Organon & Company (OGN) — Q4 2021 Earnings Call Transcript

Thank you, Mary. Good morning, everyone, and thank you for joining our fourth quarter and full year 2021 earnings call. With me today are Kevin Ali, Organon’s Chief Executive Officer; and Matt Walsh, our Chief Financial Officer; Dr. Sandra Milligan, Organon’s Head of R&D, will also be joining us today for the Q&A portion of the call. 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 & Presentations 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 registration statement and subsequent periodic filings. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered as 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. And welcome to today’s call where we will talk about our results for the fourth quarter and full year of 2021. Let me start by saying that our team of 9,500 employees, our founders did what we said we would do in 2021. We achieved all the financial objectives we laid out at the time of the spin and also began to build on our existing portfolio to fulfill our vision of becoming a leader in women’s health. In 2021, we delivered on our financial commitments. Full year revenue of $6.3 billion and adjusted EBITDA of $2.4 billion, equating to just below 38% adjusted EBITDA margins and are above the high end of the tightened guidance ranges we provided last November. Importantly, in 2021, our growth engines, Nexplanon, fertility and biosimilars, all grew double digits, and we continue to expect double-digit performance from all three again in 2022. Now, we exited 2021 on a very positive note. In fact, the fourth quarter marks the first time in our product portfolio as a whole has grown. Sales of our portfolio of products that is ex-supply sales grew 1% in the quarter, overcoming the headwind from loss of exclusivity and the impacts from the Volume-Based Procurement or VBP initiatives in China. We’re encouraged by the progress we see in several key areas. First, let’s look at our Established Brands franchise. This is a portfolio of 49 products that includes brands with significant customer loyalty. We have said, once the impact of the most significant LOEs were behind us, that we can stabilize this business such that revenue would decline in the very low single digits, and that we would use the significant and durable cash flows to further invest in our growth engines. And that is exactly what is happening. In 2021, declines in the Established Brands business moderated and the franchise ended the year down 2% on both nominal and constant currency basis in the fourth quarter. In fact, all the therapy areas included in the Established Brands portfolio grew in the fourth quarter with the exception of cardiovascular, where the LOEs in the ezetimibe family are still washing through. Going forward, we will have significantly less LOE exposure weighing on our Established Brands business. But beyond that, there are several other reasons to believe in the durability of this portfolio. First, we have been successfully managing our business in China. China is an important market for us, representing about 20% of our Established Brands revenue. VBP is a business reality in China. And like other competitors, we must find ways to manage our business in China accordingly. Already, about 50% of our Established Brands portfolio has been put through the process with an estimated 40% in 2022 and the remaining 10% in 2023 and 2024. Despite the impacts of VBP, the Established Brands revenue in China was down only 2% for the full year in 2021 and was up 7% in the fourth quarter at constant currency. This performance is primarily due to our successful efforts of moving the business out of the hospital channel and into the retail channel, which started in earnest in 2017 and is paying dividends for us today as that channel has been growing double digits and now represents about half of our Established Brands business in China. There is also strong demand for our products in the hospital channel that are currently not subject to VBP, and those products have been growing double digits as well. Across all geographies we operate in, stabilization of the Established Brands is supported by the entrepreneurial attention we have given this portfolio. Since the spin, increased management focus often initiated at an individual country level has delivered growth through launches into new geographies and secondary retail channels across our dermatology, respiratory, non-opioid pain and cardiovascular portfolio. To date, we have implemented a dozen of these life cycle management opportunities worldwide. Another milestone in the fourth quarter was Nexplanon’s performance. Nexplanon posted its highest sales in the history of the product with $226 million in revenue. Now, I want to caution everyone that this is not Nexplanon’s new run rate. Nexplanon’s growth can vary quarter-to-quarter. There are a few very important reasons driving this. And I want to remind everyone, Nexplanon is not a product for chronic disease, which means we need to engage new customers and patients to drive sales rather than relying on regular script renewals. Also, in our emerging markets where our business is largely tender-driven, volumes are dependent on government budget cycles. That said, we believe our efforts to modernize the brand with our go-to-market approaches while significantly ramping up the number of healthcare professionals trained in the insertion and removal of Nexplanon are having a positive and durable impact on physician and patient demand. Now, let’s talk about biosimilars, another growth engine for the Company. With about half of the biosimilar business outside of the U.S., subject to tenders, we will see growth rates vary quarter-to-quarter, but we expect biosimilars to continue to deliver double-digit performance on an annual basis. We remain very well-positioned as a commercial collaborator with Samsung, and we are particularly encouraged by the planned U.S. launch of our Humira biosimilar in mid-2023 for which we will be undertaking an interchangeability study. We remain committed to pursuing the sizable biosimilar opportunity, which includes an estimated $100 billion of blockbuster biologics going off patent over the next decade. We will evaluate these pipeline opportunities with Samsung as well as other biosimilar developers. In addition to achieving our financial commitments, we have laid out a bold vision of becoming the global leader in women’s health. We plan to do this by building on our established and leading positions in contraception and fertility and expanding our scope to include some of the most underserved conditions in women’s health, including maternal and peripartum illnesses, and other diseases impacting women. And since the spin, we have executed four transactions in pursuit of that vision. As we told you, you can expect our business development activity to include a mix of pipeline stage assets as well as those already commercialized. This week alone, we announced that we have reacquired the rights to Marvelon and Mercilon, both combined oral hormonal daily contraceptive pills in the People’s Republic of China, including Hong Kong and Macau, and we have entered into an agreement to acquire the rights to these products in Vietnam as well. From a commercial perspective, this was a very attractive transaction for us as Organon already owns, manufactures, and markets these products as prescription oral contraceptive in 20 other markets. Additionally, we were able to transact at a valuation that makes this immediately accretive to Organon’s adjusted EBITDA profitability. In December, we closed on our acquisition of Forendo, a clinical-stage development company whose lead investigational asset 6219 is being studied for its ability to reduce endometriosis-related pain. Endometriosis is a high-priority unmet need for women globally. This is a large and underserved market. Endometriosis affects up to 170 million patients or up to 10% of all women of reproductive age. Currently, approved therapies target the pain associated with endometriosis but often lead to systemic estrogen depletion, which impacts bone mineral density and triggers menopausal symptoms. Such treatments are therefore unsuitable for long-term use in patients. Forendo has completed the preclinical and Phase 1 study supporting the progression of 6219 into Phase 2. We expect Phase 2 development work to start this year and to read out in 2024. Those Phase 2 results will further determine the potential for a Phase 3 program. And last July, we also announced the licensing of the global development manufacturer and commercial rights to another investigational asset, ebopiprant from ObsEva. Ebopiprant is currently being studied as a potential 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. This investigational agent has demonstrated biological activity in a small Phase 2a study performed in select European countries. Our aim is to study this agent more globally. And to do so, we will be investing in additional preclinical studies and technical work to enable IND submission in the U.S. and continue Phase 2 development. Phase 2 is a critical development phase involving pregnant women and requires close collaboration with regulatory authorities to ensure that our studies meet the relevant safety criteria for both baby and mother. And our first acquisition right after the spin was Alydia Health and its JADA system, which is already commercialized in the U.S. The device is aimed at controlling abnormal postpartum bleeding or hemorrhage in one of the most common complications of birth. To date, over 3,000 mothers have now been treated with our product. We anticipate continued growth of the brand into 2022, given our investment in the commercial infrastructure necessary to satisfy the significant unmet need and demand. Overall, Organon is off to an exciting start. We are well-positioned for a solid 2022, which Matt will speak more about as he discusses guidance. Over to you, Matt.

Thank you, Kevin. As I’ve done in previous quarters, I’ll remind you that our results prior to spin-off are presented on the carve-out basis of accounting, which is a GAAP convention, and it’s not intended to present results as if Organon were a standalone company. So, I want to be clear, as we discuss results, that because our spin was June 2nd, it won’t be until the third quarter of 2022 that we can draw a true apples-to-apples comparison to prior year results where all P&L line items represent post-spin standalone financials for Organon. So, until that time, revenue is where we’ll have the best comparability to prior year periods, and that’s where we’ll start the financial discussion. So, turning to slide 7. Fourth quarter revenue of $1.6 billion was down 1%, both as reported and at constant currency. We saw solid performance from our growth franchises in women’s health and biosimilars and that was offset by the decline in Established Brands as well as a decrease in supply sales. As Kevin mentioned, the underlying portfolio of marketed products performed well. It grew 1% in the fourth quarter with volume and price contributing favorably and offsetting headwinds from LOE and VBP. And on slide 8, you can see this depicted graphically on the revenue bridge. So, in the fourth quarter, the year-over-year negative impact from LOE was approximately $50 million. The impact from LOE moderated in the back half of the year as the erosion curves continue to flatten for Zetia in Japan and NuvaRing in the U.S. And going forward, our LOE risk is very limited with remaining total exposure of about $350 million to $450 million over the next four years combined. Continuing to read across the waterfall chart, and as Kevin mentioned, the Established Brands portfolio has exposure to VBP in China. The impact to fourth quarter sales was approximately $35 million compared with the fourth quarter of last year and was associated with the third round of VBP. And that’s the largest one so far, and that included four of Organon’s products, Singulair Paediatric, Proscar, Propecia, and Arcoxia. We saw COVID-19 impact to our business in the fourth quarter. And while that was a drag on our business relative to where we believe our run rate should have been, the impact was actually less than what we saw in the fourth quarter of 2020. So, this ends up being a slight favorable comparison year-on-year. Volume grew in the fourth quarter, and that mostly offset LOE and VBP impacts. Volume growth came from Nexplanon’s strong performance as well as continued growth in biosimilars and growth in Established Brands in China for those products not impacted by VBP. The other bucket primarily represents supply sales to Merck and other third parties, which consists of lower margin sales of pharmaceutical products under contract manufacturing arrangements. For the full year 2021, supply sales contributed about $80 million to revenue growth but was down about $30 million in the fourth quarter. Full year 2022 supply sales will look much more like an extrapolation of the fourth quarter and will contribute an even smaller amount to total revenues than we saw in 2021, mostly because we expect volumes under these arrangements to decline. And finally, foreign exchange translation added about 0.5 percentage point of favorability for the quarter. 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 was up 6%, both as reported and at constant currency in the fourth quarter. For the full year, the franchise was up 4% as reported and 2% at constant currency. Nexplanon had a remarkable fourth quarter, revenues of $226 million, up 37%. But for the reasons Kevin explained, Nexplanon’s quarterly growth in 2022 will most likely vary quarter-to-quarter, primarily based on how the impacts of COVID and the timing of tenders influence the individual quarters of 2021. And this will be most prominent in the first quarter of 2022, which will be lapping a tough comparison to the prior year period when we saw some initial vaccination optimism driving physician demand in the beginning of last year. For the year just completed, Nexplanon grew 12% at constant currency. We expect similar growth in 2022 with more than half of that growth expected to come from outside the United States. Fertility was flat in the quarter. The U.S. fertility business grew 10%, but that was offset by China and Europe, which had very strong fourth quarters in 2020, as fertility patients outside the U.S. and especially in Europe returned to clinics relatively faster than U.S. patients did. For the full year, the fertility portfolio grew double digits on a percentage basis. Volume growth came from an increase in demand from new accounts as a result of increased selling efforts as well as from the macro trend of patients returning to fertility clinics for this time-sensitive treatment. Overall, the global fertility market has very attractive fundamentals, including global macro trends towards advanced maternal age as well as an increasing number of government initiatives around the world to address future negative economic consequences of lower birth rates. Now, together with our increased focus on this portfolio, these trends set us up nicely to expect another year of double-digit growth from fertility in 2022. Now, turning to biosimilars on slide 10. In the fourth quarter, biosimilars grew 14% at constant currency and grew 25% for the year. Renflexis and Ontruzant are our two largest offerings globally, and they’re both offered in the U.S. as well. Globally, Renflexis grew 29% ex-FX in the quarter and 36% for the year. The infliximab market in the U.S. itself is growing about 10% per year, and biosimilar acceptance and unit growth within the market is also increasing, driven by some recent payer updates and increased physician comfort with transitioning stable patients. Ontruzant, which was launched in the U.S. in July of last year, was down 30% in the fourth quarter but up 7% for the full year ex-FX. Ontruzant continues to have good uptake in the United States, but in the fourth quarter, growth in the U.S. was offset by a decrease in EU due to increasing competitive pressures in that region and Latin America’s timing of tenders and specifically in Brazil. With about half of our biosimilars business outside the U.S. and also depending upon the timing of tenders, we expect some volatility quarter-to-quarter in the biosimilars franchise. But for the full year, 2022, we expect that our portfolio of five biosimilar offerings will continue to deliver double-digit growth over the full fiscal year. On slide 11, you can find details for the Established Brands portfolio for the quarter and the year, and Kevin largely covered the highlights for Established Brands, but two points I would add. First, Established Brands was down 13% for the year on a constant currency basis, that broken out by volume and price, 10% of the decline was volume and 3% was price. And if we exclude volume loss associated with LOE, that volume decline is cut in half to about 5%. As we move out of 2021 with significant LOE risk behind us, combined with the renewed investment management focus in the Established Brands portfolio, we believe we can significantly flatten Established Brands revenue CAGR to the point of being almost flat over the intermediate term, and our fourth quarter performance provides support for this view. Second point is on slide 12. About 75% of Organon’s business is outside the United States and within Established Brands that’s even higher, about 90% ex-U.S. The LOE of Zetia in Japan influenced our Asia Pacific performance, as did the termination of a contract for Rosuzet in Korea. But to emphasize Kevin’s earlier point, almost flat performance in China for the year is a win, given the pressures of VBP. Now, turning to our non-GAAP income statement on slide 13. This slide shows our summary income statement for Q4 and full year versus the respective prior year periods across a range of GAAP and non-GAAP P&L line items. We already cautioned against the limited usefulness of comparing post-spin periods to pre-spin period, so I would choose to focus attention on the full year 2021 column and on the key metrics circled in green. Revenue of $6.3 billion, adjusted gross margin of 64.7%, and adjusted EBITDA margin of 37.7%. For these key metrics, we completed 2021 positively, either in the middle or the high end of the guidance ranges we provided before the spin. The point here is that we launched Organon with a very good sense of the business that we have and the business that we’re trying to build. And we delivered on that in our first few quarters. A few words on debt capitalization on slide 14. As a result of the spin-off in June, we separated from Merck with a pro forma net leverage ratio of approximately 4 times. One of our capital allocation priorities is to reduce this figure down below 3.5 times. We plan to do that through EBITDA growth, combined with reduction of debt via voluntary prepayments. During the fourth quarter, we made a $100 million voluntary prepayment on our U.S. dollar Term Loan B. So, with 2021 adjusted EBITDA of $2.4 billion, bank debt of $9.1 billion and cash on the balance sheet of $737 million, that would put our net leverage ratio just above 3.5 times, which is a modest improvement over last quarter and overall solid progress towards our net leverage goal. Now having just mentioned capital allocation, let me reiterate Organon’s capital allocation priorities. Our first priority is servicing the dividend. With a target of 20% of free cash flow, the dividend strikes an appropriate balance between reinvesting for growth and delivering near-term value to shareholders. Our second priority is organic growth, which would include life cycle 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 3% to 4% of revenue on an ongoing basis, excluding separation costs. Now, because these first two priorities are essential, our third capital allocation priority is really a tie. It’s a tie between the execution of external growth plans to develop a pipeline of new product opportunities, and we’re balancing that against discretionary debt reduction just like we did in the fourth quarter. We’re committed to maintaining our BB/Ba2 parent rating. We will continue to make progress towards a net debt to adjusted EBITDA ratio of below 3.5 times. The full year 2021 revenue bridge on slide 15 illustrates what we said since the spin off, that 2021 would be an inflection year and the last year for which our product portfolio would be subject to significant LOEs. You can see that in the first bar that LOE was clearly a significant headwind to growth in 2021, with approximately $300 million of impact, compared with 2020. VBP was also substantial at approximately $170 million over last year. COVID remained a factor in 2021, with about $400 million of impact to the business during the year, higher than 2020 by about $20 million. Also, as we expected, pricing erosion modestly offset volume growth. But the key takeaway from this chart is that we had good visibility into the business, and all of these bars fell squarely within the ranges that we had communicated. On slide 16, we bridge 2021 revenue of $6.3 billion to our 2022 guidance range of $6.1 billion to $6.4 billion. At first glance, 2022 revenue guidance looks very similar to 2021. But the underlying business is actually much better positioned than it was a year ago. And beginning with the first bar, in 2022, we expect about $100 million impact from LOEs or a third of what it was in 2021. And this is related to NuvaRing as well as the potential for a generic competitor for Dulera in the U.S. Volume-based procurement in China will continue to have an impact, about $100 million in 2022. And we’re managing that by strategically moving exposed brands into the retail channel. And given the majority of our revenues outside the United States, we expect about $200 million of price erosion in 2022. And this level of price movement is aligned with historical pricing trends for the global markets that we’ve been selling into for many years. If you look at the green bar, you see that we’re expecting very solid growth in volume in 2022, between $600 million and $700 million that would more than offset the other business factors I just mentioned. So that means we expect volume growth to grow by about 10%. By the way, we estimate that less than 20% of that growth is coming from COVID recovery. The majority of the volume increase is coming from growth across multiple pillars. Nexplanon, biosimilars, fertility, China retail, and to a smaller extent, recent business development activity, which is primarily the JADA postpartum hemorrhage device acquired as part of Alydia Health. And as an aside, the incremental contribution from reacquiring the marketing rights to Marvelon and Mercilon in certain Asian countries that we just announced, that’s really immaterial to our consolidated financial reporting, and especially so for 2022 since we’ll only see a partial year impact there. As we keep moving to the right, you’ll see a fairly sizable headwind from foreign exchange translation of $100 million to $200 million, which equates to a 200 to 300 basis-point headwind to revenue. This is largely a financial reporting dynamic. On an economic basis, we have natural hedges in place, including having the majority of our employees and all of our manufacturing plants outside the U.S. as well as a meaningful portion of our debt denominated in euros. And these hedges help us manage our true economic currency exposure. Our guidance range of $6.1 billion to $6.4 billion implies nominal growth of negative 3% to positive 1.5%. But adjusting for FX translation, let’s call it, 250 basis points FX translation headwind at the midpoint, revenue growth on a constant currency basis would be more in the range of down less than 1% to up 4%. And moving to the other components of guidance on slide 17, you can see 2021 actual performance side by side with what we expect in 2022. As we move down the P&L, you’ll notice consistency between the years. Guidance for gross margin in the mid-60% area, and that’s in line with what we said and delivered in 2021. We’re again guiding to mid-20s percentage of sales for SG&A in 2022, and I’d point you more towards our second half of 2021 non-GAAP SG&A spend as a percentage of revenue since that’s the time period for which we were operating as a standalone company, and it’s more indicative of a go-forward run rate. Where you will see an uptick is in R&D expense, where we’re expecting mid to upper single digits as a percentage of revenue. We are building a pipeline of assets that will set up the Company for future growth. And we need to invest to support those programs, and a key element of that investment shows up on the R&D expense line. That would bring us to adjusted EBITDA margin of 34% to 36%, and then you’ll see that below the line items have remained very much in line with what we guided to in 2021. So, wrapping up the financial discussion, the business performed well during 2021, very much in line with how we thought it would. This is a durable, predictable product portfolio with solid cash flow. We saw in 2021 growth in women’s health and biosimilars, supported by the significant cash flow generated from Established Brands. And going into 2022, we see these trends continuing in these franchises. The overall portfolio is significantly derisked with most LOE risk behind us. And we’re really just getting started in terms of maximizing the potential within this portfolio, whether it’s through uncovering opportunities in currently marketed products through the life cycle management programs that Kevin spoke of or through strategic business development that leverages our therapeutic expertise. And if for any reason, the pace of acquisitions slows in 2022, we can always redirect surplus free cash flow to accelerate debt reduction. And with that, we’ll now turn the call over to Q&A.

Hey, guys. Good morning. Thanks for taking my questions. First one is for Matt, just curious, talking about EBITDA margins. I guess as we look out over the next several years, you’ve got some pipeline investment ongoing. And just curious if you see kind of the next few years as a period where margins should continue to erode a little bit, or do you have more of a flattish margin outlook in that period before we’d expect the pipeline to start contributing? And then, if I heard correctly, just on the modeling side, I think you’re expecting a Dulera generic, although I always kind of assumed this was probably too small of a brand for a generic to make the investment. So just curious, do you have a specific line of sight on a Dulera generic? And can you just clarify how much the China Marvelon and Mercilon contribute to 2022 guidance?

I’ll start by addressing your question about the recent deal for Marvelon and Mercilon. This deal has a negligible impact on our 2022 results, falling within the uncertainties of our guidance. While it’s not a significant deal in size, from a percentage perspective regarding return on capital metrics, it represents an excellent opportunity for the Company. The deal exemplifies why the spin-off was justified, highlighting numerous valuable prospects that were too small for Merck to pursue while part of the larger organization. It's a logical allocation of capital, yielding returns well above our benchmarks. The acquisition multiple of enterprise value to EBITDA is notably lower than our trading value, making the deal reasonable. Over time, we anticipate it will contribute positively to our return on capital, but in terms of absolute dollar amounts, it’s small for 2022, particularly because it only represents a partial year impact. Regarding DULERA, timing the entry of a generic competitor is always complex. We are taking a conservative approach, assuming a midyear entry and a standard erosion curve for this product. While it’s possible the product may not attract much generic interest, we can’t predict that with certainty. Therefore, our outlook for Dulera remains cautious, and we’re factoring in typical generics erosion patterns, hoping for better results. On the topic of EBITDA margin, our pipeline development, which includes both near-term and long-term products in clinical stages, is expected to drive R&D expenses higher. In 2022, we’re looking at about a two-point increase in R&D compared to 2021, and this trend will continue as our clinical programs advance and new projects are added. The positive for shareholders is our expectation of consistent revenue growth beyond 2025, leading to sustainable compound annual growth rates into the future. As for margins, we predict that product mix will significantly boost our gross margins over time, favoring higher-margin products and regions. We have a good understanding of our operational costs, and we won’t need to increase these much when we start commercializing our pipeline products or as we integrate the recently announced deal for Marvelon and Mercilon. The incremental costs associated with such a deal are minimal, primarily fixed, allowing us to benefit from operating leverage as volumes increase. We do anticipate some cost inflation; however, we believe our operational excellence and productivity programs will effectively counterbalance this. This is already factored into our 2022 guidance for those concerned about the company's inflation exposure. We have secured a significant portion of our spending through annual purchasing agreements or contracts, minimizing our exposure. Should we face inflationary pressures, we expect to manage them through increased efficiency, both in our operations and as we transition away from Merck.

I guess, my first one is kind of a two-parter. But I’m just trying to get some more color around the $600 million or $700 million year-over-year volume growth that’s reflected in the guidance. I guess, on the surface, it seems like a big number. And I’m just trying to get my hands around what exactly is driving that? So how much is Nexplanon and biosimilars, some of the growth drivers you talked about versus how much of that is coming from the established product division. So, any color there would be appreciated. And maybe just kind of linked to that, as I think about the longer-term established product division, you’re talking about almost flat sales over time. Can you elaborate on the price versus volume dynamics that you need to assume to get there? So, is the 3ish percent price erosion that we saw in 2021, like a good run rate and that you’re going to need to see pretty healthy volume just to get to flat, or do you think over time, we can get a more stable price dynamic as well, as we think about the components that go into that longer-term guidance? Thank you.

Thank you, Chris. The 3% figure you mentioned represents our recent average price decline across the Established Brands portfolio, and we have incorporated a similar figure into our 2022 guidance. If I were preparing the 2023 budget now, I would likely use a comparable number for price impact in Established Brands. Regarding your first question about volume growth, it's encouraging to note that the growth is fairly evenly spread across the key areas I highlighted. We expect double-digit growth from Nexplanon, biosimilars, and fertility, meaning we're not overly reliant on any single category. This diverse growth strategy gives us confidence in our forecast, as we have multiple avenues to achieve the targeted 10% volume growth.

And if I can, just a quick follow-up on that, sorry.

No. Chris, I wanted to emphasize that China is very important for us, representing about 20% of our overall Established Brands globally. By the end of 2022, 90% of the portfolio will have gone through the volume-based procurement process. We do see potential growth coming from China with the Established Brands business, especially given the success of our pivot to retail since 2017. This is an area where we expect strong volume growth, not necessarily price growth, particularly in China and other emerging markets. Looking at Europe, we've been dealing with pricing erosion for years, but now it has stabilized. As I mentioned in my introductory comments, all therapeutic areas in the Established Brands business saw growth in 2021 during the pandemic, with the exception of cardiovascular, where we are still recovering from the LOE impact in Japan for the ezetimibe franchise. Once that effect passes, we're essentially looking at two-thirds of our business, which is high-margin, being flat without much price increase but showing good volume growth. This will provide us with the opportunity to reinvest in other portfolios that are growing in double digits, as Matt pointed out.

Excellent. For my follow-up, you mentioned that about 20% of the number is related to COVID recovery. Considering the remaining growth, is it a reasonable assumption to look at how much volume could contribute in any given year for our longer-term model? So, if we take that $600 million or $700 million and subtract 20%, is there anything unusual about 2022 compared to a typical year regarding volume growth?

When you go pillar by pillar, as I’ve described them, I don’t think that there’s anything unique about 2022. Nexplanon has a lot of runway for growth, given its relatively small market share in the United States and around the world. Fertility has the favorable macro trends that we spoke of in terms of increasing maternal age as well as governments feel like they need to address low birth rates. And biosimilars business, as Kevin described in his prepared comments, is large and growing. So off the top, I would say, absent that small piece that we believe is assigned to COVID recovery, the volume growth we’re seeing in 2022 should have legs to it out into future years. How many is hard to say. But for the near term, it does look repeatable.

Yes. And Chris, there’s nothing specific about 2021. Essentially, we expect the same type of volume growth going forward. It is a new normal for us.

On the fertility business, how much market share do you have in China? And where do you hope to grow share to over the next few years? And will you need to bring in additional products to maximize your fertility business in China, or are you well positioned with your current portfolio? And then just one other question on business development. Do you plan to remain focused on assets within reproductive health and conditions unique to women in the near term, or are you also looking at more broadly at the products for conditions that disproportionately impact women? Thank you.

Thank you for the question, Greg. Regarding China, we experienced significant growth this year, with a 23% increase in 2021 compared to 2020. This growth is influenced by pent-up demand and notable movements in China related to fertility, especially with the introduction of the three-child policy. There are indications that the government is beginning to invest in medical tourism domestically, further supporting our strong and growing market share in China. While I don't have the exact numbers at hand, our share is nearing a third of the business when compared to the other two competitors in the market. We are actively expanding our sales force to enhance our presence in China, which we view as a crucial contributor to our overall business. Currently, the U.S. accounts for about 40% of our fertility business, while China is close to 18%. It’s a rapidly growing segment that we aim to invest in. We are engaged in discussions with various companies for potential partnerships in both business development in fertility and globally. We plan to adopt a balanced approach, focusing on both developmental stage assets and products already on the market, such as Marvelon and Mercilon in China. In response to your last question about capital allocation, we are considering all areas of need. Currently, we are focusing on significant unmet needs such as postpartum hemorrhage, preterm labor, endometriosis, and polycystic ovary syndrome, which motivated our recent deals. We're also exploring assets that impact women disproportionately. There are great synergies in focusing on conditions that are unique to women, and we are optimistic about the deals we’ve completed and look forward to more in the upcoming quarters.

Kevin, I’ve been reflecting on the comments your team has made regarding the four growth pillars and how they are collectively contributing to the $600 million in volume this year. However, when I look at the consensus for next year, there appears to be only $100 million in projected growth. I'm curious if you anticipate the momentum will persist. I'm not seeking guidance for '23, but I'm wondering if there are any factors that might hinder the growth figures you've discussed for the base business. Additionally, how do you view the potential ramp-up of a Humira biosimilar, considering that while you may have a strong market presence, there are also competitors like Amgen and Alvotech entering the market? Understanding the direction of these elements would be really helpful.

Thank you for the question, Umer. It's great to hear from you again. Let's start with the last point and work backwards. Regarding Humira, we anticipate a very exciting period ahead as we will be the second company to enter the market. Speed to market is essential, and we will follow Amgen. We are collaborating with Samsung and focusing on what payers need, which includes high concentration, a citrate-free formula, and an easy-to-use innovative pen mechanism. We have everything in place, along with real-world evidence from Biogen’s Humira biosimilar launch, as they are our partner in Europe, in addition to our own launches in Australia and Canada. We have initiated the interchangeability study, allowing us to report on it in 2024 and 2025. We are optimistic about competing in this market, especially since it represents a potential $20 billion opportunity during the loss of exclusivity for Humira biosimilars. I believe the marketplace will become highly competitive in 2023 and 2024. You will witness not only price erosion for small molecules but also more significant movements on prices compared to what we previously observed in hospital launches like REMICADE. We are well-positioned for this change. Based on current consensus regarding our Humira biosimilar, Hadlima, we believe we will be in a favorable range. Looking ahead to 2023, Hadlima will start contributing significantly to our growth, along with continued contributions from China retail, while China’s value-based procurement will stabilize. Nexplanon will also continue to grow, and fertility products will maintain double-digit growth. We have a lot of positive developments in store, including the Marvelon-Mercilon acquisition. Our strategy is to take assets that may not align with larger companies like Merck and focus on them to maximize their potential. We feel similarly about the Marvelon-Mercilon business. These are strong growth drivers along with our stable Established Brands business. We are very optimistic about 2023.

Hi. Good morning. Can I please ask about Nexplanon run rate, please? Can we assume that Mexico represents most of the increase ex-U.S.? And is higher demand in the U.S. from DTC and physician training? So overall, do you see Nexplanon sustainably decoupling from lower wellness visits? And then, I have a quick follow-up on Dulera. Could we see upside from Lupin’s delayed generic? Thank you.

When I assess Nexplanon's performance in 2021, it was an impressive year despite the pandemic. We experienced a growth of about 12% for the franchise, even with wellness visits not returning to normal levels, which are currently still down by around 20%. There is a notable separation in the trends you mentioned. We see potential opportunities as we're developing a new go-to-market strategy focused primarily on the U.S. market, after which we'll discuss our efforts globally. In the U.S., we are implementing new market models and enhancing our digital processes. We've invested significantly in clinical training programs, certifying nearly 20,000 physicians during the pandemic, which is much higher than pre-pandemic levels. Our representative visits have returned to pre-pandemic levels as well. Additionally, our direct-to-consumer campaigns are gaining traction, with nearly 350,000 visitors to our website, nexplanon.com. Therefore, we feel optimistic about Nexplanon's prospects in the U.S. Moving beyond the U.S. is particularly exciting. Prior to the spin, Nexplanon received minimal attention outside the U.S., with 75% of our business occurring domestically. Now, that has shifted, with two-thirds of our business in the U.S. and one-third internationally. The international business is growing at a faster pace but is more variable due to many markets having single-payer systems and emerging markets facing government procurement processes that create fluctuating performance. This variability is why we assess Nexplanon's performance over a longer timeframe rather than by individual quarters. I am confident that Nexplanon will become a $1 billion business and continue to grow, maintaining at least the same growth rate we saw in 2021. We remain committed to driving growth both in the U.S. and internationally, as previously described.

Two questions. First on Nexplanon, was there any change in inventory levels in the fourth quarter versus the third quarter? And then, secondly, I appreciate that any business development needs to make sense. But you did four deals since the IPO out of what I think was 140 potential deals that Organon says are out there. So, rather than four deals, it seems the number should have been 10 or more deals to build this business at a decent pace. So, why haven’t there been more transactions than we have seen so far? What has been the reason? Why transactions have not gone through that you’ve kicked the tires on? Thank you.

Let's begin with your first question about Nexplanon and inventory management. By the end of the year, we implemented price protection, resulting in a slight increase in volume in the U.S. during the fourth quarter. Additionally, there was the Mexico tender, which amounted to nearly $40 million and was shifted from the third quarter to the fourth quarter. This caused some inventory fluctuations, but it's important to note that this product doesn't accumulate significant inventories since much of our business in the U.S. operates through a buy-and-bill model involving clinics, which lack the inventory frameworks found in other businesses. Our inventories are healthy, and we are managing them effectively. Regarding your second question on business development, while we evaluated over 60 potential deals, we maintain strict criteria. Currently, we have more than a dozen deals under serious consideration. The first four agreements we finalized either addressed major unmet needs with innovative action mechanisms, such as the Forendo and ObsEva deals, or included products with immediate revenue potential like JADA, Marvelon, and Mercilon. Although I would have preferred to secure 10 deals, we are increasing our business development pace. We are exploring numerous opportunities in the biosimilar sector and focusing on women’s health, specifically conditions that significantly affect women. We aim to ensure that future deals align with both unmet needs and provide fair valuations that our shareholders can appreciate, affirming that we made prudent decisions without overpaying for essential assets. I believe we have taken a careful approach, and I am proud of our team for accomplishing those four deals amid the challenges of a pandemic in our first six months post-launch.

May I follow up?

Sure.

Yes. So, on the 56 deals that you didn’t do, which of the three criteria most often was the reason? Was it they didn’t fulfill a significant unmet need? Was it that you couldn’t count on them today, or was it valuation?

I believe it was a combination of all three factors. There were certain deals that we felt did not adequately address the unmet needs. We didn’t see a unique mechanism in some of them that we could support, and in other cases, the valuations were not justified. There are several reasons behind our decisions. However, we have a strong head of Business Development, Daniel Karp, who has extensive experience at both Pfizer and Biogen. He leads a team of 29 individuals who are dedicated to this effort and are doing excellent work.

May I follow up?

Sure. So, there was 140 deals, I think, initially, and you’ve looked at 60. Does that mean, there’s 80 to go? No, no. The 140 deals that we were looking at were specifically unique to women’s health. Now, the 60 were now outside of that where we looked at devices, we looked at Femtech, we looked at diagnostics. So, we’ve got a lot more to go down that list, and we’re actually in the later stages of doing some pretty interesting deals that you’ll hopefully see coming your way in the very near future.

Thanks. So just a couple. So on Nexplanon, could you just remind us how you’re thinking about the exclusivity runway in the United States? That’s number one. And then, number two, regarding just the overall product mix, do you have a long-term target in mind in terms of the percentage of Established Brands as a portion of the overall mix. I mean, obviously, Established Brands is a pretty high portion of the mix. How are you thinking about diversifying down from that? And do you have a target in mind in terms of portion of the mix over, say, the next several years? Thank you.

So David, just real briefly about Nexplanon. We lose exclusivity in 2027 in the U.S. and 2025 in Europe and outside of the U.S. That’s one issue. But, as I mentioned earlier on previous calls, we have an indication we’re working on essentially to get an extension, so that we have a five-year efficacy of indication. And those studies started at the end of 2020. We expect to report out by the end of 2024. So, that gives us three years more of exclusivity in terms of marketing exclusivity, which essentially means if we launch in 2025 time frame, we could potentially and theoretically take it to 2028. Now, remember, generics can come in and market for a three-year indication in 2027, but they can’t market for a five-year indication, essentially. You can rest assured, we’ll do everything in our power to move everything over to the five-year indication because that’s what women want. They want a longer potential LARC availability to them that can take one minute to insert in the upper arm. So, we’re very excited about that five-year indication. We feel very good about it. And so, that’s essentially the status of that. In regards to the contribution of the Established Brands. Look, it’s two-thirds of our business today, somewhere in that vicinity, that range. But given the fact that it’s flattening out and we’re stabilizing that business, and I mean stabilizing, right, it will start to come down over time to probably half of our business, but good cash generation from there. And the other businesses that we have, biosimilars, fertility, contraception, JADA, all the other things that we’re doing will ultimately start to contribute more and so you’ll see a 50% split for everything else. And then, of course, in the later stages, if we’re lucky enough to be able to turn the cards over and launch 6219 for endometriosis, it’s a whole different game. That’s an exciting new future to think about.

Okay. And if I may just sneak in a follow-up question, and I may have missed this. Can you just talk about deal size? I know you’re looking at quantity, but what’s the extent to which you could do something more transformational? And I know that might have implications for the credit rating. But how are you thinking about that in terms of size, and ultimately, where you would go in terms of the rating?

Yes, David. Right now, as we evaluate deals, the size of the deal is not a primary factor in our criteria. In my experience, if you identify a compelling target and can build a strong investment case, there are always ways to finance it. Although we have some guidelines from the tax matters agreement with Merck related to the separation, those are quite flexible. Thus, we can utilize various financing options to pursue attractive deals. We aren't imposing any significant restrictions and are open to opportunities regardless of their size.

If I can summarize, I appreciate everyone's thoughtful questions. Our separation from Merck and our launch as an independent company has involved significant effort from all our employees, whom we view as founders. Some of us have been working on this transaction for several years. It’s fulfilling to see our belief that this portfolio can thrive under focused management come to fruition, meeting our financial and operational goals for 2021. We reflect on our achievements with pride. We have seen double-digit growth in biosimilars, fertility, and Nexplanon. We stabilized our Established Brands business, which provides substantial cash flow. We introduced a dividend and quickly expanded our women's health portfolio to address critical unmet needs. Accomplishing this during a pandemic highlights the exceptional team we have at Organon. We are equally committed and energized to pursue our goals in 2022. Thank you all for your time, and we look forward to speaking with you soon.