Organon & Co.

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

Good morning, everyone, and thank you, Jen. Our first quarter results represented a solid start to 2025, and we're very much in line with our expectations for the year. Key growth drivers are on track. Nexplanon grew double-digit and is set to achieve more than a billion dollars in revenue in 2025. The launch of VTAMA and the atopic dermatitis indication has been successful, ramping just as expected and the product is marching towards $150 million of revenue for the year. Additionally, we continue to estimate that our restructuring initiatives will yield approximately $200 million of annual savings. Given the tariff policies in effect as of today, we're affirming our revenue and adjusted EBITDA margin guidance, as well as our target of generating over $900 million of free cash flow before one-time costs in 2025. Today, we also announced that we have reset our dividend payout and will redirect those funds to debt reduction. With a reduced dividend payout, the company can redeploy almost $200 million in prospective dividend payments over the remainder of 2025 that will enable a path to achieve a net leverage ratio below four by year end. Over the last year, we have established a leaner, more fit-for-purpose cost structure while increasing revenue contribution from our core growth drivers. By deleveraging more rapidly, we will continue to strengthen the future prospects of the company. Over time, this will position us to execute more of the compelling business development opportunities we've done to date, bringing in additional growth drivers to our portfolio while maintaining lower leverage. Further, the recent macroeconomic uncertainty has created a pronounced dislocation in our equity valuation relative to our earnings. To us, this is an affirming signal from the market that now is the right time to proactively take action to support our balance sheet. A lot of the uncertainty in the broader market obviously centers around current and future tariff policy. Based on tariffs in place as of today, We have very limited exposure in 2025. Our revenue composition is about 75% ex-U.S. Europe, Canada represents about 25% of our total revenue. China represents about 13% of our revenue. And for that revenue generated in China, a majority of the supply comes from Europe. As you think about the roughly 25% of our revenue generated in the U.S., Again, most of that supply comes from Europe. Our women's health products sold in the U.S. are primarily made in the Netherlands. Next one on is the bulk of that, and we have already taken steps to mitigate exposure through inventory management. For U.S. biosimilars, Entrezon, Ranslexis, and Hadlima are mainly supplied from Korea and the EU. For recently acquired Tovidence, That product is manufactured in China, but we have inventory coverage offering us protection through 2025. The denosumab asset from Shanghai Henleus is not planned to launch until much further in the year. So again, based on the tariffs in place as of today, we have very limited exposure in 2025. With those important topics addressed, let's move now to a discussion of the financial results. As I mentioned, The first quarter was very much in line with our expectations. We had guided that first quarter would be the lightest of the year as we worked through the loss of exclusivity of AttaZed and as VTAMA ramped up. The women's health franchise grew 12% ex-exchange, led by performance of Nexplanon, which was up 14% in the quarter. Nexplanon grew double digit in both the U.S. and ex-U.S. markets. This year, we expect Nexplanon to deliver more than $1 billion in sales, driven by both price increase and demand growth. For the five-year indication, we have made our submission to the FDA, putting us in a position to be ready for a late 2025 launch, pending FDA approval. Fertility had a very strong quarter, growing nearly 26% globally. The US grew $23 million, or 70%, with about half of the growth coming from lapping a buyout in Q1 of last year. The other half was volume growth and rate favorability. Ex-U.S. fertility grew 4%, with new launches in Turkey and Japan, all setting sluggish performance in China. We expect growth in the U.S., as well as footprint expansion outside the U.S., to drive high single-digit growth in our global fertility business in 2025. Jada grew 20% in the quarter, driven by growth in shipments, especially in the U.S., among existing customers that are expanding Jada adoption. More than 94% of the nation's largest birthing hospitals now stock Jada. During the first quarter, Jada launched in South Korea and achieved the CE mark of approval in Europe. We plan to launch in select EU markets this year, and we continue to assess future market expansion opportunities. Turning to biosimilars. Biosimilars continues to be an important part of our growth story. In 2025, though, Entrezant and Renflexis will continue to decline had Lima grew 57% in the first quarter with continued strong uptake in the U.S. We also recently acquired the regulatory and commercial rights for Tofidins in the U.S. for intravenous infusion. Tofidins is the first biosimilar approved for Actemra. Tofidans was launched in May 2024, but the overall Actemra biosimilar market was slow to form in the U.S., yielding an opportunity, a very good opportunity for future sales uptake and growth. Immunology is a market we certainly know well in the U.S., notably the physician-administered business, and as a result, we are uniquely positioned to drive Tofidans sales. And finally, we anticipate launching the portfolio of Henleus products beginning in late 2025, with adenosumab biosimilar in the U.S., followed by pituzumab in Europe. Wrapping up the revenue discussion with established brands, in the respiratory portfolio, mandatory pricing revisions in Japan and mild seasonal respiratory complications in China weighed on the results in the first quarter. Performance in the cardiovascular portfolio during the first quarter was driven by the headwinds from the loss of exclusivity of Atazen. which will abate in the fourth quarter of this year. As we have said since then, though many of the brands in this portfolio have been around for decades, we have taken an entrepreneurial approach in managing the business for profitable growth. The established brand's franchise is starting to look different than it did its spin. Now home to innovative medicines that are growth engines for the company, it looks more like a general medicines portfolio. Over the last year and a half, we have added products with patent protection to this franchise. including Emgality and Vitama. Combined, we expect those products to generate over $300 million in revenue in 2025. The Vitama launch performance has been encouraging as it continues to outpace branded competition in NRX and TRX growth. For the week ending April 18th, Vitama NRX grew 71% versus direct competitors who were up 4% compared to a pre-AD approval 13-week average baseline. TRX grew 30% compared with competitors who were up 5%. The TAMA is uniquely positioned within the atopic dermatitis market. It is applied once a day and is the only nonsteroidal topical approved for mild, moderate, and severe atopic dermatitis, providing access to all segments of the addressable market. It is the only product approved for patients two years of age and older. offering a significant advantage over competitors. We have developed a core capability in finding opportunities like Mgality and Vitama. These are accretive transactions with deal structures heavily weighted towards success-based milestones. These are the types of assets that over time we will have greater opportunity to pursue with the capital freed up from the dividend. I'll now turn the call over to Matt, who will review the financials in more detail.

Thank you, Kevin. Beginning on slide nine, here we bridge the 4% constant currency revenue decline in the first quarter year over year. Starting on the left, LOE was about $60 million for the quarter, which primarily reflects the impact of the loss of exclusivity of Adazet in Europe, which occurred in September 2024. VBP in China was de minimis in the first quarter, and we expect only a nominal impact on a full year basis for 2025. Our potential exposure this year will be more back half weighted, as we expect FOSA max will be included in round 11. Once this occurs, approximately 80% of our established brands portfolio will have been subjected to the VVP process. There was an approximate $40 million impact from price for the first quarter, or about 2.5%. Pricing pressure was mainly from biosimilars, certain mature products in the U.S., like NuvaRing and Dulera, and the LOE of Adizet. From a regional perspective, we continue to face expected mandatory pricing revisions in Japan and ongoing competitive price pressures related to our respiratory products in China. Volumes increased $45 million in the quarter, representing growth of a little over 2.5 percent. Had Lima, Amgality, Vitama, and Nexplanon were the largest contributors to volume growth and will likely continue to be the main drivers for the full year. In supply other, here we capture the lower margin contract manufacturing arrangements that we had with Merck, which have been declining since the spinoff as expected. And lastly, foreign exchange translation had an approximate $45 million impact in the first quarter, or about 280 basis points of headwind to revenue which reflects a strengthening US dollar versus most foreign currencies in the current period relative to the first quarter of 2024. The recent weakening of the US dollar potentially creates a tailwind for us over the remainder of 2025, and I'll revisit this point later in the presentation when we discuss guidance. Now let's turn to slide 10, where we show key non-GAAP P&L line items and metrics for the quarter. For reference, Gap financials and reconciliations to the non-gap 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, which can be seen in our appendix slides. Adjusted gross margin was 61.7% for the first quarter, compared with 62.1% in the first quarter of 2024. A year-over-year decrease in adjusted gross margin primarily reflects the impact of unfavorable price, as I discussed. Non-GAAP SG&A expense was up 6% in the first quarter, driven by commercial and launch expenses for VTAMA, which was acquired in the fourth quarter of 2024. Excluding expenses related to VTAMA, SG&A was down versus prior year, reflective of our efforts to contain and reduce operating expenses. Non-GAAP R&D expense before $6 million of IPR&D was down 17%, primarily due to the timing of clinical study spend. As we think about the restructuring actions to reduce operating expense that we communicated as part of our 2025 earnings guidance in February, we began executing those plans during the first quarter, and we fully expect to achieve approximately $200 million in expense savings over quarters two through four. which is already incorporated into our earnings guidance. Our first quarter adjusted even a margin of 32% was about 150 basis points better than we expected, in part because of the timing of clinical study spend that I just spoke of. We also did a bit better on gross margin, driven by favorable product mix. Also in the first quarter, we benefited from a $4 million realized transaction gain from foreign exchange, mainly driven by currencies that we can't hedge. Turning to slide 11, we delivered $146 million of free cash flow before one-time costs in the first quarter, about a third better than the prior year period. This is a function of active cash cycle working capital management, lower interest rates, and timing of cash interest and tax payments. As we said back in February, one-time costs related to the spinoff were completed in 2024 following the rollout of our global ERP system. We expected one-time spinoff costs to be zero in 2025, and you can see that reflected in our first quarter results. Again, $62 million in the prior year period. In the $75 million of other one-time costs, about $15 million relates to cash payments associated with restructuring initiatives aimed at leaning out our operating expenses I mentioned earlier. $20 million relates to the final payment on the microspheric settlement. And the remaining $40 million relates to the planned exits from supply arrangements with Merck that, as we've discussed in past quarters, would be ramping up. These are activities that will enable Organon to redefine our appropriate sourcing strategy and move to fit for purpose supply chains while focusing on delivering efficiencies in terms of gross margin expansion, which we expect to begin realizing in 2027. Restructuring and manufacturing separation activities could together represent $325 to $375 million in 2025. Our current view is that we could finish 2025 at the lower end of this range. Once again, these one-time costs drive value that investors will be able to see in 2025 in the form of improved operating expense efficiency, and in later years, related to more cost-efficient manufacturing that is expected to drive meaningful margin expansion. In 2025, we expect to pay about $200 million in commercial milestones, primarily tied to VTAMA and GALADI in the biosimilar programs with Shanghai Henleus. Through the first quarter, we have paid about $130 million towards that expected amount. The achievement of these milestones means that we are realizing value for business development deals already signed and validates the path to low to mid single digit revenue growth post 2025 that we've been saying Organon should be able to deliver. Now turning to slide 12. Our net leverage ratio was 4.3 times at March 31st. That performance is consistent with prior commentary that leverage could float up to the mid four times area during 2025 as we digest the DERMAVAN transaction. As we capture more EBITDA benefit from the VTAMA launch later in the year, and realize the benefit of operating expense restructuring actions, we would naturally delever closer to 4.2 times where we ended 2024. With our revised capital allocation plan announced today that increases our retention ratio, we now have the ability to accelerate progress on deleveraging. In the near term, as Kevin stated, our priority is to reduce net leverage given the uncertain macroeconomic environment that investors are reacting to. we see a clear path to achieving net leverage below four times by year end. And over time, the capital preserved with a higher retention ratio creates a compounding improvement in financial flexibility. It offers us the opportunity to achieve meaningful deleveraging over the next few years, whether it's through outright debt repayment, accretive M&A, or some combination of the two. Now turning to 2025 guidance on slide 13. For the operational bars on this page, everything remains the same for the full year. Our constant currency guidance remains the same, which is about flat versus prior year at the midpoint. We expect the uptake of Vitamma, continued solid performance in Engality, and organic growth in Nexplanon and other products in our portfolio will help to offset the LOE of AttaZ in Europe, along with pricing headwinds in other parts of the portfolio. That's a pretty strong statement, given that Adizet's LOE represents a headwind of approximately $200 million alone between volume and price. So, with no changes to the ranges on the operational drivers, let's focus for a moment on foreign exchange. The guidance we provided in February was for an expected $200 million negative impact from FX in 2025, or about a 300 basis point headwind. As I mentioned, the Q1 impact was about 280 basis points. in line with that full year estimate. Since February, however, the dollar has weakened, and if current rates persist, we would see some upside to the full year estimate that would move us to the high end of the guidance range. Given the volatility in the currency markets, that upside could be temporary. The responsible thing to do with this point as regards guidance is to avoid chasing a very volatile currency market, and for now, leave that component of our guidance unchanged and simply note the possibility for favorability over the remainder of the year. We'll be reevaluating our view on FX as the year progresses. From a quarterly phasing perspective, we should deliver modest sequential revenue growth from the first quarter to the second quarter, and we continue to expect the fourth quarter to be the strongest of the year. Turning to slide 14, where we show all components of our earnings guidance. Again, no changes. to what we provided back in February. We expect adjusted gross margin to be in the range of 60 to 61%, about a point lower at the midpoint compared with last year. And that's a continuation of the pressure on gross margin that we saw in 2024, especially in the back half, due to price and higher manufacturing and distribution costs. On SG&A expense, we ended 2024 at 25% of revenue, And R&D was about 7% of revenue ex-IPR&D. Those general percentages also hold for 2025. And that guidance implies essentially flat OBEX dollars year over year, which is consistent with ongoing actions to improve our operating cost efficiency that would serve as offsets to investments to grow VTAMA. Those pieces culminate in an adjusted EBITDA margin range of 31% to 32%. The favorability we saw in Q1 adjusted EBITDA margin was mostly timing. Second quarter adjusted EBITDA margin should look very similar to what Q1 would have looked like without the upside that came through. So that means we're expecting a Q2 adjusted EBITDA margin in the 30.5% area. We continue to believe Q4 will have the highest margin for the full year as VTAMR ramps. and we capture more of the benefit of our restructuring initiatives. For below-the-line items, our estimate for full-year 2025 interest expense remains at $510 million, which includes about $25 million related to the debt-like instruments assumed in the DERMAVAN acquisition. Payments on a portion of those instruments are tied to VTAMA sales. Exclusive of the DERMAVAN transaction, our interest expense estimate for 2025 is approximately $30 million lower compared with last year as a result of the two refinancing events completed in 2024 and lower borrowing rates on our variable rate debt instruments. For 2025, we continue to estimate our non-GAAP tax rate to be in the range of 22.5% to 24.5%. The uptick from 2024 is largely due to the impact of the 15% global minimum tax rate required under the OECD's Pillar 2. Depreciation is a touch higher than last year at $135 million, driven by the completion of our new ERP system in 2024. In summary, first quarter performance was solid and puts us squarely on track to meet our financial guidance for the year. Nexplanon, our largest product, posted another quarter of double-digit revenue growth. Our largest acquisition, Vitama, is launching nicely and is on track to deliver the $150 million in 2025 revenue that we forecast. And we continue to make steady progress on the $200 million of identified operating expense savings in 2025, which would deliver our best operating expense efficiency metric since the spinoff. We expect these OPEX savings to benefit not only 2025, but annualized to roughly $275 million, which we would realize in 2026 and thereafter. And finally, the change we are making to our capital allocation priorities to increase our retention ratio will enable us to accelerate meaningful strengthening of our balance sheet, including lowering our 2025 net leverage ratio target to sub-four times by the end of the year. With that, now let's turn the call over to Q&A.