Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Organon Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session.

[Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Jennifer Halchak, Vice President, Investor Relations. Please begin your conference..

Thank you, Audra. Good morning, everyone. Thank you for joining Organon's second quarter 2023 earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer, who will cover strategy and operational highlights; and Matt Walsh, our Chief Financial Officer, who will review performance and guidance. Dr.

Sandra Milligan, Organon's Head of R&D, will also be joining us for the Q&A portion of this call. Today, we will 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 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 turn the call over to our CEO, Kevin Ali..

Good morning, everyone and thank you, Jen. Welcome to today's call, where we'll talk about our second quarter 2023 results. Our revenue for the second quarter was $1.6 billion, up 4% at constant currency, compared with the prior year period.

In the second quarter, our women's health and biosimilars franchise grew double digit, while our Established Brands franchise achieved flat performance again demonstrating its continued stability. Adjusted EBITDA was $530 million, representing a 33% margin. Turning to the full year.

Given our current view of foreign currency exchange rates we narrowed our guidance range on revenue from $6.15 billion to $6.45 billion to now $6.25 billion to $6.45 billion, which raises the midpoint of the revenue range by $50 million.

We also raised the lower end of our adjusted EBITDA guidance based on our latest visibility into potential milestone payments. The new range of the full year is 31.5% to 33%, a quarter of a percentage point higher at the midpoint compared with prior guidance. Now, let's review the quarter in greater detail, beginning with women's health.

Women's health grew 10% on a constant currency basis, primarily driven by 12% growth in Nexplanon. Performance of Nexplanon in the US was particularly strong this quarter, with revenue growth of 19%.

This reflects the 5% increase in US physician demand and increase in distributor inventory as well as the benefit of our pricing action in the third quarter of 2022. Year-to- date, Nexplanon is up 6% outpacing the large market, which grew 3% over the same period.

We expect continued demand growth in the United States, especially with the more than 35,000 healthcare professionals currently prescribing Nexplanon. We also expect increasing demand outside the US, especially in Latin America and countries like Brazil and Argentina as well as in Asia and countries like Thailand and the Philippines.

We continue to believe that Nexplanon will achieve $1 billion in revenue by 2025 and we expect Nexplanon to be a significant contributor to growth for the coming years. Continuing our discussion on women's health, fertility was up 17% at constant currency.

As we have discussed, China and the US are large fertility markets and together represent more than half of our current fertility business. During the second quarter, we saw significant growth in China, where there was a post-COVID rebound as patients return to clinics for treatment.

We have a very positive outlook for the fertility business in China for the remainder of the year. In the US, the fertility market is growing and remains an attractive business for Organon.

We're seeing increasing demand from our existing customer base, but also since then, we've worked to improve the consistency and reliability of our supply chain, which has allowed us to win incremental business from existing customers and to expand into new accounts in the reimburse market.

Demand is very strong in the US market and we believe volume will continue to offset a competitive pricing environment. Over the intermediate term, we believe our global fertility business can grow in the high single digit to low double digit range in line with our expectations for 2023.

Wrapping up on women's health is the JADA system, our device for post-partum haemorrhage. Year to date, revenue from JADA has more than doubled, albeit off a small base, and it's fast approaching a threshold where we'll start to disclose its revenue in our product table. During the second quarter, we added more than 300 new accounts.

We are now in over a 100 of the 150 largest birthing hospitals in the US and more than 28,000 mothers have been treated with JADA since launch.

The enthusiasm around JADA is palpable and ranges from a rising profile in scientific journals like the RUBY studies upcoming publication to healthcare professionals taking the social media to talk about the product. Overall, we are feeling very good about the future prospects for JADA.

Moving now to our biosimilars business where today I'll focus my discussion around the US launch of HADLIMA, our biosimilar for Humira. Since launch, all major wholesalers have placed orders for HADLIMA. We're encouraged by our early traction as Organon is emerging as one of the few players earning spots on formularies and winning orders.

In approaching the launch of HADLIMA, we were very intentional in our market positioning and segmentation. Our pricing strategy focuses on simplicity. It was a deliberate choice and design, so that the savings for the healthcare system would be more transparent.

We've priced HADLIMA to enable access and to bring the economic benefits of biocimilars directly to the patient. We believe this is where we can offer the highest utility to patients. For example, here we're showing the two PBMs who have so far announced their formulary listings, Optum RX and Express Scripts.

You can see where Organon has already been able to secure access within both PBMs outside of their national formulary listings. In the case of Optum RX, we have secured more than half of the lives through United Healthcare. In the case of Express Scripts between Cigna and Prime Therapeutics, we've secured about a third of the lives.

Prime Therapeutics is the fourth largest PBM. Health plans of Prime include some of the largest Blue Cross Blue Shield plans in the nation. Many of these health plans are the dominant player in their respective states. And for both Optum Rx and Express Scripts, we remain active in discussions for the custom health plan business.

While we're very encouraged by the access we've secured so far, access alone does not guarantee success. And access doesn't necessarily mean the patients will get the product.

This is why our strategy is expressly focused on customers that are not dependent on rebates, but rather the providers in the market who are focused on bringing the savings of biosimilars to the patients and we're not done. The market is still evolving. Decisions from PBMs and insurers are still forthcoming.

Product attributes will be a key in continuing to unlock opportunities. We continue to believe HADLIMA is positively positioned when it comes to its product attributes.

For example, our pen design received an Arthritis Foundation designation which recognizes products that make life easier for those living with arthritis and other functional limitations.

We also developed the HADLIMA For You Patient Support program that features comprehensive resources including a co-pay program and dedicated nurse coaches who engage with patients throughout their treatment journey.

One of the most important differentiators for HADLIMA is the five years of real-world evidence covering tens of thousands of patients that we have collected from Samsung's launch in Europe and from our own launches in Canada and Australia. This data should give great confidence and comfort to prescribers and patients alike.

And we continue to move forward with our collaborator Samsung on the interchangeability designation. We recently announced that the Phase 4 study had reached its primary endpoint, which puts us on track for a summer of 2024 approval.

And finally, our product formulation is high concentration, citrate-free, aligned with the most prescribed formulation of the originator. A product that can create a frictionless experience for a patient is the best way to drive pull-through. That is what gives patients a better comfort level and will influence physician prescriptions. The U.S.

healthcare system needs biosimilars to be successful. They fill a significant gap in more affordable options for some of the most chronic diseases people face. We're proud of our market positioning and pricing.

We're very pleased and encouraged by the signals we are getting so far, and we believe we'll be able to secure further access as this market continues to develop. Rounding out the topline discussion, let's move on to Established Brands.

Year-to-date, the Established Brands franchise has grown 1% ex-exchange as 2% volume growth has offset a 1% decline in price across the portfolio. Since launch, we've encountered skepticism around how a portfolio of off-patent brands can demonstrate that kind of continued stability.

There are several reasons, and over the next few quarters, we will highlight a few of them in detail. Last quarter, we talked about manufacturing optimization for Nasonex and Atozet to meet increasing demand resulting from heightened promotional activity. Today, I'll focus on our strategic approach to pricing.

In some lower-priced markets, lawmakers are backing policies that propose to raise originator and generic prices, hoping to draw manufacturers back into the market and cure ongoing supply issues. This is true in select EU markets such as Germany, France and Sweden, as well as some APAC markets like India and Australia.

Where this isn't the case, we have worked with policy makers to demonstrate how investments are important to ensure access to reliable and high-quality manufactured products. Further, we've been able to selectively increase our list price in many markets, subject to meeting certain conditions.

An example is our LAMERA region, where currency devaluation and inflation provided a basis for a lot of price increases in a number of countries. Beyond increasing list price, we've also scrubbed the channel for commercial and trade discount improvements.

As we continue to look at this portfolio, we're identifying opportunities that gives us greater confidence that the five-year CAGR for this franchise will be relatively flat on a constant currency basis. This June, we entered into our third year as a standalone company.

Thanks to the hard work of our people around the world, and their commitment to our vision and business, each of our franchises are performing as good as or better than we thought they would.

Importantly, we have grown our pipeline since launch and have added eight assets to our portfolio, which includes some very interesting molecules in the early stages of development. This investment is key, so that over time, Organon evolves into a pharma company with a regular cadence of catalysts at an accelerating growth rate.

In our first two years as a company, we continue to build a track record of good operational results, while also laying the groundwork for a successful future. I'll turn it over to Matt now to talk more about the solid results of the second quarter in more detail..

biosimilars, fertility, China retail, Jada and NEXPLANON, as well as contributions from established brands. Moving to the other components of guidance on Slide 18. We continue to expect adjusted gross margin to be in the low- to mid-60% range. And in fact, the back half of 2023 gross margins should look much like what we saw in the second quarter.

This is primarily due to product mix, the biosimilars franchise operates as a profit share model, so growth in that franchise from the U.S. launch of HADLIMA will be unfavorable to the gross margin line. Additionally, the inflationary cost pressures we saw in the second quarter will persist through the remainder of 2023.

On operating expenses, our ranges for SG&A and R&D as a percentage of sales are consistent with what we laid out last quarter for our expectations for the full year.

and reflect continued investment in the business as we position it for future growth, but I would add that typically, our second half OpEx spending tends to trend a bit higher than the first half of the year. Operationally, all of these ranges are largely in line with the financial guidance we laid out back at the beginning of the year.

Consistent with our view that we no longer expect, about $30 million of IP R&D in the remainder of the year, we are raising the bottom end of our adjusted EBITDA guidance by 0.5 percentage point so the new range is 31.5% to 33%. We also expect to have some net favorability below the EBITDA line.

Given the favorability on tax rate we had in the second quarter, we are lowering our estimate of our non-GAAP tax rate by about 150 basis points, which represents about $20 million of net savings in 2023.

We increased our estimate of annual interest expense by $10 million due to the Fed's most recent rate hikes, but that's offset by a $10 million decrease in our estimate of depreciation for the year. In summary, second quarter results represent solid execution against our expectations and guidance for the full year.

Our businesses continue to deliver constant currency performance aligned with our long-range targets. We're looking forward to the results from HADLIMA's launch in the U.S. as well as the upcoming U.S. launch of XACIATO. Also important, we're starting to see moderation in the strength of the U.S. dollar, which bodes well for near-term reported results.

in terms of closer alignment between our reported results in U.S. dollars and our relatively stronger performance in local currencies. With that, let's now turn the call over to questions and answers..

[Operator Instructions] We'll go first to David Amsellem at Piper Sandler..

Okay. Thanks. So I got a question on the capital structure. I think you've said in the past that you're looking to clean up some of the variable rate debt. So I just want to get some more color on how you're thinking about that, what that means for 2024, how you're thinking about interest expense.

I know it's a little early, but just help us better understand your broader thinking.

And then related to the cap structure is in terms of BD M&A, how do you -- sort of square the two goals of deleveraging and adding assets? And how are your -- how are you thinking about what to prioritize? Bearing in mind that it may not necessarily be an either or, but just give us your latest thinking..

Okay. So I'll start with that one, and we'll start with the debt piece. So just a reminder, to investors that in the first quarter, the company did make a $250 million voluntary debt paydown of our variable rate debt, given recent Fed increases, the cost of that, that is now the most expensive debt in our debt stack.

So as we look at future voluntary debt repayments we'll certainly be focused on that.

And when we think about the 75% of our free cash flow will be generated in the back half of the year, that will be a decision that we'll be looking at in the second half, in terms of capital allocation, capital deployment, further reductions in that variable rate debt.

The second part of your question, David, is really integral to it because since the spin, we've been saying that we would be looking to bring a balance between growth, external growth sourced through business development, M&A type capital deployment and balancing that against the near term and certain benefits from debt reduction.

And that's exactly what we've done to this point in time. We've deployed about equal amounts of capital to growth over the eight deals we've completed. And about $450 million in total of voluntary debt repayments. And we expect to continue to do -- we expect to continue that strategy.

The -- in terms of how we think about capital deployment in the BD program, the change in the interest rate environment, we've said this before as well, has raised the bar on capital deployment through BD, and causes us to think about opportunities that result in more near-term visibility into revenue and EBITDA accretion.

So with those comments, Dave, I think we've addressed that question..

We'll move next to Umer Raffat at Evercore..

Hi guys. Thanks for taking my question. I'm still trying to make up my mind on reading all the details of the quarter. Clearly tracked ahead, but I know there are some one-timers in there as well. So could you lay those out? First, also, first, perhaps on the cholesterol franchise ex U.S.

tracking ahead, relative to whether the trade receivables build was specifically focused on those cholesterol meds.

And secondly, also, what exactly drove such a big tax lowering?.

So I'll start with the second part of that, Umer. So we have a global tax structure that has a significant amount of exposure in Europe, where we have a significant presence, especially in Switzerland. So it was really a result of the -- the international tax planning structure that we have in Europe that generated that benefit.

And as opposed -- to address the first part of your question, June was a strong month across the board for the company. cardiovascular played a role in that. And I think it really relates to the relatively strong global demand that we see in the Atozet franchise..

Did that answer your questions, Umer?.

I guess, Kevin, I just look at it as -- your cholesterol med between Atozet and ZETIA is about $200 million a quarter.

And this quarter, it was about 25% ahead, like there must be some one-off in there, no?.

Yes. So we had kind of a slow kind of volume-based procurement implementation in China, which impacted one of the rounds, which kind of gave us more opportunity for the ezetimibe franchise, and Atozet is just doing exceptionally well in Europe.

France, for example, is doing exceptionally well, double-digit growth with Atozet in France, it's creating a lot of uplift in terms of overall volume, and we don't really face a lot of price erosion on Atozet right now. So I think it's just very, very strong, robust quarter with regards to a couple of issues.

One is, opportunity with ZETIA because of slowdown of implementation of Round 7 and Atozet growth in Europe.

Does that answer it?.

That's very helpful. Thank you so much..

Sure..

We'll move next to Jason Gerberry at Bank of America..

Hello. Hey guys. Thanks for taking my question. I wanted to just ask about the interchangeability commentary on Humira. It seemed like in the past, you guys maybe downplayed that as important to the commercial.

And I'm wondering if there's like any kind of revised view just given how AbbVie's contracting practices have made it difficult for biosimilar adoption? And maybe now interchangeability is important. And then along those lines, then, did this become a race with Teva to be the first one to get this interchangeability designation? Thanks..

Good question, Jason. So in regards to interchangeability, it was always something where a couple of years ago, when we were starting going down the path of developing along with our partners, obviously, Samsung, this asset, it wasn't something that was on the top of minds of PBMs or others.

It only came about recently because one of the competitors said, oh, we've got interchangeability designation for working on it for a lower concentration business. And obviously, the high concentration citrate-free business is about 85% of the overall business in the U.S.

So you've probably seen recently that our collaborator, Samsung, published essentially our Phase IV trial with -- that shows really kind of very positive outlook for -- we met all the endpoints for the interchangeability study. So we do expect the interchangeability indication by next summer.

I can't really comment on what's going on with Teva or anybody else in terms of that matter in terms of their race to get interchangeability.

But what I will tell you is in our discussions with the PBM folks, what they've told us is, look, what's most important to us is obviously let's contract on price, let's see how competitive things are because there's kind of a duality of the market right now.

There's about 40% of the lives covered in the PBM world, are kind of what I would consider low WACC, low rebate, in order to be able to give an opportunity for patients to have a low out-of-pocket expense experience for their biosimilar asset.

And then there's the high WACC, high rebate, which really essentially is the game that AbbVie is playing in terms of being the originator. And so what I will tell you is that obviously, that's an ongoing discussion, and we feel very good about our success to date in terms of where we're going with that.

But most importantly, they look for reliability in manufacturing. They want to look at the pen design. We just got the Arthritis Foundation designation as really being a very unique pen design. They look for real-world evidence. It's a very important thing. And we have seven million units sold since 2019.

And in Europe, now in Canada and Australia with excellent real-world evidence. So those are the kind of attributes that one looks for in order to be able to differentiate in the market, the indication -- or rather, getting the interchangeability indication just gives an extra added boost.

And I think that most PBMs know that if the studies are ongoing and now with the Phase IV study reporting out that we met end points it's just going to be basically a cost of doing business..

We'll go next to Navann Ty at BNP Paribas Exxon..

A follow-up on HADLIMA. Just wanted to hear about your dialogue with PBMs and health plans on your low WACC and high discount strategy. And do you used to expect most market formation in 2024 and 2025? And will the high concentration will be a game changer? Just a bit of a follow-up on the previous question.

And then can you also give us more information on the missing data on ebopiprant and the timing of the additional clinical work..

Yes, I can give you some of the information on the first part of the question, and then I'll hand it over to Sandy to update on ebopiprant. So in regards to what's happening right now with the PBMs and with HADLIMA, as I mentioned, there's kind of a dual strategy, a dual reality that's happening in the launches as we speak.

There are some, AbbVie being one of them, high WAC, high rebate and others that are kind of following that route.

And then there's the other group that is essentially following the route where we basically staked out the claim because we've always believed that the value proposition of biosimilars is to provide savings to the system and also more importantly, savings to patients, in terms of their out-of-pocket costs.

And keep in mind that most patients, obviously, their out-of-pocket costs are going to be related to what the WACC price is. And so that's been our focus and our strategy and far, as I've said in my script, at the beginning of this hour, we started to really see some good pull-through coming through.

And I've been saying for the last couple of years that I think that 2023 and '24 will be kind of the market forming years as you kind of get on access to formularies and ultimately, then the real revenue generating and the real market formation as it pulls through is really in the late 2024, 2025 time frame as you start to see the real uptake because I believe, by then, a number of things are going to happen.

For example, my estimate right now is that 40% of the lives covered to date, essentially are what I would consider the low WACC, low rebate, low out-of-pocket expenses lower as co-pay in that segment, in the Humira biosimilar segment.

we will -- we're very strongly positioned there because of all the attributes I've listed out a number of times before. And you've seen some of the early successes we've had, whether it's Prime in terms of the one third of the lives covered there, whether it's UnitedHealthcare, whether it's half of the lives covered there.

Now just this morning, we got notification of Centene, which is another five million lives covered. These are all areas and PBMs and areas that are focused on that. low net cost and ultimately passing on the savings to patients. So we feel really good about where we are and where we're going with this product. We've always felt really good.

And I think that's kind of the way I see it going forward. We do, of course, have both concentrations, high concentration citrate-free, as well as low concentrations available for our customers, and we feel I think we're on the right track. I'll hand it over.

Navann, did I answer the question? Or did you need some more clarity on HADLIMA?.

Yes. Thank you for the color..

Okay. So I'll hand it over to Sandy now to address the ebopiprant question, Navann..

So Navann, to answer your question, as you know, we've been doing quite a bit of additional preclinical work to progress asset.

And we've been able to take a look at that data as well as the clinical data that was obtained by ObsEva during their clinical studies and as well looking at the technical work that is necessary to get us to a clinical formulation.

And it's clear that there's additional preclinical work that we need to do before we take this forward to the development phase in humans before we get to Phase I..

And we'll go next to Chris Shibutani at Goldman Sachs..

This is Roger on for Chris. Just a quick question from us.

And maybe you touched a bit on this already in your earlier comments on BD, but how are you thinking about the relative scale of your biosimilars and women's health businesses, have you been seeing any more opportunities in women's health as of late?.

I can address that, Roger. So we made that -- we announced that deal last year with Henlius to bring in two assets in the biosimilar space. We're being very opportunistic about it. Wherever we see opportunities, obviously, the next kind of windfall will be the IOs and that's in the 2028 time frame that we see that happening.

So there's things that we're working on in that space. And so we feel good about the fact that the portfolio we have today, not only with Samsung, but with our Henlius partners now. And going forward, what do we see with women's health. Look, we've looked through a number of companies and products with our outstanding business development team.

We do see opportunities in women's health. But I will underline the following. Where we started this journey, we were focused on exclusively to women in terms of the women's health space.

And now we're kind of opening the aperture and looking at those conditions disproportionate to women, which can include a number of different indications and a number of different therapeutic areas that we feel could be a really nice fit with our overall structure and what we're trying to do. So we've got a lot of things we're looking at right now.

We're looking at some very interesting assets, both in the ready to launch or recently launched space. as well as kind of the mid-stage development cycle as well. So very committed to that as well, Roger. I hope that answered your question..

And that does conclude the question-and-answer session. I would like to turn the call back over to Kevin Ali for closing remarks..

Well, I will just say that I want to thank everybody for tuning in, and we'll talk to you soon. We're very proud of the results of the second quarter, and we'll be speaking to you soon. All the best..

And this concludes today's conference call. Thank you for your participation. You may now disconnect..