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.

Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Please ensure you are not on speakerphone and that your phone is not on mute when called upon. We ask that you please limit yourself to one question and one follow up. Thank you. Your first question comes from David Anselm with Piper Sandler. Your line is open.

Hey, thanks. So a couple for me. First, on the TAMA, can you just talk through your level of confidence that you can get to that sales target that you reiterated? And I guess part of my question here is, you know, just given the nature of the category and that it is tightly controlled, how are you feeling about access? How are you feeling about the growth of the net here? Just help us understand, you know, how you think you can get to the target. That's number one. And then number two, just with your priorities regarding deleveraging, where does additional biz dev M&A fit? Is that on the back burner? Is that something where you're just going to continue to be opportunistic? How should we think about that? Thank you.

Thanks for the question, David. Kevin? And in regards to VTAMA, we are confident that we'll achieve that 150 that I kept mentioning. And the reason for that is that the new label, the atopic dermatitis label, really is a game changer. The kind of advantages that we have versus competition are significant, whether it's essentially the once a day down to two years of age, the incredible efficacy in terms of attacking itch, which is the number one, essentially, symptom that you see with AD. And the initial reports have been fantastic. Not only that, but you see the NRX and TRX numbers. But you put your finger on probably the most important aspect of getting to that number, which is access. And we've got a fantastic managed care group working on access as we speak right now. And I think all the things that I'm seeing in terms of signals are coming from the market. is essentially getting really good uptake in regards to moving the needle on getting more covered lives and moving prior off to essentially preferred and non-preferred, and just moving that whole continuum over. And that is the key point, underpinning my confidence in being able to reach that 150. I was in the field actually doing double visits last week in three different cities in the States, and what I can tell you is there's been a lot of momentum and a lot of good positive feedback right now because now patients are coming back after they've been prescribed the drug and kind of seeing follow-up. And what they're saying, signaling to me, has been outstanding efficacy and really, really easy to apply. So we feel good about that. And ultimately, when we reach that number, we'll have a different discussion in terms of what the future outlook looks like because we're going to be launching in Canada later, actually in the few months coming, and we'll be launching XUS in terms of international and globalizing this product. We feel very good about this acquisition. And in regards to the second question about deleveraging, yeah, that's what we're focused on right now. We think it's the right thing to do, as Matt said, sub four by the end of the year and then accelerating that going forward. And then ultimately over time, what we think this is going to do is essentially it's going to strengthen the company's future prospects. As we start to de-lever, we'll be able to kind of look for opportunities down the road in terms of being able to bring in more assets like Vitama into the organization. Look, we need products like that. We've got a fantastic business development organization that really has developed a real skill set at being able to identify assets that we can bring into our hands and ultimately plug into our commercial organization. and do a really good job with. So for right now, it's really focused on de-levering. And then over time, it's really focused on being able to bring in other assets like a VTAMA or Covidence that we just brought in that have fantastic opportunities and are creative almost immediately.

Thank you.

The next question comes from Michael Nedeljkovic with TD Cowan. Your line is open.

Thank you for the question. I have one question and a follow-up. So clearly BD will be more of a focus moving forward. Should we think of any uptick in that area as an increase in the frequency of future deals, or could there also be an increase in the size of future deals? And as a follow-up, when we survey the assets that Organon has in-licensed recently, I think it's fair to say the company has adopted a pretty flexible definition of women's health. So what should we consider to be your option space moving forward? Is there any asset or therapeutic category that you view as outside the bounds of your strategic focus or is pretty much everything fair game so long as it makes financial sense? Thank you.

Thanks for the question, Michael. I would say this, that we have a very broad definition of women's health, first and foremost. It encompasses, I would say, three accesses. One is Those conditions unique to women, like, for example, our forendal acquisition, of which we'll be talking about more down the road in terms of what we're doing in that space, for endometriosis or polycystic ovary syndrome. Our partnership with Lilly on emgality, two-thirds of the patients who suffer and struggle with migraine are women, which are those conditions I would call disproportionately impacting women. And then the third category would be, I would say, fall into the category of where VITAMLA falls in, which is dermatology, specifically AD, where it affects women differently, whether it's the fact that women happen to be the caregivers by and large. And so in the pediatric space, there's nothing there that ultimately approaches, from a non-steroidal perspective, patients that are two years of age and older. And by the way, we are getting started this year on studying this product for down to three months of age and older. So that's a game changer. And for that point of view, I mean, when you look at adults, adults typically suffer more from AD that are women than men. And so that is kind of the more squishy, I would say, of the three definitions. But typically, we are looking at a broader perspective, but also we have a very business-oriented mindset in regards to getting assets that we feel that we're a better owner of, that we can do better with globally, whether it's plugging it into our international commercial markets, or whether it's essentially using our medical affairs teams or commercial assets teams. So I think overall we're making the right use of capital and our BD organization is doing a really good job of setting up these deals so that it's not just a one hit where it's essentially success-based, everybody's got skin in the game, and we're paying milestones along the way. We're happy to pay those milestones because it just basically means that we're hitting on some of those achievements in terms of commercial achievements. In regards to whether it's more frequent smaller deals or larger deals, again, like I said, the key thing is de-levering. And when we find the deal, the right deal, like a Vitama, for example, or a Topodence that we just brought in, We'll do that, but it just gives us more room to breathe when we have a much lower leverage rate, and we'll continue to accelerate that.

Thank you. The next question comes from Chris Schott with JPMorgan. Your line is open.

Hi, this is Ethan on for Chris Schott. Thanks for taking our questions. On the first question, just wanted to ask about capital allocation more broadly in your framework going forward, and maybe more specifically how share repo might fit into that equation relative to debt pay down and business development. And then my second question is just on the potential impact of tariffs. I know you provided some commentary on 2025, but any general color on your ability to navigate this dynamic looking past 2025? although details are lacking, maybe just frame out how you're thinking about that impact. Thank you.

Yeah, Ethan, I think Matt and I will ping pong on addressing these topics. I'll keep the tariff issue aside for Matt to deal with. But on capital allocation, really, really briefly, right? Look, we're doing this, I want to be clear, we're doing this from a position in terms of what we've done with the dividend today, what we announced, from a position of strength. Over the last few years, we have, for example, reestablished an expo on our key product where we're going to surpass a billion dollars this year. We have stabilized the established brands business. We have essentially regrown our fertility business. We have also successfully launched Jada and had Lima. and Emgality, and now Vitamma, and Tofidense. And so we're very comfortable with the fact that going forward, some of the headwinds we face this year with a loss of exclusivity of our second largest product, Adizet, will be behind us. And essentially going forward, we have opportunities really to accelerate our top-line and bottom-line growth. And so for that, and we've done three restructurings in the last year and a half, so we're a much more leaner, fit-for-purpose organization that's This is really done in order to be able to set us up so that in the future we can do more business development deals like the VTAMA and the topodence deal that we just did recently in order to be able to continue to grow, continue to grow for the long term. And so I believe this is a position of strength. And when it comes now to your second question around tariffs, I'll hand that over to Matt in terms of, in regards to the fact of what we see today is not something that we feel very concerned about, but.

Yes, yeah, thank you, Kevin. So, as we spoke of in the prepared comments, where the policy is more clear around countries like Canada, Mexico, China, we have very nominal exposure. Less than $5 million in 2025 has been, it's one of the factors that has enabled us to affirm guidance for the year. When you look forward, Organon has six manufacturing plants, all of them outside the United States. Most of the production that ends up coming into the United States is from our plants in Europe. And since the policy around that route into the United States is still very fluid, it's really too soon to be talking about what potential impacts might be.

You want to address share buybacks that he had mentioned earlier? Sure.

So share buybacks have been a lower priority for us on our roster of capital allocation priorities. The biggest issues we face that can improve Organon's valuation in the near term relate to managing our leverage and relate to growth. And we need capital to solve both of those issues. And so returning capital to to shareholders is right now less of a priority. It's one of the reasons why we made the move that we did with the dividend announcement today. So, and especially as long as our leverage is above four times, I believe we'll create more value and better positioning and overall strength for the future by right-sizing our leverage versus buying back shares.

The next question comes from Umar Rafat with Evercore ISI. Your line is open.

Hi, guys. Thanks for taking my question. I mean, look, I feel like Dermavan deal was a surprise, but today is a bigger surprise. And there's a lot of market sentiment that they can't have confidence in consistency and decision-making process at Organon right now. So specifically, last call, you guys said you're committed to regular dividend as the number one capital allocation priority. I think you just now said returning capital is a lower priority. And I guess the question is really for all the investors on the line, what is the priority and how can we be sure that this will be the priority going forward? Because there appears to be a lot of things just moving around constantly.

Well, Umar, thanks for the question. And, you know, if you notice, Things are going on on the outside. Macro environment is changing. It's quite volatile out there. Clearly, investment community is not clearly focused on the dividend for us as much as it is on leverage. I hear it in almost every discussion that I have with investors that they're very concerned about where we are in terms of leverage in these very volatile times. It's really a risk-off type of analysis. So for us, we were very, you know, very committed to that. But when we saw the type of volatility happening, we saw the timing, we're on the verge of really having, I think, a really great year in 2026 and the second half of this year, I think we're in a much better position to say, look, we know that we can de-lever very quickly. And as we de-lever and as we have a situation where we give ourselves more of an opportunity to bring in assets like VTAMA. And I will tell you that right now, if you just look at the NRX and TRXs of VTAMA, it's clearly positive signaling to the fact that we made the right decision, and hopefully we'll be able to have a discussion at the end of the year where you see that, you know, we delivered what we said we were going to deliver with the product, and ultimately then you see that the run rate of where we're going with this product and the type of label we're developing is was a good use of capital. And I think there's a better use of capital in bringing in more assets in that space. And so the combination of what's happening externally, coupled with where investors essentially are kind of telling us that they're very focused on de-levering, much more so than anything else, kind of brought us to the fact. And the initial encouraging results we're really having with FITAMA and the continued strength of our core products like Nexplanon, tells us that there's a better use of that capital in terms of being able to go forward and use it to be able to not only deliver, but bring in growth aspects for the company.

Thank you for that, Kevin. And maybe just to clarify then, is part of your thought process in anticipation for tariffs, given your manufacturing network, or was it exclusively from de-leveraging perspective?

Well, right now, you know, we don't know where, we're pretty well set for where the tariffs are today. Let's see where they land in the U.S. It's very early to be able to determine exactly what that's going to look like. But I think we're pretty good for 2025. We brought in a lot of the inventory that, as I said, we managed the inventory of our biggest product, Nexplanon. But the focus really is on deleveraging right now. And I think that, as I said, volatile times, Investors being very clear with us, we need to de-lever, accelerate that process, kind of took us to where we took that decision, not lightly, but I think very clear-minded.

Thank you.

The next question comes from Jason Gerberry with Bank of America. Your line is open.

Hey, guys. This is Bhavan Patel. I'm for Jason. Two questions from us. First, what are your views on the next one on paragraph four? Do you see the filer as a credible threat to launch a generic in ex-US markets? And where does the FDA stand on the issue of applicator similarity, which I believe was the core issue in your citizen's petition? And then my second question is regarding the expected 900 million plus of free cash flow before one-time cost, can you break down the anticipated one-time cost for 2025 how should we think about free cash flow both before and after one-time costs in 2026? Thank you.

Why don't we address those questions in reverse order? Matt, why don't you deal with cash flow issues, one-time costs, and then maybe Juan Camilo, you can address the paragraph four issue, which is U.S., by the way, specific.

Yeah. So with regards to this fiscal year, in the – included in our estimates for one-time costs is about $150 million in round numbers related to the manufacturing separation from Merck. Recall that the one-time cost of separation on the administrative side for things like TSA activities, that number is zero. From a restructuring perspective, We were looking at something in the vicinity of $200 million to achieve the operating expense savings of 200 million this year, annualizing to 275. And then there's about $75 million of other costs, which I elucidated in the prepared comments. As we look forward to 2026 and really beyond, We will continue to have manufacturing separation costs for the next few years. This year is probably the largest. It'll be gradually declining. And then what we will start to see is the back-end milestone payments for BD deals already signed. That'll probably be in the to the maybe $250 million range going forward. But, you know, thankfully, the further we get from the spinoff, the less of an impact these various one-time costs are making.

And then I'll ping pong with Juan Camilo in regards to the question on the paragraph four. It's not a surprise to us. And the legal process that that's going to go through will take us anyway through probably mid-2027. But we still have a patent that needs to be determined in regards to legal process in regards to our applicator. We feel very confident that that's a fairly strong patent that takes us through 2030. And, you know, the issues in terms of regulatory issues. process of being able to get the FDA approval in regards to actually having a three-year, remember we're launching five-year indication later this year, so they'll be, if they overcome all the significant large obstacles, which nobody's been able to do yet with the FDA on the LARC, then they'll be coming into the market this year.

It's already moved to five-year indication. I'll move to the front.

Therefore, it's one of the challenges that a VA is going to have to decide how much

Then you mentioned the applicator that gets to the safety. FDA is really focused on the safety of the insertion and removal of implants like this. Any changes to the applicator open the door for really questioning of the state of Hawaii for a redistribution for the litigation of the petition before they continue to do so.

So, there is complexity all throughout.

The only way of having to be violated is if there is really multiple aspects of this in detail in our citizen's petition because Uh, we know how complex it is because we've been doing it for, for many, many, many years, uh, to ensure the safety of next one. So we see that, that there is a very, very high bar, not only from, uh, from a legal perspective on the IT of the RUD and the applicator, but also the regulatory bar for FDA to be confident on the efficacy and safety of a new product. So as Kevin pointed out, we continue to be very, very confident in our ability to grow Nexplanon all the way to the end of the decade, and we're excited about the potential for a five-year indication coming our way before the end of the year. Thank you.

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