Organon & Company (OGN) — Q1 2022 Earnings Call Transcript

Thank you, Mary, and good morning, everyone. Thank you for joining Organon's first quarter 2022 earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer, who will cover our strategy and operational highlights; and Matt Walsh, our Chief Financial Officer, who will review performance, guidance, and capital allocation; Dr. Sandra Milligan, Organon's Head of R&D, will also be joining us for the Q&A portion of this 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 and 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 10-K 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'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 quarter 2022 results. For the first quarter of 2022, revenue came in at $1.6 billion, up 8% at constant currency, and adjusted EBITDA was $647 million, representing a 41.3% adjusted EBITDA margin. We had a strong first quarter. The year is off to a great start, and we are reaffirming the full year guidance ranges we provided back in February. Now, since our launch almost a year ago, all three of our franchises, women's health, biosimilars, and established brands have been delivering on their objectives, each playing their important role in creating a sustainable company driving forward our vision of improving the health of women. Let's start with fertility and biosimilars, two of our growth pillars. They continue to grow double digits in the quarter, and we expect both to deliver double-digit performance for the full year. We're also very confident in the demand trends we are seeing for NEXPLANON that support our view that for the full year 2022, NEXPLANON will perform at least as strongly as the 12% growth at constant currency that we saw in 2021. As we've said in prior calls, some of our products, especially in women's health and biosimilars, are subject to the buying patterns of our institutional customers and will vary quarter-to-quarter. This was evident in the first quarter with NEXPLANON in the U.S. We had a price increase go into effect in December 2021. And as you may recall, we had a very strong Q4 of last year, and some volume was pulled forward ahead of that price increase. But demand exiting the first quarter was very strong, and NEXPLANON is off to a healthy start in the second quarter and on track to deliver our expected full year performance. Organon is continuing to bring renewed focus to NEXPLANON. This includes our digital marketing efforts aimed at raising awareness among consumers and motivating conversations with health care providers, all of which are gaining traction and resulting in increased product demand. Other initiatives include unique social media projects and the recent ability to have telehealth conversations, where women can connect with an independent health care provider to discuss NEXPLANON and other contraception options. We also continue to evolve our clinical training program offerings. In the first quarter, we trained 6,700 new health care professionals to perform the one-minute insertion and two-minute removal for NEXPLANON. This has more than tripled the number trained in the first quarter of last year and is well ahead of our pre-pandemic activity. We're also very encouraged about NEXPLANON's growth outside of the U.S. NEXPLANON grew over 30% ex FX outside the U.S., driven by performance in Latin America, which benefited from tender phasing, but also increased demand. We are seeing very strong demand in important markets like Brazil, which had a record month in March of this year. Continuing our discussion on women's health, fertility, both in China and the U.S., two very important markets grew double digits in the quarter. With women waiting until later in life to have children, the use of assisted reproductive technologies like in vitro fertilization is growing about 5% to 10% annually. It is a large market, impacting an estimated 190 million people, and it is also an industry with significant brand loyalty. Our products, Follistim, Orgalutran, and Elonva are well established and foundational to the patient-friendly GnRH antagonist treatment protocol, which requires fewer injections and is favored in conjunction with egg and embryo freezing. Now, let's turn to biosimilars, another growth engine for the company. With about half of our biosimilar business outside of the U.S. and 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 annualized basis. In the U.S., our two offerings are RENFLEXIS, or infliximab biosimilar, and ONTRUZANT, our trastuzumab biosimilar. The infliximab market continues to grow every year, and RENFLEXIS has benefited from that tailwind with sales still growing even five 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 growth since its launch in 2020. 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 presented by an estimated $100 billion plus of blockbuster biologics going off patent over the next decade. We will evaluate these pipeline opportunities with Samsung as well as other biosimilar developers. Equally important to our growth pillars is the stabilization that we are seeing in our established brands business. This is a basket of 49 important medicines with significant brand loyalty, covering multiple therapeutic areas globally. The potential for this sizable part of Organon's business to stabilize was evident to us well before the spin, and that's what we're seeing now. The LOE risk in this portfolio is now behind us. In addition, by maximizing commercial and life cycle management opportunities often at a country level, we believe we can manage this business at a sustained, very low, single-digit erosion rate over the intermediate term. Matt will walk you through some of the favorable one-time items that contributed to the double-digit growth with established brands in the first quarter. That needs the one-time favorability, but the underlying business performed well. And in light of the outperformance in the first quarter, we expect established brands to deliver close to flat performance for the full year 2022 on a constant currency basis. Critical to our success in established brands is our approach to managing our business in China. Since 2017, we've been focusing our growth strategies on the retail channel, which has been growing double digits and now represents about half of our established brands business in China. There's also strong demand for our products in the hospital channel for those products not yet subject to volume-based procurement. And those products have been growing double digits as well. China represents a very important market for us, and we're well positioned there with a solid retail strategy and good revenue diversification. Overall, there was very solid operating performance from the franchises in the quarter, and I'd like to now provide an update on our external growth initiatives. Consistent with our stated commitment to deliver health care interventions that address unmet and undermet needs in women's health, we continue to be active on the business development front, expanding our women's health portfolio beyond contraception and fertility. Today, we've been active in clinical stage assets like our licensing of the investigational ebopiprant for preterm labor and our collaboration with our partner, ObsEva, and the acquisition of Forendo with assets in development for endometriosis and PCOS. This is balanced against our new commercial stage products like Jada for PPH, Marvelon, and Mercilon, and most recently, our global licensing agreement with Dare Bioscience. Now, bacterial vaginosis is the most common cause of vaginitis worldwide. It is estimated to affect 21 million women in the U.S. and can have disruptive symptoms and potentially pose serious health risks. Today, approximately half of the women treated for bacterial vaginosis experience multiple episodes of BV within 12 months of treatment. As evidence of our commitment to the unmet and undermet needs of women, we are licensing RA Xaciato, which is an FDA-approved medication for the treatment of bacterial vaginosis in women 12 years of age and older. In a Phase III clinical trial, Xaciato demonstrated improved clinical cure rates as compared to placebo in a one-time dose. We're looking forward to a potential Q4 launch of this product in the U.S. The opportunity with Dare is emblematic of our approach to business development. Our goal is to assemble a suite of options that advance women's health with assets that address unmet needs, including those that may have been overlooked because of patient populations or therapeutic area. Further, we're looking to build a portfolio of assets in various phases of development from clinical stage with blockbuster potential to already commercialized products. Overall, 2022 is off to a very solid start. And at this point, I'd like to turn it over to Matt to review the quarter in more detail.

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. It's not intended to present results as if Organon were a stand-alone company. So I want to be clear as we discuss our results that because our spin date was June 2, it won't be until the third quarter of 2022 that we can draw true apples-to-apples comparisons to prior year results, where all P&L line items represent post-spin stand-alone financials for Organon. 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, revenue for the first quarter was $1.6 billion, up 4% as reported and up 8% at constant currency exchange rates when compared to the first quarter of last year. In this graphic, we break out the change in revenue according to key drivers, and I'll highlight some of the more significant impacts. The impact of the loss of exclusivity or LOE during the first quarter was approximately $30 million, and it's primarily related to new Barings LOE in the United States. We didn't have any LOE impact in established brands this quarter. The most significant LOEs facing the portfolio washed out in 2021; we expect only modest new LOE exposure going forward. Since December of 2020, we have been expecting a generic entrant in the U.S. for DULERA. That did not happen in 2021 and has not happened thus far in 2022. Our current expectation is that any potential LOE for DULERA, should it happen this year, will have a limited impact on 2022 results, and that view is currently incorporated into our full-year guidance. Continuing to read across the waterfall chart, in the first quarter of last year, the impact from volume-based procurement in China was significant due to the December 2020 implementation of the third round of VBP. Now back then, that was the largest round to that point and included four of Organon's products: Singular pediatrics, PROSCAR, PROPECIA, and Arcoxia. That compares with the first quarter of this year when there was no new LOE impact from VBP on Organon's products. Moving to volume now, which grew significantly in the first quarter. The increase in volume came from our growth pillars: fertility, biosimilars, NEXPLANON outside the U.S. this quarter, and China retail, but also from volume growth in our base business and established brands, particularly demand in China for non-VBP brands, as well as for products in Europe and the LAMIRA region. As Kevin mentioned, some of the favorability in established brands this quarter was due to one-time items. If we think about the 15% ex FX revenue growth in the quarter for established brands, 18% of that was volume growth offset by 3% pricing pressure. And in that 18% volume growth, it was about evenly split between one-time items and underlying growth in the base business. Given the product and geographic diversity in the established brands franchise, taken alone, none of the one-time items would be needle moving. But just to give you an example of the kind of things that we're talking about, the largest among them was a temporary supply issue currently impacting several competitors in the Japanese market. That drove outperformance in Japan this quarter, which compares to weaker performance in Japan in the first quarter of last year when demand was lower due to the expectation that the government was preparing to take action to lower prices. The supply 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 quarter, supply sales were down about $30 million year-over-year, and that's consistent with our view that we expect volume under these arrangements to decline. Finally, foreign exchange translation represented about 400 basis points of headwind for this quarter, which is not surprising given the fluctuations in global currency markets and also, understanding that approximately 80% of our revenues were derived outside the United States during the first quarter. Briefly on Slide 8. This is where we show geographic distribution of revenue. All of our ex-U.S. regions were nicely ahead of prior year at constant currency, and following up on my earlier comment, here, you can see the favorability we had in Japan, showing up in the APJ region, the good growth in NEXPLANON and in established brands in Latin America, and the solid performance in China in both established brands and fertility. 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 down 5% as reported and 3% at constant currency in the first quarter versus prior year, driven by a 5% constant currency decline in NEXPLANON and a 6% decline in NuvaRing. Those declines were partially offset by continued strength in fertility led by Follistim, which grew 20% ex FX in the quarter. As Kevin mentioned, and as we've explained in prior quarters, NEXPLANON's performance can vary quarter-to-quarter based on customer buying patterns and tenders. But we saw good trends exiting the first quarter, and the second quarter is off to a solid start. We continue to expect NEXPLANON to deliver double-digit revenue growth on a constant currency basis for the full year 2022. Turning to biosimilars on Slide 10. Biosimilars grew 22% as reported and 25% ex FX. We have five products 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 21% ex FX in the quarter driven by continued strong performance in the U.S., and ONTRUZANT was up 5%, driven by continued uptake in the U.S. since its launch in July 2020 and partially offset by competitive pressures in Europe. Turning to Established brands now on Slide 11. Revenue for Established brands was up 10% as reported and 15% ex FX in the first quarter. And while we did have volume growth in the base business, this should be taken in the context of, first, there was no VBP impact this quarter; second, there was no LOE in established brands this quarter; and third, and finally, if you look at Slide 5 that Kevin showed earlier, our established brands revenue in the first quarter of 2021 shows a dip, which made the first quarter of last year a favorable comparison point. Some of the prior year dynamic was related to Japan; some was COVID; and some was related to buying patterns of consumers. So as good as the double-digit year-on-year performance looks, the more important comparison point, really, is how the established brands do versus our expectations embedded in the guidance we provided in February. And the answer there is quite well and nicely ahead of our expectations. Established brands getting out of the gate this well in the first quarter is what underpins Kevin's comment that we now believe revenue growth in this franchise can get close to flat for 2022 at constant currency, which is better than our estimated longer-term trajectory of low single-digit erosion. Now, turning to our income statement on Slide 12. Our GAAP income statement for the first quarter is available in our earnings release, and I encourage investors to look at that important information. Here on Slide 12, we'll be looking at our non-GAAP income statement for the first quarter. For gross profit, we're excluding purchase accounting amortization and one-time items related to the spin-off from our GAAP cost of goods sold. Making these straightforward adjustments in the first quarter of 2022, non-GAAP adjusted gross profit was $1 billion, representing gross margin of 66.5% compared with 62.2% in the first quarter of 2021. And again, I'll remind you that at this point in the company's history, it's hard to draw meaningful comparisons because there were pre-spin allocated costs in the first quarter of 2021, which were not incurred this year. Due to an operating lens though, we can point to reduced supply sales, which are lower margin compared with product sales as a driver of the year-over-year improvement in gross margin. Adjusted EBITDA margins were 41.3% in the first quarter and benefited from the higher gross margin, as well as operating expenses that, due to timing, were at their lowest expected point this year. I'll speak more about adjusted margins in a moment when we discuss the outlook for the full year. As we look at debt capitalization and leverage on Slide 13. As of March 31, we have bank debt of $9.1 billion netted against cash and cash equivalents of $694 million. Using an LTM EBITDA number that does not adjust for acquired in-process R&D expense for the SEC's recent guidance, our net leverage ratio was approximately 3.6x as of March 31. Our capital allocation priorities remain consistent with past communications. Our first priority, of course, is servicing the dividend, which we're targeting at 20% of free cash flow before one-time items and which we believe strikes an appropriate balance between reinvesting for growth and delivering near-term value for 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 capital expenditures in the range of 3% to 4% of revenue on an ongoing basis, excluding separation costs. Now, because these first two priorities are not big absorbers of capital, that leaves significant self-generated cash flow for our third capital allocation priority, which I would really say is a tie between execution of external growth plans to develop a new pipeline of new product opportunities, we'll balance that against discretionary debt reduction, just like we did in the fourth quarter of last year. We're committed to maintaining our BB BA2 Parent rating, and we will continue to make progress towards a net debt to adjusted EBITDA ratio sustained below 3.5x. Once again, balancing debt reduction with capital deployed for externally sourced growth initiatives. Turning now to guidance on Slide 14. Here, we bridge our expected revenue change year-on-year. The biggest difference on this slide from the version that we showed you in February is the FX translation impact, which has gone from an approximate $100 million to $200 million or a headwind of 200 to 300 basis points to an approximate $200 million to $300 million impact or 300 to 475 basis point headwind based on where spot rates are today. Operationally at constant currency, the year is unfolding mostly aligned with our expectations. No significant net changes to the business, and most of the drivers on this page are identical or even slightly better than our original 2022 guidance. With the data that we have at present, we continue to see 2022 revenue within the original guidance range. Although if exchange rates don't improve from where they are today, we would likely be at the lower end of our $6.1 billion to $6.4 billion revenue range. For LOE, we still expect an approximate impact of $100 million as we communicated last quarter, coming from NuvaRing and a possible generic competitor for DULERA in the U.S. As both Kevin and I have reiterated today, 2021 was the last year for which we expected significant LOE revenue impact within our product portfolio. We continue to manage VBP in China. And based on our assumption that VBP rounds 7 and 8 will be implemented later this year, we think that VBP will be an approximate $100 million impact is also the same message we communicated last quarter. We expect about $200 million of price erosion in 2022, and that's in line with the historical pricing trends for the global markets that Organon has been selling into for many years. And for volume, we're tracking to $600 million to $700 million of growth for the full year. This important component of our guidance remains unchanged, and it is supported by our first quarter actual performance. The majority of that volume increase is expected to come from multiple growth pillars: NEXPLANON, biosimilars, fertility, China retail, and to a lesser extent, recent business development activity. We do expect volume growth in our base business and established brands as well, once again, supported by our first quarter actual results. And by the way, we estimate that less than 20% of the volume growth that we're projecting can be attributed to COVID recovery. Turning to other guidance metrics on Slide 15, all of which we are affirming today. With regard to adjusted EBITDA margins, looking forward in 2022, the margin favorability we saw in the first quarter will be absorbed and balanced downward over the remaining quarters of 2022, with expected increases in operating expenses related to the execution of business development initiatives that will drive future revenue growth, as well as increased supply chain costs driven by higher energy costs, as well as inflation. We expect the impact of increased supply chain cost and inflation will impact all operating expense line items, although mainly the COGS volume. Incremental operating expense for completed business development deals will show up primarily in R&D, Forendo as an example of that, and SG&A, where the examples would be launch costs for the product and promotional spending around the reacquisition of Marvelon on Mercilon marketing rights in certain Asian countries. As operating expenses build throughout the year, the fourth quarter is expected to be the lowest point for adjusted EBITDA margins. And while our range for the full year is being maintained at 34% to 36%, just as I discussed for revenue, if exchange rates remain where they currently are, we need to be looking at the low end of that range as well for the full year 2022. Important to our guidance practices going forward and along with other companies in our sector, beginning in 2022, Organon will no longer exclude expenses for in-process R&D from our non-GAAP results. These changes are being made to align with views expressed by the SEC. There were no such expenses in the first quarter of this year or last year. The third and fourth quarters of last year, along with the full year 2021, have been recast to reflect these changes in full detail of that recasting can be found in Tables 7 and 8 of our press release, as well as in the appendix slides to this earnings presentation. We're not incorporating an estimate of future in-process R&D into our guidance for any business development transactions not yet executed. Our criteria for inclusion will be to have a signed contract. Business development is a strategic priority for us, as future business development activity that involves upfront and/or milestone payments would impact our non-GAAP results and would also impact any guidance we might provide. And while we'll work to provide details on those relevant payments when we announce the transaction, we do not plan to update our guidance between quarters based solely on those associated payments alone.

Wrapping up the financial discussion, we're off to a solid start to the year. Operationally, the business is performing well, with strong demand trends in NEXPLANON, structural tailwinds in fertility, double-digit growth in biosimilars, and the stabilization of the established brands business that we have been signaling for some time.