OGN - NYSE

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Organon First Quarter 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. Thank you. I would now like to turn the call over to Jennifer Halchak, Vice President, Investor Relations. Please begin your conference.

Thank you, Mary, and good morning, everyone. Thank you for joining Organon's first quarter 2022 earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer, who will cover our strategy and operational highlights; and Matt Walsh, our Chief Financial Officer, who will review performance, guidance and capital allocation; Dr. Sandra Milligan, Organon's Head of R&D, will also be joining us for the Q&A portion of this call. Today, we'll be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call on the Events and Presentations section of our Organon Investor Relations website at www.organon.com. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements. Actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our 10-K and subsequent periodic filings. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered as a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation. I'd now like to turn the call over to our CEO, Kevin Ali.

Good morning, everyone, and thank you, Jen. Welcome to today's call, where we will talk about our first quarter 2022 results. For the first quarter of 2022, revenue came in at $1.6 billion, up 8% at constant currency, and adjusted EBITDA was $647 million, representing a 41.3% adjusted EBITDA margin. We had a strong first quarter. The year is off to a great start, and we are reaffirming the full year guidance ranges we provided back in February. Now, since our launch, almost a year ago, all three of our franchises, women's health, biosimilars and established brands have been delivering on their objectives, each playing their important role in creating a sustainable company driving forward our vision of improving the health of women. Let's start with fertility and biosimilars, two of our growth pillars. They continue to grow double digits in the quarter, and we expect both to deliver double-digit performance for the full year. We're also very confident in the demand trends we are seeing for NEXPLANON that support our view that for the full year 2022, NEXPLANON will perform at least as strongly as the 12% growth at constant currency that we saw in 2021. As we've said in prior calls, some of our products, especially in women's health and biosimilars, are subject to the buying patterns of our institutional customers and will vary quarter-to-quarter. This was evident in the first quarter with NEXPLANON in the U.S. We had a price increase go into effect in December 2021. And as you may recall, we had a very strong Q4 of last year, and some volume was pulled forward ahead of that price increase. But demand exiting the first quarter was very strong, and NEXPLANON is off to a healthy start in the second quarter and on track to deliver our expected full year performance. Organon is continuing to bring renewed focus to NEXPLANON. This includes our digital marketing efforts aimed at raising awareness among consumers and motivating conversations with health care providers, all of which are gaining traction and resulting in increased product demand. Other initiatives include unique social media projects and the recent ability to have a telehealth conversations, where women can connect with an independent health care provider to discuss NEXPLANON and other contraception options. We also continue to evolve our clinical training program offerings. In the first quarter, we trained 6,700 new health care professionals to perform the one-minute insertion and two-minute removal for NEXPLANON. This has more than triple the number trade in the first quarter of last year and well ahead of our pre-pandemic activity. We're also very encouraged about NEXPLANON's growth outside of the U.S. NEXPLANON grew over 30% ex FX outside the U.S., driven by performance in Latin America, which benefited from tender phasing, but also increased demand. We are seeing very strong demand in important markets like Brazil, which had a record month in March of this year. Continuing our discussion on women's health, fertility, both in China and the U.S., two very important markets grew double digits in the quarter. With women waiting until later in life to have children, the use of assisted reproductive technologies like in vitro fertilization, are growing about 5% to 10% annually. It is a large market, impacting an estimated 190 million people, it is also an industry with significant brand loyalty. Our products, Follistim, Orgalutran and Elonva are well established and foundational to the patient-friendly GnRH antagonist treatment protocol, which requires fewer injections and is favored in conjunction with egg and embryo freezing. Now, let's turn to biosimilars, another growth engine for the company. With about half of our biosimilar business outside of the U.S. and subject to tenders, we will see growth rates vary quarter-to-quarter, but we expect biosimilars to continue to deliver double-digit performance on an annualized basis. In the U.S., our two offerings are in RENFLEXIS, or infliximab biosimilar and ONTRU

Thank you, Kevin. As I've done in previous quarters, I'll remind you that our results prior to spin-off are presented on the carve-out basis of accounting, which is a GAAP convention. It's not intended to present results as if Organon were a stand-alone company. So I want to be clear as we discuss our results, that because our spin date was June 2, it won't be until the third quarter of 2022 that we can draw a true apples-to-apples comparisons to prior year results, where all P&L line items represent post-spin stand-alone financials for Organon. Until that time, revenue is where we'll have the best comparability to prior year periods, and that's where we'll start the financial discussion. So turning to Slide 7, revenue for the third quarter was $1.6 billion, up 4% as reported and up 8% at constant currency exchange rates when compared to the first quarter of last year. In this graphic, we break out the change in revenue according to key drivers, and I'll highlight some of the more significant impacts. The impact of the loss of exclusivity or LOE during the first quarter was approximately $30 million, and it's primarily related to new Barings LOE in the United States. We didn't have any LOE impact in established brands this quarter. The most significant LOEs facing the portfolio washed out in 2021, we expect only modest new LOE exposure going forward. Since December of 2020, we have been expecting a generic entrant in the U.S. for DULERA. That did not happen in 2021 and has not happened thus far in 2022. Our current expectation is that any potential LOE for DULERA, should it happen this year will have a limited impact on 2022 results, and that view is currently incorporated into our full year guidance. Continuing to read across the waterfall chart. In the first quarter of last year, the impact from volume-based procurement in China was significant due to the December 2020 implementation of the third round of VBP. Now back then, that was the largest round to that point and included 4 of Organon's products. Singular pediatrics, PROSCAR, PROPECIA and Arcoxia. That compares with the first quarter of this year when there was no new LOE impact from VBP on Organon's products. Moving to volume now, which grew significantly in the first quarter. The increase in volume came from our growth pillars, fertility, biosimilars, NEXPLANON outside the U.S. this quarter and China retail but also from volume growth in our base business and established brands, particularly demand in China for non-VBP brands, as well as for products in Europe and the LAMIRA region. As Kevin mentioned, some of the favorability in established brands this quarter was due to onetime items. If we think about the 15% ex FX revenue growth in the quarter for Established brands, 18% of that was volume growth offset by 3% pricing pressure. And in that 18% volume growth, it was about evenly split between onetime items and underlying growth in the base business. Given the product and geographic diversity in the established brands franchise, taken alone, none of the onetime items would be needle moving. But just to give you an example of the kind of things that we're talking about, the largest among them was a temporary supply issue currently impacting several competitors in the Japanese market. That drove outperformance in Japan this quarter, which compares to weaker performance in Japan in the first quarter of last year when demand was lower due to the expectation that the government was preparing to take action to lower prices. The supply other bucket primarily represents supply sales to Merck and other third parties, which consists of lower margin sales of pharmaceutical products under contract manufacturing arrangements. For the quarter, supply sales were down about $30 million year-over-year, and that's consistent with our view that we expect volume under these arrangements to decline. Finally, Foreign exchange translation represented about 400 basis points of headwind for this quarter, which is not surprising given the fluctuations in global currency markets and also, understanding that approximately 80% of our revenues were derived outside the United States during the first quarter. Briefly on Slide 8. This is where we show geographic distribution of revenue. All of our ex-U.S. regions were nicely ahead of prior year at constant currency, and following up on my earlier comment, here, you can see the favorability we had in Japan, showing up in the APJ region, the good growth in NEXPLANON and in established brands in Latin America, in the solid performance in China in both established brands and fertility. So now, let's take a look at performance by franchise. We'll start with women's health on Slide 9. Our Women's Health business was down 5% as reported and 3% at constant currency in the first quarter versus prior year, driven by a 5% constant currency decline in NEXPLANON and a 6% decline in NuvaRing. Those declines were partially offset by continued strength in fertility led by Follistim, which grew 20% ex FX in the quarter. As Kevin mentioned, and as we've explained in prior quarters, NEXPLANON's performance can vary quarter-to-quarter based on customer buying patterns and tenders. But we saw good trends exiting the first quarter, second quarter is off to a solid start. We continue to expect NEXPLANON to deliver double-digit revenue growth on a constant currency basis for the full year 2022. Turning to biosimilars on Slide 10. Biosimilars grew 22% as reported and 25% ex FX. We have 5 products in the portfolio, 3 in immunology and 2 in oncology. RENFLEXIS and ONTRU

[Operator Instructions]. Our first question comes from the line of Jason Gerberry from BofA.

Just on biosimilar, Sonera, can you confirm, do you have a target action date yet for the high concentration version of the product? And then, what do you hope to benefit from an interchangeability study? I mean, in terms of timing, presumably, you're not going to be first. And by the time you have it, a good chunk of the volume will be in biosimilars. So just curious sort of what you see as the value of running that study. Thanks.

Yes, Jason. So Kevin, so good question. So in regards to HADLIMA, our Humira biosimilar, we are planning to launch in July of next year. So it's rapidly approaching. We've got exciting plans for HADLIMA and in regards to -- and we think it's going to be a very important contributor to our future growth. But in regards to interchangeability and the importance of interchangeability, clearly, I think that's one of the many variables that various PBMs are looking at in terms of the fact that those variables being interchangeability, I believe real-world evidence. Do you have -- does this product, as asset, been launched in other markets? And how is it doing and what's the issue -- what's the safety and regulatory issues around it? Innovative applicator, high concentration, high concentration dose is being -- actually being launched, and we have all of that. Now, nobody is going to be coming to the market, Jason, at the time of launch, or at the time of LOE of Humira with a perfect profile of what you're looking for. Some may have interchangeability and high constant high citrate-free concentration, but others may not have real-world evidence, may not have the type of backbone that we have with Samsung in terms of their production capabilities and excellence in being able to manufacture. So we feel very good about the fact that interchangeability will be one of many variables that PBMs are looking for. And by the way, probably most important that people are not considering in terms of the biosimilar segment is your relationships with the PBMs. Do you have long-term relationships? Is there a lot of trust built up there? Are there long history of being able to work with and develop credibility with these folks? And we do. Back to the fact that many of these people that we have in the biosimilar group in the U.S. have been working on these assets since before the days of the spin for almost a decade now and have really good relationships with payers in order to be able to get formulary access, which is a key variable in terms of how well you do in the business.

Our next question comes from the line of Terence Flynn from Morgan Stanley.

Great. Thanks so much. Maybe, two questions for me. One, a follow-up on HADLIMA. I'm assuming you've already had some preliminary discussions regarding contracting in 2023. So just wondering if you're confident you'll be able to secure a decent piece of the volume second half of the year, as I think, some investors are assuming that biosimilars now, really, won't be able to participate until 2024 in a meaningful way. So that's kind of the first question. And then, as you think about the rest of the year for China, maybe, Matt, just remind us, what's embedded in your guidance for the outlook there? Particularly, given some of the rolling lockdowns on the COVID side? Just help us think about any impact or is that already baked into your guidance?

Yes, Terrence. So I'll start with the first part of your question in regards to HADLIMA as a follow-on. We believe 2023 is going to be very busy. There's no doubt. There's quite a few assets coming to the market, quite a few players will be essentially second to market. We do believe that the way that PBMs are going to approach this business is not going to be a full wholesale like a small molecule segment of a shift, but rather, there's going to be probably, I would guess, two to three, it depends on the PBM, two to three biosimilars on any given formulary. Probably, obviously, the originator will be there as well as a few others. And so I think the others being all the variables that I talked about, the citrate-free, high concentration dose, the ultimate interchangeability indication coming down the line, the real-world evidence, the unique applicator and so on and so forth. And so I do believe that probably, PBMs, currently as we speak, are working on the 2023 contracts. And so there will be some volume, but clearly, it's going to start to increase. And then, in 2024 and beyond, you'll see much more of a penetration. But ultimately, getting on formulary is going to be critical in the near-term as we start to come online, and we're very happy that we've got all of excellent asset in HADLIMA. We've got good relationships with the payers and various PBMs across the country, and we're ready to go. I'll hand it over to Matt to talk about your question regarding second half of business in China.

So for China, we did not see much of an impact in our business related to COVID lockdowns. We have factored, though, into our forecast for the rest of the year an impact in Q2 recovery in the latter half of the year. So we feel like we've incorporated appropriate consideration for COVID lockdowns in China that can be absorbed within the affirmation of guidance. And we see, really, on a constant currency basis, China will grow this year.

Our next question comes from the line of Umer Raffat from Evercore ISI.

Hi, this is Eric calling in for Umer. I just had a quick question on the NEXPLANON R&D. How are recruitment going for the five-year study? Has COVID slowed down any timelines there? And separately, is Organon planning any trials in other indications like dysmenorrhea or nausea?

HI, Eric, thanks for the question. So with regards to the enrollment for the five-year indication, it's generally on track. We saw about a month slowdown based on the COVID impact, but we're not concerned that we're not going to bring this in on the previously shared timeline. And with regards to additional indications, the team is taking a look at the additional indications right now and formulating our development strategy around our key asset of NEXPLANON.

Got it. And just the last one on biosimilar growth. You mentioned drivers before in Australia and Brazil. Can you give more detail on what kind of trends you're seeing there, maybe, on uptake or upcoming tender offers?

Yes. So Eric, in regards to -- so there's 2 parts that I look at in that question. First of all, as I mentioned, U.S. obviously, is going to be the key market, the key market for our HADLIMA, Humira biosimilar, as you start to look at our overall biosimilar business footprint across the world. But part of that is the real-world evidence. And as you said, we have Canada, we have Australia as two countries that have been doing very well, with ultimately and growing double digits -- strong double-digit with those products. And the uptake has been really nicely across all of -- late 2021 and 2022, we see great movement in those two countries. Now, having said that, back to the real-world evidence aspect of it, Biogen, which is the partner of Samsung [indiscernible] HADLIMA in Europe has had long-term experience with HADLIMA in Europe gaining a sense of confidence by PBMs in the U.S. for this product that we do have quite a bit of experience with this product.

Our next question comes from the line of Chris Shibutani from Goldman Sachs.

I wanted to ask 2 questions relating to the women's health business, particularly to the contraception focus area. Can you comment about the market in general, what you're seeing in terms of U.S. growth, perhaps the share of the [indiscernible] in general? And any color as well on contraception broadly, about gaining further approvals outside the U.S.? And then, within that, specific to NEXPLANON, can you talk about some of the metrics further? I think you provided about the U.S. international mix has been shifting from 75%, 25% to more of a 2/3? How do you see that trending? And then maybe, more quantification further that you've also previously provided on what the engagement has been like with your digital marketing and direct-to-consumer?

Chris, thanks for the question. Let me address that first part in terms of the lark movement, in terms of growth, [indiscernible] have been growing worldwide as well as in the U.S. And I think that's a shift, a lot of times, from the daily pill business segment into Lark , both in terms of long-acting reversible contraceptives, by the way, as well as short-acting reversible contraceptive as well, like, for example, NuvaRing and others. And in regards to how is it going with NEXPLANON. As I mentioned, we had a fantastic Q4. Last year was our all-time high. There was a bit of pull forward because we had a price increase in the end of last year. There's a bit of pulling forward in terms of the overall business. But -- And so that's why we saw a relatively slow January. But when I start to look at the February and March and April data, it clearly shows that there's sequential growth month, over month, over month. And we feel that there's a very strong signals in terms of sales from distributors to physicians as we -- a lot of the business is buy and bill, in clinics that is clearly showing a very strong kind of receptivity to some of the things that we're doing, as you mentioned, in terms of the digital media, issues that we're doing as well as other things that we're engaging in. It's an all-time high in terms of what we've been able to do versus the previous 2 years in terms of the clinical training program, in terms of all the certifications that we're doing, we are seeing tremendous improvement of -- for example, when you mentioned in terms of nexplanon.com, or internet sites. So we have a physician locator exceeded benchmark, almost 32,000 searches out of 58,000 total visitors in the first quarter. As I mentioned in my initial statements, we started a new telehealth capability at nexpelon.com, and in April 2022 to enable women to immediately talk to a health care professional about NEXPLANON and our contraception offers. So we're doing quite a bit in terms of tactically, when you talk about rep visits being back to pre-pandemic level, when you talk about clinical training program certification on the 1-minute insertion and 2-minute removal being really at an all-time high since the pre-pandemic phase. When you talk about our digital strategies in regards to the things that we're doing on nexplanon.com, as well as our social media campaigns. We have really, really great, and I'm very confident that for the year, we'll see the same type of double-digit growth as we saw in last year in 2021.

And to follow-on, you had commented previously that there was about a 20% decline in wellness business, as a proxy, perhaps, for patients returning to engagement with practitioners on the wellness front that has bearing for NEXPLANON. Any update on what you're seeing, trends there?

Yes. That's a great point, Chris. Let me say this, that, that number continues to be kind of lingering at around 20% in terms of a reduction of women seeking health visits, health checks. We're hoping that, that does better over time, that people are able to move forward. Because remember, though, that there's been an increase in telemedicine. So telemedicine is an increase, and I think that's what's probably taking the place of some of these women who are not going to seek help directly in terms of their health checks. And we think that, that's kind of stabilizing to the point as the fact that the pandemic has kind of changed the market dynamics a bit. And I think that there are some women, especially who are going to getting new forms of health care that is nontraditional as opposed to what they used to do before in terms of going to the office for those health checks, health visits. But having said that, NEXPLANON continues to do, I think, extremely well because of all the activities that we do. So for example, for the whole market, you might see a 20% reduction, but for NEXPLANON, we see double-digit growth because we have all-time highs in a number of areas, because of the fact that the promise of Organon was really, about putting emphasis, support, resourcing, senior management attention into NEXPLANON and we're starting to see some of the dividends pay off in that in the early phases.

Our next question comes from the line of David Amsellem from Piper Sandler.

So I just had a couple of questions. First, I just wanted to get your overall thoughts on vertical integration in biosimilars. Obviously, you have shared economics. Here, in light of what [indiscernible] did with Biocon. I wanted to just pick your brain on that model, something that's vertically integrated versus what you are trying to accomplish with your distribution model and how you see, I guess, the wisdom of what you're doing in terms of your shared economic model in biosims. So that's number one. And then, number two, can you just remind us how you're thinking broadly, longer term, about the direction of the established brand portfolio ex U.S., how you think about sort of a natural rate of erosion, if you will, in terms of price? Or how competitive dynamics come into play? And what's a good way of thinking about erosion, longer term, for that business?

Thanks for the question, David. Thanks for the question, David. Let me just answer and address the first question with regards to around biosimilars and doing a vertical play there. We are very comfortable both in terms of our relationship with Samsung, which is going almost now almost a decade long, in terms of the way that we perceive our part of the overall -- the business process going forward. Look -- I mean, our focus right now is you don't know what really is going to happen to biosimilars in a decade from now. Things could change in terms of the overall erosion of price being more aggressive. And there are a number of variables out there. We though, see this as a very strong opportunistic play at least for the next 6 to 10 years. And beyond that, we'll have to see. So as a result of where we put our capital allocation, it's really better for us to really focus on our vision, a better and healthier every day for every woman, which is to grow our women's health portfolio. We see opportunities there. We see kind of, what I would call, responsible valuations in the space. And that's where we've done the 5 deals we've done before even being a year old in the market. So we see biosimilars as a very important contributor to growth, but we also see the opportunity of being very smart in terms of capital allocation and putting it where we see long-term viability of women's health as being a real strong growth player going over for time. Now, in regards to the second question of established brands, specifically ex U.S. business, look, we saw a phenomenal quarter, but that was predicated on a number of onetime events that were very positive in our favor. If I look at the long-term view, I've had a lot of experience with these products. I've worked with these products for well over 25 years. I know them well. And I knew coming into this spin that with the right type of attention, the right type of resourcing, the right type of focus, entrepreneurial focus, country-by-country -- because there's no single country or single region that has the same level of opportunities. They all vary from one to the other, that this business could go from a very strong erosion pattern, almost double-digit erosion, to actually being flat. And now, over the last quarters, the 3 quarters, we've proven that now. Given the fact that we've had strong double-digit growth of established brands, 2/3 of our overall company in the first quarter, that I want to temper that, because of the fact that there was again some very favorable onetime events, but we see some headwinds coming over in the next -- in the second half of the year that we expected, we planned for, things like volume-based procurement around 7 round 8, Things like, for example, pricing for Atozet, our second biggest product in Europe. Things like, for example, our annual review that you get in Japan for some of these products. These are some of the pricing headwinds that we factored in. But overall, I am very, very confident that this year, we'll see a flat business overall. And potentially, if things go our way, it could be slightly better. So for the long term, I would say it would be very, very low single-digit erosion. But for the short term, I would say flat.

Our next question comes from the line of Greg Fraser from Truist Securities.

I apologize if you covered this already, but on established brands, how much of that strong growth in Q1 was related to easy comps and the onetime items that you called out versus fundamental drivers that could be more sustainable? And then, on NEXPLANON, do you expect new patient share to be driven primarily by patients switch from daily products? Or is there an opportunity to take share from IUDs? And I'm curious if an IUD is something that might make sense for your portfolio.

So for the first part of your question, established brands for the first quarter, we had about half and half, really. I would say, half would be attributable to onetime items and the other half, was just underlying volume growth in the base business. And in regards to the second question, with regards to NEXPLANON and we're ultimately where we're going to get our business for -- in the future. We're really focused on a couple of things. Unintended pregnancies for the last decade has been hovering around 50% worldwide, just south of that in the U.S. in the high 40s. That's clearly an unmet need that needs to be addressed. And we do feel that, for example, the biggest opportunity we have is from women who are not very happy with pills and ultimately, the daily compliance issues that continue to lead to unintended pregnancies being way, way too high. And that could be one area that is definitely going to be the key area of moving over. But I don't think that we're going to be fighting against other LARCs. I do believe, though, the big opportunities -- because we've only got about 10% share worldwide in terms of value and a much lower number in terms of volume. And so there's a huge runway for us. And clearly, COCs or pills are the #1 prescribed product out there, and there's clearly a lot of dissatisfaction in a number of communities in terms of women really wanting to have something that's convenient, much higher efficacy rate and so simple and easy to administer. So I think that's really the way that we look at the future of NEXPLANON.

Our next question comes from the line of Michael Nedelcovych from Cowen.

Another on HADLIMA, if you don't mind. Are there any external circumstances that would inhibit Organon from launching HADLIMA in 2023? For instance, are you reasonably certain that other IP, maybe, not contemplated by the contract, won't block such a launch?

So Michael, I don't see any issues right now. I think we're late in the game right now, and all those issues have been worked out in regards to the IP challenges and all the things of that nature. So I don't see anything right now, in my view, that would inhibit us from launching in July of next year.

There are no further questions at this time. Presenters, you may continue.

So I'd like to just -- some concluding remarks. Look, in Organon short history as an independent company, we've made tremendous progress executing on our state of business objectives. From the outset, we have known that the right level of investment and management focus would enable all 3 of our franchises to reveal their true potential. That is what we are now seeing. Of particular significance is the stabilization of our established brands business. I am delighted with our efforts to unlock the full potential of these brands and to deliver sustained, significant cash flows to fund our vision of a better and healthier every day for every woman. We're well on our way to building a suite of products that address important unmet medical need in women's health and our ability to deliver on what we say and remain focused on making a difference for women is what sets Organon apart. Thank you for your time and attention today, and we do look forward to speaking with you throughout the quarter. Thank you very much.