Organon & Co.

Withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Jennifer Hallchuck, head of investor relations. You may begin.

Thank you, operator. Good morning, everyone. Thank you for joining Organon's second quarter 2024 earnings call. With me today are Kevin Ali, Organon's chief executive officer, and Matt Walsh, our chief financial officer. 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 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 10K 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.

Good morning, everyone, and thank you, Jen. Welcome to today's call, where we'll talk about our second quarter results. For the second quarter of 2024, revenue was $1.6 billion, representing a 2% growth rate at constant currency. The women's health franchise grew 3%. Our biosimilars franchise grew 22%. And our established brands franchise was down 1%. In the second quarter, adjusted EBITDA was $513 million, representing a .9% adjusted EBITDA margin, which includes $15 million of IPR&D expense. Adjusted diluted EPS was $1.12. We have had solid revenue growth in the first half of the year of 4% at constant currency, and we're on track to deliver our third consecutive year of constant currency revenue growth. Given -to-date performance and our view into the rest of the year, we have narrowed our range for full year 2024 revenue around the midpoint to $6.25 billion to $6.45 billion. The guidance represents constant currency revenue growth of 2% to .7% X exchange for the full year. -to-date adjusted EBITDA margin was 32.5%, which includes $30 million of IPR&D and milestone expense incurred in the first six months of the year. We are running at the high end of our full year adjusted EBITDA margin range of 31% to 33%, whether you look at it with or without the impact of IPR&D. -to-date EBITDA margin performance reflects actions we have taken to contain operating expenses, and the first half of the year also benefited from favorable timing of spend. We expect SG&A expense to pick up in the second half of the year due to planned expenditures related to rolling out new products like the migraine medicines and further investment in Nexplanon. Given that timing, we're holding to our 31% to 33% adjusted EBITDA margin range for the full year. From a capital allocation standpoint, -to-date, we're tracking well to our commitment to deliver $1 billion of free cash flow before one-time spin-related costs in 2024. That strong cash flow will provide financial flexibility to comfortably service our dividend, which is our number one capital allocation priority. It also gives us optionality to make discretionary debt payments and to continue to pursue sensible business development. Let's move now to discuss our franchise performance. Growth in women's health was driven by continued strength in Nexplanon, which is up 13% XFX in the second quarter. Last year, we took action to position Nexplanon for a strong 2024, and that is showing up in -to-date constant currency growth of 22%. In the US, Nexplanon grew 8% in the second quarter. We've benefited from Nexplanon's leadership in the US contraception market, our pricing strategy, including management of the 340B discount program, as well as continued physician demand growth. Outside the US, Nexplanon grew 27% XFX in the second quarter, primarily driven by our expansion and supply capabilities. And so we are now able to better meet the demand in our access markets, which we cited as a priority for us in 2024. But we also benefited from increased demand in countries in the UCAN region. Given strength in performance -to-date, we expect Nexplanon can achieve constant currency full year revenue growth in the low teens. This would be our best year in Nexplanon and also puts us closer to the $1 billion mark for next year. With regard to the Nexplanon five-year study, the study met its primary endpoints, showing contraceptive effectiveness and no new safety signals. Based on this data, we are beginning to prepare for regulatory submission in the US, EU, and UK. We continue to believe that would put us on track for a potential US launch of the Nexplanon five-year indication in 2026, pending FDA approval. We see this launch as an important event because it would mean that we would have data exclusivity on the five-year claim for three years. That means between 2026 and 2029, no generic with five-year duration could come to the US market. And further, any generic would need to have a different insertion device until our device patent expires in 2030. We remain very optimistic about Nexplanon's future prospects and the expanding potential of the brand. Moving on to other women's health, our global fertility business was down 8% XFX in the second quarter. In the US, we are seeing patient volume in the self-pay market level off. Our business has been shifting towards the reimbursed market, which is largely dominated by PBMs, and we've had good success here. In fact, you may recall that in the fourth quarter of last year, we secured broad access to the largest PBM in the country. Also weighing on US fertility results is that we had a very strong buy-in of Falastem in the fourth quarter of last year that was related to both the onboarding of the large customer as well as to the exit of a spin-related interim operating model. In China, our second largest fertility market, we're seeing a slower than expected rollout of the -by-province effort to expand reimbursement of procedures using assisted reproductive technology, or ART. But going forward, we remain very optimistic about this initiative expanding to other provinces. We have seen strong double-digit growth in some of the larger provinces where reimbursement has already been implemented, for example, in Beijing. Given -to-date performance, we believe global fertility performance for the full year will be flat compared to our initial expectations of a high single-digit increase. Still, that guide implies good growth in the second half, which will be coming from gradual uptake of ART reimbursement in China coupled with lapping a weaker fertility market in China in the second half of last year. We also will benefit from footprint expansion in other international markets. We see 2025 as a rebound year with very strong growth for fertility underpinned by continued ART-expanded reimbursement in China, international expansion, and performance in the US that won't have the noise of the IOM exit. Let's move now to our biosimilar franchise, which grew 22% at constant currency in the second quarter and 33% -to-date. The exceptionally strong first half performance was driven by continued uptake of HADLIMA in the US following the launch in July of last year, along with the timing of an international tender for Entrezant. For the full year, we expect the biosimilar franchise to deliver strong growth in the low teens XFX. US HADLIMA sales were $20 million in the second quarter. Throughout the second quarter, HADLIMA was a leading Humiro biosimilar with regard to total prescriptions, pointing to prescriber preferences for our product. From the first quarter to the second quarter, total prescriptions for HADLIMA grew over 60%, consistent with the TRX Trend Synth launch. We are having success because our strategy is focused on stakeholders who want to lower net costs and improve patient affordability. That strategy is paying off and we are building on our momentum. Regarding the interchangeability status of HADLIMA, in the US, the designation was approved on the low concentration formulation for the pre-filled syringe and single dose file presentations. Samsung continues to navigate the approval of the other presentations, and we continue to expect to have interchangeability on those presentations in the middle of next year as planned as pending FDA approval. On the pipeline side of things, our other partner, Shanghai Henleus Biotech, already filed in the EU for the Denosimab biosimilar candidate we licensed in from them. And they plan to file in the US later this year. They anticipate making filings for Pertuzumab biosimilar candidate later this year and in 2025. Organon will have exclusive global commercialization rights to these assets outside of mainland China, Hong Kong, Macau, and Taiwan regions. And then rounding out the discussion with Establish Brands, which declined 1% XFX in the second quarter and has grown 1% XFX year to date. So far in the first half of the year, the $40 million contribution from the recent commercialization agreement with Eli Lilly for the two migraine drugs led by Mgality are also a good start. Also the recovery in certain injectable steroid products following last year's market action have more than offset expected impacts from VBP, LOE, and mandatory price revisions in Japan. Performance in those products also compensated for unfavorable timing of shipments related to our ERP implementation, which was completed in April. The pushes and pulls on the Establish Brands portfolio tend to be different in every quarter. But since the spin, we have shown that the diversity of our products, geographic span, and entrepreneurial focus leads to very steady results. Entrepreneurial focus encompasses business development opportunities like the migraine assets. We continue to look for those types of transactions where the assets are launch ready, complimentary to our existing portfolio, and can enhance the overall growth profile of the company. Moving now to slide six, where we take a look at revenue by geography. UCAN was down 1% XFX in the quarter, though this region benefited the most from the addition of the two migraine assets and the recovery of injectable steroids. It was also the region most affected by unfavorable phasing of sales related to the ERP implementation. The US was up 5% in the quarter driven by solid performance of Nexplanon, as well as uptake of both Hadlima and Jada. These factors offset price pressure and the channel dynamics and fertility, as well as performance of Entrezant and Renflexis, which are in decline after more than five years on the market in the US. The APJ region was up 5% XFX in the quarter, mostly due to the recovery of injectable steroids and some favorable timing and singularity. We expect it to be a challenging year in Japan as we face national price revisions for some products and work through LOEs of Adizette and Rosazette in that market. The La Mer region, which has been a significant contributor to Organon's growth since the spin had 8% XFX growth in the second quarter, which was primarily driven by volume associated with the Entrezant tender in Brazil, as well as strong growth in Nexplanon across certain access markets and Mexico. China was down 4% XFX in the quarter, but we expect the second half of the year to be stronger than the first, driven by fertility and the continued performance in the retail and hospital channels. Overall, we're very pleased with the results through the first half of the year, and we feel confident in our ability to deliver our third consecutive year of constant currency revenue growth in 2024 and higher -over-year adjusted EBITDA. EBITDA growth underpins strong cash flow, which accelerates our ability to deliver and to play offense when it comes to executing on business developments and driving revenue growth. So optimizing our cost structure and implementing efficiency initiatives across the enterprise is ever critical in creating shareholder value. Now let's turn the call over to Matt, who will go into our financial results in more detail. Thank you,

Kevin. Beginning on slide seven, here we bridge revenue for the second quarter -over-year. The biggest driver in the bridge is volume growth of $55 million, comprised of strength in the areas we've mentioned, biosimilars, Nexplanon, and the addition of mGallity. Combined with stronger volume growth in the first quarter, -to-date revenue growth due to volume is solid at about .5% organic growth, which rises to about 6%, including the addition of mGallity. The typical headwinds to revenue growth, which we show as the first three steps in the bridge, were all fairly light in the second quarter. LOE was about $5 million of impact, which reflects the loss of exclusivity of AdoZet in Japan. The impact of DPP in China was also about $5 million in the second quarter, which reflects lingering effects of round eight that began in the third quarter of last year and included Remeron and Heizar. There was also an approximate $5 million impact from price in the second quarter, overall pretty negligible. 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 extent, fertility. In Supply Other, here we capture the lower margin contract manufacturing arrangements that we have with Merck, and which have been declining since the spinoff as expected. And lastly, foreign exchange translation had an approximate $30 million impact, or two percentage points of headwind to revenue, which reflects a strengthening dollar relative to prior year. Now let's turn to performance by franchise. As I've done in past quarters, I will target my comments over the next three slides to those areas most relevant to your modeling. Let's start with women's health on slide eight. Kevin already discussed in detail our expectations for Nexplanon. I'll add that achieving a growth rate of low teams for the full year would imply a lower, but still very robust, mid to high single digit growth rate for Nexplanon in the second half of this year. That is sensible considering that the very strong growth realized in the first quarter of this fiscal year benefited from lacking a significant buyout in the prior year period. For fertility, as you phase your expectations for the second half, I remind you that the fourth quarter of 2024 will be a tough comparison since it was in the fourth quarter last year that we had the buy-in related to onboarding the new PBM customer and the interim operating model exit in the US. So globally, third quarter will be a stronger quarter for fertility compared with the fourth quarter. With regard to other key products within women's health, NuvaRing was the most significant revenue offset in the quarter and likely will continue to be in the near term as that product now has five generic competitors in the US. And lastly, women's health, it's worth noting the strong year to date performance in Marvillon-Mercelon up 13% XFX. Like the migraine assets, this reacquisition of rights to the Marvillon and Mercelon assets in certain markets highlights areas of business development where we can leverage our global capabilities. Turning to buy-in similars on slide nine, for head Lima, we expect US revenues to grow sequentially every quarter of this year. What isn't evident in the US revenue of $20 million in Q2 is a small one-time wholesaler inventory adjustment in Q1 to support the onboarding of the VA contract that we won. Excluding this inventory adjustment, US head Lima growth would have been about 20% sequentially from Q1 to Q2. The low teens constant currency growth that Kevin referenced for the full year for our global biosimilars franchise will be driven by strong growth in head Lima that we expect will offset expected pressure in Entresant, particularly in the US and Europe. Renflexis should also be a moderate contributor to the franchise for the full year, helped by good performance in Canada that has the potential to offset price pressure in Renflexis in the US. Turning to slide 10, if we think about the 1% year to date revenue growth in established brands during the first half of the year, across the franchise, that was driven by 1% volume growth that offset very negligible pricing impact. Year to date, revenue drivers like VBP, LOE and Price have all had minimal impact on established brands performance as we said earlier. In the back half of the year, we will see more prominent impact and we're mainly focused on three drivers. First, the impact from VBP in China will pick up driven by Fosamax's inclusion in round 10 as we expected late in the fourth quarter. Second, LOE impact will be more significant as Adizette will go through LOE in the EU in September of this year. And third, price will be more of a headwind as we expect the impacts for mandatory pricing revisions in Japan to accelerate. We do expect strength and volume growth in the second half of the year in the established brands portfolio, coming from continued onboarding of the migraine products, which we initiated during the first quarter of this year. Additionally, when Kevin spoke about our performance in established brands, especially UCAN, he noted the phasing of shipments related to the implementation of our ERP system. Those impacts are largely contained in our first half performance and we have put that behind us. For the full year, we continue to expect established brands to achieve flat performance, XFX. Now let's turn to slide 11, where we show key non-GAAP P&L line items and metrics for the second quarter. For reference, GAAP financials and reconciliation to the non-GAAP financial measures are included in our press release and the slides in the appendix of this presentation. For gross profit, we are excluding from cost of goods sold, purchase accounting amortization, and one-time items related to the spinoff, which can be seen in our appendix slide. Adjusted gross margin was 62% in the second quarter of 2024, compared with .9% in the second quarter of 2023. In the second quarter of 2024, as with the first quarter, the lower adjusted gross margin was primarily related to unfavorable product mix, foreign exchange translation, and higher inflation impacts to material and distribution costs. Excluding $15 million of IPR&D expense incurred during the period, non-GAAP operating expenses were down 2% year over year. This is a reflection of our cost containment efforts and also favorable timing of spend. Of the $15 million of IPR&D expense in the second quarter, $10 million was related to our collaboration with Circle in on-demand non-hormonal contraception, and $5 million was related to our collaboration with Shanghai Henleus for further advancement of a dinosumab biosimilus. Milestone payments are inherently difficult to forecast, so we will continue to utilize the same guidance convention that we initiated in late 2023, which 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. These factors culminated in an adjusted even margin of .9% in the second quarter of 2024, compared with 33% in the second quarter of 2023. Non-GAAP adjusted net income was $289 million or $1.12 per diluted share, compared with $336 million or $1.31 per diluted share in 2023. Turning to slide 12, we provide a closer look at our cashflow for the first half of the year. In 2022 and 2023, our two full fiscal years post-spinoff, we generated a significant majority of our free cashflow in the back half of those years. This year, we're on track to deliver more balanced phasing of free cashflow between first half and second half. In part, this is driven by timing as our full year expectation of approximately $1 billion in free cashflow before one-time items remains unchanged. With our single instance global ERP system now completely in place as of April, we are working to optimize business processes around cash cycle working capital, which will help stabilize free cashflow generation. And of course, one-time spin related cash cost, $117 million in the first half, will be declining meaningfully in the second half. We expect to finish the year at a figure just north of $200 million or roughly a 40% decline relative to 2023. Next year, we would expect one-time spin related costs to be de minimis. In the $70 million of other one-time costs, here we capture headcount restructuring initiatives and manufacturing network optimization. These network optimization costs are distinct from the spin related costs and that they're associated with actions to separate our manufacturing and supply chain activities through exits of supply agreements with Merck, which will ultimately drive cost efficiency. Slide 13, our net leverage ratio has remained level with 2023 year end and is holding at 4.1 times. This is a favorable development versus our expectation at the start of the year, when we believed we would see leverage tick higher in the first half before coming down. Given our adjusted EBITDA guidance for the year, we continue to see an achievable path to ending the year with a net leverage ratio below four times. Now turning to 2024 guidance on slide 14, where we highlight the items driving our 2024 revenue guidance range. As Kevin mentioned, we have tightened our revenue range around the midpoint. We're showing a slightly different version of this graph compared with prior quarters to illustrate the acceleration of driver activity in the second half or relative to the first half. The first takeaway from this slide is that there are only minor tweaks to the ranges for each of the drivers, all netting to a consistent view of operational performance relative to our previous guidance communication. The midpoint of our revenue guide on a nominal basis remains unchanged at .4% growth and the midpoint of our revenue guide on a constant currency basis remains unchanged at .4% growth. The objective in showing the numbers this way is that when we bifurcate the bars to show first half versus the expected impact in the second half, you can see the point we made earlier that LOE, VDP and price were all negligible drivers year to date, but their respective impacts will pick up in the second half. Importantly, you can see that we expect second half volume growth to more than offset the collective impact of the other drivers. For LOE, that approximate 70 million to $90 million range reflects LOE of Adizette in Japan, which is already underway, and also the LOEs of Adizette in the EU, which will occur in September and to a lesser extent Rosizette in Japan, which will also occur later in the year. VDP impact is still expected to be in the range of 30 million to $50 million for full year 2024, which will be back half weighted to reflect Fosamax's expected inclusion in round 10 late in the year, as I mentioned. Our range on expected impact from price improves very modestly as we take the high end of the range down by $20 million. The revised range of 180 million to $200 million represents an approximate three percentage point headwind versus prior year, and is in line with our longer term expectations from price impact across the entire business. Year to date, impact from pricing has been minimal, mostly due to the changes we've made in Next Slanon's pricing strategy, along with work across the established brands franchise to minimize the mandatory pricing revisions we expect to see in certain international markets. Impact from price will be felt more acutely in the back half as the mandatory pricing revisions in Japan accelerate. There will also be mandatory price reductions associated with the adizit LOE in the EU. And finally, the competitive dynamics and fertility and biosimilars also pressure price. For the year, we've narrowed the range on volume to $500 million to $600 million with no change to the midpoint. The range for volume reflects an approximate 9% growth rate over last year. In the first half of the year, volume growth was strong at 6%, but second half volume growth is expected to be even stronger, about double that actually, with the inflection primarily driven by assets that are new to the portfolio since the spin. US had Lima, and Galati, Marvillon, Mersillon, and the additional markets reacquired, as well as Jada. We'll also benefit from geographic footprint expansion and fertility. And finally, based on the continued strength in the US dollar using recent spot rates, we upped our range slightly on our view of the impact from FX to 110 million to $140 million. Moving to the other components of guidance now on slide 15. For adjusted gross margin, we are continuing to guide to a range of 61 to 63% for 2024. Year to date gross margin was 62%, just right in the middle of our range and feels like a pretty good barometer for second half and therefore full year. On SG&A expense, year to date, we've been tracking on the low end of our $1.5 billion to $1.7 billion range, but that's really just timing. We expect SG&A spend to pick up in the second half of the year, tied to planned investment in product launches, the migraine products, for example, as well as Nexplanar. To provide a guidepost, we expect non-GAAP SG&A expense to grow in the mid single digits in the second half of the year compared with the second half of

last

year. For R&D, all we did here was raise the range by the $30 million of IPR&D incurred year to date. Operationally, we're tracking close to the mid point of that 400 million to $500 million range XIPR&D that we set at the beginning of the year. It's worth noting that to this point, we've been able to absorb the year to date IPR&D expense within our adjusted EBITDA margin range of 31 to 33% for the full year. The $30 million of expense was worth about one percentage point of adjusted EBITDA margin year to date. As you think about quarterly phasing, at this point in time, we believe that Q3 and Q4 should be fairly similar with regard to absolute revenue dollars and EBITDA margin. For below the line items, there's no change to ranges for interest, taxes, or depreciation. Year to date, we're running a bit favorable relative to our non-GAAP income tax rate guide. Our non-GAAP effective tax rate in the second quarter was .3% and is 16% year to date. The 2024 year to date non-GAAP ETR was favorably impacted by the conclusion of two non-US tax audits. For the full year 2024, we continue to view .5% to .5% as a good range. Despite our debt refinancing in May, we didn't change our point estimate of approximately $520 million for annual interest expense because the sum of the accelerated amortization of previously capitalized financing costs and financing fees for the new instruments and expense in the current period is substantially offset by the lower interest rate on the new instruments. Summing up, Q2 was another solid quarter performance that continues the strong results posted in the first quarter. We're heading in the right direction on volume growth, margins, operating expense discipline, and free cash flow. We are tracking to another year of constant currency revenue growth consistent with our expectations for the year. With that, now let's turn the call over to questions and answers.

Thank you. We will now begin the question and answer session. If you dialed in and would like to ask a question, please press star one on your telephone keypad, raise your hand, and join the queue. If you'd like to withdraw your question, simply press star one again. If you're called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. We ask for today's session that you please limit yourself to one question and one follow-up question. Again, press star one to join the queue. Our first question comes from the line of Umar Rafa with Evercore ISI. Please go ahead.

Morning, guys. Thanks for taking my question. I'm sure you've seen some of the headlines on Guardisil last week. I have two questions off of that. Number one is more of a history question, if I may. During your time at Mark, obviously there was a decision made to sell Guardisil to a local partner, but all the Organon products were sold directly in China. Could you speak to why the commercial strategy was different and if you would expect a different outcome if you had a local partner or not? And secondly, I remember last year when you had an 11% down in 3Q, you talked about healthcare budget deficit in China for the first time, as well as stricter enforcement of the procurement rules and investigations. So would that or would that not affect demand? It doesn't look like it's affecting your demand, but could you speak to that dynamic? Thank you very much.

Hey, Umar, this is Kevin. Thanks for the question. Let me start with your last question first. If I just kind of put it in perspective, let me just kind of narrow down on Q2. Our Q2 results were impacted with a very high comparator in Q2 of 23, based on a kind of a COVID rebound. And so that drove significant sales last year for example, fertility. Also we're washing through the round date VVP impact in Q3 of 23, but we're seeing some really positive tailwinds to your point on established brands. In the hospital sector, we see strengths post VVP as well for retail, we've had the third consecutive quarter sequential growth, but we're washing through a number of those things that I've just mentioned earlier. What I do see going forward, again, to your point is that we see the second half of the year returning to what I would consider mid single digit growth for China. So I don't see anything there that ultimately tells me that we're gonna have any type of continuation of downdraft. I think we're gonna be in good shape for the year, but I've always basically said, when we finished this year, 80% of our business, established brands business will have gone through the VVP. So next year we expect to have finally back to kind of what I would consider solid growth momentum for China going forward, based on a number of different aspects. In regards to your first question, yeah, I was in charge of the international segment for Merck, but we don't have necessarily the partner relationship that Merck does in China. So we don't have that type of exposure. So that's kind of the way I would signal to you that we don't have any issues there in regards to local partnerships that potentially could affect our forecasting opportunities.

And Kevin also, would there not be any inventory dynamics either, because I know part of the issue on Gardasil is local CDC is not buying as much. So I wondered, could there be any hospital inventory, anything like that, which may be getting drafted down? Is there nothing like that?

For us at least, our inventory is at a healthy level. It's not anything that I would consider to be too high or too low. It's basically within line of what we've always had. So that's what I would signal to you in terms of where our inventories are locally.

Got it. And at the hospital acquiring channel as well, correct? The inventory? Yes, yes, both. Thank you very much.

Sure. Questions? Our next question comes from a line of Chris Schott with JP Morgan. Please go ahead.

Hi, this is Ethan Brown on for Chris Schott. Thanks for taking our questions. Can you just give us a sense of how you see operating margins progressing through the rest of 2024 and into 2025 and just directionally, do you expect you'll be able to increase margins from here or is the guidance range today a good proxy for margins over the next couple of years? Thank you.

Thank you for the question. Yeah, we see operating margins fairly stable through the rest of the year where we're making sure that our full year guidance has enough recognition as we showed on slide 14 of the deck, that we expect some amplitude more in the second half on things like LOE, BBP and price than we did in the first half. But we feel very good about what we're signaling in the guidance about our operating margins. It's a little bit too soon to talk to 2025, but we certainly see the continuation of the volume growth that we've been talking about in our key drivers. And yeah, more on 2025 when we get a little bit later in the year.

Thanks so much, that's all for me.

Our next question comes from the line of David Amsallam with Piper Sandler, please

go ahead. Hey, thanks, so just a couple for me. One, can you talk about your longer term contracting strategy on headlina and how you're thinking about tackling the payer landscape, particularly in the context of Peva's recent execution on their significant contract. How do you think about that and help us better understand how you drive more volumes in that market, that's number one. And number two is just on the R&D spend. Wanted to get your sense philosophically for how you're thinking about it long-term. I know there was a change in the guidance is basically on the in-process R&D, but I guess the larger point is, when are we gonna get more visibility on the pipeline and how are you prioritizing balancing overall pipeline spend versus margin stability or expansion? Thanks.

Thanks for the question, David. In regards to the first question regarding headlina going forward, I think we've always been very clear about our strategy. It's providing a really high quality, frictionless experience in terms of product to product comparison between the comparator of Humira and headlina at the lowest net cost to give the affordability so as many patients possibly can take the product as possible. And so with that, I've always signaled that about 45% of the market today is what I would call part of that low net cost segment. The rest is essentially made up of the PBMs. Around 55% is PBM driven. And right now that's where we're getting our growth. We are growing in TRX is about 60%, quarter two over quarter one, and you can see that playing out. And I've always signaled that we'll be in the top two or three biosimilars for Humira when it's all said and done. I think that's essentially where you wanna be over time. And we're seeing good solid growth as you've seen with our numbers. And we continue to see that going forward as well. In regards to R&D, I think that's a function of the fact of what we have right now. We're very excited about what we've got in the pipeline, 6219, which is our endometriosis asset. We'll hopefully be reporting out this time next year in terms of our phase two A to B data. And in regards to the future, I think we're being very prudent in regards to how we use our capitals, whether it's deals like we do with Lilly and these tuck-in deals, which we think is very prudent, or whether we see something that kind of coming down the pipe that we think are really, really exciting. And there's more and more access, or rather more and more interest right now in terms of the women's health field. There's a lot of activity, there's a lot of R&D going in that space, but it is a long-term journey, which we'll be able to dedicate when we start to see things that are really very interesting for us. In the meantime, we do a lot of these, what we consider tuck-ins, which are really good hygiene. Just look at the Lilly deal. That's really been very, very profitable for us just in the first few months. We'll continue to do those, and we'll be very, we'll be very careful in terms of what we're gonna do in regards to our R&D expenditures going forward.

Thank you.

Our next question comes from the line of Jason Gerberry with Bank of America. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. So first one for me is just on EBITDA Beyond 2024, not looking for guidance, but just directionally. Your thoughts on being able to either hold the cost structure flat or keep it down in 25 or 26, and the ability to do these imgality type of deals, what I say one per year, just thinking about some of the tier ones to 2024, and then how we think about that going forward. And then my follow-up question on how Lima is this interchangeability at this point on high concentrate matter at all in your view, and any thoughts on ability to participate on the private label side? Thanks.

Yeah, Jason, I'll take the last question first, and I'll hand it over to Matt to discuss the EBITDA question. So in regards to interchangeability, right now, Samsung's been able to get the designation, which was approved for the low concentration pre-film syringe and the single-dose vial presentations. But to your broader question, does it really matter? I think you see currently, I mean, on the high concentration that was granted with TAVA, I mean, it hasn't, and that was granted in May, it hasn't done anything in terms of overall performance and our overall growth. We see continued growth there, but we feel that by the time the exclusivity period wears off in next May, we'll be ready to essentially launch or rather to get the indication as well. So I don't see any type of any roadblocks in terms of continuing ongoing performance. We are the sole winner of the VA business, for example, and interchangeability doesn't matter because of the fact you're the single source asset that you've got there. So we've got a lot of confidence in Hadlima going forward and we'll have interchangeability when the time comes in terms of when that exclusivity period wears off. And I'll hand it over to Matt regarding the EBITDA question.

Yeah, Jason, in terms of talking about years beyond 2024, obviously too soon for guidance, but directionally, we see holding margins where they are is a very realistic outcome for 2025, which is a significant statement given that the relatively modest LOE exposure that we have in the established brands portfolio, most of that's going to be hitting actually in 2025. So we do see that we have the ability to hold margins through that. And then once you get beyond 2025, then you start to see the ability for Organon to actually improve gross margins as we separate the manufacturing network away from Merck. Those opportunities are fairly substantial. And combined with the fact that we would generally see product mix improving more towards some of the growth products that we've put in place through business development since the spin contributes to that. And this all comes on top of a cost structure, which is largely now right-sized in place and from which we can generate operating leverage. So we're pretty optimistic about the ability to hold margins and then grow them. Yeah,

thanks much. Sure. Our next question comes from a line of Terrence Flynn with Morgan Stanley, please go ahead.

Thanks so much for taking the question and congrats on the next one on five-year data. Was just wondering if you can give us your latest insight on how you're thinking about the pricing inputs for that product and then the ramp of conversion and would the plan be to discontinue the three-year product? Thank you.

Yeah, Terrence, so just for clarity, the five-year efficacy indication is essentially the same product. It's just that now we've got the indication for five years of efficacy. We're very excited about that data and we're submitting in the process of getting ready for submission to the FDA. And so in terms of price, we're still looking at that. Obviously we have that optionality when the time comes and we still have time for that to discuss that. But more importantly, it really starts to give us a line of sight on the fact that this product will continue to be with us in a very robust manner till the end of the decade and possibly beyond. Just because of the fact, as I mentioned, our Inserter device, which is very unique and it is a very clear differentiator, has exclusivity until 2030. So from that perspective, if somebody were to come to market, they'd only be able to come to the market with a three-year indication of which the whole market will be moved over to the five-year indication by that time in 2027. And they'll have to have their own device, which is no easy thing for FDA approval prior to 2030. So I think we're in great shape with regards to next phenomenon in the future, expanding that portfolio.

Our next question comes from a line of Chris Shibutani with Goldman Sachs. Please go ahead. Your line is open. Please go ahead.

Thank you. Apologies, I was on mute. Two questions, if I could. International pricing dynamics. Some of the regions, it's tougher for us to get a sense for what the trends are. You seem to call out Japan in particular. I believe you expressed that there were some tougher than expected dynamics there. And then if I could just follow on a little bit on the China question that Umar had asked earlier, we have seen historically enforcement of the anti-bibaric, anti-corruption element impact different product segments, hospitals. We saw that with vaccines brought up as a potential commentary. Is this a dynamic that your China business navigates? And then second question about business development, certainly the Lilly transaction has been quite helpful. What is your sense for the potential to do similar and other type deals from your capacity standpoint and the availability? Thank you.

Thanks for the question, Chris. So let's take that question in regards to the effect of the anti-corruption campaign in China. That was a short-lived issue that we went through, I think in the Q3 or so of last year. We've watched through that. We don't see any, essentially any remnants on any parts of our business, any parts of the portfolio products we have in China. Things are kind of going back to what I would consider the normal state of affairs and normal business metrics. And we're gonna see a mid single digit growth in China in the second half of this year. And I think washing out whatever we faced in terms of headwinds from round eight and VVP for the first half and also some fertility slowdowns. But going forward, I see some more robust growth in China in 2025 and beyond as we'll have kind of passed through this VVP storm of sorts. And in regards to the international reference pricing, that really was more of something that China was kind of pulling forward. And that hasn't really affected us much so far in terms of our negotiations with the Chinese government. We've landed in, I think, in a very positive place when it comes to that. And finally, in regards to more tuck-ins, like the likes of which we did with Lilly, we're very pleased with the Lilly deal. I think it's off to a really solid start. And we're gonna be doing more of those. But that's what I would call part of our organic business strategy. It's just good hygiene. And we'll continue to be able to have plenty of capacity to do more and more of those type of tuck-in deals going forward, which are, I think, very nice. And they proved to be very essential to our strategy going forward.

Yeah, and just to add to that, Chris, the reason why we're able to do those deals they're generally characterized by relatively modest upfront payments. And most of the compensation it was actually based on success-based milestones. Thank

you. That concludes our Q&A session. I will now turn the call back over to Kevin Ali for closing remarks.

Thank you. And thanks everyone for joining us today. We are, as I said in my introductory comments, we're very encouraged about our progress here today. And we're confident, very confident in our ability to deliver the performance ranges we've outlined here today. And we look forward to continued investor engagements throughout the quarter and through the year. Thank you very much.

This concludes today's call. You may now disconnect.