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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. My name is Gretchen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Viatris 2022 Third Quarter Earnings Call and Webcast. All participant lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] Thank you.
I will now turn the call over to Bill Szablewski, Head of Global Capital Markets. Please go ahead.
Good morning, everyone. During today's call, we will be making forward-looking statements on a number of matters, including our financial guidance for 2022, various strategic initiatives in our Phase I and Phase II outlooks. These forward-looking statements are subject to risks and uncertainties and that could cause future results or events to differ materially from today's projections. Please refer to today's presentation and our SEC filings for a full explanation of these risks and uncertainties and the limits applicable to forward-looking statements, including certain assumptions and risks related to the Phase I and Phase II outlooks.
We will be referring to certain actual and projected non-GAAP financial metrics to supplement investors' understanding and assessment of our financial performance. Reconciliations of those non-GAAP measures to the most directly comparable GAAP measures can be found on our website and in the appendix of today's slide presentation. A copy of today's presentation and other earnings materials will be available on our website at investor.viatris.com following this call.
Now I'd like to turn it over to our Executive Chairman, Robert Coury.
Almost two years ago today, we brought together two great complementary organizations to form a new company, Viatris, with the purpose of creating a sustainable global health care leader. Under the leadership of our Board of Directors, along with management, we laid out a very clear and deliberate strategy to build a highly diversified company with multiple capabilities spanning numerous geographies and therapeutic areas.
At that time, we established a two-phase road map that detailed and emphasized our strategic priorities to deliver value to our shareholders. Phase 1 has always been designed as our setup Phase for Viatris. It is about building a rock solid foundation setting us up for Phase 2, which is expected to be a period of renewed growth and leadership in our sector.
Up until now, we have been laser-focused on executing on Phase 1, consisting of the years 2021 through 2023. In doing so, our priorities have been clear: integrate the two organizations, generate $1 billion in cost synergies, deleverage the balance sheet, pay down at least $6.5 billion in debt, reduce our gross leverage to our long-term target ratio of 3x and maintain our investment-grade rating, all while returning capital to our shareholders.
Today, here's where we stand. First, we continue to execute on our integration plans and are well on track to capturing at least $1 billion of cost synergies by the end of Phase 1. Second, we continue to exercise our financial discipline and intend to keep our investment grade rating. Third, we paid down $4.2 billion in debt since the beginning of 2021 and are on track to paying down at least $6.5 billion by the end of Phase I.
And lastly, we returned capital to shareholders beginning in 2021 with our inaugural dividend, growing the dividend by 9% in 2022 given our strong cash flow generation and plan to add to such return through the execution of our share repurchase plan.
All of this while delivering on the seventh straight quarter of strong operating results despite many industry headwinds, including inflationary pressures and a negative impact that we estimate to be approximately $1.3 billion year-over-year for 2022 to the top line as a result of the material effects of adverse foreign exchange movements. We anticipate that Viatris' second full year results will only further demonstrate the strength and robustness of our business.
This past February, we announced a strategically important transaction with Biocon Biologics regarding our biosimilars franchise, which we anticipate will close shortly. We also reported strong results on our first year of operations as well as announced, after careful analysis, the economics and proceeds that we anticipate receiving through other potential divestitures.
I will give more detail and speak more about these potential divestitures shortly, but first, while we will remain therapeutic-agnostic overall, we announced this morning two acquisitions consistent with one of our previously announced therapeutic areas of emphasis: ophthalmology. We anticipate the combined assets of these acquisitions to add to the top line immediately and grow in strong double digits from there, potentially reaching to at least $1 billion in sales by 2028.
As a result of the expected strong top line growth, we anticipate these acquisitions will also add at least $500 million in adjusted EBITDA by 2028 as well. The aggregate purchase price for the acquisitions is approximately $700 million to $750 million, which we expect to fund with cash on hand upon closing. Michael and Rajiv will discuss more about this in their prepared remarks.
Furthermore, given that we believe that our shares are significantly undervalued, our view is that, in addition to investing in growth assets, repurchasing our shares is another one of the best uses of our cash. Therefore, we intend to increase our return of capital to shareholders, not only through the continuation of our dividend, but also following the receipt of the proceeds of the Biocon Biologics' transaction, we intend to begin executing in 2023 on the $1 billion stock repurchase program authorized by our Board of Directors earlier this year.
And now, with almost two years of operations under our belt, we are even more confident in the strength of our platform and can more fully address a number of important questions that we have received from investors since our last investor update. These include: one, further details on our planned divestitures; two, the stability of our base business post Phase 1; three, our future capital allocation priorities and plans for Phase 2; four, how we will return our business back to growth; and lastly, confidence in our ability to ultimately execute on all actions that we have outlined to date.
I will start with our announced divestitures. In February, management provided commentary with respect to our planned divestitures. We currently expect approximately $5 billion to $6 billion in pretax proceeds in addition to the proceeds expected from the sale of our biosimilars business.
In order to fully address the stability and outlook of our current base business in Phase 2, 2024 and beyond, I will lead to identify for you additional detail on the planned assets to be divested. It is important to note that these identified assets, which once were core assets to us in the past based on where we were in our business lifecycle them, but have been now determined not to be core assets today based on where we are taking Viatris on a going-forward basis, which is continuing to move up the value chain.
Similar to our biosimilars transaction, we believe some additional benefits of divesting these non-core assets are reduced SG&A costs, reduced capital expenditures and the aggregate average gross margin profile of these assets is lower than the Company's current gross margin as a whole.
The non-core assets that have been identified and that we intend to divest are as follows: one, our OTC business; two, our women's healthcare business; three, our active pharmaceutical ingredients business, or API, but retaining some selective development API capabilities; and lastly, certain geographical markets that were part of the combination with Upjohn's business that are smaller in nature and in which we had no established infrastructure prior to or following the transaction. We expect to complete these planned divestitures by the end of 2023 and also expect the proceeds to provide additional significant financial flexibility for both our Phase 1 and Phase 2 commitments.
Now that I've addressed our divestiture plans, let me provide some additional detail on the outlook of our current business in Phase 2. My comments will refer to the base business from that point going forward, but before any positive impact of the two acquisitions we announced this morning, unless otherwise indicated.
We believe that our base business will be well positioned to deliver 1% top line growth long term. This is supported primarily by our strong internal organic pipeline for our new product launches. We expect our strong pipeline alone to more than offset our annual base business erosion, which we now expect to be 2% to 3% beginning in Phase 2 versus previously forecasted 4% to 5% that we modeled for Phase 1. Rajiv will provide more details later.
Additionally, when including the potential financial impact of the two acquisitions announced this morning, which we expect will only be additive to our growth, we are targeting during Phase 2 a top line total revenue CAGR of approximately 3%, adjusted EBITDA CAGR of approximately 4% to 5% and, most importantly, an adjusted earnings per share CAGR of approximately mid-teens.
Note that while these CAGRs include acquisitions announced this morning, they do not take into consideration the positive impact of any future business development or M&A. These targets reflect our commitment to executing and delivering growth to our business only using the assets that we already have in-house, a continuation of paying down debt and thereby decreasing net interest expenses and, most importantly, returning capital to shareholders through our anticipated future share repurchases plans, which I will discuss shortly.
For modeling purposes, you should consider two adjustments in exchange for the additional $8 billion to $9 billion of aggregate pretax proceeds we anticipate to receive by the end of 2023, or shortly thereafter, from all our divestitures, including our biosimilars business. Therefore, as we enter Phase 2 beginning in 2024, you should think about making the following adjustments where we see ourselves for 2022.
First, an adjustment of $2.1 billion in revenues and $700 million in adjusted EBITDA to reflect our four planned divestitures just mentioned, including our biosimilars business. And two, an adjustment of approximately $300 million in increased R&D expenses, partly due to the impact of the recent SEC guidelines for licensing deals that were previously excluded from adjusted EBITDA that will be included in the future.
Also in that number are some continuing development expenses for the two acquisitions announced this morning which will drive our continued long-term growth. Although we are not giving any official guidance today beyond 2022, these adjustments have taken into consideration the remaining actions that need to be taken on our divestitures as well as other expected pushes and pulls in 2023 as we reshape and rebase Viatris.
Now turning to our future capital allocation priorities. For Phase 2 beginning in 2024, we expect to reshape and rebase features to generate at least $2.3 billion of free cash flows per year, excluding transaction, costs and taxes, of which we intend to earmark 50% annually to be returned to shareholders in the form of dividends and future share repurchases.
With the remaining approximately 50%, we do intend to identify and be able to reinvest further into our business organically and inorganically with value-creating, financially accretive, bolt-on transactions and other potential transactions that fit the mold of what we announced this morning.
We are excited as we begin to approach the end of Phase 1 and enter Phase 2 of our strategic plan. After reporting of seven straight strong quarters, we are hopeful that the market will increasingly begin to recognize the value of our strong balance sheet, our ability to generate strong cash flows, our ability to return capital to shareholders through our dividend and especially now with our commitment to future share repurchase plans given the tremendous undervaluation in our security shown by our current PE multiple.
Now in terms of adding to the growth of our base business, when we laid out our strategic vision at our February investor event, we discussed business development in the areas of ophthalmology, GI, dermatology as an important complementary vehicle to drive inorganic growth for our company. As Michael and Rajiv will elaborate later, we believe that the acquisitions of Oyster Point and Famy Life Sciences are excellent examples that will establish for Viatris a strong foundation for a leading ophthalmology franchise.
We expect these acquisitions over time to be substantially additive to both our top line and bottom line. And on a stand-alone basis, when combined with our commitment to begin repurchasing our shares, we expect these acquisitions to be adjusted earnings per share accretive in 2023.
I'd like to personally welcome Dr. Jeffrey Nau, CEO of Oyster Point Pharma, who upon closing will be the newest member of Viatris' management team and who will be introducing himself and speaking to you shortly. Dr. Nau will be leading our new ophthalmology franchise at Viatris along with his talented and seasoned management team.
We have been keenly impressed by Jeff and his team's accomplishments, and especially Jeff's leadership and vision. We are confident that their talent and expertise will be a great asset to Viatris following the closing of the acquisition of Oyster Point Pharma and the complementary acquisition of Famy Life Sciences.
In terms of the confidence in our ability to execute on all the actions that we have just detailed, when we consider the tremendous operational and financial progress that we have made over the past two years despite a challenging external backdrop, there is no stronger testament to our entire company's ability and capabilities to successfully execute on all facets of our plan than delivering the consistent results that we have.
Another notable achievement in our continuing successful integration is having been able to exit substantially all the transition services with Pfizer last month. And for all of this, the Board of Directors would like to thank the senior management team and all of our approximately 37,000 employees around the globe for their unwavering commitment, dedication and performance, especially towards some of the toughest years in this industry, including taking on the global fight against COVID.
Before I conclude my prepared remarks, I would like to provide to the broader investment community a few items from our perspective that might be self-evident but underappreciated. One, how truly differentiated our company is amongst many of our peers. I believe that it sometimes gets lost on the investment community that we are no longer just a U.S. generics and specialty pharmaceutical company that is materially exposed to all the volatility and the level of erosion that exists in the U.S. market.
In fact, only $1.8 billion out of an estimated $16.5 billion of our estimated sales in 2022 will represent the total sales of our generics in the U.S. We have deliberately taken steps to minimize such exposure by derisking our business model in the United States through geographical expansion and also by moving up the value chain with more highly complex products launched in the United States and elsewhere where our products would be differentiated and with a better financial analog.
Two, Viatris is the only U.S. company with an investment-grade credit rating amongst our peers which we believe is significant and meaningful especially in today's environment.
Three, with one of the strongest balance sheets amongst our peers and significant cash flows, we have significant financial flexibility which we believe positions us to be able to quickly adapt and adjust to the ever-changing global health care environment.
And four, we have one of the lowest gross leverage ratios amongst our peers.
Five, we will be returning a quantum capital to shareholders through what we believe is an attractive dividend and, soon, through share repurchases.
Six, the Board will continue to look at opportunities to add or even further unlock value when and where we see opportunities.
And lastly, we represent a unique opportunity for the investment community to participate in what we expect to soon be a strong adjusted earnings per share growth story.
Simply put, once our business is rebased, we feel very confident in our future prospects for where we believe we will be able to deliver top line growth, adjusted EBITDA growth and adjusted earnings per share growth. And with our significant cash flow generation, we expect to be able to return capital to shareholders through dividends and especially through share repurchases.
With that, and before I turn the call over to Michael, Rajiv and Sanjeev, I would like to note that following the call today, we will be commencing our annual shareholder outreach program, so please look forward to hearing from us in the coming weeks. Thank you. And especially thank you for your interest in Viatris, I look forward to answering your questions during our Q&A period.
I will now turn the call over to Michael.
Thank you, Robert. Now following your detailed outline, let me go directly to today's acquisition announcement and a high-level overview of our Q3 results.
In February, we announced three therapeutic areas of focus for moving up the value chain with NCEs and 505(b)(2)s and that included ophthalmology. We believe that the two ophthalmology acquisitions which we're announcing today, Oyster Point Pharma and Famy Life Sciences, give us a significant head start in creating an ophthalmology franchise within the Company that will set a strong foundation for what we expect to be a future ophthalmology leader and in accelerating our strategy to move up the value chain.
The total cash consideration for both acquisitions, including equity and debt, will be between $700 million and $750 million. I'm excited about the assets, the talent the expertise and the capabilities which we're bringing into the Company with these acquisitions. Oyster Point will provide us with an exciting commercial stage growth asset, Tyrvaya, the first and only FDA-approved nasal spray for sinus symptoms of dry eye disease with a unique and novel mechanism of action, activating the trigeminal parasympathetic pathway to increase the production of the patient's own natural tear film.
Tyrvaya was launched in November 2021 and patients and physician feedback is very encouraging. Dry eye disease is an area of major unmet medical needs affecting approximately 17 million patients in the U.S. alone, and we're excited to bring an important innovation like Tyrvaya to more patients and more countries consistent with our mission to empower patients worldwide to live healthy at every stage of life regardless of geography or circumstances.
Clinical development is also ongoing to expand Tyrvaya into further indications, such as neurotrophic caratopathy. In addition to that, the Famy Life Science's acquisition will add five additional Phase III or Phase III-ready front-of-the-eye programs in various indications. We believe Tyrvaya and these front of the eye ophthalmology assets could potentially have combined annual revenue of at least $1 billion by 2028.
Together with our own capabilities, we believe we'll have everything we need to set the foundation to become the next global ophthalmology leader. The entire management team and I look forward to working with Dr. Jeffrey Nau, who will be leading this effort, and his talented team as we build a leadership position in ophthalmology and as we execute to make this area one of several billion-dollar growth drivers for Viatris.
As you can see, and consistent with our strategy which we announced in February, we continue to make important strides to reshape Viatris, and we believe we have a clear, defined path to return our company to top and bottom line growth from 2024 and beyond and to have the necessary financial flexibility to return significant capital to our shareholders as well as to continued business development.
And this all would not be possible without the solid performance in our current business and focused execution of our integration and reshaping plans. We now have a track record of seven quarters of consistent and strong business performance. And for the third quarter of 2022, we delivered total revenue of $4.08 billion, adjusted EBITDA of $1.5 billion and free cash flow of $765 million.
Our teams across the world are highly engaged and are performing at peak levels. Our pipeline continues to deliver, especially in the area of complex generics and injectables. We added $144 million in new product revenue in the quarter three.
The year-to-date performance is operationally in line or better than our own expectations and we believe enables us to continue to deliver on our Phase 1 financial commitments. Notably, we have paid down approximately $2.1 billion in debt year-to-date in 2022 and approximately $4.2 billion since the beginning of 2021, putting us squarely on track for our target to pay down $6.5 billion by the end of 2023.
Our Board of Directors has declared another quarterly dividend of $0.12 per share. Cumulatively, since the formation of Viatris, we've already returned to more than $800 million to shareholders through dividend payments. We are reaffirming, again, our most recent 2022 full year guidance ranges for total revenue, adjusted EBITDA and free cash flow, driven by solid operating momentum and in spite of further increased foreign exchange headwinds.
As Robert has already clearly indicated, we are confident in the outlook and future growth potential of Viatris. The key tenets for the confidence are: the strength and market dynamics of our remaining base business after the main divestitures are based on stabilizing results of business transformation and the portfolio choices we have made in the past years as well as solid performance of our branded portfolio. The strength of our pipeline, especially with complex generics and complex injectables as well as novel products, 505(b)(2)s and NCEs and the expectation of our growing ophthalmology franchise upon completion of the acquisitions.
With that, I would like now to hand it over to Rajiv to give further details on the Q3 performance and the outlook of our business going forward. Rajiv?
Thanks, Michael, and good morning, everyone. I'm very proud of what we have accomplished in our last two years as Viatris. We have executed seven consecutive quarters of strong performance, underscoring the underlying strength of our diversified base business.
Let me begin with brief commentary about our strong third quarter operational results. On an operational basis, we were down 1% year-over-year for the quarter. Every segment performed solidly versus our expectations, including China, despite COVID headwinds.
Our Generics segment in developed markets benefited from the launch of lenalidomide in North America. Overall, our Brands grew 1% year-over-year on a rational basis in the quarter and performed better than expected, led by Lipitor, Brufen and Creon.
Our resilient global operations once again delivered excellent customer service levels while we weather increasing headwinds from inflation.
Moving to integration. We successfully completed our remaining SAP cutovers from Pfizer, and we have now substantially exited all of the remaining transition services. For the full year '22, we now expect to deliver approximately $525 million in new product launch revenue with better-than-expected margins, but below our expectations due to the timing of certain launches.
And on the R&D front, we crossed a major milestone with the announcement of positive top line results from our GA Depot Phase III clinical trial along with our partner Mapi. We remain on track for our submission to FDA in quarter one, two and three.
Now turning to the next slide. I want to remind you of our operational priorities for Phase 1. We are well on our way to integrate and synergize, stabilize the base business and deliver the pipeline. In addition, we are on track to complete the planned divestitures by the end of '23. We believe these achievements position Viatris well for the future growth.
Flipping to the next slide. As we look ahead to Phase 2, our priorities are to continue to optimize and minimize total base business erosion, further enhance our existing durable high-margin organic pipeline to offset base erosion, maximize the execution of our ophthalmics franchise and identify and add inorganic opportunities to further accelerate the growth.
Now on the next slide, I'll walk you through some details behind what is driving our total base erosion improvements. Recall, we originally modeled our total base erosion in Phase 1 to be about 4% to 5%. Based on our better-than-expected Brands performance and combined with other key catalysts, we believe the total erosion for Phase 2 is expected to improve by 200 basis points, getting us to the 2% to 3% of total erosion range.
Turning to the next slide. Our Brands business, excluding China, will make up slightly more than 50% of the portfolio. Prior to formation of Viatris, our combined Brands were trending at approximately 6% erosion. At the launch of Viatris, we modeled approximately 4.5 to 5.5 brand erosion based on that trend. But as a result of our ability to effectively manage the Brands business, we have been able to contain this erosion to 1.5% to 2.5% over the last seven quarters.
The line graph on the right, depicting our total Brands sales, excluding China, from 2017 to this quarter is an insightful visual. Our business operating model completely changed and stabilized the trajectory of our expected erosion, and we expect this improvement to continue in Phase 2 which will potentially contribute an uplift of 150 basis points to our total base erosion.
The next slide is some other key contributors to our total erosion improvement and stabilization of the core in Phase 2, which we expect to contribute an additional 50 basis points. These include no additional significant LOEs on the horizon, our purposeful diversification of our core generics portfolio, which is now repositioned towards complex products; our decreased dependency on the commoditized U.S. generics market, today the total U.S. generics portfolio contributes approximately 11% of total net sales; and anticipated divestitures of certain non-core assets which, once completed, will not only help simplify the Company but will also help to further stabilize the remaining business.
We believe that our ability to minimize the total base erosion when combined with our current organic pipeline, lays a solid foundation for us to return to growth in Phase 2, which I will cover on the next few slides.
Our current pipeline, which is driven largely by the U.S. market, consists of an increasing number of complex, hard-to-make products with a higher barrier to entry as well as fewer number of partner programs. In addition to this, some other key geographies like China, Europe and the rest of the world markets will also benefit from the efforts of the last few years because of their dedicated and focused programs to build their pipeline.
We expect Europe to have $100 million to $150 million of new product revenue every year and China to get the benefit of close to $100 million every year from '25 onwards. As Robert said, we have certain underappreciated assets in our pipeline that we have invested in during the recent past.
We anticipate our complex injectables and select novel products to each make up at least $1 billion in peak annual net sales in Phase 2. Given all of these pieces, we feel confident to deliver $450 million to $550 million of annual new product revenue.
On the next two slides, I'll share more about our complex injectables. Our science team has successfully developed several technology platforms including, but not limited to, nanoparticles, microspheres, liposomes and nano emulsions. We expect these platforms to deliver a strong portfolio of approximately 40 products, 10 of which are already filed and under review with FDA. This portfolio represents a rapidly growing $50 billion to $60 billion growing market. Perhaps a generic COPAXONE analog as a reference is the closest to help model these products.
I would like to highlight the pipeline chart on the next slide. Of the 10 products which are already under review with the FDA, we are confident that we will be the first to market with seven generics, including Abilify Maintena, Invega Trinza and Sandostatin LAR. On a risk-adjusted basis, we believe these complex injectables franchise represents at least a $1 billion peak net sales opportunity in Phase 2.
Turning to the next slide. Another growth catalyst of our organic pipeline is our novel products franchise with several 505(b)(2)s. We expect products like GA once monthly and our novel meloxicam formulation will have patent protection. Additional in our products on the slide includes Xulane Low-Dose and Effexor GAD. This chart also highlights our continued pursuit of highly complex products like the biosimilar to BOTOX. On a risk-adjusted basis, we believe these five select assets alone represent at least $1 billion peak net sales opportunity in Phase 2.
Now let me move on to the great news we announced today. We have taken a major step to create an ophthalmics franchise. I want to echo the excitement you heard from Robert and Michael about the future addition of Oyster Point and Famly Life Sciences to Viatris family. Let me walk you through the strategic rationale for bringing these foundational assets together.
Oyster Point brings to Viatris not only a novel marketed dry eye product in the U. S. but, more importantly, a very experienced team that possesses deep knowledge of the ophthalmic space from a clinical, medical, regulatory and commercial perspective. Further, when combining Oyster Point to the Famy Life Sciences pipeline and our global commercial footprint, R&D and regulatory capabilities, we believe that we are setting the foundation to become the next global ophthalmic leader.
Moving to the next slide. I'm more excited that in addition to Tyrvaya, we are getting to start with a combined pipeline of exciting complementary programs, which include additional indications like neurotrophic keratopahty and five Phase III-ready programs we are acquiring from Famy Life Sciences. This combined global pipeline has the potential of net sales of more than $1 billion on a risk-adjusted basis by 2028.
As we close this transaction, the ophthalmics franchise will function as a separate division within the Company and will be led by Dr. Jeff Nau.
In summary, as I walked you through this morning, we believe we are well positioned to bring Viatris back to growth in Phase 2. We remain confident in our ability to contain erosion to 2% to 3% and generate $450 million to $550 million in new product revenue annually, which we expect will not only offset the erosion but enable us to generate a 1% organic top line CAGR growth of the base in Phase 2.
Maximizing and executing our ophthalmic strategy will help us reach a total revenue CAGR of approximately 3% from '24 to '28. Further, it's worth noting that this growth does not include any additional inorganic opportunities, which we expect to identify and add to our portfolio in Phase 2.
With that, I would like to welcome Dr. Jeff Nau to the call to share some more information about Oyster Point and its exciting growth driver as well as his perspectives on the Famy assets. But before I do, I would like to thank our Viatris colleagues for their continued performance and look forward to welcoming our future colleagues from Oyster Point and Famy Life Sciences who are listening today.
Thank you, Rajiv, and thank you to Viatris for allowing me the opportunity to speak today.
Good morning. My name is Jeff Nau, and I am the President and CEO of Oyster Point Pharma, a public biopharmaceutical company focused on the discovery, development and commercialization of first-in-class pharmaceutical therapies to treat ophthalmic diseases.
Our mission at Oyster Point is to advance truly breakthrough science to deliver therapies that patients and eye care professionals need. I was the first employee at Oyster Point in 2017. And since then, we have grown the Company to more than 250 employees, including launching one of the most exciting commercial products in dry eye disease with a leading sales team in ophthalmology.
By educational training, I hold a Masters in Medical Science and a PhD in Public Health and Epidemiology. And for over 20 years, I have dedicated my career exclusively to drug and device development in the field of ophthalmology. Prior to joining Oyster Point Pharma, I was involved in the development of a number of promising therapies in the retina space, including while at Genentech, where I was part of the FDA approval and commercialization of numerous indications for the anti-VEGF therapy Lucentis, a medical breakthrough for treating blindness which generated multibillion-dollar peak annual sales.
The Oyster Point team brings decades of experience in the eye care space, with most of the leadership team dedicating their entire careers to eye care. Currently, we are one year into the successful launch of our first FDA-approved product. Tyrvaya is the first and only nasal spray for the treatment of the signs and symptoms of dry eye disease. Dry eye disease is a large market affecting an estimated 38 million Americans and over 700 million people worldwide. It's a chronic multi-factorial disease, which is characterized by the imbalance to the nutrient-rich layers of the ocular surface, known as the tear film. Increasing the production of natural tear firm is believed to reduce the signs and symptoms of dry eye disease.
Prior to Tyrvaya's entry into the market, many patients reported being dissatisfied with older treatments in the class due to lack of efficacy, slow onset of action and the stinging and burning associated with prescription eye drops. The team at Oyster Point broke new ground with Tyrvaya. Tyrvaya's differentiated clinical profile, rapidly bio-activate tear film production to help the body create more natural tears and can be easily administered. It's a preservative-free nasal spray that's convenient with a twice-a-day dosing regimen with no contraindications.
Tyrvaya's unique mode of action involves activating the trigeminal parasympathetic pathway in the nose, which is believed to trigger tear film production. Tyrvaya was studied in a broad population of adults with mild, moderate and severe dry eye disease. In clinical trials, patients achieved statistically significant improvement in tear film production and other key dry eye measurements.
In addition to this exciting product, let me share details on what Oyster Point will add from a pipeline perspective. In our development pipeline, we have several programs aimed at treating other ophthalmic disease with unmet needs, including Stage 1 neurotrophic keratopathy, a severe degenerative condition affecting the nerves of the cornea. Separately, our proprietary transformational gene therapy program is currently progressing towards IND-enabling studies in 2023 for Stages 2 and 3 neurotrophic keratopathy and we have begun early development for a therapy to treat vernal and atopic keratoconjunctivitis, severe allergic conditions of the eye.
Oyster Point originally engaged with Viatris on ex-U.S. licensing and partnering opportunities for our products. As discussions progressed, we quickly realized that the global health care gateway that Viatris has built provides a unique partnership opportunity to accelerate and amplify Viatris' and Oyster Point's growth strategies and would enable increased access to ophthalmic therapies for patients worldwide.
Just as Oyster Point could propel Viatris' expertise in ophthalmology through its infrastructure and deep knowledge of the space from a clinical, medical, regulatory and commercial perspective, Tyrvaya and pipeline assets, Viatris could propel Oyster Point with its global commercial footprint, R&D and regulatory capabilities, supply chain as well as the multiple additional ophthalmic assets.
Conceptually, this is not a one plus one equals two addition of companies, but potentially more like a one plus one equals four addition. The sum of the merger amplifies itself based on the synergy that both companies would provide to each other.
Oyster Point as the foundation of the ophthalmology franchise of Viatris will bring a team with deep expertise in ophthalmology to advance research and drug development as well as an experienced U.S. commercial sales and medical affairs infrastructure that I am confident will lead to a future innovation at Viatris.
The ophthalmology and optometry communities deserve partners who are committed to investing in and bringing new therapies to market for patients and eye care professionals. I'm joining Viatris as its new ophthalmology franchise, we'll be committed to being that market leader in addressing the industry's unmet needs.
As Rajiv previously stated, the ophthalmology portfolio that has been created to date is expected to have significant peak potential by 2030. What we have outlined here today is simply the foundation of what is expected over the next few years.
Our focus will be to invest in the resources behind the continued launch and international expansion of Tyrvaya as well as the clinical development of multiple key assets ranging across a full spectrum of eye care disease areas, including dry eye disease and potentially glaucoma, neurotrophic keratopathy, blepharitis, presbyopia and a number of other vision-related disorders.
In closing and on a personal note, I would like to thank the Oyster Point team for building such a strong organization over the last five years. We have built capabilities in R&D, clinical development and commercial within the eye care space in such a short period of time. It is the value of our people, our lead asset Tyrvaya and our pipeline that compelled Viatris to decide to bring our company into their organization.
I would like to thank Robert, Michael, Rajiv and our future colleagues at Viatris for the opportunity to join the Viatris family and to say that I also share in the excitement surrounding the future of Viatris.
Thank you, Jeff, and good morning, everyone. It's great to be with you today to share my thoughts on the recent quarter and expand on what you've heard from Robert, Michael and Rajiv on the outlook of our company.
Please turn to the slide with our third quarter financial highlights and the outlook for fourth quarter and full year 2022. We had another strong quarter operationally that was in line with our expectation. On a reported basis, revenue was impacted by foreign exchange headwinds by approximately 9% versus Q3 2021.
Let me walk you through the key drivers that contributed to the strong performance in third quarter. For revenue, we saw continued stability in our segments, including developed markets and China. New product revenue in the quarter benefited from the launch of lenalidomide in the U. S. This performance contributed to an overall favorable mix resulting in better gross margin.
With respect to SG&A, we continue to benefit from synergies. R&D increased due to continued investment in the pipeline. We had another strong quarter of free cash flow generation. This underscores our confidence in the stability of our base business and the organizational effort around cash optimization initiatives.
On a year-to-date basis, we have met 2020 commitments and have paid down approximately $2.1 billion in debt and have also paid out approximately $436 million in dividends. With three quarters of solid performance under our belt, we feel good about the rest of the year and expect the positive momentum to continue.
Now a few comments on the expected Q4 financial results. We anticipate the gross margin percentage will moderate from third quarter levels due to product and segment mix. SG&A, similar to last year, is expected to step up from Q3 2022. Free cash flow is expected to be significantly lower compared with Q3 2022 due to anticipated lower adjusted EBITDA, phasing of interest payments and higher CapEx.
Given the continued strength from operations, we expect to absorb the incremental impact from foreign exchange. We are reaffirming our guidance across total revenues, adjusted EBITDA and free cash flow.
As previously mentioned on our Q2 call, it is likely we will come in at the lower end of the adjusted EBITDA range due to foreign exchange. And for free cash flow, it is likely we will end up at the midpoint of the range, fully absorbing the foreign exchange headwind.
The next slide is an illustration of free cash flow over the last seven quarters. Q3 was another strong quarter, especially considering it included EpiPen settlement for approximately $259 million. Taking this into account, the underlying free cash flow would have exceeded Q3 2021. This is another indication of stability we see in our business.
I'm very pleased with the progress we are making in improving cash conversion. This is a focus we expect to continue in 2023 and beyond. As mentioned, we expect the Biocon transaction to close shortly, and we expect to update you at that time to the associated impact on the current guidance.
The next slide is an illustration of our sources and uses of divestiture proceeds. A key takeaway: we expect significant amount of cash over next year or so. On the left, we anticipate total estimated pretax proceeds of approximately $8 billion to $9 billion. This includes approximately $5 billion to $6 billion of pretax proceeds from the divestitures of identified non-core assets.
Since our Investor Day in February, we have made significant progress on these initiatives and have updated our ranges based on latest discussions with our advisers. We expect to cover all taxes and transaction costs with the divestiture proceeds. It is important to note that the proceeds from these divestitures will not be reported in the U. S. GAAP net cash provided by operating activities.
However, the taxes and transactions' costs will be reported in our future U.S. GAAP net cash provided by operating activity and therefore will impact reported free cash flow. As these costs are incurred, they will be appropriately disclosed in order to better model the underlying base business free cash flow.
Totaling the estimated uses, including the cash to acquire ophthalmology franchise, we expect net divestiture proceeds of approximately $4.9 billion to $6.1 billion. We intend to allocate this significant financial flexibility towards incremental debt paydown, share buyback and potential future business development.
Turning to next slide, which highlights a few key points on the acquisitions we announced earlier today. We're excited about the acquisition of Oyster Point Pharma. The transaction will consist of $11 per share in cash upfront through a tender offer. In addition to upfront cash consideration, each Oyster Point stockholder will receive one non-tradable contingent value right, representing up to additional $2 per share contingent on Oyster achieving certain metrics based on full year 2022 performance.
Concurrent to Oyster Point closing, we also expect to acquire Famy Life Sciences, which has a complementary ophthalmology portfolio, for a total cash payout of approximately $281 million. Both transactions are subject to customary closing conditions. We expect these transactions will be funded with cash on hand.
Now moving to next slide, which captures all the components of capital allocation framework. Taking into account the net divestiture proceeds and the significant free cash flow from our base business, we have the confidence that we will not only be able to deliver our Phase 1 commitment but also be able to increase our return of capital shareholder in Phase 2.
To recap our Phase 1 commitment, our highest priority in this Phase has been debt paydown and leverage reduction. There are two components of this commitment. Pay down $6.5 billion of debt, which represents the short-term and scheduled maturities between '21 and '23 and pay down additional debt to reduce our pro forma gross leverage ratio to 3x by the end of 2023. This priority fully supports our commitment to maintaining our investment-grade rating. The outcome is a financial profile that we believe differentiates us from our peer and has afforded us an attractive capital structure in these volatile times.
Another part of Phase 1 commitment was returning capital through a dividend, which we issued in 2021 and increased in 2022. As we mentioned, the net divestiture proceeds and the underlying free cash flow gives us the necessary flexibility to begin executing on the authorized share buyback in 2023.
The expected completion of these Phase 1 commitments, especially meeting our gross leverage target of 3x by the end of 2023, will enable us to rebalance our capital allocation plan for '24 and beyond.
As you heard in Robert's opening remarks, we expect to take a more balanced approach with a focus on capital return and business investment during Phase 2. This is a result of an expectation of significant free cash flow growth during this phase. We will remain committed to our investment-grade rating and we'll target gross leverage at 3x with a range of 2.8 to 3.2x.
We expect there will be significant cash available for capital return. We anticipate allocating approximately 50% of annual free cash flow to share buyback and the dividend. The organic adjusted earnings growth expected during this Phase and the reduction in annual share count is expected to accelerate our adjusted EPS growth.
With respect to investing in our business organically and inorganically and taking into account the importance of our investment-grade rating, we will continue to be financially prudent in targeting bolt-ons and tuck-ins.
Moving to the next slide. After roughly two years of managing the business and the solid performance of last seven quarters, we have high confidence on the rhythm of the business, the outlook, the investment needs to drive future growth. Therefore, we are in a position to provide long-term targets for total revenue, adjusted EBITDA, free cash flow and adjusted EPS. As Robert noted in his comments, these targets exclude the associated revenue of approximately $2.1 billion and adjusted EBITDA of approximately $700 million from the divestiture of biosimilars and non-core assets and $300 million of increased R&D.
Key assumption to support these targets, including base business erosion of approximately 2% to 3% being fully offset by new product revenue from our pipeline, the return to growth will also be supported by the ophthalmology franchise. The anticipated 3% total revenue CAGR from '24 to '28 does not reflect any additional business development activity beyond the acquisition of ophthalmology franchise.
Now a few assumptions supporting the growth of adjusted EBITDA. With the evolution of our portfolio moving up the value chain and the focus on more novel and branded products, we anticipate relatively stable gross margin during this period.
We anticipate SG&A investment on a total basis to be stable, but to decline on a percentage basis as revenues grow during this period. R&D investment will include the novel and complex pipeline, as outlined by Rajiv, and the ophthalmology asset. It will also include the impact of recent SEC guidelines for licensing deals that were previously excluded from adjusted earnings but will be included in the future.
Free cash flow growth is expected to be significant and will benefit from reduced interest expenses, reduced onetime cash costs and expected benefit from cash optimization initiatives.
Finally, we expect adjusted EPS growth to be enhanced by annual share repurchases, which we believe will be an important part of our focus on capital return to shareholders. These assumptions, based on July 2022 foreign exchange rates, do not assume any benefit if foreign exchange rate return to historical averages.
In conclusion, I'm really pleased with how the business is performing after seven strong quarters and the actions we're taking to strengthen our foundation. The free cash flow generation, along with financial flexibility from divestitures, gives us confidence in achieving our Phase 1 commitments, increasing our capital return to shareholders and positioning the business for future growth in Phase 2.
With that, I'll turn the call back to the operator for Q&A.
[Operator Instructions] We'll take our first question from Elliot Wilbur from Raymond James.
A lot to digest this morning. I appreciate the team taking the time to walk us through the detail. My first question and only question, I guess, is with respect to the acquisition of Oyster Point and Famy Life Sciences. I know you've talked about the ophthalmology portfolio generating around $1 billion in sales by 2028. But if I look at current external expectations, at least for Oyster Point, they seem to embed peak sales somewhere around $400 million, which I assume is Tyrvaya exclusively in 2027. And I know that you're expecting contribution from some other pipeline assets, but doesn't seem like many of those would hit before 2025 or 2026. So I'm trying to close the gap there between external expectations and what you are anticipating in terms of contribution from the new broader portfolio. Are you simply more optimistic on Tyrvaya than external expectations? Or am I under appreciating the potential contribution from some of the pipeline assets in that period of time?
Elliot, I will take. And maybe later on, Jeff can add. So first of all, let me just break it. One is that, yes, provides U.S. expectations and we are talking about the global expectations. We have take this $1 billion, divide almost 2/3 is U.S. and 1/3 is the rest of the world for us. That's the first one.
The second one is most and maybe every -- all of these products will hit the market within this period of time. Because as you see, there are some Phase III assets and well advanced. And it's not going to be a long clinical study over there. So, we see more products launched around '26, '27 to add on along the Tyrvaya.
So and if I have to do my portfolio, I think our dry eye will be almost 2/3 again and 1/3 will be -- maybe, Jeff, do you want to add something to that?
We're really excited about the portfolio that's been created here. And as Rajiv said, with the two dry eye assets making up most of the potential, I wouldn't discount the other products that are in the pipeline. They are exciting markets. This is the leading front of the eye portfolio. Lots of unmet need here with regards to things like blepharitis [Technical Difficulty] we're really excited about the opportunity to go forward. And I think what's most exciting about it is, we have many Phase III-ready assets that will drop right into an existing sales force that is there and ready to go.
Your Next question comes from Umer Raffat from Evercore.
EBITDA. So your midpoint of the guidance is $6 billion. And Robert, I think you mentioned between divestitures, the SEC accounting as well as additional spend on new tuck-ins, it sounds like there's an additional $1 billion to $1.2 billion worth of headwinds on EBITDA, and that's without sort of the impact of China VBP rollout back on schedule next year. So is it fair to say that the EBITDA in 2024 is trending somewhere between $4.6 billion and $5 billion? That's question number one.
Number two, on Oyster Point. It looks like there's either a bridge program or a major co-pay systems in place. And you can kind of see that on the realized pricing per prescription versus where Xiidra and where RESTASIS track. Can you speak to the absolute bonds we're seeing and to the extent we can scale them up?
And also on Oyster Point, the Phase II OLYMPIA trial in neurotrophic keratopathy, that was due right around now. There was no update of that. I'd be curious on that.
And it looks like the CVR is in the bag because the TRx and the sales numbers that were pointed out, it looks like it's trending towards that anyway. So we should assume that Oyster Point acquisition is $450 million valuation, correct, plus the net debt?
So let me go first. Obviously, I want to thank the entire investment community and really all of you for your input since the management team came forth in February because today, we're able to deliver in much more detail just on the basis of answering all of your questions, quite frankly.
And so the clarity that we gave you, and obviously I want to be clear, we're not giving the kind of the detailed '24 actual financial guidance right now. But we've given you enough directionally a guide where I will not dispute, let's just say, some of the things that you're throwing out because I think, once again, given your numbers, you can get to -- people can see you can get to where you are.
I think the most important, Umer, is in my prepared remarks, I also try to be clear that we've taken into consideration living out 2023 with the rest of the initiatives that -- and the actions that were going to be taken as well as the pushes and pulls that we can see today in order to build that bridge for you to get to '24 to where you're at. So Jeff, do you want to take his next question?
Yes. Maybe I'll break it down into two parts, and we'll answer the easier one first. So as we have earnings coming up this week, what I would say on Olympia is we are tracking according to schedule, and we'll have an update there.
And then with regards to Tyrvaya, I think what's really important in looking at this product is obviously first launched into the space this year. Our goal this year was really to build prescriber base. We are primarily a commercial prescription product this year. We still have bridge on. As we enter into 2023, we intend to pick up additional coverage. And at that point in time, we will reassess bridge.
But I think that's also a really big opportunity for some marketing during that time. So we want to make sure that we have good coverage on before we really pull the trigger on marketing. And as we know, this space is highly sensitive to that type of marketing. I think when you look at a product like Tyrvaya, there's a really unique opportunity to market the patient as it is the only nasal spray for the treatment of signs and symptoms of dry eye disease.
Next question is from Balaji Prasad from Barclays.
This is Mikayla on for Balaji. Just circling back on the acquisition. Just wondering if this would be the template for your other two specialties as well? And could you provide some more color on when the EPS accretion will start?
So, I think as I mentioned in my prepared remarks, yes, we think that this is an excellent example of a very attractive -- the type of targets that we can be highly sensitive, while maintaining our investment grade, while being sensitive to the increase in R&D and while we continue to be real sensitive to adding to the growth to the top line.
But I think most importantly, in terms of an earnings per share accretion, I also try to stress, given now the clarity that we've now delivered to the Street. Our capital allocation, we cannot ignore the 50% commitment once we're done with Phase 1 and hit our gross leverage target of 3x. There is a tremendous amount of more capital we intend to return to shareholders and especially through share buybacks. So, I think that the earnings accretion, the adjusted earnings per share growth is really going to be what this story is all about on a going-forward basis.
Next question comes from Chris Schott from JPMorgan.
You've laid out today why ophthalmology is the right vertical for Viatris. But I'm just interested in how you compared, I guess, this vertical versus some of the franchises like OTC and biosimilars where the Company also had an established footprint but where the Company is exiting. So, I guess what led you to kind of build up this direction and exit the others? I'm just trying to understand a little bit of kind of the thought process of kind of what's staying and what's going as you're thinking about the portfolio build?
Thanks, Chris. I mean I would say that we made a -- we've done a tremendous amount of work and analysis on where we wanted to take Viatris. We've examined all the things that have worked in the past, investments made in the past and kind of sort of where we are, where we want to take.
I would say that the financial analog of our entire business model is what we're being most sensitive to. If you look at our current pipeline portfolio and if you just examine the rotation within our own pipeline portfolio, we've been changing, moving up the value chain. We have a complete different product mix today than we did four or five years ago. And we've seen the benefit of that already.
So continuing to move up the value chain, and really, for example, the OTC, I'll be honest with you, is just a great business. It's not a declining business. It had very low single-digit growth. But in order to even keep that since we're not a consumer-oriented company, there was a tremendous amount of investment we would have to make year in and year out to support even that low-digit growth.
Now as we shift our attention and really have identified what we consider to be what was once a core asset, no longer to be really a core asset, where we want to focus our attention going forward, both in human capital and financial resources, we think that today is a very good example of the opportunity to really once and for all set the interest on the trajectory of growth and do it in a way where we can grow that top line, grow the EBITDA, continue to generate significant cash flows while returning a substantial amount back to shareholders and especially through the share repurchases.
Your next question comes from Gary Nachman from BMO Capital Markets.
Thanks for the update. So for the other non-core divestitures, to get to the $5 billion to $6 billion of additional proceeds, that's a lot to get through between now and the end of next year. So how far along are you with those discussions? And what's your confidence in getting that done with respect to the different areas that you outlined? Maybe you could walk through some of the opportunities in more detail.
And then just a quick follow-up. Just what caused some of the launch delays causing new product revenue to be lower than expected? And when you think of the annual contribution per year, I think you said $450 million to $550 million, just talk about your confidence in that, how risk-adjusted that number is given the importance in generating the 3% revenue CAGR in '24 to '28?
I mean just in terms of the -- and let me take the second one, Rajiv. But in terms of the -- we actually did really have a head start. We've been working on this project for quite some time in terms of identifying these particular assets. We have all the right advisers on board for each one of these. So, we are well into the process. And we see no issue at all by striking and executing on each one of these in '23 and actually expect to even have the proceeds, certainly and if not, by the end of '23, the proceeds from these initiatives, but very, very shortly thereafter. Rajiv?
Yes. On the platform stands around top, as Robert mentioned about very clearly on rotation in the pipeline, over the several years, we have been moving up the value chain steadily and have proven success record.
Now on -- if you just -- that's why I tried to give you a little bit more granularity today about the growth catalysts of this pipeline. I try to break it in the bucket of the -- let's just take examples of complex injectables, that how much they add. In the Phase 1 of the -- if I break up this five years, First two, three years, you will see major contribution coming from those injectables.
While '25, '26 onwards, 24 onwards, whether COPAXONE once a month, BOTOX, meloxicam, Xulane Low-Dose, Effexor GAD, now five of these products have a great potential just to have $1 billion over there and injectable bucket of one here. And then we have a dedicated focused program of markets like Europe and China and the rest of the world market.
And I gave a breakup of the China benefiting '25 onwards about approximately million every year and Europe getting $100 million to $150 million every year. If you add that up, $450 million to $550 million is a very well-thought and risk-adjusted range.
Your next question comes from Ash Verma from UBS.
For the potential diversity of candidates that you mentioned, I guess what I'm trying to understand is, is the collection -- solely based on whether you can be a core or non-core tier portfolio. Have you also considered factors like how these divestments would impact your main core revenue or EBITDA post play or the user profile?
Ash, obviously, we would have taken all that into consideration to be able to come here and to deliver to you our outlook. So the answer is yes, we've taken all that into consideration.
Our next question comes from Jason Gerberry from Bank of America.
Just on Famy care, it looks like that's probably about half the value that's kind of -- of the $700 million to $750 million. So is there a specific asset that sort of drives the valuation? Or is it just kind of more broadly dispersed across all the late-stage-ready assets?
And then as you lay out what looks like a leverage for what will be effectively remain quo, just wondering, is that sort of what you think is the right amount of leverage for this business to carry longer term? And how ambitious should be sort of once the dust settles on all these transactions in terms of either more aggressively or more ambitiously building out some of these specialty brand verticals?
Let me just address on the Famy assets. I'd like to make a point that we've been around these assets for the last five years. We helped set up this company originally. We have a small 13.5% stake. And we've watched the development of what this company has done. So we're very, very familiar with these assets.
To be able to find the right frontline asset, such as Oyster with such a phenomenal leadership team, they're very, very much into this community, this was not by happenstance. This was a very deliberate, well-targeted opportunity that we saw to create a real ophthalmology franchise.
So yes, we're very, very confident. Michael, do you want to just address some of the actual sure opportunities?
Sure. So Jason, for the Famy life sciences portfolio, it's really portfolio is not one single asset that kind of drives the fair value. Just to give you a little bit more color, the blepharitis asset is the asset that we talked about a few months ago already, which just basically at time Cromologous. We now got the full right to that.
Then there is the dry eye product that we're quite excited about, that's very complementary to mechanism of action to Tyrvaya. And the other three indications, the presbyopia, the mydriasis and the night vision, that's actually the same molecule, maybe combined with another one, for all these three indications. So it's a very balanced portfolio.
It was the second question on -- yes, I mean let me just say that after two years of now operating this business, the only way you really ever know what kind of sort of that sweet spot from a leverage ratio perspective is actually living your business and understanding all these pushes and pulls. I would say that the range of about 2.8 to 3.2, with 3 being the midpoint, is that sweet spot range where you can have that accordion, where you can lever up and very quickly, get right back to your target. That is -- I mean we are extraordinarily disciplined and focused on that. All activity from here will be -- that will be front and center because we made some commitments to maintain investment grade.
And what we now see, even with that commitment to 3x, we've actually seen through the significant cash flows that we're going to be generating once our Phase 1 commitments are satisfied that we can -- we have enough financial flexibility to fund ourselves. We do not see a real need of outside capital. And that's why I think that the transactions we announced this morning is a perfect example how we can continue to return significant amount more of capital back to shareholders, especially through share repurchases plan but as well as invest in our business at the same time. Sanjeev, do you want to add anything?
I think Robert you covered that. You covered very well that we will have -- that we've not had in Phase 1 additional cash to invest organically, inorganically, and that will support that. That's why we are comfortable with the range that we talked about.
Our next question comes from Glenn Santangelo from Jefferies.
I just want to follow up on some of the pro forma numbers you gave regarding 2024 and the Phase 2 part of the plan. I mean it seems like you're assuming that once you get out to 2024 that the erosion on the base business on the revenue line will be about minus 3%. And now with the benefit of some of these announcements today that the new growth CAGR is going to be plus three -- 6% swing or almost close to $1 billion a year.
And so, I just want to make sure I understand in terms of what you're seeing and where that's coming from. It sounds like you -- in the past, you've been talking about $500 million a year from new product introductions, maybe with the balance coming from the acquisitions?
And then my follow-up to that would be, does that 3% CAGR in '24 to '28 include any incremental contribution from GI and Derm? Or could those opportunities augment those growth rates from here?
So thank you, Glenn, and welcome to our sector. Let me start by saying, I think you can recalibrate if you get one of the variables in everything that you mentioned, and that is the base business from '24 and going on, we no longer see it eroding. Actually, we see a -- and that's why this morning I took the time because I think it was highly critical that, one, we identify exactly the assets for divestitures to support the economics and the expected proceeds we are going to get in; two, what we intend on doing with those proceeds in a very clear and transparent way. And then three, once these assets are no longer with the -- our core business going forward, what does that base business look like ex any inorganic activity, including this morning's announcement.
So it's very important that we share with the investment community what is that current base business that we have right now, with all the assets that we have right now in-house, after these divestitures? What we outlined this morning and what you heard from Rajiv is what we now forecast, given now that we have much more visibility and clarity, a 2% to 3% based this erosion, which is naturally inherent in our model. And we're benefiting from such a lower erosion than really most in our industry because we did diversify ex U.S.; outside the United States. As I mentioned, I think that could have been one of the -- maybe sometimes misunderstood, were viewed as a U.S. and specialty generics company, but we're actually not. We've spent a considerable amount of time to derisk our model not to have such emphasis in any one market or, in fact, any one country.
So I think once you can see the base business, only then, in the strength of that base business, only then when you begin to add that anything from that point forward can be truly additive. So if you take a look at the 1% that we see in the base business alone and then add the Oyster Point asset on top of that, that's how you get to the 3% revenue CAGR from '24 to '28 and a 4% to 5% EBITDA growth from there.
And Robert, just to further clarify, you talk about 2% to 3% base erosion, which is being more than offset by $450 million to $550 million of launches to bring what Robert said, a stable base. And then overlay on that, that ophthalmology assets, which will bring it back from flat to 1% to 3% growth.
And the answer to your last point, because there was a lot in your question, Glenn, there is nothing, as a matter of fact, right now, in the current models that we see as a hedge, we committed -- we are committing 50% return of capital to shareholders. But right now in our models, we have the other 50% simply accumulating cash in our current models. We did not deploy that cash yet for two reasons.
One, we wanted to hedge for anything that can come our way; and two, we have not really identified at this juncture the specific target that we're looking at other than directionally giving you the kind of assets that we're looking at. So I think that from everything that we see, it should be noted that we are also accumulating cash in our model at a rapid base to be deployed, which also really significantly brings our net leverage ratio down even that much more.
Our next question comes from Greg Fraser, Truist Securities.
I want to follow up on capital allocation. How should investors think about the mix between funding the dividend and share buybacks in 2024 and beyond given the 50% targeted for free cash flow allocation? I guess, is a material increase in the payout ratio likely?
I guess I think the most important thing today, right now, today, and to be very honest with you, I don't know what '24, I'm not going to try to predict what '24 would look like. I think the most important commitment today is the commitment of 50% of our free cash flows to return to shareholders. That is a -- that's our commitment, period.
Now if it were today, I have to tell you with our -- as I mentioned, I really think with our current PE multiple and where we are, it's very difficult, very difficult to find a better investment than to buy our own shares back. I just have to be very honest with you.
So I think we want to focus on total shareholder return, dividend combined with share buyback. But if it were today, I would probably strike much more on reinvesting in our own business through the purchase of our own shares.
Because I think what is going to quickly become the investment -- I think that what Viatris is going to become is very quickly an extraordinarily strong adjusted earnings per share growth story once we begin to execute. And especially the repurchase of our shares is going to go a long way, I think, in that story.
The next question comes from Nathan Rich from Goldman Sachs.
I wanted to ask you on free cash flow. I guess how should we be thinking about the baseline for free cash flow? Kind of understand you're not planning to give guidance, but should we think about sort of the step down in EBITDA similar to what would happen to free cash flow? Or are there other factors to consider as we think about free cash flow in 2023 and beyond?
And then just a couple of clarification questions, as we think about the target for EPS accretion next year from the deals as well as share repurchases, any more detail on how much EBITDA dilution you're expecting from the acquisitions? And was the R&D expense step-up of $300 million, was that inclusive of the two acquisitions as well?
Sanjeev, before you answer that question, I think, Nathan, I think we gave you the starting point of at least $2.3 billion in what we see in -- as a starting point. But we absolutely see it growing from there. Sanjeev?
Yes. So Nathan, so as Robert pointed out in the opening remarks, so you start from where we are this year, which is -- it takes the midpoint. We're about $2.7 billion.
There are two adjustments that we are making from there. One is the EBITDA loss that is from the divested businesses and the R&D increase. So that both have an impact on cash flow. A high percentage of that goes into the cash flow.
On the positive side, you will see our onetime cash cost is coming down. And then there's going to be a reduction in the interest cost as we pay down significant amount of debt next year.
So put all those things together and you get our number, which is close to what Robert talked about. Again, we're not giving the guidance.
I think the important thing to think about this is once that 2024 is achieved, our focus that we have -- you have seen in t he last seven quarters in terms of continually growing the cash flow conversion in the Company will continue and we continue to add in the growth from cash optimization effort and then obviously focusing on our onetime cash costs.
Now 2023 is going to be a little bit choppy, if I kind of use the term, in terms of the cash flow because of all the transactions that are going to be happening during the year. The base cash flow is going to be very, very strong. But as I pointed out, as we divest these assets, the taxes of these assets that only proceeds and some of the onetime cash costs gets recorded in the free cash flow line.
So we'll provide you all the transparency so you understand that the cash flow is very strong, but the outlook that I gave you for 2024 is a good starting point from that perspective.
Because I mean, one thing we are not able to be able to time exactly. So until we actually divest the assets that we've identified, we will continue to benefit in '23 from the top line EBITDA and even its cash flow.
So look, the beauty about this is that we don't have a gun to our head and there's no need to rush and because these assets are all what they are. They're contributors, but certainly not where we want to apply our focus. That's why we took the time to build you a bridge to get right to '24 with all the activities that are going to be going on in '23.
Yes, the R&D question, so the increased $300 million, that includes the investment from the two assets that we did, the R&D investment of those pipelines.
Our last question comes from David Amsellem from Piper Sandler.
So just going back to Tyrvaya. Can you talk about the challenges associated with the payer landscape, bearing in mind that with Stasis is available as a generic? And I know there's some differentiation that you cited, but I just wanted to get your thoughts on what you have to do to improve access.
And then related to that, as you're thinking broadly about your acquisition strategy, are you also willing to look at clinical-stage assets in more rare diseases where payer challenges ostensibly would not be as much as an issue? How do you think about that in your overall strategy in terms of taking on significant R&D risk?
Yes. Great. This is Jeff now, and thanks for that question. So I think with -- as it pertains to our Tyrvaya, as we look at any launch into this space, the commercial opportunity is obviously the first opportunity that any company would face. We've been lucky enough that this year we're tracking at about 19% of our scripts will go to Medicare Part D patients.
As we turn the year into 2023, obviously, we expect those formularies to begin to adapt. And we're really excited about the opportunities as we move into that year. We've had great coverage so far on the commercial side. As you talked to, this is a really well-differentiated product. Our goal in 2023 is adopt that additional coverage and really just drive demand into the year.
Before Robert jumps in, one of the things that I will say on the ophthalmology pipeline is keeping in mind there are a number of products in there, especially on the gene therapy pipeline, that are in that rare disease area. And so, that has already begun, but I'll let Robert add to the story there.
Well, I mean I would just say that in terms of the R&D, David, I would guide you more towards the D and not the R. We will not be a company to be taking the type of binary risk that, say, big pharma takes. We're going to be very careful and selective. And we've also given you targets what we'll be looking for next in the GI side as well as dermatology from mature emphasis because if you now look at our business model, we're crystal clear about being therapeutic agnostic.
Our product portfolio with having products from first to every stage of life around the globe is very critical going forward in our portfolio. It's just that the cash flows that we generate off of that portfolio is exactly what is going to be funding the very marketed opportunities that we highlighted, that we've emphasized, ophthalmology, GI and dermatology. So I think you can expect that directionally going forward. But yes, thank you for your question.
Was there any other questions?
No. We're good.
We have reached our allotted time for question-and-answer session. I will now turn the call back over to Michael Goettler, CEO, to make a few quarterly remarks.
Okay. So thank you, everybody, for the good questions. And look, as you've seen, this is an exciting point in our development. We're following up on everything we said in terms of returning the Company to growth, having a capital allocation that has the ability to both return capital to shareholders as well as invest in our business. And we're really excited to have Jeff and his team, join us in Viatris going forward.
Thank you very much.
This does conclude today's Viatris 2022 third quarter earnings call and webcast. Please disconnect your line at this time, and have a wonderful day.