Organon & Company (OGN) — Q2 2021 Earnings Call Transcript

Thank you, Reign. Good morning, everyone. Thank you for joining our second quarter 2021 earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer; and Matt Walsh, our Chief Financial Officer. Today we'll be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call on the Events and Presentation section of our Organon Investor Relations website at 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 Form-10 and subsequent SEC 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 and thank you for joining us today. As you may know for several years in the making, Organon officially spun from Merck on June 2nd to began trading as a public company on June 3rd. So today marks our first earnings call as a standalone public company, and I'm very pleased to be here. Organon's vision is to create a better and healthier everyday for every woman. We have seen how our vision and purpose has connected with so many and continues to motivate thousands of our employees, who have been hard at work standing up Organon and at the same time have been focused on driving our business. In the second quarter, Organon generated $1.6 billion of revenue, $627 million of adjusted EBITDA and $1.72 in adjusted earnings per share. Year-to-date, all three of our franchises are delivering on their objectives, each playing their role in driving our vision of improving the health of women. Accordingly, today we affirmed the full year 2021 guidance we provided at our May Investor Day. Looking out past 2021, we remain confident in our ability to grow revenue low to mid single digits on an organic basis as LOE risk will largely be behind us and the women's health and biosimilar franchises are positioned to deliver double digit growth. Today, we also announced an important milestone for Organon. Our Board of Directors has declared a quarterly dividend of $0.28 per share, which speaks to the cash-generating power and sustainability of our business. Turning to Slide 5 now. Though new as a standalone company, the 64 products that came to Organon from Merck are trusted well-recognized medicines, many of them household names. We operate in three franchises. Women's health and biosimilars are two growth engines, and established brands, which is a portfolio of 49 products that generate sizable and stable cash flows even though most have already lost exclusivity. Organon endeavors to be a different kind of company, one focused on advancing the health of women. In order to do that, we are broadening our portfolio beyond our already market-leading positions in contraception and fertility. We have already begun to execute on this vision, already completing two transactions in important areas of unmet needs for women. In June, we completed our acquisition of Alydia Health, which is a commercial stage medical device company that received a 510(k) clearance from the FDA in 2020 for the Jada System, a product intended to control abnormal postpartum bleeding or hemorrhage. We plan to use our global commercial footprint in reproductive health and experience in creating affordable access to further develop and bring the Jada System to more women around the world. We recently also announced the licensing agreement with ObsEva for the global development, manufacturing and commercial rights to investigational agent Ebopiprant, currently being studied as the first potential first-in-class innovation for the treatment of preterm labor. To remind everyone, every year, 15 million babies are born preterm. And although preterm birth rates are on the rise, there are currently no other known compounds in development and no approved therapies for the acute treatment of preterm labor in the United States. As our first development-stage asset, Organon intends to leverage its considerable expertise and work with the scientific and medical communities and regulatory authorities in major markets, including the United States to advance the clinical development and registration of Ebopiprant. Both of these opportunities fall squarely in line with our business development strategy in size, scale, and market opportunities and to our focus on helping address the most serious unmet needs of women. Our early progress demonstrates how serious we are about our commitment to becoming the leader in women's health and expanding our portfolio beyond contraception and fertility. Turning to Slide 6 now. We can't talk about our women's health portfolio without talking about NEXPLANON, the number two contraceptive worldwide by revenue and a product we believe has blockbuster potential. NEXPLANON plays in the LARC market, or otherwise known as the long-acting reversible contraception segment, and globally the hormonal contraception market continues to see usage shift away from the daily combined oral contraceptive segment towards LARCs. LARCs are highly efficacious and considered to be one of the most effective forms of hormonal contraception available. NEXPLANON or IMPLANON NXT as it's known for markets is differentiated even within the LARC segment, as it's the only single-rod subdermal long-acting reversible contraceptive. It is a progesterone-only rod that is inserted in a woman's upper arm, average insertion time takes about a minute and it is conducted in a healthcare provider's office. NEXPLANON has exclusivity in the U.S. until 2027 and until 2025 in markets outside of the U.S. Currently, NEXPLANON is approved for three years of efficacy, but in November 2020, we began a registration study to evaluate the use of NEXPLANON for up to five years. If successful, we believe this will make NEXPLANON an attractive contraception option for many more women, including those who are family complete. During the quarter, our fertility portfolio also showed particular strength. We're very encouraged by the early traction, especially in China where fertility demand is very close to being back to pre-COVID levels. Governments around the world are becoming increasingly active in addressing the fertility issues families can face. Recently, the Chinese government introduced the three-child policy, and next year Japan will introduce reimbursement for IVF treatments in an attempt to address declining birth rates. The French government also recently passed a bill to allow egg freezing and for same-sex couples to seek IVF treatment. Outside of women's health, we're also encouraged by the growing support for biosimilars. The U.S. biosimilar market continues to grow with increases in physician and payer comfort with biosimilars. Both of the therapeutic areas we compete in, mainly immunology and oncology, are seeing increased biosimilar utilization. Though oncology conversion from originator to biosimilars has been faster, for example, trastuzumab which is where Ontruzant plays, has some of the highest adoption rates among biosimilars. We currently see nearly 70% of the trastuzumab market converted to biosimilars. We are well-positioned in the biosimilar market as a commercial collaborator with Samsung Bioepis. We have a good balance in terms of geographic contribution, so we're not levered to the particular dynamics of any single market. We have balanced with the lifecycle of our portfolio and we have marketed products that are growing like RENFLEXIS and Ontruzant. We have launch assets like Hadlima in Australia and Canada, which are performing very well. And we have what we believe will be a major pipeline opportunity with our anticipated Hadlima launch in the U.S. in 2023. We also continue to evaluate other potential pipeline opportunities with Samsung as well as other partners. And as we think about our established brands portfolio, part of the strategic timing of the spin is that 2021 is an inflection year. It is the last year during which the portfolio is subject to significant new LOE risk. Beyond 2021, the impact from the LOEs dissipates. Further, we have opportunities to soften the erosion curve with continued growth of Atozet launches of certain products in selected markets and other lifecycle management opportunities. We continue to take an entrepreneurial view with regards to the established brands portfolio. And all three franchises are global businesses, as you'll see on the next slide. Asia-Pacific was the only geographic region that was down in the quarter, and that was driven by Zetia’s loss of exclusivity in Japan. Our largest region, Europe and Canada, is showing strong double-digit growth, driven not only by COVID recovery but also by volume growth in biosimilars and in fertility. The U.S., particularly Nexplanon, benefited from lapping the significant COVID impacts in the second quarter of last year but also from growth in fertility. The U.S. also showed solid performance in biosimilars where we offer both RENFLEXIS and Ontruzant. In China, we had several positive areas of momentum that more than offset the impact from four of our products being included in the volume-based procurement process in the fourth quarter of last year. We also saw the respiratory market recovering from the negative COVID impact in 2020. Our fertility portfolio outpaced the market in Q2, and the contribution from the retail channel continues to grow. We're actively monitoring the impacts of COVID and its variants across the world. But overall, we are very encouraged by how the portfolio is performing. And now I will turn it over to Matt to discuss our second quarter performance in more detail.

Thank you, Kevin. Before I review the details of the quarter, it's important to remind everyone that our second quarter is unique. It's hybrid in that Q2 includes approximately two months of pre-separation operations for which GAAP mandates the carve-out method of accounting and approximately one month of post-separation business activity accounted for by conventional GAAP methodologies. But the key area of commonality across these two different methods is revenue, which is presented by and large on an apples-to-apples basis. And that's where I'll focus most of my commentary. So with this clarification on basis of presentation, let's turn to Slide 8. Revenue for the second quarter was up 4.5% as reported and down about 1% at constant currency exchange rates. The impact of a loss of exclusivity or LOE during the second quarter of 2021 compared to the second quarter of last year is approximately $130 million, and it's primarily related to Zetia's loss of exclusivity in the back half of 2020 in Japan, as Kevin mentioned and NuvaRing’s LOE in the United States. The established brands portfolio has exposure to the volume-based procurement initiative or VBP in China. The total impact to sales for the second quarter compared to the second quarter of last year was approximately $40 million and was associated with the third round of VBP, which is the largest so far that occurred in the fourth quarter of 2020. That included four of Organon’s products, Singulair Paediatrics, Proscar, Propecia, and Arcoxia. In the second quarter of 2021, the negative impact of COVID-19 was estimated to be approximately $120 million, which is about $100 million better than last year. Our product portfolio is comprised of physician-prescribed products, which have been affected by social distancing measures and fewer medical visits. And although we believe that global health systems and patients continue to adapt to the evolving impacts of the pandemic, we have experienced recoveries during the second quarter as compared to the year-ago quarter. We do expect that ongoing negative impacts will persist through the remainder of 2021. Foreign exchange translation had a sizable impact in the second quarter with about 550 basis points of favorability. That's not surprising given the impact of COVID-19 on global currency markets in the prior year period and also understanding that approximately 80% of Organon’s revenues are derived outside the United States. We are seeing volume growth, mainly driven by our key growth businesses, women's health and biosimilars, as well as growth geographically in China and fertility and in our established brands products, ex-VBP. So now let's take a look at performance by franchise. We'll start with women's health on Slide 9. Our women's health business grew 19% as reported and 16% ex-FX in the second quarter. We saw growth in Nexplanon, which was up 39% ex-FX in the quarter and benefited from patients beginning to return to their healthcare providers as COVID-19 restrictions are lifted. While in-person patient visits to healthcare professionals demonstrated recovery in the second quarter, relative to the height of the COVID-19 pandemic during the same period last year, they're not yet back to pre-pandemic levels. As a result, we expect that ongoing negative impacts will persist throughout the rest of 2021, and that view is incorporated into our guidance, which we'll discuss shortly. Our fertility portfolio is showing strength, FOLLISTIM grew 40% in the quarter. Volume growth came from an increase in demand from new accounts as well as from patients returning to clinics. We have observed that patients seeking fertility treatments are more motivated to return to doctor's offices than those patients seeking normal course health visits. These growth drivers more than offset the 19% decline in NuvaRing related to increased generic penetration as a result of NuvaRing’s LOE in 2018 in the U.S. Turning now to biosimilars on Slide 10. Biosimilars grew 43% as reported in the second quarter and 35% ex-FX. We have five assets in the portfolio, three in immunology and two in oncology. We launched our first asset, Brenzys in 2016, followed by RENFLEXIS in 2017, Ontruzant in 2018, and Aybintio in the back half of 2020. Hadlima launched this year in Australia and Canada. RENFLEXIS and Ontruzant are our two largest offerings and both are offered in the United States. Globally, RENFLEXIS grew 38% ex-FX in the quarter, driven by strong performance in the U.S., and Ontruzant, which was launched in the U.S. in July of last year, was up 13%. Turning to established brands now on Slide 11, due to the number of products in established brands and the multiple markets in which they're sold, we'll often discuss the performance of this franchise in terms of how it behaves as a portfolio. Revenue for established brands was down 4% as reported and 10% ex-FX in the second quarter of 2021. Excluding the impacts of LOE, revenue was down about 2% ex-FX. Volumes were up incrementally, mainly driven by COVID rebound, and price was down about 2%, which is consistent with our prior disclosures and that we expect price erosion in established brands to be in the low single digits ex-LOE over the intermediate term. China is an important market for established brands. Part of our strategy in this market has been to move business out of the hospital channel and into the retail channel, and this has been very successful. The retail channel in China grew double digits and now represents about 45% of established brands revenue in China, up from approximately 35% a year ago. Total revenue in China across all organized business lines for the second quarter was $236 million, up 12% versus the second quarter of last year. Now turning to our income statement on Slide 12. Again, because of the hybrid nature of this quarter, comparability to prior year performance across most income statement line items is not particularly meaningful. We can, however, draw comparisons at the revenue and gross margin lines if in the case of the latter we make a sensible adjustment to exclude purchase accounting, amortization, and one-time items from cost of goods sold. So making this adjustment in the second quarter of 2021, non-GAAP adjusted gross profit was $1.044 billion representing a gross margin of 65.5% compared with 71.2% in the second quarter of last year. The decline reflects an increase in standalone costs, including certain costs related to manufacturing agreements between Organon and Merck, which have lower gross margin percentages compared to third-party product sales. While comparisons to prior year performance are challenging, the most important commentary we can make about Q2 performance is that it aligns very well with the full year guidance for 2021 that we provided at our Investor Day across all line items of our P&L from revenue down to adjusted EBITDA, and then including our non-GAAP effective tax rate. We'll come back to guidance in a few moments. A few words on debt capitalization. At June 30, our bank debt was $9.5 billion against cash and cash equivalents of $730 million. Although this cash balance includes about $400 million of pre-funded cash that will shortly be remitted back to Merck related to pre spin-off inventory conveyance that will actually occur post-separation. So a more representative net debt number is actually closer to $9.2 billion. If we think about leverage ratios in the context of the guidance that we're affirming today, and just to be illustrative, if we use the midpoint of our implied 2021 adjusted EBITDA guidance that would put our net leverage ratio just below four times. We discussed our capital allocation priorities at our Investor Day in May, and I'll repeat them here today. With a recurring dividend now declared, of course, the dividend becomes capital allocation priority number one. We've endeavored to set the dividend at a low 20s percentage of free cash flow, excluding one-time costs of the separation. At this level, we believe will be very manageable going forward. Our second priority will be organic growth, which would include lifecycle management opportunities for existing products in the portfolio and capital deployed in our manufacturing plants. On the latter, we expect to see annual CapEx in the range of 3% to 4% of revenue on an ongoing basis, excluding separation costs. Our third capital allocation priority is really a tie between execution of external growth plans to develop a pipeline of new product opportunities balanced against debt reduction and our commitment to maintaining our BB/Ba2 rating. We are targeting a long-term leverage ratio below 3.5 times net to adjusted EBITDA. Turning to guidance now on Slide 13. Today, we are affirming the guidance that we laid out at our May 3 investor event. Revisiting the basis of presentation, our guidance both for the May 3 investor event and today is non-GAAP and pro forma as if the spin-off happened on January 1. Beginning with revenue, this is the chart that we showed at Investor Day, and there has been very little change. We continue to expect revenue to be in the range of $6.1 billion to $6.4 billion, which is essentially all organic. We do include de-minimis partial year revenue contribution from the acquisition of Alydia Health that closed in June. The biggest component of the year-over-year change in revenue, of course, is the expected LOE impacts. Impacts from LOE were approximately $210 million a year-to-date and are primarily related to the loss of patent protection for products in Japan and NuvaRing in the United States. So far, we have not seen a generic entrance for Dulera, which lost exclusivity in 2020. We're improving our full year estimate of LOE impact to $300 million to $400 million from the $400 million to $500 million that we projected at Investor Day. As we were careful to describe previously, 2021 is an inflection year for Organon. After 2021, our LOE exposure dissipates to approximately $300 million cumulative over the four-year period 2022 through 2025. Those who attended Investor Day would know that we had said $250 million, but with Dulera moving out of 2021 and into 2022, that pushes out some LOE exposure into future years. As far as upcoming VBP exposure, we now expect that a trial will most likely be included in the next round of VBP in 2022 instead of this year, as we previously expected. We do not see that moving the needle on the $200 million to $300 million range we previously expected. Obviously, COVID is something we're watching closely. The year-to-date impact from COVID was about $220 million. However, as we consider lagging trends in well visits and the effect that has had on Nexplanon, as well as potential disruptions from the COVID-19 Delta variant, we now believe the 2021 impact from COVID could be more in line with 2020, as opposed to slightly better as we previously thought. On a yearly basis, we expect foreign exchange translation to be a modest tailwind based on year-to-date currency performance and where spot rates are currently. Taken on the whole, this quarter's revenue performance is well aligned with our previous guidance, and it continues to reflect the key themes that we've been talking about in our public communications prior to the spin-off. Looking through the LOE issues that are waning, we are seeing volume growth as we expected, mainly driven by our key growth businesses, Women's Health and Biosimilars. We're also seeing volume growth geographically in China, infertility, and established brands ex-VBP. Turning now to other guidance items on Slide 14, we're affirming all of the guidance that we provided at an Investor Day. We're updating shares outstanding, so that's now a fully diluted number. We expect weighted average, fully diluted shares to be about 254 million for 2021. To reiterate what we said in May, we expect gross margin to be in the low to mid 60s range. We expect SG&A expense to be in the range of mid-20% of sales. We expect R&D expense to be in the mid-single-digit range as a percentage of revenue. What this really represents is mostly R&D infrastructure and a relatively small amount of variable spend on the organic lifecycle management opportunities that we're planning to undertake for products currently in the portfolio. As we fill out a pipeline, our R&D expense would rise to support these programs, and we expect some of that to occur in 2021, but not by enough to revise the guidance range that we gave previously. So taking all this together would put us on an adjusted EBITDA margin in the range of 36% to 38% for 2021. We expect the back half of the year margins to be lower than this range based on the phasing of spending, and this is primarily related to delayed spending due to COVID, as well as the timing of spending for lifecycle management programs, the integration of Alydia Health, and some other investments that we're planning that are intended to drive revenue growth in the future. Below the line, interest expense for 2021, again as if we were a standalone company since the beginning of the year is expected to be approximately $400 million for the year, which reflects our new debt structure as a standalone company. Depreciation is expected to be in the range of $100 million to $115 million, and we expect our ongoing non-GAAP effective tax rate to be in the range of 17.5% to 19.5% with book and cash taxes being roughly similar. Wrapping up the financial discussion, the franchises are progressing as we have expected, and given our outlook for 2021 we continue to believe that we're well positioned for future organic revenue growth in the low- to mid-single digits on a constant currency basis. This will be driven by stabilization in the established brands portfolio and continued growth in both women's health and biosimilars, each of which has the potential to grow at low-double digit CAGRs in the intermediate term. At this point, I'll turn the call back to Kevin for closing remarks.

Thank you, Matt. And I just want to stress that we're very early in our journey, but we're off to a solid start. Today, we reaffirmed our outlook for 2021, and we continue to feel very well positioned to deliver low- to mid-single digit growth off of our 2021 base of business. In closing, I'd just like to say we're building something special at Organon. They're early in the stages of building a unique and differentiated ESG approach in the company. We take diversity inclusion and equity initiatives very seriously, and we believe our board, which has the most female representation of any S&P 500 Healthcare Company today, will play a key role in our future success. When we launched our company back in June, we also launched a commitment to listening and understanding women's healthcare needs throughout the world, so we can find new solutions to address those needs. It is a purpose that permeates throughout the entire company in our culture, and we believe it creates value across the spectrum of Organon stakeholders. Now we'd like to open up the call and take your questions. Thank you very much.

Hi. This is Terence Flynn. Thanks for taking the questions, and congrats on your first quarter as a public company. I was just wondering, it's a two-part question: first, if you could elaborate further on your business development strategy in women's health. I'm assuming the deals with ObsEva are indicative of the deals you're looking for, but maybe you could give us a little bit more color on the universe of opportunities and what that looks like and how you're thinking about the pacing moving forward? And then the second question I had is just on the dividend – outlook for dividend growth. How are you thinking about that, or is it simply going to be anchored to a payout of free cash flow? Thanks.

Thanks for your question, Terence. I'll take the first question and then pass it over to Matt to deal with the second question on dividends. You're right; as we mentioned during our Investor Day, as well as our various equity roadshow discussions, we're looking at, as we say in baseball parlance, singles and doubles, and ObsEva fits perfectly in this area. Having said that, we've done a scan a couple of years back, and we identified probably about 140 assets in various stages of development around the world, where we could actually use some of our balance sheet capital to be able to go out and make some meaningful acquisitions. We're working because as I mentioned several times, unmet needs are significant out there in a number of different areas for women, in areas specifically affecting women. So there's plenty of opportunity for us, and stay tuned; we're in discussions right now with more to come.

And on the dividend, we thought very carefully about where to set the dividend in terms of balancing our desire for shareholders to participate in the cash flow generation of the business while making sure that we retain enough cash flow to support our growth programs. So the target of the low-20% of free cash flow strikes the right balance, and we expect that the dividend will grow in conjunction with our growth of free cash flow.

Hi, good morning. Thanks for taking my question. Could you comment on the COVID recovery on your key products and can we expect contraception to be offset by fertility in the near term? And then longer-term, do you have any comments for the outlook on fertility in China and the U.S.? Thank you.

Matt, do you want to take that?

Sure. We have seen a COVID recovery in the business in Q2 versus this point last year, and let's remember at this point last year was really sort of the depth of the issue in terms of patients accessing healthcare systems in the United States and many countries around the world. We were on lockdown. We have seen COVID rebound. In the business, we've seen it more in infertility than in contraception. As we stated in the prepared comments, fertility patients for a number of reasons are more motivated to return to the clinics versus patients seeking to initiate or rollover contraception. We do think that there is more COVID recovery to be realized in the businesses depending on the progression of the Delta variant and any other variants that may come. We've seen some encouraging results regarding the COVID rebound, both for fertility and across solid portions of the established brand portfolio, but we are looking for more as the pandemic recedes.

If I could just add to some of the points that Matt made, and I'm sure we're going to get into discussions on the Nexplanon and some other issues down the road, but in terms of fertility, because that was a focus of one of your points in your question, it has significant growth in the quarter. It really anchors our women's health focus. Q2 was 59% growth versus Q2 2020, and year-to-date, we've got 46% growth versus year-to-date 2020, and we're significantly outpacing the fertility market growth. The market's growing at 35% and we're growing at 46%. So very positive signs for our fertility efforts and what we're doing. And remember that overall behind what's going on here is there's a movement. I mentioned China and its three-child policy, Japan, and soon IVF reimbursement soon to begin, and France in terms of egg freezing as well as same-sex couples reimbursements, more reimbursements from U.S. employers for single parents like in the EU, recognizing the need to address declining birth rates. We're very bullish and focused on fertility, an important area of focus for us, and we'll continue to see the kind of double-digit growth we've always expected from it.

Thank you.

Thanks for taking the questions. Good morning, folks. On the revenue guidance, can you speak to the pushes and pulls that could get revenue to the high end versus the lower end of the range? The pandemic is clearly an unknown, but what other pushes and pulls would you call out that are important to consider for the second half? My second question is on biosimilars; etanercept and Brenzys are facing greater competitive intensity in the EU. I think you’ll have some challenging year-over-year comps in the second half of those products. The biosimilar business is an important part of your growth strategy. So how should we think about growth in the second half, and what will be the key growth drivers for that business ahead of the biosimilar launch in the U.S. in 2023? Thank you.

I'll take the first part of the question, Kevin, with the push and pull – low end of guidance, and then you can cover biosimilars. We feel very good about our full-year revenue guidance at $6.1 billion to $6.4 billion. The biggest source of variability in terms of where we land in there is the progression of the pandemic. We believe we have a good handle on most other key drivers, whether it's LOE impact, China VBP. Whether we end up at the high end or the low end, I think, will really be driven by the progression of the pandemic and where FX rates may go, let's not forget that 80% of our revenues are outside the United States, and we report in U.S. dollars. So there can be cases where foreign exchange translation and it's just a reporting impact, not an economic impact per se, can drive our reported numbers, even though we may end up close to our expectations in local currencies.

Yes. Great question, Greg. Just to clarify, we do not have the Samsung Bioepis anti-TNF business in Europe that is essentially part of Biogen's business there. What I will say is we are clearly doing well in biosimilars; in Q2, we had 35% growth and year-to-date it's 23% growth in spite of obviously the COVID. But we see, for example, going forward the fact that RENFLEXIS in the U.S. is doing exceptionally well. Ontruzant just recently launched and Aybintio has been recently launched in the EU where we continue to do well, because we are the oncology biosimilars in the EU. Our biggest product potential is HADLIMA, which is the Humira biosimilar that's going to be launching in 2023. We expect to be second on the market, where there is our own citrate-free high-dose availability, which we are very, very bullish on.

Hi, good morning. It's Matthew Harrison. I was hoping that you could just comment more broadly as opposed to just this year, but the longer-term outlook on VBP pricing and the impact that it can have on the business, especially for Nexplanon. Thanks.

Sure. I can handle that, Matt. We're very enthused by the performance in China currently; in Q2 we got essentially 12% reported growth and year-to-date it’s 3% reported growth. Remember, four products – key products – the largest batch we’ve had were included into the volume-based procurement process in Q4 of 2020. Through the second quarter, we already stabilized the business showing volume growth in revenue growth. We're really excited as well about the overall retail performance. I mentioned on several occasions before that the retail focus we started in 2017 is important because we saw that the VBP would be an issue. Our performance in the retail sector in Q2 has grown almost by 30% and now accounts for nearly 45% of our established brands business in China. I also mentioned fertility; by the way, just take this opportunity to say that fertility grew 70% in the second quarter, and just as a reminder, the fertility franchise is not subject to volume-based procurement and is a 100% cash-pay business. Our portfolio in China right now – 60% of the established brands business has gone through the volume-based procurement process. 10% will not because it's really fertility driven. 30% is remaining. 20% of that 30% will go through in 2022, and the remaining 10% will come in the outer years. We have a diversified business. Volume-based procurement is in terms of China; no single product represents more than 20% of our business. We have a well-diversified business and we have a business that's moving quickly to the retail channel because we've had experience in this for the last five years. We see that in the outer years, we have potential exposure, which could happen in 2023 approximately, affecting about 40% of our business there, but it's already folded into our forecast discussed during our May Investor Day.

Hi guys. Thanks so much for taking my question. Kevin, if a large business development opportunity were to become available, something of the scale of, let's say, the Biogen-Samsung JV, or a large women's health business from one of the pharma companies, what can you speak to in terms of your ability to engage in something like that, especially early on being a public company? Are you constrained in being able to use equity or not? That's the first question. Secondly, I know there is a lot of investor interest in figuring out what the true growth drivers are, perhaps beyond biosimilars going forward. One of the points I've thought about is what's your ability to engage with Merck on the possibility of using Nexplanon device IP for substituting other women's health generic products in there to create a new sort of Nexplanon 2 and Nexplanon 3 kind of thing, new offerings using that device, given the physician comfort with that device. Can you speak to that and any programs ongoing? Finally, where are you guys on microspheres versus Nexplanon IP side? I know you'd lost a couple of cases, but it's also been my sense that you're starting to align. Should we expect microspheres to be a non-issue for Nexplanon from a damages perspective going forward? Thank you.

Thanks. Let me try to address those points. From a business development perspective, of course, we're always looking for what we feel is going to be a really important contributor to the type of business we're doing. We are executing currently exactly on our strategy, which is essentially, as I mentioned, there are many assets out there that really are looking for homes, given the significant unmet needs, and we believe we can start to aggregate some of these women's health assets that are unique in terms of what they provide as solutions for some of the significant unmet needs that women face around the world. Right now, the way that we've executed on that strategy is what I believe is spot on for what we wanted to do; keep in mind we're two months into our launch and spin. We've already done two deals, which shows our seriousness, but to your point, if something attractive with the right evaluation and focus presents itself, of course, we're going to look at that seriously, but nothing of that nature is something we're considering right now. We're considering more of the same of what you've seen from us over the first two months. In terms of Nexplanon raw technology, of course, we're always in very close coordination with our Merck colleagues, and right now we don't have anything in the pipeline using that raw technology for anything else besides what we're doing today, which is essentially moving from three years to five years in our lifecycle management development for Nexplanon. We hope this will give us an opportunity to extend the life of Nexplanon to 2030, making it available to many more women who really need and want something with that long of horizon in terms of efficacy for five years. Finally, in terms of microspheres, we feel very solid and confident in our position there. I can't comment on ongoing litigation, but we feel very optimistic about where we stand right now with that potential issue.

Thank you. In the second quarter, there was a $20 million contribution from other. Can you elaborate on what other consists of? Secondly, has Organon done the studies necessary for your Humira biosimilar to be substitutable? Finally, does Organon have any new molecular entities in development from legacy Merck in its existing pipeline? Thank you.

I can take the first part of that question, Kevin. The $20 million in other is principally supply sales to Merck. As part of the separation, we inherited six manufacturing facilities in their totality, and some of the activity at those sites is related to Merck products, which will continue under an NSA manufacturing services agreement. So that's what shows up in the other bar.

In regards to your second question about the interchangeability focus, our partner Samsung doesn't feel that interchangeability is a key issue right now, and most of the biosimilars up for FDA review, ultimately, and hopefully approval in the timeframe that we stated do not have interchangeability as an important issue. The primary focus is really on the citrate-free and high-dose focus of our product availability; that is key, as that is what qualifies us as a true biosimilar since the originator for Humira has citrate-free and 100 milligrams available. We are very confident that we'll be in a position to enter market second; it is our biggest opportunity, and it's obviously a pharmacy-dispensed product which serves as a good proof point for the value proposition of what biosimilars can bring to market. Regarding your last point about new molecular entities, no, we did not get any new molecular entities from Merck. We're building our pipeline out, as I mentioned, and there is plenty in the hopper in terms of our business development strategies and focus on what we can do with our cash flow. The proof is in the two deals we've done in the few months since we spun.

Last question we had in queue. Thank you, everybody, for joining us today. The team looks forward to engaging with you throughout the quarter.

Thank you.