Organon : Q1 2024 Transcript

Corrected Transcript

02-May-2024

Organon & Co. (OGN)

Q1 2024 Earnings Call

CORPORATE PARTICIPANTS

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OTHER PARTICIPANTS

Jason Gerberry

Analyst, Bank of America

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MANAGEMENT DISCUSSION SECTION

Operator: Thank you for standing by. My name is Mandeep, and I'll be your operator today. At this time, I'd like to welcome everyone to the Organon & Co. First Quarter 2024 Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and- answer session. [Operator Instructions]

Thank you. I would now like to turn the call over to Jennifer Halchak, Vice President of Investor Relations. You may begin.

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Jennifer Halchak

Vice President-Investor Relations, Organon & Co.

Thank you, operator. Good morning, everyone. Thank you for joining Organon's first quarter 2024 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. Also joining us for the Q&A portion of this call is Organon's Head of R&D, Juan Camilo Arjona Ferreira.

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 would now like to turn the call over to our CEO, Kevin Ali.

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Kevin Ali

Chief Executive Officer & Director, Organon & Co.

Good morning, everyone, and thank you, Jen. Welcome to today's call where we'll talk about our 2024 first quarter results. We entered this year with a clear focus to deliver our 2024 financial targets, improving our financial position, and positioning ourselves for future growth. And to that end, the first quarter was a very solid start.

For the first quarter of 2024, revenue was $1.6 billion, with all three franchises contributing to a 7% growth rate at constant currency. I'm pleased to report that the Women's Health franchise grew 12%, our Biosimilars franchise grew 46%, and our Established Brands business continued its stable performance with growth of 2%. In the first quarter, adjusted EBITDA was $538 million, representing a 33.2% adjusted EBITDA margin. And adjusted diluted EPS was $1.22.

The strong performance in the first quarter strengthens our conviction in our financial guidance for the full year 2024, and we are affirming those ranges. We remain confident in our ability to deliver our third year of revenue growth on a constant currency basis, and we remain committed to delivering full year adjusted EBITDA margins that are in line with last year or better.

From a capital allocation standpoint, we continue to believe this business can generate $1 billion of free cash flow before one-time costs, and we will be driving towards that number in 2024. That strong cash flow will provide financial flexibility to comfortably service our dividend, make progress on achieving a leverage ratio of below 4 times by the end of 2024, and to continue to do business development in line with the types of transactions we have completed in the last couple of years. This includes transactions in Biosimilars and the recent commercial agreement with Eli Lilly to license two migraine assets. These transactions have solid returns but, importantly, they're also aligned with our mission of offering solutions in women's health beyond the narrow definition of reproductive health.

Moving on to discuss our franchise performance. In the first quarter, growth in Women's Health franchise was led by Nexplanon. The last year we took the appropriate actions to position Nexplanon for a successful 2024 and the long-term growth opportunity we see for the product. We remain confident that the product can achieve robust revenue growth in 2024.

Nexplanon's first quarter constant currency growth was 34%. The US was up 35% and the rest of the world was up 34%. Year-over-year growth in the US reflected a shift in timing of our list price increase, which brought stability to distributor buying patterns. As a result of the shift going forward, we expect less volatility quarter to quarter in Nexplanon results. For the full year, we expect growth to be driven by Nexplanon's leadership in contraception, the benefits of our pricing strategy, including list price in the US and management of the 340B channel, as well as physician demand growth.

Outside the US, Nexplanon grew 34% ex-FX in the first quarter, driven by increased demand in the LAMERA region and in larger markets in the EUCAN region like France, the UK, and Canada. Outside the US for the full year of 2024, growth will be driven by continued strong performance in those markets, as well as our ability to better meet increased demand in our access markets, which we cited as a priority for us in 2024.

As I mention nearly every quarter, we believe Nexplanon will be on $1-billion annual run rate in 2025, and beyond 2025 we believe there is still significant runway for growth up until the loss of exclusivity for Nexplanon in the US, which in our view will not occur until 2030 for three specific reasons. First, our five-year study is on track to close this year. And pending FDA review and approval, our planning assumption is that we will be able to market with a five-year label in 2026. A differentiated label will give us three years of data exclusivity on that five-year duration of use claim, which we know from our market research is preferred by women and providers.

Second, we have IP protection on aspects of the applicator device until 2030. We believe that any generic coming to market before then would have to develop their own device and training programs to go along with it. So, it's not until 2030 when IP protection on both implant and device would have expired that we might see the market start to alter with a similar five-year product and applicator.

And third, complex drug device combinations have demonstrated strong post LOE performance, which could be due to the fact that complex drug device development can pose significant challenges in terms of showing therapeutic equivalence. So, overall, we're confident in the sales longevity of Nexplanon. And further, when competition does come, we do not expect a traditional generics erosion curve.

Moving on to our fertility franchise. As expected, our global fertility business was essentially flat this quarter, down about $2 million or about 2% ex-FX. You'll recall that in the fourth quarter of 2023, in the US, we exited a spin- related commercial arrangement and we onboarded a significant customer, resulting in a very strong buy in of Follistim at the end of last year that we have largely worked through in the first quarter.

Offsetting US performance was strong growth in fertility in China, which grew double digits, benefiting from strong demand. We expect continued momentum in our fertility business in China in 2024, with growth supported by solid demand, especially in key provinces like Beijing, where reimbursement for assisted reproductive technologies has been implemented. Together, the US and China make up north of 50% of our fertility business. Strong demand in those markets coupled with new launches and footprint expansion in other markets are supportive of the high-single digit revenue growth we expect to see in fertility on a global basis for the full year of 2024.

Let's move now to our Biosimilar business, which grew 46% in the first quarter and continues to be a solid growth pillar for Organon. We expect 2024 should be another year of double digit growth on a global basis for our Biosimilars franchise. In the US, the growth driver in 2024 for Biosimilars will primarily be the uptake of Hadlima. We are getting very good traction with Hadlima with Veterans Affairs, who within 60 days of exclusively carrying Hadlima managed to convert more than 50% of the patients from HUMIRA to Hadlima. This is a strong indicator of payers' ability to rapidly convert utilization, which is a critical factor for accelerating conversion to biosimilars in this market.

Behind the US, two other key markets in our Biosimilar business are Brazil and Canada. In Brazil, we're seeing strong performance from Ontruzant in particular. The fourth quarter of 2023 was very strong for Ontruzant, driven by favorable timing of a tender in Brazil. But in Q1, we saw incremental volumes come through that we would

characterize as opportunistic upside. In Canada, we continue to see strong performance, especially in Hadlima and Renflexis, as the government mandated a province-by-province transition to biosimilar progresses.

As we have previously talked about, our aim in Biosimilars is to launch a new asset every couple of years. We are well-positioned to execute on that beyond 2024. A great example of this is our collaboration with Shanghai Henlius Biotech, where we license commercialization rights for two investigational products, Perjeta or pertuzumab and Prolia and Xgeva or denosumab biosimilar candidates. Organon will have exclusive global commercialization rights to these assets outside of Mainland China, Hong Kong, Macao and Taiwan.

Clinical trials on both molecules have been progressing. In fact, we just recently announced that the Phase 3 comparative clinical trial for the denosumab biosimilar met primary endpoints. We expect regulatory filings for our two denosumab biosimilar candidates to occur during 2024 in certain markets, including the US and EU, followed by filings for the pertuzumab biosimilar candidate in the US in late 2024 or early 2025.

And then rounding out the discussion with Established Brands, which grew 2% ex-FX in the first quarter, demonstrating the resilience of this business. Impact from VBP in China was more than offset by the initial contribution from the recent commercial agreement for the two migraine drugs Emgality and RAYVOW. We also saw a recovery in our injectable steroid products following last year's market action. For full year 2024, we expect Established Brands to achieve flat performance on an ex-FX basis, and Matt will go into more detail about the pushes and pulls on the Established Brands portfolio for 2024.

Moving now to slide 6, where we take a look at revenue by geography. The EUCAN grew 10% ex-FX in the quarter, driven by the addition of the two migraine assets and the recovery of injectable steroids, both of which I just mentioned. We're still having solid growth in Atozet in Europe, which should be the trend for the nine months of the year until it loses exclusivity in late third quarter of this year.

The US was up 14% in the quarter, driven by performance in Nexplanon, as well as uptake of both Hadlima and Jada post-launch. These factors offset rate pressure and the channel dynamics in fertility, which benefited the fourth quarter of last year as well as US performance of Ontruzant.

The LAMERA region has been a significant contributor to Organon's growth since spin. The 36% ex-FX growth in the first quarter was primarily driven by opportunistic volume associated with the Ontruzant tender in Brazil, as well as strong growth in Nexplanon across the access markets and Mexico.

The APJ region was down 7% ex-FX this quarter. We expect it to be a challenging year in Japan as we face some national pricing revisions lap favoribility from last year when some competitors were out of stock and work through the LOEs of Atozet and Rosuzet. China was down 5% ex-FX in the quarter. But for the full year 2024, we expect China to grow, particularly as we lap the economy related challenges in China as we saw in the back half of last year.

Overall, we are very pleased with the results through the first quarter of the year. Operational execution is progressing very nicely. We also have our eye on smart deals that fit within our desired financial profile while moving us forward as a company. And finally, there is potential value yet to be unlocked in our clinical portfolio. In life cycle management, in addition to the Nexplanon five-year study and the two biosimilar assets with Shanghai Henlius that I spoke about earlier, we're making progress in the development of Mercilon for primary dysmenorrhea in Japan.

On the innovative side, both assets we acquired through Forendo are progressing well and our OG-6219 study investigating a novel approach for treating endometriosis is progressing towards a Phase 2 readout next year. We're also awaiting first-in-human dosing for our OG-7191 program targeting the symptoms related to PCOS later this year for which there is no current treatment. Additionally, we are anticipating preclinical data related to our collaboration with Cirqle, which is a novel method for non-hormonal contraception. It's great to see progress not only happening on the commercial execution side of things, but also in positioning Organon for future growth through our innovative therapies.

Now let's turn the call over to Matt, who will go into our financial results in more detail.

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Matthew M. Walsh

Chief Financial Officer, Organon & Co.

Thank you, Kevin. Beginning on slide 7, here, we bridge revenue for the first quarter year-over-year. In February, for modeling purposes, we suggested that you could consider evenly spreading revenue over the year, which would mean every quarter would be slightly under $1.6 billion in revenue if you're working from the midpoint of our guidance range.

We did a little better than that in the first quarter of 2024, driven by stronger volume, especially from Nexplanon and Biosimilars, followed by recovery in injectable steroid, namely Diprospan, as well as continued growth from Jada. Outside of FX, the other revenue drivers were fairly neutral in the quarter. Taken in totality, these other drivers finished Q1 ahead of our expectations, which drove the margin favorability we saw in the quarter. We'll discuss margins in more detail shortly.

LOE was about $5 million of impact in the first quarter, which reflects the LOE of Atozet in Japan. The impact of VBP in China was also about $5 million in the first quarter and reflects lingering effects of the July 2023 implementation of Round 8 that included REMERON and HYZAAR. There was negligible impact from price in the first quarter. The benefits of our Nexplanon pricing strategy in the US muted expected pricing pressure in other parts of our business, particularly in Biosimilars and to a lesser degree fertility.

In supply/other, we captured the lower margin contract manufacturing arrangements that we had with Merck and have been declining since the spin-off as expected. And lastly, foreign exchange translation had an approximate $30-million impact or 2-percentage point headwind to revenue, and that's a function of more than 75% of our business being generated outside the US.

Now let's turn to performance by franchise. As has been our convention, I will target my comments over the next three slides to those areas most relevant to your modeling as we think about where we ended the quarter and what the near term future may hold. Let's start with Women's Health on slide 8.

As Kevin mentioned, we expect robust growth for Nexplanon in the full year. With such strong growth in the first quarter and the benefit of our annual price increase in the US, which we took in January, Nexplanon could achieve double digit growth this year on a constant currency basis.

For fertility, growth will be skewed towards the second half of the year. In the first half, we will be absorbing the two Q4 2023 issues that Kevin referenced. First, the buy in that resulted from exiting a temporary spin-off related commercial arrangement in the US and, second, initial supply chain stocking related to the large contract initiation, which is also in the US. In the second half of the year, we will have the benefit of lapping what was a difficult fertility environment in China last year. Plus, we expect volume growth from the provincial expansion of reimbursement and new launches in other markets, as Kevin referenced.

Turning to Biosimilars on slide 9. With Ontruzant, we have had competitive success as a key supplier of a biosimilar of Herceptin in Brazil. And in the quarter, we had the benefit of incremental upside coming from additional volume through that tender. I would note that Ontruzant growth would have been down this quarter if not for the incremental upside we had from these additional volumes in Brazil. In fact, on a global basis, we expect Ontruzant will be declining this year due to competition in other markets.

And on US Hadlima, we had a strong first quarter. But given that this market has been difficult to predict and continues to evolve, we'll always say that it is our objective to grow that product sequentially each quarter this year.

Turning to slide 10, let's talk about pushes and pulls on Established Brands for the full year 2024. We'll see VBP impacts pick up later in the year driven by Fosamax' inclusion in Round 10 expected late in the third quarter. Atozet will go through LOE in the EU in September of this year and that product has been doing very well for us in that market. We expect those headwinds to be offset by continued volume growth. For example, contribution from the new migraine assets, Emgality and RAYVOW. We expect injectable steroids to continue to recover, and you already see that here with 19% ex-FX growth in the non-opioid pain and bone derm portfolio. These factors should result in about level performance for the Established Brands portfolio in 2024 ex-exchange.

Now let's turn to slide 11, where we show key non-GAAP P&L line items and metrics for first quarter performance. For reference, GAAP financials and reconciliations to the non-GAAP financial measures are included in our press release and the slides in the appendix to this presentation.

For gross profit, we are excluding from cost of goods sold purchase accounting amortization and one-time items related to the spin-off, which can be seen in our appendix slides. Adjusted gross margin was 62.1% in the first quarter of 2024 compared with 65.2% in the first quarter of 2023. In the first quarter of 2024, the lower adjusted gross margin was primarily related to unfavorable product mix, foreign exchange translation, and higher inflation impacts to material and distribution costs. Despite being below last year, gross margin actually came in stronger than we expected in the first quarter, mostly driven by better performance in price across the aggregated portfolio.

Total non-GAAP operating expense was down 3% in the quarter, excluding IPR&D, reflective of our cost containment efforts. That is especially the case in R&D where we have reprioritized clinical spending and rationalized head count to better align with the types of business development programs we've recently completed and plan to pursue in the near term. IPR&D expense was $15 million in the first quarter compared with $8 million in the prior year period.

The $15 million of milestone expense in the first quarter was related to development progression of a denosumab biosimilar. Milestone payments are inherently difficult to forecast, so we will continue to utilize the same convention that we employed this quarter. That is to include an estimate of IPR&D and milestones to be recorded in the quarter in our earnings date press release, which will be posted as soon as practical after the close of each quarter.

Foreign exchange losses were modestly lower, $6 million in the first quarter of 2024 compared with $9 million in the prior year period. In both periods, these are foreign exchange losses primarily driven by normal course business activities in countries where it's not feasible to hedge movements in the local currency. These factors culminated in an adjusted EBITDA margin of 33.2% in the first quarter of 2024 compared with 33.7% in the first quarter of 2023. Non-GAAP adjusted net income was $315 million or $1.22 per diluted share compared with $276 million or $1.08 per diluted share in 2023.

Turning to slide 12, we provide a closer look at our cash flow for the quarter. For the last two years, our free cash flow generation has followed the approximate pattern of 30-70. 30% of our free cash flow is generated in the first half of the year and 70% is generated in the back half. In 2022, we generated $875 million of free cash flow before onetime charges. In 2023 that figure rose to $940 million. And in 2024, we expect to reach approximately $1 billion of free cash flow before onetime items, underpinned by our financial guidance.

Like many companies with December fiscal year ends, Q1 free cash flow is impacted by accrual runoff, largely related to the timing of annual incentive payments, and that represented about a third of that working capital consumption number. Typical to the first quarter, we also see seasonal fluctuations in working capital, which drove the remainder of the change.

For onetime cash costs related to the spin-off, in February when we gave full year 2024 guidance, we said to expect about a 40% reduction from 2023, which would put us in the $200-million ballpark. The $68 million you see here is consistent with that expectation. Of note, we have completed the implementation of our global ERP system as of April, which was the main driver of onetime costs up until this point. Next year, we would expect even lower onetime spin-related costs and beyond 2025, we expect onetime spin-related costs to be de minimis.

In the $36 million of other onetime costs, here we capture head count restructuring initiatives and the transition of our manufacturing network related to the spin-off. These costs are distinct from the spin-related standup costs in that they're associated with actions which will ultimately drive cost efficiencies, some of which we realized in Q1 and which are already incorporated into our earnings guidance for 2024.

Moving to slide 13 now on debt and leverage. When we provided guidance in February, we were bracing ourselves for leverage to tick higher in the first half of the year before coming down in the second half, ending the year better than 2023 with a view to ending the year below 4 times. With stronger than expected EBITDA performance in Q1, our net leverage ratio has remained level with 2023 year-end and is holding at 4.1 times. This solid result gives us greater confidence in our February commentary around lowering our net leverage ratio during the year.

Now turning to 2024 guidance on slide 14, where we highlight the items driving our 2024 revenue guidance range of $6.2 billion to $6.5 billion. Some of the individual drivers have changed, but our top line revenue guidance is remaining unchanged. For LOE, that approximate $70-million to $90-million impact for the full year 2024 incorporates Atozet both Japan and in the EU later this year. We also have a provision for Dulera where we have been expecting a generic since its LOE in 2020.

VBP impact is still expected to be in the range of $30 million to $50 million for 2024. By the end of the year, we expect approximately 85% of the portfolio to have gone through VBP. Though minimal in Q1, we expect the impact from price to be in the $180-million to $220-million range, which is up $25 million at the midpoint from the $150-million to $200-million range we talked about in February. Overall, this represents a bit over a 3-percentage point headwind versus prior year and is more in line with our longer term expectations of price impact across our entire business given pricing pressure in BIOSIMILARS, US fertility, and the mandatory pricing revisions we expect to see in certain international markets.

And for volume, we are raising our estimate by $75 million at the midpoint to $450 million to $650 million to primarily reflect the upside we saw in Biosimilars in the first quarter. Overall, that almost 9% volume growth we expect over last year will be coming from our growth pillars: Nexplanon, fertility and Jada within Women's Health, Biosimilars, and China retail, as well as the latest addition of Lilly's Emgality and RAYVOW in Europe.