Organon & Co.

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Argonaut Third Quarter 2021 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. To ask a question during the session, you will need to press star 1 on your telephone keypad. As a reminder, this call is being recorded. Thank you. I would now like to turn the call over to Jennifer Halchick, Vice President, Investor Relations. Please begin your conference. Thank you, Polly. Good morning, everyone. Thanks for joining our third quarter 2021 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, guidance, and capital allocation. 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 presentation section of our Organon Investor Relations website at 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 Form 10 registration statement 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 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 full quarter as a standalone company. Also, as today is Veterans Day in the U.S. and Remembrance Day in other parts of the world, we would like to thank all of those who have served, especially our own employee veterans. Let me start by saying I continue to be inspired by the commitment of our employees across the world. They are unified in the dedication to our vision, creating a better and healthier everyday for every woman. Already, less than six months after spinning into an independent company, we are delivering on our corporate and financial goals. Our year-to-date results have shaped up very much in line with our expectations. with third quarter revenues of $1.6 billion and adjusted EBITDA of $636 million. And with about seven weeks left in 2021, we have good visibility into the performance of each of our key three franchises for the remainder of the year. Accordingly, we affirmed our guidance and narrowed the ranges for revenue and adjusted EBITDA margin for full year 2021, which Matt will discuss with all of you shortly. Importantly, we have been active on the business development front, as we told you we would be. We have executed three transactions in the last six months. This underscores our stated commitment to deliver healthcare interventions that address unmet and undermet needs in women's health. We're partnering with or acquiring companies to advance true innovation, something that has been woefully lacking in the area of women's health. Today, we announced our proposed acquisition of Forendo, a clinical stage drug development company focused on novel treatments in women's health. This acquisition brings a pipeline of candidates, including a lead candidate for endometriosis and a secondary candidate in polycystic ovary syndrome, or PCOS. Endometriosis is a high priority unmet need for us. It affects up to 170 million patients or up to 10% of all women of reproductive age. Current therapies and development candidates target the pain associated with endometriosis but do not address disease progression. Existing treatments also often lead to systemic estrogen depletion, which impacts bone mineral density and triggers menopausal symptoms. Such treatments are therefore unsuitable beyond short-term use in premenopausal women. Completing the acquisition of Ferenda will be another step in building our end-to-end women's health portfolio. It joins our other recent additions, including a Lydia Health and its Jada system, which Organon acquired in June of this year. The JADA system is aimed at controlling abnormal postpartum bleeding or hemorrhage, one of the most common complications of birth, impacting up to 10% of mothers and potentially resulting in emergency interventions such as hysterectomy and blood transfusions. In July, we also announced the licensing of the global development, manufacturing, and commercial rights to an investigational agent, EboCritPrint, from Opsiva. Ibuprofen is currently being studied as a first in-class innovation for the treatment of preterm labor, which impacts an estimated 15 million babies or about 11% of all babies born globally. These acquisitions are tightly aligned with our goal to be the leader in women's health by addressing the significant unmet needs of women. We have quickly expanded beyond contraception and fertility, where we are well established and already hold leading market share positions. I want to turn my attention to fertility, where we saw revenue growth of approximately 30% year-to-date, XFX. We don't believe the opportunity for the products in our fertility portfolio, Follistim, Orgolutron, and Elanva, are always well understood. These products are used in the patient-friendly GnRH antagonist protocol, which requires fewer injections and is favored in conjunction with egg and embryo freezing. Globally, infertility rates are increasing. We have seen the average age for giving birth to a first child increase from 21 years old in 1970 to 29 years old today, about 15% of couples worldwide experience infertility, impacting almost 190 million people. These figures are impacted by women proactively choosing to delay parenthood until an optimal time due to advances in modern fertility protocols and egg and embryo freezing technology. Governments are recognizing fertility rates are not just a personal family planning issue, but also have an impact on GDP. In 100 countries, birth rates are now below 2.1, the level needed to maintain the population. Low birth rates are a growing threat to some very large economies, such as China, the U.S., and Japan, triggering public sector responses that serve as structural tailwinds for fertility treatment. Recently, China introduced the three-child policy. Next year, Japan will introduce reimbursement for IVF treatments, and the French, Swiss, and Spanish governments recently passed bills allowing egg freezing and IVF treatments for same-sex couples. These recent changes are just the beginning of providing equal access to reproductive assistance. Government interest in increasing fertility rates and changing laws on access to reproductive assistance makes us optimistic for the growing prospects of our fertility portfolio. Let's talk now about contraception and Nexpanol, the number two contraceptive worldwide by revenue. We believe Nexplanon, a LARC, or long-acting reversible contraceptive, has blockbuster potential. Historically, there has been a sustained shift in the hormonal contraception market away from the daily combined oral contraceptive segment towards LARCs. LARCs are highly efficacious and considered to be one of the most effective forms of hormonal contraception. Implanon, or Implanon Next T, as it's known in some markets, is differentiated even within the LARC segment. It is the only single rod subdermal long-acting reversible contraceptive comprised of a progesterone-only rod inserted in a woman's upper arm. Average insertion time takes about a minute. Historically, Nexplanon sales have been highly correlated with well visits, and logically, the pandemic dampened our ability to reach healthcare providers and patients, especially in the U.S. However, as the pandemic is slowly receding, we are seeing improvements in recent weeks. Additionally, since Nexbon has been in our hands, we have been aggressively working to modernize the brand's marketing and our operating model. This has included a direct-to-consumer education campaign in television and social media with digital campaigns to drive traffic to our revamped websites where patients can find healthcare professionals by zip code trained in Nexbon insertion. This was complemented by targeted bespoke campaigns aimed at specific patient segments. Additionally, our clinical training programs ramped up quickly once providers' offices reopened. We trained over 7,500 healthcare professionals in the third quarter alone, which is above our pre-pandemic baseline levels. And we trained over 6,000 healthcare professionals in Q2. This is a steep ramp up from the 2,000 that were trained in Q1. And we believe it's contributing to increasing demand. And we are very encouraged by the results of these programs. especially given we're less than six months into this journey. We continue to feel very positive about next month on path, particularly now midway through the fourth quarter. Now, let's talk about biosimilars, which has grown 30% year-to-date and where we are well-positioned with our commercial strategy. In the U.S., our two offerings are Renflexis, our infliximab biosimilar, and Entrezanth, our trastuzumab biosimilar. The infliximab market continues to grow every year, and Rinflexis has benefited from that tailwind, with sales still growing even four years after launch. The tristuzumab market has some of the highest adoption rates, about 70% among biosimilars, and the uptake of Entrezant in the U.S. continues to show unit growth since its launch last year. Outside the U.S., our recent launches of Hadlima in Australia and Canada have been performing exceptionally well. We also continue to evaluate other potential pipeline opportunities with Samsung as well as other developers as we pursue the potential opportunity to present it by the estimated $100 billion plus of Blockbuster Biologics going off patent over the next decade. As we now turn our attention to established brands, I'll repeat what I said last quarter. Part of the strategic timing of our spin is that 2021 is an inflection year. It is the last year during which the portfolio is subject to significant new LOE risk. Beyond 2021, the impact from the LOEs decreases significantly. This portfolio of 49 products comprised of brands with significant customer loyalty that tend to respond well to promotion. For example, in China, our retail business now representing almost 50% of our China-established brands revenue continues to grow strong double digits because of brand loyalty. offsetting the impact of the Volume-Based Procurement Program, or VPP, and positioning Organon for sustainable growth in China post-VPP. Importantly, we are taking a very entrepreneurial view of this portfolio and have uncovered a number of accretive opportunities within our existing portfolio. For example, we anticipate taking Nasonext, OTC in Russia, with that launch planned for early next year. All three franchises are global businesses, as you will see on slide seven. There are several areas I want to highlight about our business geographically. The decline in Asia Pacific is primarily related to Zetsu's loss of exclusivity in Japan. In the U.S., the LOE from NuvaRing as well as Nexplanon performance through the pandemic were factors. However, importantly, we continue to grow in China despite four of our products being included in the volume-based procurement process in the fourth quarter of last year. Revenue from China is up 4% XFX, this quarter driven by the respiratory market recovering from the COVID impact in 2020. The favorable positioning of our fertility portfolio and continued contribution from the retail channel. Overall, we are very encouraged by our performance in this very important market. Now, I'd like to turn it over to Matt to discuss our third quarter performance in more detail. Thank you, Kevin.

Before we dive into the specifics of our financial performance, let's start briefly with basis of presentation and make sure we align on exactly what numbers we're looking at, where we have apples-to-apples comparability, and where we may have something less than that. On the plus side, our third quarter results mark the first time that Organon is reporting an entire quarter of standalone results. As I discussed in last quarter's call, our results prior to the June 2nd spinoff date are presented on the carve-out basis of accounting. Carve-out accounting is a GAAP convention, which has a lot of positives. However, it's not intended to present results as if Organon were a standalone company. So I want to be clear as we discuss results for this quarter and for the next three quarters that any comparisons to prior year periods will be somewhat apples to oranges. in that we'll be comparing Oregon on stand-alone performance to pre-spin carve-out basis of accounting. With that said, where we'll have the best comparability is at the revenue line. So I'll be focusing attention at the top line as we discuss our performance. So turning to slide eight, revenue for the third quarter was $1.6 billion, down 1% as reported, and down about 3% at constant currency exchange rates when compared to the third 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 loss of exclusivity, or LOE, during the third quarter compared to the third quarter of last year is approximately $70 million, and it's primarily related to the LOE of Zetia in Japan and NuvaRings LOE in the United States. Continuing to read across the waterfall chart, the established brands portfolio has exposure to BBP in China. The total impact of sales for the third quarter compared to the third quarter of last year was approximately $60 million and was associated with the third round of VBP, the largest round so far, which occurred in the fourth quarter of 2020, and that included four of Organon's products, Singulair Pediatrics, ProScar, Propecia, and Arcoxia. In the third quarter of 2021, the negative impact of COVID-19 was estimated to be approximately $100 million, which is about $20 million above Q3 of last year. Our product portfolio is comprised of physician prescribed products, which have been infected by the shortage of qualified personnel, social distancing measures, and delayed medical visits. In the third quarter, we continued to see lingering effects from COVID, as compared to the year-ago quarter, including, as Kevin just mentioned, a slower return of well visits, which particularly impacts Nexplanon. We continue to observe restrictive measures which vary by country and region, so we expect to see some further lingering negative impacts from COVID persisting into the fourth quarter. Although, we believe we're starting to see encouraging trend developments in U.S. Nexplanon early in the fourth quarter, which could be pointing to stronger sequential performance in Q4 versus Q3. Foreign exchange translation had about 200 basis points of favorability for the quarter. Year-to-date, that impact is more pronounced at about 350 basis points, which is not really surprising given the impact of COVID-19 on global currency markets in the prior year period and also understanding that about 75% of our revenue is derived outside the United States. And finally, on the plus side, we saw volume growth in Q3, mainly driven by growth in China, in U.S. biosimilars, and in Europe with established brands. So now let's take a look at performance by franchise, and we'll start with Women's Health on slide 9. Our Women's Health business was down 10% as reported and 11% in constant currency in the third quarter versus the prior year. Next went on to climb to 8% XFX in the quarter. As Kevin mentioned, well visits are not yet back to pre-pandemic levels in the U.S., and Nexplanon sales are largely tied to that metric. So we know the question on investors' minds is, can Nexplanon have a $200 million revenue quarter in Q4? And while we don't provide specific guidance by product, this question is important enough to address and provide you with at least a directional answer. And based on current visibility into the data that we're looking at, we do see fourth quarter as being favorable for U.S. next month. There's three reasons why. Reason number one goes back to the quarter just completed. Third quarter negative growth should be considered in the context of Q3 2020 being a tough comp from the standpoint that in September of last year, even though we were in the pandemic, we saw a short-lived resurgence in patient well visits that positively impacted third quarter 2020 next month sales. There has been volatility in the trend of patient OBGYN well visits over the last year, but for the third quarter of last year, those visits were almost back to a pre-COVID baseline and Q3 2020 Nexplanon sales were the highest since the start of the pandemic. So the message here is that the third quarter of 2020 was a tough comp for Nexplanon. Second reason goes to phasing of revenues within this year. There was a tender that we were expecting in the third quarter in Mexico that was delayed. and has now become signed business for us in the fourth quarter. Third and final reason goes back to what Kevin said about our Nextbanon DTC campaign in the United States, which began running this summer. It's starting to show results now, as well as other new digital campaigns that are raising brand awareness for Nextbanon and driving sizable increases in our website traffic by potential new users. Beyond Nextbanon, Also pressuring women's health this quarter was the continuing and expected decline in NuvaRing, down 17% XFX in the quarter, related to increased generic penetration as a result of the product's LOE in 2018 in the U.S. On a positive note, our fertility portfolio continues to show strength. Follison grew 18% XFX in the quarter. Volume growth came from an increase in demand from new accounts, as well as from patients returning to clinics. And our observation has been that patients seeking fertility treatments are more motivated to return to doctor's offices than those patients seeking normal course OBGYN well visits. Turning to biosimilars on slide 10, biosimilars grew 41% as reported in the third quarter and 39% XFX. We have five assets in the portfolio, three in immunology and two in oncology. Rinflexus and Entrezon are our two largest offerings, and both are offered in the U.S. Globally, Renflexus grew 43% XFX in the quarter, driven by strong performance in the U.S., and Entrezon, which was launched in the U.S. in July of last year, was up 47%. The biosimilars business outside the U.S., which represents about half of our total biosimilars revenue, is tender-driven, and therefore it's more price-sensitive. The timing of tenders can also make this business somewhat lumpy, and we benefited from that in the third quarter. So while we are coming off two quarters of about 40% year-on-year revenue growth in biosimilars, we see some moderation of that growth rate for the remainder of 2021, resulting in solid double-digit revenue growth year-on-year. I now turn to established brands on slide 11. Revenue for established brands was down 6% as reported and 8% XFX in the third quarter of 2021. Excluding the impacts of LOE, revenue was down 4% XFX. Volumes were up incrementally, mainly driven by COVID rebound, although not as strong as it was in Q2, as well as growth in China retail. Price was down about 5% across the established brand's portfolio. Now, given that this is a portfolio of medicines that, for the most part, are well beyond their LOEs, it may be counterintuitive to investors to hear that in the third quarter, more than 50% of established brands' revenue came from products for which volumes grew. These brands are well-known, they respond to promotion, and we're actively managing lifecycle opportunities across the portfolio. These factors support our May investor day discussion that we expect erosion in this portfolio to be in the low single-digit area, XLOE, over the intermediate term. China. China is an important market for established brands, and part of our strategy in this market has been to drive volumes into the retail channel versus our historical presence in the hospital channel. And this effort continues to be successful. The retail channel in China grew 20% in the third quarter versus prior year, and now represents almost 50% of established brands revenue in China, up from approximately 35% a year ago. Now turning to our income statement on slide 12. Our GAAP income statements for Q3 and year to date are available in our earnings release, and I encourage investors to look at that important information. Here on slide 12, we'll be looking at our non-GAAP income statement for these same time periods. For gross margins, we're excluding purchase accounting amortization and one-time items related to the spinoff from cost of goods sold. So making these straightforward adjustments, in the third quarter of 2021, non-GAAP adjusted gross profit was $1 billion, representing gross margin of 64.9% compared with 68.6% in the third quarter of 2020. The decline reflects costs associated with standing up Organon as an independent company, including certain costs related to manufacturing agreements between Organon and Merck, which have lower gross margin percentages compared to product sales. Those manufacturing agreements had an approximate 180 basis point negative impact to gross margins in the third quarter. Also included in the cost of goods sold this quarter was a $24 million one-time cost related to estimated losses associated with a vendor supply contract conveyed as part of the spin, which had a 160 basis point negative impact to gross margins. There were some spin-related accounting items that partially offset this unfavorability, but this quarter's gross margin is a good example, actually, of where we have apples and oranges comparability issues with prior year comparisons and why our 2021 guidance becomes a much more useful yardstick for investors. That said, Our gross margin for the third quarter was squarely aligned with the guidance that we've communicated in the low to mid 60% range. Adjusted EBITDA margins were 39.8% in the third quarter, which brings year-to-date margins to 38.9%. We had told you last quarter that we expected second half EBITDA margins to be lower than the first half. The reason why our EBITDA margins are running stronger than we forecasted is driven by lower operating expenses, and this is mainly timing related. We're onboarding our standalone operating expenses a bit more slowly than we thought in headcount costs, as well as promotional spending in certain markets. And if you're doing back-of-the-envelope math, you'd likely draw the conclusion that Q4 adjusted EBITDA margin would have to be markedly lower than year-to-date for us to finish within the EBITDA margin guidance range that we'll be discussing shortly. But we do expect operating expenses to increase sequentially in the fourth quarter relative to the third quarter as the pace of onboarding some of these expenses speeds up going into year end. Given the strong EBITDA performance in Q3, we did consider raising the adjusted EBITDA margin guidance range for the full year, but it would have been by a relatively small amount. So instead, we elected to just narrow the range. and communicate to you a high and improved level of confidence in the guidance that we are affirming. A few words on debt capitalization on slide 13. At September 30th, our bank debt was $9.3 billion against cash and cash equivalents of $1 billion. Now, embedded in that cash balance is approximately $320 million that is earmarked for finished goods inventory purchases from our former parent that's really related to the spinoff transaction. So a more representative net debt number as of September 30th is closer to $8.6 billion. If we use the implied midpoint of our 2021 EBITDA guidance just for illustrative purposes, that would put our pro forma net leverage at about 3.7 times, which is a modest improvement in leverage ratio compared sequentially to last quarter. And one more item here. Our imputed cash flow for the third quarter is a good indicator that we are meeting our pre-spin forecasting and is representative of the cash-generating power of this business. Our capital allocation priorities remain consistent with what we laid out in our pre-spinoff communications, and we are reiterating them today. Now that our board has established a dividend, the dividend becomes our first priority. We're targeting the dividend at a low 20s percentage of free cash flow, excluding one-time cost of the separation, a level of which we believe is very manageable. Our second priority will be organic growth, and that would include lifecycle management opportunities for existing products within our portfolio, supported by capital deployed in our manufacturing plants. And on the latter, we expect to see annual CapEx in the range of 3% to 4% of revenue on an ongoing basis, once again, excluding separation costs. Our third priority for capital allocation is really a tie. It's a tie between, A, execution of external growth plans to develop a pipeline of new product opportunities, like you've seen us announce already, Aledia Health and the JADA system, investigational evoPIP for preterm labor, and now Forendo targeting endometriosis. We'll balance that against, B, debt reduction and our commitment to maintaining our BBBA2 parent rating. We are targeting a long-term leverage ratio below 3.5 times net debt to adjusted EBITDA. Turning to guidance on slide 14. Consistent with previous communications, this guidance is all non-GAAP and pro forma as if the spinoff happened on January 1st of this year. Beginning with revenue, this is a chart we showed at Investor Day, and changes since then have really been at the margin. Based on where we are in the year, we're narrowing our full year 2021 revenue range from $6.1 to $6.4 billion to $6.2 to $6.3 billion. This revenue is essentially all organic. We do include a de minimis partial year revenue contribution from the acquisition of Lydia Health. The biggest component to the year-over-year change in revenue is the expected LOE impacts. Impacts from LOE were approximately $280 million year-to-date are primarily related to the loss of patent protection for ZTE in Japan and NuvaRing in the U.S. We continue to expect a full-year LOE impact of approximately $300 million to $400 million. As we've been careful to describe previously, 2021 is an inflection year for Organon as regards LOE impacts. After 2021, our LOE exposure dissipates to approximately $300 million cumulatively over the next four years combined, 2022 through year-end 2025. We now think our VBP exposure in China for the year will be on the low end of the $200 million to $300 million range we previously communicated. Year-to-date exposure has been about $150 million, and we have a fairly good understanding of what will be included in the next rounds of VBP, which is likely to include Ezetrol, Hyzar, and Nasonex. Now, COVID is something that we're obviously watching very closely. We updated our view on COVID impact last quarter to expect that our total year impact from COVID in 2021 would be about even with what we experienced in 2020, which was about $400 million. Year-to-date 2021 impact from COVID was $320 million. And given the recent trends that we've seen in Nexplanon prescriptions, which is the product where we see the most lingering COVID impact, we are comfortable with that implied estimate of about $80 million of COVID impact in the fourth quarter. On a yearly basis, we expect foreign exchange translation to be a modest tailwind based on year-to-date currency performance and where spot rates are currently. And finally, for performance, we've tweaked this bucket down a hair, and this is mostly tied to my earlier commentary on biosimilars and the lumpiness of tenders quarter to quarter. Taken as a whole, Year-to-date revenue performance is largely to be expected, despite the uncertainties introduced by COVID. The key themes that we've been talking about in our public communications prior to spinoff and since the spinoff remain very much intact, and those are LOE issues that are waning, women's health, especially fertility, and biosimilars that are delivering growth, and China that's performing very well despite VBP headwinds. Turning to other guidance metrics on slide 15, the message here is that for all the items shown, we're affirming prior guidance for most metrics. And for revenue and adjusted EBITDA, we're simply narrowing the ranges in light of where we are in the fiscal year. Reiterating a point I made earlier, during 2021, we've onboarded operating expenses more deliberately than we had forecasted. We're not yet at our run rate for SGA expenses in independent companies. We know R&D expense will be increasing in 2022 and beyond as we add pipeline assets. And I say this more as we start to look forward to next fiscal year and we will provide quantitative guidance for 2022 when we report our full year 2021 results in February. Wrapping up the financial discussion, the franchises are progressing as we had expected and given our outlook for 2021, We continue to believe that we're well-positioned for future organic revenue growth in the low to mid-single digits on a constant currency basis. This will be driven by stabilization in the established brands portfolio and continued growth in both women's health and biosimilars, each of which has the potential to grow with low double-digit CAGRs in the intermediate term. At this point, I'll turn the call back to Kevin for closing remarks.