Organon & Company (OGN) — Q3 2021 Earnings Call Transcript

Thank you, Carly. Good morning, everyone. Thanks for joining our third quarter 2021 earnings call. With me today are Kevin Ali, Organon Chief Executive Officer, who will cover strategy and operational highlights. And Matt Walsh, our Chief Financial Officer, who will review performance guidance and capital allocation. Today we'll be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call on the events and presentations section of our Organon Investor Relations website at organon.com. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements. Actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our Form 10 registration statement and subsequent periodic filings. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation. I'd now like to turn the call over to our CEO, Kevin Ali.

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

Before we dive into the specifics of our financial performance, let's start briefly with the basis of presentation and make sure we realign on exactly what numbers we're looking at, where we have apples-to-apples comparability. On the plus side for an entire quarter of stable loan results. As I discussed in last quarter's call, our results prior to the June second spin-off date are presented on a carve-out basis of accounting. Carve-out accounting is a GAAP convention, which has a lot of positives; however, it's not intended to present results as if Organon were a standalone company. So I want to be clear as we discuss results for this quarter and for the next three quarters, that any comparisons to prior-year periods will be somewhat apples-to-oranges, and that we'll be comparing Organon's standalone performance to pre-spin carve-out basis of accounting. With that said, where we'll have the best comparability is at the revenue line. So I will focus attention at the top line as we discuss our performance. So turning to Slide 8, revenue for the third quarter was $1.6 billion, down 1% as reported, and down about 3% at constant currency exchange rates. The change in revenue has significant impacts, primarily related to the LOE of Zetia in Japan and NuvaRing's LOE in the United States. Continuing to read across the waterfall chart, the established brands portfolio has exposure to volume-based procurement in China. The third quarter of last year was approximately $60 million and was associated with the third round of VBP. The largest round so far, which occurred in the fourth quarter of 2020, included four of Organon's products. Singulair Pediatrics, Proscar, Propecia, and Arcoxia. In the third quarter of 2021, the negative impact of COVID-19 was estimated to be approximately $100 million, which is about $20 million above the third quarter of last year. Our product portfolio is comprised of physician-prescribed products that have been inspected by the shortage of qualified personnel, social distancing measures, and delayed medical visits. In the third quarter, we continued to see lingering effects from COVID as compared to the year-ago quarter, including, as Kevin just mentioned, a slower return of well visits, which particularly impacts NEXPLANON. We continue to observe restrictive measures that vary by country and region, so we expect to see some further lingering negative impacts from COVID persisting into the fourth quarter. Although we believe we're starting to see encouraging trend developments in U.S. NEXPLANON early in the fourth quarter, which could be pointing to stronger sequential performance in Q4 versus Q3. Foreign exchange translation had about 200 basis points of favorability for the quarter. Year-to-date, that impact is more pronounced at about 350 basis points; it's not really surprising given the impact of COVID-19 on global currency markets in the prior year period and also understanding that about 75% of our revenue is derived outside the United States. And finally, on the plus side, we saw volume growth in Q3, mainly driven by growth in China, in U.S. biosimilars, and in Europe with established brands. Now let's look at performance by franchise, and we'll start with women's health on Slide 9. Our women's health business was down 10% as reported, and 11% at constant currency in the third quarter versus the prior period. NEXPLANON declined 8%, excluding foreign exchange, in the quarter. As Kevin mentioned, well visits are not yet back to pre-pandemic levels in the U.S., and NEXPLANON sales are largely tied to that metric. So we know the question on investors' minds is can NEXPLANON have a $200 million revenue quarter in Q4? And while we don't provide specific guidance, I can leave a directional answer. Based on current visibility into the data, we do see the fourth quarter as being favorable for U.S. NEXPLANON. And there are three reasons why. Third quarter negative growth should be considered in the context of Q3 2020 being a tough comparison from the standpoint that in September of last year, we saw a short-lived resurgence in patient well visits that positively impacted third quarter 2020 NEXPLANON sales. There has been volatility in the trend of patient OB-GYN well visits over the last year. But for the third quarter of last year, those visits were almost back to a pre-COVID baseline, and Q3 2020 NEXPLANON sales were the highest since the start of the pandemic. So the message here is that the third quarter of 2020 was a tough comp for NEXPLANON. The second reason relates to the phasing of revenues within this year. There was a tender that we were expecting in the third quarter in Mexico that was delayed and has now become signed business for us in the fourth quarter. The third and final reason goes back to what Kevin said about our NEXPLANON direct-to-consumer campaign in the United States, which began running this summer. It's starting to show results now, as well as other new digital campaigns that are raising brand awareness for NEXPLANON and driving sizable increases in our website traffic by potential new users. Beyond NEXPLANON, also pressuring women's health this quarter was the continuing and expected decline in NuvaRing, which was down 17% excluding foreign exchange in the quarter related to increased generic penetration as a result of the product's LOE in 2018 in the U.S. On a positive note, our fertility portfolio continues to show strength. Follistim grew 18% excluding foreign exchange in the quarter. Volume growth came from an increase in demand from new accounts, as well as from patients returning to clinics. Our observation has been that patients seeking fertility treatments are more motivated to return to doctor's offices than those patients seeking normal course OB-GYN. Turning to biosimilars on Slide 10, biosimilars grew 41% as reported in the third quarter, and 39% excluding foreign exchange. We have five assets in the portfolio, three in immunology and two in oncology. RENFLEXIS and ONTRUZANT are our two largest offerings and both are offered in the U.S. Globally, RENFLEXIS grew 43% excluding foreign exchange 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 47%. The Biosimilars business outside the U.S., which represents about half of our total Biosimilars revenue, is tender-driven and therefore is more price-sensitive. The timing of tenders can also make this business somewhat lumpy, and we benefited from that in the third quarter. So while we're coming off two quarters of about 40% year-on-year revenue growth on biosimilars, we see some moderation of that growth rate for the remainder of 2021, resulting in solid double-digit revenue growth year-on-year. I now turn you to established brands on Slide 11. Revenue for established brands was down 6% as reported and 8% excluding foreign exchange in the third quarter of 2021. Excluding the impacts of LOE, revenue was down 4% excluding foreign exchange. Volumes were up incrementally, mainly driven by COVID rebound, although not as strong as it was in Q2, as well as growth in China retail. Price was down above 5% across the established brands portfolio. It's counterintuitive to investors to hear that in the third quarter, more than 50% of established brands revenue came from products for which volumes grew. These brands are well-known; they respond to promotion. We're actively managing life cycle opportunities across the portfolio. These factors support our May Investor Day discussion that we expect erosion in this portfolio to be in the low single-digit area, excluding LOE over the intermediate term. China is an important market for established brands, and part of our strategy in this market has been to drive volumes into the retail channels versus our historical presence in the hospital channel. This effort continues to be successful. The retail channel in China grew 20% in the third quarter versus the prior year and now represents almost 50% of established brands revenue in China, up from approximately 35% a year ago. Now, turning to our income statement on slide 12. Our GAAP income statement for Q3 and year-to-date are available in our earnings release, and I encourage investors to look at that important information. Here on Slide 12, we will be looking at our non-GAAP income statement for these same time periods. For gross margins, we are excluding purchase accounting, amortization, and one-time items related to the spin-off from cost of goods. So making these straightforward adjustments in the third quarter of 2021, the non-GAAP adjusted gross profit was $1 billion, representing a gross margin of 64.9%, compared with 68.6% in the third quarter of 2020. The decline reflects costs associated with standing up Organon as an independent company, including certain costs related to manufacturing agreements between Organon and Merck, which have lower gross margin percentages compared to product sales. Those manufacturing agreements had an approximate 180 basis point negative impact on gross margins in the third quarter. Also included in cost of goods sold this quarter was a $24 million one-time cost related to estimated losses associated with a vendor supply contract conveyed as part of the spin, which had a 160 basis point negative impact on gross margins. There were some spin-related accounting items that partially offset this unfavorability, but this quarter's gross margin is a good example of where we have apples and oranges comparability issues with prior-year comparisons and why our 2021 guidance becomes a much more useful yardstick for investors. That said, our gross margin for the third quarter was squarely aligned with the guidance that we've communicated in the low to mid-60 percent range. Adjusted EBITDA margins were 39.8% in the third quarter, which brings year-to-date margins to 38.9%. We had told you last quarter that we expected second-half EBITDA margins to be lower than the first half. The reason our EBITDA margins are running stronger than we forecasted is driven by lower operating expenses, and this is mainly timing-related. We're onboarding our standalone operating expenses a bit more slowly than we thought in headcount costs, as well as promotional spending in certain markets. If you're doing back of the envelope math, you'd likely draw the conclusion that Q4 adjusted EBITDA margin would have to be markedly lower than year-to-date for us to finish within the EBITDA margin guidance range that we'll be discussing shortly. We do expect operating expenses to increase sequentially in the fourth quarter relative to the third quarter as the pace of onboarding some of these expenses speeds up going into year-end. Given the strong EBITDA performance in Q3, we did consider raising the adjusted EBITDA margin guidance range for the full year, but it would have been by a relatively small amount. So instead, we elected to just narrow the range and communicate to you a high and improved level of confidence in the guidance that we are affirming. A few words on debt capitalization. As of September 30th, our bank debt stood at $9.3 billion, while our cash and cash equivalents were $1 billion. Within that cash balance, approximately $320 million is designated for finished goods inventory purchases from our former parent, related to the spinoff transaction. Therefore, the more accurate net debt figure as of September 30th is around $8.6 billion. If we apply the implied midpoint of our 2021 EBITDA guidance for illustration, our pro forma net leverage would be approximately 3.7 times, representing a slight improvement in the leverage ratio compared to the previous quarter. Additionally, our estimated cash flow for the third quarter confirms that we are on track with our pre-spin forecasts and reflects the cash-generating capabilities of our business. Our priorities for capital allocation remain consistent with what we communicated before the spin-off, and we are reaffirming them today. Now that our board has established a dividend, the dividend becomes our first priority. We're targeting the dividend at a low twenties percentage of free cash flow, excluding one-time costs of the separation, a level which we believe is very manageable. Our second priority will be organic growth. And that would include lifecycle management opportunities for existing products within our portfolio, supported by capital deployed in our manufacturing plants. On the latter, we expect to see annual CAPEX in the range of three to four percent of revenue on an ongoing basis, once again, excluding separation costs. Our third priority for capital allocations is really tough, it's a tie between execution of external growth plans to develop a pipeline of new product opportunities, like you've seen already with Alydia Health and the Jada System, the investigational Ebopiprant for preterm labor, and now Forendo targeting endometriosis. We'll balance that against debt reduction in our commitment to maintaining our BB/Ba2 parent rating. We are targeting a long-term leverage ratio below 3.5 times net debt to adjusted EBITDA. Turning to guidance on Slide 14. Consistent with previously provided indications, this guidance is all non-GAAP and pro forma as if the spin-off happened on January 1st of this year. Beginning with revenue, this is a chart we showed at Investor Day, and changes to incentive are really focused on margin. Based on where we are in the year, we are narrowing our full-year 2021 revenue range from $6.1 billion to $6.4 billion to $6.2 billion to $6.3 billion. This revenue is essentially all organic. We do include a de minimis partial year revenue contribution from the acquisition of Alydia Health. The biggest component to the year-over-year change in revenue is the expected LOE impacts. In fact, our LOE were approximately $280 million year-to-date primarily related to the loss of patent protection for Zetia in Japan and NuvaRing in the U.S. We continue to expect the full-year LOE impact of approximately $300 to $400 million. As we've been careful to describe previously, 2021 is an inflection year for Organon regarding LOE impacts. After 2021, our LOE exposure dissipates to approximately $300 million cumulatively over the next four years, combined from 2022 to year-end 2025. We now think our VBP exposure in China for the year will be on the low end of a $200 million to $300 million range we previously communicated. Year-to-date exposure has been about $150 million, and we have a fairly good understanding of what will be included in the next rounds of VBP, which is likely to include additional products. COVID is something that we're obviously watching very closely. We updated our view on the COVID impact last quarter to expect that our total year impact from COVID in 2021 would be about even with what we experienced in 2020, which was about $400 million. Year-to-date 2021 impact from COVID was $320 million, and given the recent trends that we've seen in NEXPLANON prescriptions, we are comfortable with that implied estimate of about $80 million of COVID impact in the fourth quarter. On a yearly basis, we expect foreign exchange translation to be a modest tailwind based on year-to-date currency performance and where spot rates are currently. Finally, we've tweaked this bucket down a hair, and this is mostly tied to my earlier commentary on biosimilars and the lumpiness of tenders quarterly. Taken as a whole, year-to-date revenue performance is largely to be expected despite the uncertainties introduced by COVID. The key themes that we've been discussing in our public communications prior to the spin-off, and since the spin-off remain very much intact. Those are LOE issues that are weighting, women's health, especially fertility, and biosimilars that are delivering growth, and China, which is performing very well despite VBP headwinds. Turning to other guidance metrics on Slide 15. The message here is that for all the items shown, we're affirming prior guidance from most metrics. For revenue and adjusted EBITDA, we're simply narrowing the ranges in light of where we are in the fiscal year. Reiterating the point I made earlier, during 2021, we've on-boarded operating expenses more deliberately than we had forecasted. We're not yet at our run rate for SG&A expenses in an independent company. We know R&D expenses will be increasing in 2022 and beyond as we add pipeline assets. And I'd say this more as we start to look forward to next fiscal year, and we will provide quantitative guidance for 2022 when we report our full-year 2021 results in February. Wrapping up the financial discussion, the franchises are progressing as we had expected. 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 rates in the intermediate term.

Thank you, Matt. Again, we are very pleased with how our year has been taking shape. Organon is very well diversified geographically and therapeutically. Our mix of business is uniquely aligned to our future vision. Additionally, timing is in our favor as we move out from the negative impacts of the LOEs and can focus on building out our vision. Further as the pandemic starts to recede, we have doubled down on our operational investments behind NEXPLANON in the U.S. to ensure that we meet her where she is. We have started to see very positive impacts of those investments in the first weeks of the fourth quarter. We've been very disciplined in our business development plans and have acted on three attractive assets. Two of them are earlier-stage products with significant downstream opportunities, as well as the recently commercialized device in JADA, which is helping to address a significant unmet need. All in all, we're very pleased with our third quarter performance, and all the evidence points to a solid fourth quarter to finish off the year. So now we are happy to take your questions. Thank you.

I think we can queue up the first question.

Great. Thanks so much for the questions. My first one was just on EBITDA margins as we think about it going forward. I guess given some of the comments you're making about the timing of onboarding and the R&D step-up gears directionally help us in '22 in doing formal guidance yet, I guess at a high level, I assume we shouldn't use Q4 as a run rate for margins. But when we think about year margins for next year, is it fair to think about those coming down a bit from '21 as again, it sounds like SG&A comes up, R&D comes up. So just any directional before that I think would be very much appreciated. And then my second question was just on the pipeline build-out, you've done three deals this year. Should we think about these types of transactions which seemed like there are some R&D elements to them. They seem a bit smaller in size, as kind of the sweet spot in terms of acquisitions, both near and long-term? Or do we think about deals starting to skew towards larger transactions as you deliver, like if there weren't capital constraints right now, would you be also mixing in some larger deals? Or again, are these types of transactions more of the go-forward to think about? Thanks so much.

I will start with the EBITDA margin question, Chris. This is a sensitive topic since we're not providing guidance for 2022. I want to be clear about that. However, to provide some context, the earlier comment you made was accurate. Let's revisit some of the prepared comments that address this question. We know that R&D expenses will increase in 2022 to support pipeline assets, which we believe is crucial for the company’s future sustainable revenue growth. Therefore, you will see an increase in R&D expenses. We have been very cautious about how we are adding costs in the SG&A line to align with what we believe our run-rate expenses are. We analyze every dollar we add very carefully. That said, you mentioned that it appears the 2022 EBITDA margin is likely to be below the guidance for 2021, and I think that’s a fair point. You also asked how we should consider the fourth quarter EBITDA margin regarding 2022. It might not be as low as that, and I think that's also accurate. I believe it’s best to leave it there for now. We will provide clear, quantitative guidance in February.

Chris, regarding your second point, we've been actively working on these assets for over six months to a year, identifying and reaching out to potential targets. We've been very disciplined in our approach to business development. Earlier in our Investor Day, we indicated that we plan to focus on smaller opportunities, as we've identified significant unmet needs, such as postpartum hemorrhage with Jada's solutions and preterm labor with ObsEva's product. We're also very enthusiastic about the Forendo acquisition, which introduces a new treatment approach for endometriosis, affecting approximately 170 million women worldwide. We recognize great potential there. Currently, there are about 140 assets at various development stages, but I want to clarify that we are not dismissing larger deals. We are open to any opportunities that will be most beneficial for our company. For now, we are focused on what we see as low-hanging fruit to strengthen our portfolio and establish ourselves as leaders in women's health.

Thanks so much.

Hi. Good morning. Can you discuss your expectation among the recovery of contraception visits and NEXPLANON and when do you expect to see any training programs to benefit NEXPLANON sales? And then my second question is around the cash balance, which was higher than I expected. Can you discuss the free cash flow generation this quarter and going forward? Thank you.

So let me take that first question. It's very important regarding the performance of NEXPLANON. The thing to keep in mind is that we truly believe that NEXPLANON will be a blockbuster for all of us. We have patent protection until 2027 with an opportunity to extend it to 2030 as we start to round out and look at our five-year extension data that will possibly come through and report out in the 2025 time frame. Having said that, we've truly invested in the operational opportunities in the U.S. And I'd like to point out three key investments and then ultimately, I'm going to answer your question by going through that. Clinical training programs, these are essentially just to keep you in mind that physicians or healthcare providers need to be certified and trained on how to insert and remove NEXPLANON in order to be able to prescribe the product. Prior to the pandemic, the market averaged about 18,000 certifications per year. Since spin, that would essentially be June through September, we've done 10,000 certifications. We're essentially averaging in the second and third quarters nearly 13,500 certifications. That is a significant proxy for NEXPLANON uptake and performance going forward. Direct-to-consumer marketing, we've invested in direct-to-consumer initiatives, initiated a TV and social media campaign with a well-known celebrity. More importantly, real-world users of NEXPLANON have indicated that two observations, Unaided awareness of NEXPLANON has increased when compared to the prior three months, and our organic searches for NEXPLANON information have increased, as we've made significant improvements to our nexplanon.com site, where we expect to see about 7 million unique visitors every year. Finally, representative activity has increased as the COVID pandemic recedes over the last three quarters of 2021 versus the three quarters of 2020. Our representative calls face-to-face have increased by 60%. All of that is leading to the fact that right now in the first five weeks of Q4 performance, we see sales increasing strongly in double digits. We expect the fourth quarter to be a very strong quarter for us and NEXPLANON. As I've always been saying, as we start to invest in senior management attention, we will see NEXPLANON start to ramp up and fulfill its potential in addressing unintended pregnancies in the U.S. and beyond. Regarding the second part of your question about free cash flow, the reason we included Slide 13 of the earnings deck in the format that we did was so that investors could triangulate back to what the third-quarter operating cash flow was and free cash flow. And so now the question is, is that figure for operating cash flow representative? I would tell you there are one-timers running through that, but they're netting out, and the Q3 operating cash flow figure is really pretty representative of what the company should do. That said, I put that in my prepared comments to say that the cash-flow-generating performance in Q3 is well aligned with what we had forecasted. So that much I can say for this fiscal year, and I'll refrain from making any free cash flow commentary for 2022 at this point.

Hi guys, thanks for taking my few questions. Not one question today. I thought it would be helpful to focus on the latest tuck-in that you guys announced on Forendo, just given the potential optionality. So if I may, perhaps a few quick ones: one, could you speak to endometrial thickness changes you saw in Phase 1B? Secondly, can you also speak to any ECG changes and/or hypertension with this molecule so far? Third, perhaps just a selectivity for 17B, HSV-1 versus 11 beta or other one. And finally, would you potentially intend to develop it in oncology indications as well? Thank you so much.

Thank you for your question. We are genuinely excited about the Forendo announcement and the potential acquisition going forward. When it comes to endometriosis, it's significantly under-researched, underfunded, and often misunderstood, with women typically facing an average of eight to ten years before receiving a diagnosis. In response to your inquiries about endometrial thickness, we are just beginning our Phase II proof-of-concept studies. We anticipate sharing updates in the 2024-2025 timeframe, with commercialization of this product, assuming everything proceeds well, targeted for 2027-2028. We will continue to revisit this topic as we gain a deeper understanding of the data involved. Currently, endometriosis treatment primarily involves pain management and symptom control rather than addressing the root causes. For instance, GNRH functions systemically at the pituitary level, halting all signals to the female reproductive system, which effectively induces menopause and results in various bone density issues. Consequently, its use is limited to the short term. FOR-6219 is aimed at the estradiol pathway, specifically affecting the conversion of estrone to estradiol, which is crucial for endometriosis and its related symptoms, including inflammation, pain, and bleeding. We are very optimistic about this mechanism, as it holds promise for both disease modification and symptom management directly at the affected site. Regarding endometrial thickness and any ECG or cardiovascular concerns, we will provide more information as we analyze the data further.

Thank you. I have a few questions and then an observation. First, under the drug price for foreign proposal reimbursement for Part B drugs would go from ASP plus 6 to ASP plus a thousand dollars. This would seem to potentially encourage prescribing biosimilars over more expensive brand drugs. Can you put some numbers on that? To what extent could biosimilar usage increase simply due to reimbursement changes, or do you think that it's not correct that biosimilar use will not be encouraged by any reimbursement change? Second question is on the acquisition of Forendo. The total consideration of $954 million seems strikingly high. How much is that attributable to the lead asset versus the follow-ons? And what happens with the existing collaboration with NuvaRing for chronic liver disease? Lastly, the observation: For a company that has a core strategy of business development, I'm surprised that business development is third or even last on the capital allocation priority list. Thank you.

Let's address the capital allocation question first. The business currently generates strong cash flow. Both our former parent, Merck, and our Board of Directors believe that investors should benefit from this cash flow in real-time. During a crucial period around the spin-off, the company's valuation emphasized the importance of the dividend in achieving the appropriate value for the company, which is why it was instituted. Once established, the dividend becomes the top priority. Organic growth projects rank second because these involve products already in our portfolio with a proven track record of safety and performance. Introducing these products to new markets or for adjacent indications typically presents lower risks and attractive returns on investment. This approach does not significantly consume capital overall. With the dividend being relatively modest and manageable, along with the organic growth plans, we still have a substantial portion of our operating cash flow available for business development initiatives. Regarding the Forendo deal, of the total $954 million consideration, $600 million is tied to commercial milestones, meaning the product must succeed commercially for the majority of the deal's value to be realized. The consideration includes around $84 million upfront and approximately $270 million of clinical milestones. We structured the deal to minimize dependence on back-end payments based on commercial success. The primary value is associated with the lead candidate. Regarding biosimilars, we view the ongoing discussions in Washington as positive for this area. While it's challenging to quantify the impact on Organon at this time, we will clarify this when we provide guidance for 2022. Overall, we see the dialogue in Washington as favorable for our biosimilar portfolio.

Thank you.

Good morning, folks. Thanks for taking the questions. Just following up on your comments around NEXPLANON. Would you intend to suggest that $200 million plus of sales in Q4 is achievable given the positive drivers that you mentioned? And then on endometriosis, clearly an area of women's health that need Forendo's assets appears promising; it's relatively early development. Do you see that it makes sense to have multiple shots on goal for endometriosis, or is this an area that deserves more focus?

You want to take the first question?

I believe that achieving over $200 million in sales for NEXPLANON in the upcoming quarter is possible. While we typically refrain from making strong predictions for future quarters, especially at this stage, we wanted to address any potential interpretations of the Q3 results we just released for NEXPLANON. We view this as a positive trend for NEXPLANON moving forward. Therefore, we are confident that $200 million is a realistic target for NEXPLANON's Q4 sales.

Greg, to your second question in regards to endometriosis and shots on goal, Forendo does have backup compounds to the lead 6219 compound. We feel very excited and extremely thrilled that we were able to work with Forendo and potentially acquire this company for this very exciting asset. We look forward to being able to continue to develop this product. Of course, they've got very exciting earlier-stage assets, not in humans yet in terms of PCOS, which is another significant unmet need. I just want to reiterate that we started this journey saying that there were significant unmet needs in women's health across the globe. This is the right time for a company like Organon to be born to take on those challenges and resolve issues like postpartum hemorrhage, preterm labor, endometriosis, and PCOS. This is the beginning of the journey in that respect, but we do hear you; Forendo does have backup molecules.

Hi. This is Ashville on for Jason. Thanks for taking our question. I just have one. In terms of contracting for biosimilars, how might that change in 2022? Do we expect to have a line of sight on this contracting as the company believes that the payers will look to up the deal in the first half to mid-'22, given the early entry post-buy in 2023? Thanks.

Are you referring to Hadlima specifically?

Yes.

Okay. There are ongoing discussions right now and it's early. We expect to launch in June of 2023 with our Hadlima, our HUMIRA biosimilar. It's going to be a busy year in 2023, but we expect to be second in line in terms of overall launching sequence, which is obviously a very important aspect in terms of the launch sequence. Right now, there are discussions. The unique thing about Organon is that the biosimilar team essentially moved over from Merck. They've been working for a number of years and have established great relationships with all the PBMs as well as their ongoing discussions with them. Remember, this is a pharmacy-distributed product, and it's going to move very fast, we believe, by the PBMs to take advantage of the biosimilar switch.

I just have two questions, please. One is can you discuss in a bit more detail the biosimilar price and volume dynamics going forward? The second question is regarding NEXPLANON's outlook. What would that look like in terms of the count, growth acceleration, and trend? Thank you.

Yes. So Charlie, those are good questions. Let me take NEXPLANON first. As we've said last May in our Investor Day, we believe that NEXPLANON is poised for strong double-digit growth. It was a double-digit growing product prior to the pandemic. We believe that will continue as soon as clinics start to reopen, as they are reopening now. That's why we made the investments we did, including clinical training programs and direct-to-consumer marketing and all the rep activities that are ongoing right now, and many other things in this space. Keep in mind that NEXPLANON only has about 5% market share, so there's tremendous room for growth going forward. We do have patent protection for some time in order to build this product out. It will be a billion-dollar product for us, and we feel very confident about that. As I mentioned, the first half of the fourth quarter looks very strong for NEXPLANON. This is tied to the fact that as women return to clinics, there are opportunities to fully utilize NEXPLANON. Regarding the second point you mentioned in terms of price-volume activity around HUMIRA biosimilars, we expect, unlike hospital products like infliximab and REMICADE, where the price tends to move in a lumpy fashion, account-by-account, we expect it to move very quickly. Not like small molecule erosion but nevertheless, it should move fairly rapidly in terms of price erosion with the loss of exclusivity of HUMIRA and moving forward in 2023, as you start to see all the launches of the biosimilars. You're going to likely see between seven to eight biosimilar launches in the first year of opportunities for biosimilars to enter the market. We expect to see significant erosion, but nothing like the small molecule type of erosion, and it won't be as pronounced as what you see, for example, in hospital dispense biosimilars that you see today.

Thanks. Just a couple more questions on biosimilars and this relates to Hadlima, but it's also a broader question. With ongoing discussions around interchangeability, how do you think about the role of interchangeability and what that means for your volume share of other products that don't possess interchangeability? So this is really not a question about price but more about value share given the interchangeability dynamics. The second question I have is on ex-U.S. established brands. Is there a good way to think about what might be steady-state pricing erosion, if any at all, could be over the long term? It's a business that admittedly is a little more opaque, so I'm wondering if you could help us get a window into your thoughts there. Thank you.

David, I'll address the first question regarding interchangeability, as I anticipated it would come up. Focusing on Hadlima rather than the HUMIRA biosimilars, you’re correct that Boehringer has conducted a low-dose interchangeability study. However, this represents a very small part of the market, with the majority being in the high-dose segment. We believe several factors are crucial, including order entry. We aim to be the second to market in June 2023, which is a significant aspect of our launch strategy. Ongoing discussions are taking place at the moment. A unique aspect of Organon is that our biosimilar team transitioned from Merck, bringing strong relationships with all the PBMs and engaging in continuous discussions with them. It’s important to note that this is a pharmacy-dispensed product, which we believe will be rapidly adopted by the PBMs looking to leverage the biosimilar switch. Now, let’s have Matt provide insights on established brands.

Yes. Just to ground you, Dave, approximately 92% of our established brand sales are outside the U.S. Across the entire portfolio, we see, let's say, over a planning horizon of four to five years, pricing declines of about 3% to 4% per year. Volumes across the portfolio are expected to grow about 1% to 2% per year. This supports our earlier commentary that we see the established brands business having a low single-digit CAGR in terms of glide path revenue over the foreseeable future.

Thank you for your very thoughtful questions. To wrap up today's call, I want to conclude by saying we are exactly where we want to be. At our first Investor Day in May, one month before the spin, we laid out our plan for delivering low-to-mid-single-digit organic growth. We are delivering on what we committed to. Women's health driven by NEXPLANON in fertility remains positioned for double-digit growth over the intermediate period. We are making the changes necessary to build the foundation for continued growth going forward. Year-to-date, biosimilars are already delivering double-digit growth and we expect that to continue throughout the planning period. We are stabilizing the established brands business with volume increases in more than 50% of our products, and we believe we have a pathway to sustain performance over the coming years. This portfolio serves as a cash generator contributing to the free cash flow that Matt referenced, enabling us to build out our pipeline with targeted and disciplined business development lifecycle management activities focused on our company's purpose to address significant unmet medical needs in women's health. With our three deals in the past six months, we have wasted no time in tackling areas where new innovation is sorely needed. We've commercialized the Jada device to address postpartum hemorrhage. We've launched in the U.S. with plans to bring it to the rest of the world as quickly as possible. We've licensed ObsEva's investigational preterm labor agent, a new mechanism of action in a space with few options. Our exciting deal announced today, the proposed acquisition of Forendo brings an early-stage asset with new mechanisms of actions being studied for endometriosis, plus earlier stage assets for PCOS. We also have a number of lifecycle management opportunities underway, including the potential for NEXPLANON's five-year label extension and many more. Overall, our company is shaping up just as we planned: sustainable, predictable, and on-strategy. Thank you, and we'll talk again early next year. All the best.