accelerating our $1 billion synergies that we committed to. Our cash flow generation potential reinforces our confidence in our ability to execute on our capital allocation priorities. This includes paying a dividend of at least 25% of free cash flow, the first payment of which we expect the Board to declare in May.
In addition to the other commitments we’ll be discussing today, we’re obviously committed to maintaining our investment-grade rating. The Viatris Board and the management team view maintaining a strong balance sheet as critical to sustainably delivering value to our shareholders for two reasons. First, a strong balance sheet will provide us with long-term flexibility to invest in our pipeline and growth opportunities through our unique global healthcare gateway. And second, a strong balance sheet will give us sustainability to continue to perform and return capital to shareholders through market cycles.
Since we closed the transaction in November, we’ve taken swift action to ensure that we can capitalize on the significant potential of our unique business model and better position Viatris to succeed in the current environment. We’ve made significant progress seamlessly integrating our two global organizations with no business disruption despite operating within a pandemic. And as we announced in December, we have implemented a multiyear global restructuring initiatives intended to ensure that our new company is optimally structured to sustainably achieve our Board mission. Rajiv will provide you with more details on our progress on this program later in today’s discussion.
Now, as you can see, the compelling strategic rationale for the formation of Viatris remains unchanged. What has changed is our starting point. The COVID-19 pandemic negatively impacted our revenue by about $800 million and EBITDA by approximately $510 million in 2020, and the delay in closing significantly reduced our initial cash position by approximately $1 billion. We’re well aware that the right starting guidance is paramount to setting Viatris on the right path to success and to maintain our commitment to transparent communication with you.
Additionally, our commitment from the beginning is that we would take into account all the risks and all the opportunities that we can see, including any one-time events and any country-specific headwinds. So with that in mind, we expect our revenue to be between $17.2 billion and $17.8 billion for the point of $17.5 billion; adjusted EBITDA to be $6 billion to $6.4 billion with a midpoint of $6.2 billion; and free cash flow to be $2 billion to $2.3 billion, with a midpoint of $2.15 billion in 2021, and that 2021 free cash flow guidance includes a $1.5 billion in cash costs to achieve synergies and other one-time costs — cash cost, which we expect to phase out in the future.
While Sanjeev will go into the dynamics in more detail later, at a higher level, we are confident that 2021 will be our trough year because we have a number of one-time costs related to the restructuring program that we expect to phase out in future years. We expect that our rapid deleveraging in ’21 will significantly reduce our interest expenses in ’22 and beyond. We expect script volumes to normalize as COVID recovery begins in ’21 second half and extends into 2022. And we expect our synergies of $1 billion to be achieved over the next three years instead of four. Regarding the top line, we have no major upcoming loss of exclusivity of any product in excess of $100 million after Lyrica in Japan and we fully expect as we continue to work together, we’ll be able to get more out of our platform, including maximizing future launches and achieving revenue synergies. We’re confident that our guidance accurately reflects the changes in operating environment and is the right starting point for Viatris.
With our diverse portfolio of pipeline, our global network and significant scientific, manufacturing and commercial capabilities, we are highly confident in our ability to capture the opportunity ahead through the Global Healthcare Gateway to drive significant long-term shareholder value. My management is with me here today, and I know the power of what we’re building at Viatris. We’re committed to executing on our TSR focused operating model and to capitalize opportunities and deliver value to set Viatris up for long-term success.
I also want to provide you a brief overview on slide 7 of the way we’re providing metrics today on the call and our expected structure for transparent disclosures and financial reporting going forward. Going forward, we will be providing results in four expected new reporting segments that includes our key regions: Developed Markets; Emerging Markets; the JANZ region that stands for Japan, Australia and New Zealand; and Greater China. And as we start reporting actual performance, we’ll report our financial results in each of these segments broken down in three product categories: brands, complex generics and biosimilars and generics, as well as top products for each of the geographic segments. And of course we’ll also provide segment profitability for each of the geographic segments. We believe that this will provide the details necessary to follow our business, and we look forward to continuing this dialog with you going forward.
With that, I’ll turn the call over to Rajiv to go into our 2021 expectations by market segment in more detail.
Rajiv Malik — President
Thank you, Michael, and good morning, everyone.
At the onset, I would like to extend my sincere thanks to our employees for their hard work and dedication, which enabled us to set up this new company for success. I would also like to echo Michael’s confidence in the strength of our platform and our long-term prospects.
Let me start with slide number 8 and provide color around each of our expected segments, especially about expected headwinds and tailwinds and share with you why we are confident that ’21 will be a trough year in terms of our financial guidance measures. As we look forward into ’21, we are forecasting an approximately 4% overall decline in the year-over-year revenue from our 2020 combined preliminary estimate. This overall performance is expected to be primarily due to two factors: first one-time special events, including the loss of exclusivity of Lyrica in Japan; the Perforomist loss of exclusivity in US; a one-time rebate accrual adjustment in US; and remdesivir in emerging markets are expected to drive approximately a 5% decline. It’s important to note that these items are not expected to drive further decline after ’21 months. Second, the normal base business erosion of 4% is more than offset by an anticipated $690 million new product revenue along with FX tailwinds.
I will now walk you through each of the segments in detail to put this in perspective. Beginning with our developed markets, which includes our North America and Europe businesses. We expect revenue to remain flat on a year-over-year basis. Europe is anticipated to show a strong performance and is expected to achieve high-single-digit growth in ’21, driven by biosimilars business, the expected contribution of recent acquisition of Aspen’s portfolio and new launches. North America’s performance is expected to offset European growth to keep developed markets flat. North America decline is expected to be primarily due to the special events such as Perforomist’ loss of exclusivity and the positive impact of a US rebate adjustment in 2020 related to the Upjohn business, which is not expected to reoccur in ’21. On a normalized basis, developed market is expected to be stable, supported by key drivers like Yupelri growth, biosimilar product uptick and new product launches, which are anticipated to offset expected 3 to 4% normalized base business erosion.
In emerging markets, we expect a 3% year-over-year decline, primarily due to a special item regarding the World Health Organization’s withdrawal of its recommendation for the use of remdesivir as a COVID-19 treatment. On a normalized basis, we see the business as stable with anticipated biosimilar growth and the new product launches offsetting the expected 3% base business erosion.
The Greater China business on a year-over-year basis is projected to decline by approximately 10%, primarily due to expansion of China VBP to Lyrica, Celebrex and Zoloft products and also assuming the implementation of URP in 11 cities to begin in the third quarter of 2021. Our China business has been restructured, and we believe that it has adopted well to absorb the impact of VBP while achieving strong growth in its retail channel business. As a result, our current estimated split between the hospital and retail business is almost 50-50. Beyond URP, we believe that our business in China is set up for modest growth, primarily driven by our fast-growing retail channel and is expected to achieve more as we also leverage legacy Mylan’s retail oriented portfolio. We see China as a strategically very important market, and we are excited to invest in our pipeline in the region. To that end, [Technical Issues] recently identified more than 25 products for regulatory submissions.
The JANZ business on a year-over-year basis is projected to decline by approximately 20%. The region is experiencing the special event of Lyrica LOE where we have assumed an accelerated genericization of the brand in line with the current industry trends. On a normalized basis, we expect the base business to erode 3% to 4%, which we expect to be offset by new launches like our recent launch of the first biosimilar to Humira in Japan and the launch of authorized generics.
To sum it up, with the significant special events like this LOEs behind us, we are confident about ’21 being the trough year and we expect to be able to offset normalized base business erosion of 3% to 4% by maximizing our anticipated new product launches, including biosimilars and complex generics through our enhanced combined global manufacturing and commercial platform.
And before I hand it over to Sanjeev, I would like to update you on where we stand with our previously announced structuring program and cost synergy activities. As you can see on slide number 9, we have a number of important initiatives in progress. The execution of our global restructuring program is well underway. In addition to the five sites we have already announced in December, we have identified and finalized plans to close, downsize or divest additional eight manufacturing facilities across various technology verticals and geographies. And as always, throughout this process, we are committed to ensuring supply continuity so that patient needs for critical medicines are met. We have also made significant progress and have identified commercial overlaps as well as opportunities to efficiently organize our support functions. As previously stated, up to 20% of our global workforce may be impacted upon completion of the restructuring initiative, which includes the site rationalizations.
As Michael shared earlier, we have accelerated our efforts and anticipate achieving over $1 billion in cost synergies in three years instead of four years. The in-depth rigor and discipline we are applying against these activities give us the confidence that we will not only meet but have the potential to exceed our synergy targets. We expect approximately $500 million potentially being achieved in ’21. These restructuring decisions are the most difficult in business, and we are extraordinarily grateful for the dedication of our employees and the important role they have played in our journey to become Viatris. Any restructuring actions we take are expected to be done in a way that is consistent with our longstanding commitment to treating employees fairly and with respect. We are confident that these actions will enable us to create a more flexible organizational structure and put our resources in right places to succeed and deliver on the potential of our platform.
And with that, I will now turn the call over to Sanjeev.
Sanjeev Narula — Chief Financial Officer
Thank you, Rajiv, and good morning, everyone.
As Michael and Rajiv mentioned, we are committed to providing you with the visibility and key elements that influence our guidance for 2021. We are providing this level of detail to enable you to see how we arrived at what we believe is the right starting point for Viatris. All our financial commitment remain intact, starting with our firm commitment to delivering, which includes paying down approximately $6.5 billion in debt over next three years and achieving our long-term leverage targets of 2.5 times. Second is returning value to shareholders through the dividends, which we expect to be initiated in the second quarter and to be based on 25% of free cash flow midpoint. Since we closed the transactions, we have been focused on bottoms-up exercise to construct our 2021 guidance. Given all the dynamics that Michael and Rajiv mentioned, it’s important to ground you on the starting point by reviewing the full year 2020 combined preliminary estimate.
On slide 11, as previously reported, the historical results for nine months ending September 30 consisted of combined revenue of $13.8 billion and $5.6 billion of adjusted EBITDA. They are derived from nine months results included in Mylan’s 10-Q and Upjohn’s carveout financials. While we are not reporting fourth quarter and full year results at this time, I’d like to briefly highlight some preliminary drivers that impacted the fourth quarter. The first item is continued COVID headwinds, primarily associated with lower prescriptions. Secondly, lower volumes of certain product sales to align customer inventories at the year-end for anticipated competition coming in 2021. Third, determination of generic collaboration with Pfizer in Japan and related reduction in revenue as a result of repurchase of collaboration inventory. Lastly, we were negatively impacted by foreign exchange headwind.
This brings us to 2020 combined preliminary estimates of $18.4 billion for revenue and $7 billion for adjusted EBITDA. Just please note, these combined preliminary estimates include the estimates of fourth quarter for Mylan and Upjohn. It’s important to recall there are some transaction-related adjustments which include required divestitures for certain products. This brings us to a total 2020 combined preliminary adjusted estimates of $18.15 billion for revenue and $6.8 billion for adjusted EBITDA.
The next three slides are intended to provide key takeaways for future reference. On slide 12, we have summarized some of the key assumptions for the guidance. On slide 13, we’re summarizing financial guidance for revenue, adjusted EBITDA and free cash flow along key metrics. Slide 14 provides additional transparency with respect to revenue composition of our expected reportable segments as estimated for 2020 and expected for 2021.
Moving to slide 15 and diving deeper into 2021 revenue guidance. We have organized this slide to show you on the left-hand side all the event-based one-time pushes and pulls to give you a cleaner picture of the underlying base business. To start, we have generic entry in Japan. In fact, the generic erosion is higher than what we had initially anticipated. Second is the anticipated Perforomist LOE in US. Next is the rebate spend for Lyrica that favorably impacted 2020 Upjohn results and is not expected to repeat in 2021.
For China, 2021 reflects the impact of fourth round of volume-based procurements, or VBP, bidding, which was completed earlier this month. VBP should essentially be behind us after this year as most of hospital-based revenue will have been subject to VBP. We’ve also factored in initial implementation of China’s universal reimbursement pricing beginning of third quarter. While we’re assuming a gradual recovery from COVID beginning in the second half and expect less of an impact on revenues relative to 2020, the full year negative impact is expected to be approximately 3% of revenue. These specific items are high margin, above the Company average, thus having a disproportionate negative impact versus our preliminary adjusted estimate for 2020 gross margin. After considering the impact of all event-based special items, we arrived at a normal — 2021 normalized base for the business.
Now, we look at the puts and takes from here. We estimate base business erosion driven by competitive market dynamics and products mix, which is entirely offset by new product revenues, including the full year benefit of the Aspen transaction. Additionally, we expect some product pruning as a result of continued transformation initiative. This is defined as discontinuation of product in our portfolio that generate very low, or in some cases, negative profit margins. We expect minimal impact of pruning on adjusted EBITDA. Finally, we’re expecting a meaningful tailwind from foreign exchange. All these dynamics gives us the confidence that 2021 will be trough year for revenue.
Moving to slide 16. You will find 2021 adjusted EBITDA guidance walk from 2020, combined preliminary adjusted estimate. Three additional items I will call out on this slide that are not specifically driven by revenue impact discussed in the previous chart. First is the depreciation and amortization adjustment which is reflected in the operating costs related to TSA reprices. Secondly, we expect to realize approximately $500 million of synergies in 2021. Finally, we’re also expecting an increase in certain expenses, primarily related to an increase in R&D and normal discretionary charges like employee merit and other benefit increases. Taking into account all these factors, we believe the guidance [Technical Issues] $6.4 billion for adjusted EBITDA represents a trough year for the Company.
Turning to slide 17 and our free cash flow guidance range of $2 billion to $2.3 billion. Using adjusted EBITDA as the starting base, we’re expecting cash outflows related to interest, tax, capital expenditure and further investments in working capital. In addition, we expect cash costs to achieve synergies and other one-time cash costs for approximately $1.5 billion, which primarily made up of cash costs to achieve synergies, litigations and settlements, integration-related costs and other restructuring-related costs. Going back to our financial policy commitment, as we have consistently said, we expect to return capital to shareholders in form of dividend beginning with the first full quarter post-close. The expected dividend payout will be based on 25% of 2021 free cash flow guidance midpoint of $1.15 billion or an annualized dividend of approximately $540 million or $0.44 per share. Due to the timing of the initiation of dividend with the first full payment to be made in June, we expect to make fee prepayments of 2021 for a total 2021 dividend of approximately $400 million.
Before I hand it back to Michael, I want to make a quick comment on the calendarization as you begin to update your financial markets. While we are not providing quarterly guidance, we expect both revenue and adjusted EBITDA to be more second half weighted as percentage of total is less due to normal seasonality of certain products, timing of tenders and expected synergy realization. In addition, we expect quarter one to be the lowest contributing quarter for total revenue, adjusted EBITDA and free cash flow.
With that, let me turn it back to Michael.
Michael Goettler — Chief Executive Officer
Thank you, Sanjeev.
Before we open it up to question on slide 20, I just want to wrap up by saying that now — now that we’re able to operate as one company, we are accelerating measures to ensure that we maximize the value from our unique Viatris platform, and will be laser-focused on fully integrating the business, investing in our pipeline, realizing the full potential of our pipeline launches, leveraging our now enhanced commercial footprint and leveraging our Global Healthcare Gateway to the fullest extent possible to fuel future growth without impacting our debt reduction plans. We’re confident that we have a clear roadmap for delivering shareholder value and execution, transparency and accountability will really be the key operative word as we continue down this path, and we hope we demonstrated that today.
So with that, let me turn it over to the operator and open it up for Q&A.
Questions and Answers:
Operator
[Operator Instructions] Our first question is coming from the line of Umer Raffat of Evercore.
Umer Raffat
Hi guys. Thanks so much for taking my question. I feel like there is a few moving parts there. We’d appreciate any color you can provide. Maybe starting with the free cash flow guidance. I understand, initially, the expectation was for around $4 billion. I also understand there was an expectation that synergies would be captured faster. Therefore there might be a bit more of a one-timer spend. But if you could just walk us through sort of part by part how much of the free cash flow — how much of the one-timer charges are baked in, how much of legacy Mylan restructuring charges are baked in and how much of additional Upjohn specific charges are baked in. I’m trying to go from $4 billion as kind of where we started and sort of get down to $2 billion to $2.3 billion. That’s one. And then also, I feel like I’m very confused by the preliminary adjusted estimate for 2020 in that revenue walk. It reads like it’s through November 15. So if that’s the case, then all the bars we’re seeing on that slide, are they for about 10.5 months’ equivalent or are they for the full year equivalent? I do understand the ’21 midpoint on the far right is obviously for the full year. Thank you very much. Hello?
Michael Goettler
Hey, we’re having just a sound issue. Give us one moment. Okay. Can you hear me now? All right. So sorry for the technical issues. We’ll obviously make up the lost time at the end. Umar, thank you very much for the question. I’ll address the last question first. It’s absolutely, these are full year numbers that you see, and Sanjeev, you can explain the technical reasons for why the full year number was formulated this way. But clearly, it’s the full year numbers. And on free cash flow, Sanjeev, if you could provide that color that Umar talked about.
Sanjeev Narula
Yeah. Umar, just to kind of add to that. So simple way to think about it is the nine months results that you see on slide 11 are the actual results that have been published for Mylan’s 10-Q and Upjohn’s Current Report statement. And then you see the full year. That includes the estimate for fourth quarter for both Upjohn and Mylan. We haven’t finalized the results. They will be — the 10-K will go out in March 1, but that is the best estimate we have and represents the 12 months, and almost mirror like the pro forma numbers.
Going back to the comment about the cash flow. Slide 17 actually provides the — all the elements, but let me just begin to kind of give you the transparency that you are asking for on the $1.5 billion cash cost. First of all, it includes both Mylan and Upjohn and also includes the historical restructuring program that Mylan has indicated. There are four large elements that you need to keep in mind for that. First is the cash cost to achieve synergies. As Rajiv pointed out, we’re accelerating that. So there is obviously severance-related cost that — and some site-related restructuring cost that’s part of their $1.5 million [Phonetic]. The second element is the litigation and settlement. We got — we got all that lined up and there are cash costs associated that we didn’t anticipate to pay this year. The third element of that is the integration-related cost. So we, as you know, we are setting up DSAs with Pfizer and working on the integration of all the platforms. There is a cost associated with that which is one-time. The fourth item is the other restructuring-related costs, which are primarily site restructuring. All these four items roughly account for 90% of $1.5 billion we talked about.
The other important factor to note, this $1.5 million would rapidly reduce over next year — next two years and will significantly improve our free cash flow.
Michael Goettler
Thank you. Next question, please.
Operator
Our next question comes from the line of Chris Schott of JPMorgan.
Chris Schott
Great. Thanks so much for the questions. I’m still just trying to bridge between the $18 billion top line and particularly the $7 billion of EBITDA that the Company pointed to for much of 2020 relative to today’s results. I mean, it wasn’t [Indecipherable] from this team specifically. But it does seem like EBITDA margins are coming in about 500 basis points below those kind of soft guidance targets that have been out there. I know part of this is COVID. I’m just trying to a get sense. Is this just an issue of not having that line of sight into margin performance versus last year? Is it just the Company thinking about maybe its investment levels different as you’re looking at the pro forma business? I’m just trying to get a little bit more color on that front. And then just following up on Umar’s question what is a more normalized free cash flow conversion ratio for this business. I guess in the low-30s based on that slide 17. Just roughly, what is that number over time as you get past these one-time charges? Thanks so much.
Michael Goettler
Okay. Thank you, Chris. Well, Chris, what I will say is, if you go back — we announced this deal in July 2019. We originally planned to close it in maybe April, then it got delayed because of COVID. We finally closed it in November 2020. We’re now here in November — in February 2021. And I’ll — that’s almost two years, and a lot has changed. And we pointed out I think two of the main big drivers, which was COVID that impacts our EBITDA margin, our starting point. We pointed out the delay in closing which has impacted our starting cash position.
That’s history. We are now here. That’s our starting point. We really want to give you guidance for what to expect in ’21 and the least that we found — convinced that we saw the right starting point and giving you the right number that we can meet and exceed and as the basis for the business going forward. We’ve fundamentally re-based the business. All the one-time items are kind of flushed out after Lyrica LOE. We’ve taken into account all the puts and takes as we give guidance going forward. We’ve been I think very transparent about what these puts and takes are in these slides as you can follow and track that and model us all eyes forward as we deliver, as we delever, as we rebalance, and I think we also got [Indecipherable] the right number but also the right priorities, debt paydown, strengthening our balance sheet, initiating a dividend, rebalancing the business and then leveraging the platform that we have going forward. So that’s — that’s what I’ll comment on that. And then specifically on the free cash flow, Sanjeev, maybe you can comment on that.
Sanjeev Narula
Sure, sure. So, Chris. The cash flow conversion, obviously, as we pointed out, 2021 is going to be a trough year for free cash flow as well. Because of the one-time costs that I mentioned about, $1.5 billion. As that cost declines over next three years and as we improve the EBITDA because of synergies, and as we look at paydown debt and reduced interest costs, we believe our cash conversion will go up. We’re not providing the guidance this time for next couple of years, but we should expect rapid improvement in free cash flow because of the factor that I mentioned.
Michael Goettler
Okay. Next question, please.
Operator
Our next question comes from the line of Gregg Gilbert of Truist Securities.
Gregg Gilbert
Hi. I just wanted to follow up that last part of your answer. I was hoping you could walk us through that $1.5 billion synergy/one-time costs. Simplistically, if we were to take free cash flow guidance for 2021, add back $1.5 billion, which you are calling one-time, can we take 25% of that number plus the growth you would expect in free cash flow to come up with a dividend in 2022? Obviously, suggesting a very sharp increase in dividend, but I want to make sure we have the appropriate thought around that. And as it relates to the longer-term outlook that you say you plan to provide whenever that is, can you walk us through the process that you’re going through now that would enable you to be confident in expressing a longer-term view? Thank you.
Michael Goettler
Yeah. So I’ll take both of these question. On the dividend, Gregg, clearly, we expect to grow the dividend with — starting with a 25% free cash flow dividend in ’21 that the Board will declare in May. But obviously, that’s a decision — future dividend increases — that’s a decision the Board will make at the time, take into account the situation of the business at the time. So that would be our answer on the dividend. On the long-term outlook, today, we give you 2021 guidance. We’ve not done the work bottom-up to do because we only had 90 days to do a long-term quantitative detailed planning so that we can give you a numeric guidance going forward. But what we have done and have confident, well, I’ve seen enough of this business, have seen enough of the levers that we have to confidently say that we — ’21 is our trough year and we provide you more quantitative guidance in a few months as we go through this process. Okay. Next question?
Operator
Our next question comes from the line of Elliot Wilbur of Raymond James.
Elliot Wilbur
Thanks. Good morning. Can I just ask Sanjeev to just quickly clarify his comments around free cash flow conversion? I think the questions were, measuring that relative to EBITDA levels, and then I just want to make sure that’s what you’re thinking about when you talk about the acceleration going forward because if you back out the $1.5 billion in cost, you’re at almost 60% which is a pretty high level. So I want to make sure that I clarified what you were referring to when referencing free cash flow conversion. And then, help us think about the $1.5 billion in cash costs this year. I guess my prior expectation was that that was going to be spent over a couple of years to realize these synergies. But what happens in 2022 and 2023? What are we looking at in incremental cash spend relative to some of these restructuring programs that’s going to offset some of the synergy realization? Thanks.
Operator
[Technical Issues] It sounds like we’re having technical difficulties again. We apologize.
Michael Goettler
Are we back on? All right. We went to back up old-fashioned speaker phone now. We hope this won’t give us anymore trouble.
Sanjeev Narula
So, Eliot, you had three questions on this part and let me take you one by one. First of all, I’m going to start with that. The 2021 free cash flow is the trough year based on all that what we explained. And then, I expect the free cash flow to improve. So there are three things going on essentially, which is important to keep in mind. So one is the $1.5 billion cash cost that I mentioned about. There are four elements of that. That item is not going to become zero next year. That I think is going to be substantially reduced in next year and year after that. So that obviously will improve the free cash flow. Then we obviously have an EBITDA improvement that will go year-on-year. Then the third element is the interest cost reduction as we paid down our debt. So free cash flow will improve over a period of time, conversion ratios will improve over a period of time, and I’m very confident about the — the rapid improvement part. The second part of your question was on terms of the — I think you’re referring to the comment that we made that at the JPMorgan, about $1 billion to $1.3 billion of cost to achieve synergies. So the context of that is that — still valid, that $1 billion to $1.3 billion of cost to achieve synergies will happen over the next three years. What I mentioned about $1.5 billion is both includes cost to achieve synergies and other one-time cost. So both are combined in that amount, and we expect the amount to go down and cash flow to improve as we go forward.
Michael Goettler
Okay? Next question.
Operator
Our next question comes from the line of Randall Stanicky of RBC Capital Markets.
Randall Stanicky
Great. Thanks, guys. I want to ask about your ability to grow from the pipeline. If we look at the EBITDA bridge on page 16, it shows base business erosion of $480 million, which is higher than new product contribution of $325 million. So the eroding revenue is also at a higher margin. So can you address that and get us comfortable around Viatris’ ability to drive growth from the pipeline with new launches against that erosion going forward? And then the — the additional question would be, what’s your ability to pursue business development to help supplement that growth through 2023 as you guys focus on debt paydown? I guess is there an annual amount that you can deploy or how are you thinking about BD MAX?
Michael Goettler
Thank you, Randall. So as you correctly pointed out, if you look at 2021, the numbers you quoted, ’21 has a bunch of unique drivers on the left. These drivers will — will go away. And then what we’re left with is a fundamentally rebalanced business. All the LOEs are washed out, the major LOEs. The cost structure is adjusted; we’re paying down debt; one-time costs will be phasing out; synergies will come in. So all of that benefits our business. Regarding the top line, again, no major LOEs coming up, and we will be able to get more out of the platform we have. So we, based on all the push and takes that we see, we are highly confident that 2021 will be a trough year for revenue, will be a trough year for EBITDA and certainly will be a trough year for cash flow, which we expect to strongly accelerate.
On your BD question, BD — we are a hybrid business model. We have been — and we are unashamed about it. We will grow in the future — a combination of internal and external R&D, if you will, internal R&D and BD. The key is to be very focused with that, with disciplined capital allocation and make sure that everything we do, whether it’s R&D or whether it’s BD is value creating. Now, at the same time, our short-term priorities are very, very clear. And we will in the near term focus on delivering and will not do any BD that will impact our ability to pay back debt. Next question, please?
Operator
Our next question comes from the line of Jason Gerberry of Bank of America.
Jason Gerberry
Hey, guys. Thanks for taking my question. Mine relates to your outlook for the 2021 business. It seems like from the time the deal was struck, the main difference is COVID, primarily, which seems transient in nature. And what I wonder about is how your expectations [Technical Issues] And the reason I ask is, investors will look ahead to a 2Q goodwill impairment test, and the legacy of large generic pharma mergers hasn’t been particularly favorable on that front. So I’m wondering qualitatively if you can get a sense or give us a sense, has the business fundamentals altered in a meaningful way relative to when the deal was consummated? Thanks.
Michael Goettler
Okay. So I’ll ask Rajiv to answer the first part of the question and Sanjeev on the technical question that was asked.
Rajiv Malik
So, yes, and as Michael said very earlier in his remarks, nothing about the business fundamentals, the foundations of — or the ethos which we have, the principles, why we did this deal, this standard deck, diversity of the scale, the transformative scale, the diversity of the portfolio, the pipeline, the platform which we have and our ability to get more out of this, that has not changed. What has changed, of course, you say that COVID last year is a — COVID has been a one big driver. And as I look forward, with every bigger cleft which you call it, LOE or any such event behind us, and we had assumed, even if it comes to let’s say URP, we had made an assumption that, okay, Q3 sets in weeks. From here onwards, we look into as a normalized business, which we have a base where our job will be how best to manage the erosion of SPA, that there are opportunities over there, how get to — maximum [Phonetic] of these launches which we have in our pipeline, and execute on the synergies, and we believe there is a potential for us to not only exceed which we have already accelerated in terms of the timing [Indecipherable] 1 billion. So I don’t think the fundamentals about this combination of change to any extent. Michael, back to you again.
Sanjeev Narula
Yeah. Jason, on the second question about the goodwill impairment. So obviously, as I mentioned, we are in the process of doing our purchase accounting and fair valuing the asset and finalizing our balance sheet. Based on the latest forecast that we talked about today, I don’t expect any material goodwill impairment or anything like that. We were very comfortable with the underlying value of the business.
Michael Goettler
We just did the transaction in November [Indecipherable]?
Sanjeev Narula
Yeah.
Michael Goettler
All right. Next question, please.
Operator
Our next question comes from the line of Balaji Prasad of Barclays.
Balaji Prasad
Good morning. Thanks for taking the question. I found slide 8 very useful and the way you presented it over there. But can you comment on the longevity and the quantum of growth of the tailwinds that you had mentioned in each of the geographies? And also looking beyond 2021 and one-off challenges, could we be sitting here next year thinking that China [Indecipherable] [0:51:14] now or Japanese generics got hit by stronger mandated price cuts? What could go wrong and what could be newer one-offs that we are not seeing now? Thank you.
Michael Goettler
Rajiv?
Rajiv Malik
Yeah. So, Balaji, great question. Let me start with China, for example. I think that China — with the VBP, the full impact of VBP, while we are now extending this to Lyrica, Zoloft and Celebrex, business has absorbed that impact or is set up to absorb. And actually we are very happy with how the business is responding to and shift from the hospital to retail, which is the fastest-growing channel. In fact, we are excited to invest and drop in more pipeline, drop in more products, and I believe that our Mylan legacy is a retail oriented portfolio like Dona or Legalon or Dymista, these products will do better in the hands of this new — the combination. So that — let’s put China there. Japan, we had assumed — we have taken the worst-case scenario. In fact, we have taken the recent trends which because of the COVID had got accelerated, not genericization but our opportunity in Japan is — we have a portfolio — established brand portfolio, which is growing at about 9% to 10%. The launch of authorized generics and the new launches like we just launched the first biosimilar to the Humira over there and there are other pipeline products which will help us offset that. So I don’t see a lot of big moving pieces as we have mentioned again and again as we look forward. Emerging market, to me – I think once we have this one-off issues over there, it’s a stable business as we look forward and now we’re going to work on how we can get that business back to the growth [Phonetic]. Europe is a great — at a great place. The normalized European erosion is not more than 1%, 2%, 3%. That’s what we have seen over the last few years. Our portfolio is well set over there. It’s more towards the brand. 60% towards the brand and 40% towards generics. And then going biosimilars. Biosimilars are growing there almost at about 50%, 60% year-over-year. So all this provides more sustainability to our business in Europe. And we have been working continuously to minimize the volatility of our US business. That was the most — and now, from the exposure point of view, that core generics is not more than 10% of our combined platform. So that should give you a little bit flavor on going-forward basis.
Balaji Prasad
Thank you.
Michael Goettler
Okay. Next question, please.
Operator
Our next question comes from the line of Nathan Rich of Goldman Sachs.
Nathan Rich
Hi. Good morning. Thanks for the questions. Looking at the revenue and EBITDA walk that you gave on slide 15 and 16 and as we think sort of about the growth outlook off the normalized base, I guess looking at the base business erosion and new product contribution in 2021, do you feel like that’s what you would typically expect in a normalized year? Just as we think kind of beyond 2021 and after some of these one-time headwinds go away, what the different kind of moving pieces are to the growth outlook? And then if I could just ask a follow-up to Sanjeev, your comments earlier. Could you maybe just talk about the 4Q EBITDA performance in a little bit more detail? I think it was a little bit softer than we had expected. So I just want to make sure I understand the moving pieces in the fourth quarter.
Michael Goettler
Okay. So I’ll let Rajiv talk about our pipeline and new product revenue and then Sanjeev can go to the Q4.
Rajiv Malik
Yeah, Nat. I mentioned in my prepared remarks about on a normalized basis if we did all this one-off items out, we see this base business on the normalized way eroding at about 3% to 4%. And if you look into our average track record of how we have launched or how much we have launched over the last five, six years, it comes into the line-up for $500 million, $600 million every year. So we believe that that this combined platform, that our ability to get more out of those launches, that we have not factored in. That’s — I think that’s where we have been a little bit balanced. But we believe we can get more out of that. So if I look forward, I think that it’s a simple dynamic. We have to manage this base business erosion. If we can arrest that decline and manage it efficiently, that’s one opportunity. And second, we can get more out of the launches in the near term.
Sanjeev Narula
And, Nathan, on the fourth quarter, clearly, we haven’t kind of finalized that. We’re one week away from reporting our 10-K. But I kind of give you a little bit more color on what’s going on. Clearly, COVID has continued to be a major headwind associated with lower prescriptions. And we’ve seen lower volumes in certain products. This is to align the customer inventory levels in anticipation of upcoming competition in 2021. The third item is, which is one-time in nature is — of that chart is the termination of generic collaboration with Pfizer in Japan. And we have taken back the inventory which was sold to Pfizer, and that’s got an impact on the fourth quarter results and obviously the foreign exchange headwind.
Michael Goettler
And it obviously was a very unusual quarter.
Sanjeev Narula
Right, right. So this is — for reasons of coming together, unusual quarter. And then I think the important thing to note there is we’ve got a starting base that we can now look forward to 2021 without pushes and pulls that we described to you on these walks.
Michael Goettler
Okay. Next question, please.
Operator
Our next question comes from the line of David Risinger of Morgan Stanley.
David Risinger
Yes. Thank you very much. So I have two questions, please. First, with regard to the 3% to 4% erosion that’s expected annually, could you just discuss that a little bit further in light of the Company’s very high margin? So, the Company is targeting a 35% margin and that’s set to go higher, and I would think that that would attract additional competition given low-cost structures of competitors throughout the world. So if you could speak to that. And then second, with respect to the dividend, it seems like given that the dividend is based upon free cash flow, there should be a tremendous gap up in the dividend in 2022 since the one-time costs will step down tremendously. Could you speak to that opportunity and also the annual dividend volatility that you expect relative to other public companies that do not determine their annual dividend using free cash flow? Thank you.
Michael Goettler
Okay. Thank you, David. So, look, I’ll start with the dividend and I’ll ask Rajiv to comment on the erosion and [Technical Issues] Very clearly, what we say is our 2021 initial dividend will be determined. We expect it to be set by 25% of free cash flow. Future dividends will be decided by the Board of Director at a time and I don’t want to get into speculating on this right now. Rajiv?
Rajiv Malik
David, I think a week from now, Investor Day will be a great opportunity for us to walk you through what this business is made up of and what are the underlying dynamics of — is just this base is made up of the LOEs, a bunch of established brands which are not declining, which are — some of those brands are actually growing, complex and biosimilars. Complex, generics and biosimilars and the core generics — or generics portfolio. And everything has a different dynamics. So the catch is in understanding at a granular level how these businesses are performing and manage them accordingly. So once we walk you through the dynamic and how we are managing that, I think we will be able to give you a much better appreciation about how we are basically managing because your point about the low cost competitors might be applicable to the generics — core genetics segment, but there also, this restructuring exercise that everything we are doing is saying how can we continue to be more competitive in that space and not lose that floor. So I think it would be a great opportunity for us to walk you through the — walk around the globe and walk through this businesses, the underlying dynamics and how we intend or propose to manage these.
Sanjeev Narula
Just one other point. I think we said in the press release today that clearly the Board is going to decide on the dividend. But our expectation is the dividend amount to grow next year and thereafter.
Michael Goettler
Okay. Yeah. Next question, please.
Operator
Our next question comes from the line of Akash Tewari of Wolfe Research.
Akash Tewari
Hey, guys. So, do you see this as kitchen sink guidance? Because I’m a bit concerned about some of the embedded benefits in your bridge, particularly what gives you confidence on the $188 [Phonetic] million FX benefit. And on EBITDA, you bake in a $325 million new product gross margin benefit. Looking at your revenue growth, you have $690 million in new product revenue, but that includes about $250 million in Aspen. So how do you get such a big benefit on new product gross margins, given your new product revenues that you’re guiding? And then, it also looks like China is still a very critical part of your 2021 revenue assumption. I think you guys are implying about — about $1.75 billion. That’s higher than what you originally guided at the time the deal closed. What gives you confidence given about 30% of your business is retail, that it will stay steady at those levels going forward? Thank you.
Michael Goettler
Okay. A lot to unpack here. So one thing just to clarify, very quickly. The new product revenue number, as you can see the footnote, includes the Aspen deal. So we’re very transparent about that. The guidance — the guidance we give you today is a realistic guidance. It’s the right number. It’s a number that takes into account all the puts and takes that you see in the business and we try to be as transparent as possible to lay those out for you. We also think we struck the right number in terms of priorities going forward. And thank you for pointing out China. We’re very proud of the performance in China. We fundamentally restructured the business there. The performances is ahead of our expectations. And we’re very bullish on the future, what we can do in China. Rajiv, do you want to add anything to it?
Rajiv Malik
No, in China, the retail [Indecipherable]. Actually that’s been growing at about 20%, 25% year-over-year, and we feel very bullish about that.
Sanjeev Narula
And on the FX, it’s the normal course of business. The FX tailwind that you see here is in line with how the currencies are behaving, and is in line with how some of the other guidance have come out from the other peer was. So there is nothing extraordinary in that.
Michael Goettler
Okay. All right. Next question, please.
Operator
And ladies and gentlemen, we have time for one more question. Our last question will come from the line from Ronny Gal of Bernstein.
Ronny Gal
Good morning, everybody, and thanks for fitting me in. First, as it was not said by my peers, I will just say that. I want to thank you for promising us more detailed guidance than we have received before from Viatris. So that will obviously be a positive for us. Second, Michael, I mean, the question I always have about — about the business you are in, is that things seem to be going well as the business — as the countries continue to fund healthcare the way they do. But you just takes a step down when countries change their strategy about how they pay for healthcare. And we’ve seen before — we’ve seen it before with Germany, we’ve seen it with Australia, we’re now seeing it with VBL in China. And the question to me is, why should we not continue to see that — you got an ongoing running business which after this one-time might look slightly growing on the top of — on the top line. But you always have the risk that once in a while countries will come in and do something about this. And right now, China has been very successful with the VBL from their perspective, why should they not expand that to the retail market? You made European market have talked about the need to curtail government cost in the post-COVID period. Why wouldn’t they go ahead and curtail some spending on the minor drugs, which is the core of your — of course, your business? How do you think about the longer term in terms of the impact of this new business?
Michael Goettler
Yeah. Thank you, Ronny. I think the business we’re in — we do have, and we ignore that, we always have natural erosion. The benefit of this strategic combination, the benefit of the Viatris platform is that we are so diversified now, we’re so broad geographically, right. You look at the exposure — if you take the — our new reporting and disclosure on the categories, take generics for example. Our US generic — generic business is about 10% now. Our exposure to China is 10%. Our product portfolio is very diverse, over 1,400 molecules; only a single product make more than 5% of the revenue. So, for things to go wrong, a lot of things need to go wrong now. That we have — that’s the benefit of the diversification we have. That gives us stability. And yes, we do expect things to happen in one country and things go up or down, but we now have enough levers to off that. That’s — I think the key reason, the strategic benefit that we have. Was there a second part to the question? I forgot.
Okay. Well, Ronny, thank you for that question. And I think thanks everybody for joining us today. I apologize for the two technical issues that we had. We will see how we improve our technology going forward. But we look forward to providing you more details on our unique platform and some of the initiatives that we have that makes us so excited about the potential for Viatris going forward at our upcoming Investor Day on March 1. And thank you very much again.
Operator
[Operator Closing Remarks]