Organon & Company (OGN) — Q2 2022 Earnings Call Transcript

Thank you, Chantel, and good morning everyone. Thank you for joining Organon’s second quarter 2022 earnings call. With me today are Kevin Ali, Organon’s 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. Dr. Sandra Milligan, Organon’s Head of R&D will also be joining us for the Q&A portion of this call. Today, we will be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call on the Events and 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 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 presentation and conference call presentation. I would now 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 second quarter 2022 results. Our second quarter 2022 results round out one full year as a standalone publicly traded company. And today, I am proud to be reporting our third consecutive quarter of product sales growth and solid progress against our stated objectives. Now, despite a challenging global macroeconomic and geopolitical environment, during the second quarter, we delivered growth across all reportable geographies and in all three franchises. We even saw growth in China despite the negative impact from the COVID-related lockdowns. And in our LAMERA region, our growth in Latin America offset the negative impacts associated with the war in Ukraine. For the second quarter of 2022, revenue was $1.6 billion, up 5% at constant currency, and adjusted EBITDA was $512 million. That includes $97 million of acquired in-process R&D, otherwise known as IP R&D, and milestones in the quarter. So, on the basis we are all accustomed to, our adjusted EBITDA would be over $600 million in the second quarter of 2022. During the quarter, biosimilars continued its double-digit growth trajectory and grew 42% ex-FX. All five of our currently commercialized biosimilar assets had a strong second quarter and year-to-date 2022 compared with the previous reporting periods. Our next biosimilars launch will be mid-next year with our launch of Hadlima in the U.S. We believe that biosimilars that will be best positioned for success are those that share the same attributes as the originator of Humira. That includes the option for a high concentration citrate-free formulation and a low concentration form, which we expect to have at launch. We also believe that real-world evidence and experience in other markets is important for provider uptake. And our collaborator, Samsung Bioepis has data from the launch of Hadlima in the EU, Canada, and Australia. These critical product attributes differentiate Hadlima from other offerings. Also in biosimilars this quarter, we demonstrated our commitment to the business by adding a collaboration with Shanghai Henlius Biotech, who, like Samsung Bioepis, will be an R&D and manufacturing collaborator with us. And I will talk more about that in a minute. Women’s Health grew in the second quarter, driven by 8% growth in NEXPLANON and continued demand for our fertility products. Outside the U.S., NEXPLANON grew 16% in the quarter as access continued to expand in key markets like Latin America and Canada. NEXPLANON growth in the U.S. was 4% in the second quarter compared with the prior year period and 14% sequentially versus the previous quarter. In the U.S., the long-acting reversible contraception market, also known as LARC, continues to face a macro trend that OB/GYN office visits continue to lag behind pre-pandemic levels. This has translated into a sustained level of telemedicine visits, which are not often conducive to prescribing a LARC. Since our spin, we have accelerated our efforts to adapt to this environment and have developed and executed marketing campaigns to meet her where she is. We have added a telehealth capability at nexplanon.com to enable women to immediately talk to an independent healthcare professional about her contraception options and about NEXPLANON, and we are training and certifying more physicians each quarter on the insertion and removal of NEXPLANON. All of these efforts are helping NEXPLANON to outperform the high single-digit decline we have seen in the overall LARC market in the U.S. year-to-date. Despite this dynamic in the U.S., we still see a path to double-digit growth globally for NEXPLANON for the full year. This is based on four drivers. First, in the U.S., physician demand per week increased over the last three months with a meaningful increase in July. Second, continuing strong momentum outside of the U.S. Third, the visibility we have into customer buying patterns for the remainder of the year. And finally, in the third quarter of last year, NEXPLANON was heavily impacted by COVID, so that presents an easier comparison for us next quarter. But let’s talk longer term about NEXPLANON in the LARC market. There is much progress to be made when it comes to all dimensions of women’s health, and this includes unintended pregnancies. Just this year, a United Nations Population Fund report estimated that nearly 50% of all pregnancies worldwide were unintended. Data from the Group Market Institute report also estimates that a large share of these unintended pregnancies, more than 40%, are a result of inconsistent or incorrect use of contraceptives. On the other hand, long-acting reversible contraception methods like NEXPLANON do not require daily self-administration and are subsequently very effective at preventing unintended pregnancies. So consider that just weeks after publishing our inaugural ESG report in which we outlined our vision of creating a healthier everyday for every woman, Roe v. Wade was overturned, an important moment in history. We expect that now more than ever, women together with their healthcare professionals will be seeking information about the most efficacious methods of contraception, not necessarily the option that in the short term may seem more convenient, like an oral contraceptive that doesn’t require an initial in-office doctor visit, but the most effective methods for preventing unintended pregnancies, which wind up being more convenient because LARC like NEXPLANON do not require daily self-administration. We believe that over time, we can help with the education process and to be a resource for those women and healthcare professionals looking for an efficacious and long-acting reversible contraceptive option. Turning to fertility, where we also expect to see double-digit growth for the full year. This past quarter, the fertility business was affected by strict COVID-related lockdowns in China, which have since eased. Fertility is a therapy area with strong demographic tailwinds. Women are waiting longer to start a family, resulting in higher infertility prevalence, and more governments are realizing that they need to take action to address the associated low birth rate. This is increasing demand for IVF treatments and, in turn, our fertility products. Turning to established brands franchise which again demonstrated very solid performance and grew 4% ex-FX this quarter. Established brands showed growth in almost every therapeutic area, demonstrating the sustainability and untapped potential of these brands. With the strong performance in the first half, we now expect this franchise to achieve flattish revenue growth in 2022. This is stronger performance compared with the low single-digit erosion that was expected of this franchise at the time of our spin. We have been very successful at creating opportunities locally and globally for the established brands franchise. This has included developing new commercial models and new digital approaches focusing on consumers, repatriation of our business in certain emerging markets, and building flexibility to capitalize on market opportunities like competitors’ stock-outs and later-than-expected generic entries. The established brands business represents approximately two-thirds of our revenue, and its sizable cash flows are critical to our ability to execute on investments that will help to grow our top line over time. And in that regard, we have been very active on the business development front. We are striving for balance in our business development program, adding already commercialized or soon-to-be commercialized assets as well as pipeline stage assets that will set up Organon for future growth. In the commercialized assets column, we are focusing on a distinctive way of working that allows us to unlock value quickly beyond what others have the capabilities to do and apply it to new assets from the start of integration. An example of this is Jada, where we could apply our expertise in regulatory and manufacturing and leverage our commercial footprint. We plan to do the same for XACIATO and replanning Marvelon and Mercilon, the People's Republic of China, including Hong Kong, Macau, and in Vietnam made a lot of sense since we already manufacture these products and commercialize them in 20 other markets. In the second column, our pipeline assets, these earlier bets are important to get a foot in the door with potential treatments that could be significant catalysts for Organon in the longer term. An example is our acquisition of Forendo. Just this week, we received a safe to proceed notification from the FDA for the OG-6219 asset for endometriosis, which enables the team to start the initiation of our planned Phase 2 study. And during the second quarter, we added Shanghai Henlius Biotech as our second R&D and manufacturing collaborator for biosimilars. This is the first biosimilars deal we have completed since our spin. The global agreement includes two biosimilar candidates, one referencing Perjeta and one for Prolia/Xgeva in 7 markets in Europe and in North America. The agreement also includes an option to negotiate an exclusive license for the global commercialization rights for our biosimilar candidate referencing Yervoy. Our strategy in biosimilars remains the same, namely to bring our commercial expertise to collaborations where we expect to have a very favorable launch position and competitive pricing. This transaction expands on our existing collaboration with Samsung Bioepis and further emphasizes our commitment to growing our biosimilars franchise. It also demonstrates that we recognize the importance of delivering treatment options that are aimed at reducing spending pressures on healthcare systems and enabling a greater number of patients to access these important medicines. Also in business development, we recently announced a research and collaboration agreement with Cirqle Biomedical to develop a non-hormonal, on-demand effective contraception candidate, a category preferred by many women, but with limited available options. From the start, Organon has been an advocate for access to a broad range of effective contraceptive options and comprehensive counseling in partnership with healthcare providers. There is no one-size-fits-all solution when it comes to family planning. Women need more and different efficacious options that better reflect their varying needs and preferences. And as a leader in contraception, Organon is focused on driving innovation and bringing forward more of these types of options. Overall, this was another solid quarter of progress. In just one year, we have focused on our women’s health business to modernize the NEXPLANON franchise while ensuring that our fertility business returns to a sustainable growth rate. We have broadened our therapy area focus in Women’s Health from two with contraception and fertility to seven with the addition of postpartum hemorrhage, preterm labor, endometriosis, polycystic ovary syndrome, and bacterial vaginosis. We have expanded our biosimilars portfolio and continued to accelerate revenue growth. And finally, we have demonstrated that with the right entrepreneurial focus that Organon is applying to these brands, established brands do not have to be a business in steady decline. This was a big achievement. Our ability to arrest the steady decline in that portfolio, following legacy loss of exclusivity patterns, was probably the biggest open question in investors’ minds at the time of the spin. These accomplishments are all due to the remarkable dedication and effort of our team of over 9,000 founders. We have made tremendous progress, and the team has much to be proud of. Now, I would like to turn it over to Matt to review our financial performance in greater detail. Over to you, Matt.

Thanks a lot, Kevin. As I have done in previous quarters, I will remind you that our results prior to spin-off are presented on the carve-out basis of accounting, and that’s a GAAP convention that’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 date was June 2 of last year, it won’t be until next quarter, the third quarter of 2022, that we can draw a true apples-to-apples comparisons to prior year results, where all P&L line items represent post-spin standalone financials for Organon. Until then, as I have said over the past few quarters, the revenue line is where we will have the best comparability to prior year periods, and that’s where we will start the financial discussion. Now, turning to Slide 6, revenue for the third quarter was approximately $1.6 billion, down 1% as reported, but up 5% at constant currency when compared to the second quarter of last year. In this graphic, we breakout the change in revenue according to key drivers, and I will highlight some of the more significant impacts. The impact of loss of exclusivity, or LOE, during the second quarter compared to the second quarter of last year is approximately $10 million, which is primarily related to NuvaRing’s 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 prior to the spin-off, and we expect only modest new LOE exposure going forward. Since the spin-off in 2021, 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. Continuing to read across the waterfall chart, the impact from volume-based procurement in China was negligible in the second quarter, which is also the case year-to-date as the implementation of the next rounds of VBP have been delayed. Moving across, we saw an approximate $60 million impact coming from price in the second quarter, which is consistent with our expectation that we will see low single-digit price erosion on a company-wide basis. This is mostly coming from established brands, where products are subject to mandatory price reductions in some markets. We had good volume growth in the quarter. You may recall we had some one-time favorability in established brands last quarter. We continue to see some benefit in Japan where certain competitors are out of the market because they didn’t receive good manufacturing practice or GMP certification. But the impact of that in this quarter is about half of what it was in Q1. In addition to volume growth in established brands, we also saw volume growth from our key growth drivers, including the China retail sector, biosimilars, and NEXPLANON. 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 quarter, supply sales were down about $25 million year-on-year, and that’s consistent with our view that we expect volumes under these arrangements to decline. And finally, foreign exchange translation continues to be a headwind for us. FX represented about 500 basis points of headwind for the quarter, which is not really surprising given the fluctuations in the global currency markets and the composition of our business with approximately 80% of our revenues derived outside the United States during the second quarter. Briefly on Slide 7. This depicts the geographic mix of our revenues. As Kevin mentioned, all of our geographic regions grew versus prior year at constant currency. EUCAN benefited from volume growth in the established brands franchise, most notably from respiratory and cardiovascular products. Strong performance from RENFLEXIS and ONTRUZANT drove growth in the U.S., along with increased NEXPLANON sales in the quarter. Asia-Pacific, Japan, as we mentioned earlier, had some help from a near-term competitor supply issue, however, to a much lesser degree than last quarter. In China, growth in retail, as well as the recently repatriated brands, Marvelon and Mercilon, offset the decline in fertility that was due to strict protracted COVID lockdowns. And finally, the LAMERA region showed strong results on a constant currency basis, primarily from growth in NEXPLANON, as well as benefiting from the timing of an order of ONTRUZANT in Brazil. So now let’s take a look at performance by franchise and we will start with Women’s Health on Slide 8. Our Women’s Health business was down 2% as reported, but up 1% at constant currency in the second quarter. NEXPLANON grew 8% ex-FX during the quarter, and that strong performance was partially offset by NuvaRing, where we continue to see pressure from generic competition. Fertility was down low single-digits this quarter and that was due to the impact of COVID lockdowns in China. In the United States, Follistim had some unfavorable channel mix this quarter, but that was partially offset by other products in the fertility portfolio. Year-to-date, fertility is up mid-single-digits on a constant currency basis. We expect the fertility business to deliver double-digit growth in 2022, driven by recovery in China and strong demand across our markets. Turning to biosimilars now on Slide 9. Biosimilars grew 39% as reported and 42%, ex FX. RENFLEXIS grew 39% ex FX in the quarter driven by strong performance in the U.S. The infliximab market continues to grow and biosimilar adoption for infliximab also continues to grow, with biosimilars now representing close to 40% of the infliximab market share in the U.S. ONTRUZANT was up 61%, driven by continued uptake in the United States since its launch in July 2020, as well as the timing of a government contract in Brazil that hit the second quarter this year compared with the third quarter of last year. And most factors were partially offset by competitive pressures in Europe. Turning to Established brands on Slide 10. Revenue for Established Brands was down 2% as reported, but up 4%, ex FX, during the quarter. As Kevin mentioned, this franchise is performing very well. It’s a sizable and stable source of revenue for us. In addition, the sequential revenue trend on this franchise is fairly steady, as you can see on Slide 18 in the appendix. In the second half of the year, we expect that we will see impact from the next rounds of VBP in China, but still with minimal LOE risk expected until we see a generic entrant for DULERA; together with the strong performance year-to-date, we now expect that revenue for established brands will be flattish for full-year 2022 at constant currency. Now turning to our income statement on Slide 11. Our GAAP income statement for the second quarter is available in our earnings release. I encourage investors to look at that important information. Here on Slide 11, we will be looking at our non-GAAP income statement for the second quarter. For gross profit, we’re excluding from cost of goods sold, purchase accounting amortization and one-time items related to the spin-off. Making these straightforward adjustments, the second quarter of 2022 non-GAAP adjusted gross profit was $1.047 billion on revenues of $1.585 billion, representing a gross margin of 66.1%, up from 65.6% in the second quarter of last year. Year-to-date 2022 gross margin is tracking a bit ahead of the prior year period on both an adjusted and as-reported basis, and underlying that is really product mix. We have less and lower-margin supply sales in 2022 than we expected would be the case. There were also allocated costs related to the spin in the 2021 financials that are not in 2022 and impact apples-to-apples comparability as I mentioned at the outset. Adjusted EBITDA margins were 32.3% in the second quarter. I’ll draw your attention to the R&D line in this P&L. That $203 million of R&D expense in the second quarter includes IP R&D and milestones of $97 million related to the biosimilars transaction with Shanghai Henlius Biotech. So as Kevin mentioned, that would be $97 million that in prior quarters, we would be adding back to our adjusted EBITDA calculation, driving adjusted EBITDA to $609 million or 38.4% margin on a like-for-like basis with prior quarters. SG&A costs were modestly higher in the second quarter of 2022 compared with the prior year, primarily due to standing up Organon as an independent company as well as commercial expenses associated with business development transactions completed in the last year. R&D expenses increased in support of a growing pipeline, for example, OG-6219 and ebopiprant. Spending of this kind to develop new products, support new product launches, and to build capabilities will be drivers of our adjusted EBITDA margin in the intermediate term. On that topic, it’s important to take another look at the business development slide that Kevin showed. As Kevin mentioned, we’re looking for balance in our BD program. That includes adding immediately accretive or imminently accretive deals to the portfolio. Together, those commercialized deals that we’ve done to-date, shown in the first column of this slide, they are expected to contribute about a point of revenue growth in 2022. Our pipeline assets in the second column are longer cycle and require years of investment in order to realize their significantly larger commercial potential relative to the immediately or imminently accretive deals that we’ve completed so far. Our goal is to construct a suitably sized portfolio of these longer-term pipeline projects to enable Organon to sustain attractive revenue growth well beyond the five-year planning horizon, when we need to be launching new products that can more than offset any revenue declines we might see related to NEXPLANON’s loss of exclusivity. All of our business development projects, whether near-term accretive or pipeline, compete for capital. We analyze all of these opportunities on a risk-adjusted basis set against the baseline, the next best use of capital, which, in our case, is reducing outstanding leverage. And that happens to be a good lead into the next slide. As we look at debt capitalization and leverage on Slide 13, as of June 30, 2022, we have bank debt of $8.9 billion netted against cash and cash equivalents of $545 million. Our bank covenants allow us to add back acquired and process R&D and milestones to our LTM EBITDA calculation, which is consistent with how we’ve been showing you leverage on prior earnings calls. And on that basis, net leverage was about 3.5x as of June 30. Recall that at the spin-off in 2021, we had a pro forma leverage ratio of about 4x. And we said that we were targeting a leverage ratio of less than 3.5x on a sustained basis. We’ve made solid progress on debt reduction, and that was aided by another voluntary $100 million repayment of the U.S. Term Loan B during the quarter. This is the second voluntary repayment of debt that we’ve completed since the spin-off, $200 million in total. Our capital allocation priorities remain consistent with past communications. Our first priority, of course, is servicing the dividend, which we’re targeting at a low 20s percentage of free cash flow, 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 plans. 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. So 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 is really a tie, between execution of external growth plans to develop a portfolio of new product opportunities balanced against discretionary debt reduction, just like we did this quarter. We are committed to maintaining our BB BA2 Parent rating, balancing debt reduction with capital deployed for externally sourced growth initiatives. Turning to revenue guidance on Slide 14 now, here we bridge our expected revenue change year-on-year. Compared with our last guidance update, the biggest difference on this slide is the FX translation impact, which has gone from an approximate $200 million to $300 million impact or a headwind of 300 to 475 basis points to an approximate $350 million to $400 million impact, now at 550 to 650 basis point headwind based on where FX spot rates are today. Accordingly, we’re adjusting our guidance range for full year 2022 revenue from $6.1 billion to $6.4 billion to $6.1 billion to $6.3 billion, consistent with the movements we’ve seen in foreign exchange. We feel comfortable maintaining the low end of the previously guided revenue range because the view on a few of our key drivers has improved modestly, for example, LOE. But given the volatility in currency markets, I’ll employ language here, as I did last quarter and signaled that if exchange rates don’t improve from here, we would likely be at the lower end of our revised guidance range. For LOE, at this stage of the year, the Generic of Delaire is looking unlikely. So we expect LOE impact for 2022 will be less than the approximate $100 million full-year impact we had communicated last quarter, and that remaining exposure is mainly tied to NuvaRing. For VBP in China, the implementation of around seven and eight have been delayed. So again, we’ve not had any year-to-date impact from VBP this year. But we think that remains likely to occur in the second half, which could result in approximately $50 million of impact in 2022. We continue to expect about $200 million of price erosion in 2022 in line with the historical pricing trends for global markets that we've been selling into for many years. And for volume, we’re tracking to $600 million to $700 million of volume growth for the full year. The majority of that volume increase has been coming from our multiple growth pillars: NEXPLANON, Biosimilars, Fertility, China Retail, followed by favorable one-time items like that competitive issue in Japan, and, to a lesser extent, recently completed business development transactions. We do expect net volume growth across our product portfolio and established brands as well, which is well supported by our first-half actual performance. Turning to other guidance metrics on Slide 15. As I mentioned, we are recasting our revenue range to incorporate the continued strength in the U.S. dollar. The other range that we’re modifying this quarter is for adjusted EBITDA margin. Operationally, there are no changes in our outlook. In fact, on an absolute dollar basis, EBITDA is less impacted by foreign exchange relative to revenue. So if not for these adjustments, we and our industry peers are making to incorporate in-process R&D and milestones, we would be keeping our full-year margin range identical to prior guidance. But given effect to the now approximate $110 million of IP R&D, we now have a view for 2022 that impacts margins by just under 2 percentage points. So we’re adjusting the range accordingly from 34% to 36% to 32% to 34%. And by the way, that approximate $110 million nudges our R&D expense as a percentage of revenue into the upper single-digit range from mid to upper single-digit range. And to remind you, our criteria for inclusion of an IP R&D estimate attached to a business development transaction will be to have a signed contract. Business development is a strategic priority for us, and future M&A activity that involves upfront and door milestone payments could impact our guidance ranges. And while we will 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, on a constant currency basis, the business is doing very well. Operationally, the business is performing as we expected, and we believe Biosimilars and Women’s Health should deliver solid growth in 2022, paired with a revenue trajectory within Established Brands that’s meaningfully better than we expected prior to the start of the year. At this point, I’ll turn the call back to the operator for questions.

Hi, guys. Good morning, and thanks for taking my questions. Matt, just one for you first. Just in terms of the business model, it seems like you’re more likely than not going to do a couple of license deals per year. So should we be thinking about this year’s EBITDA margin as more likely to go forward? EBITDA margin, I’m seeing the Street at like 35% next year, but it seems like it may be prudent to kind of factor in some deals. And then just secondly, on the commentary about the impact of the ROW decision. Just curious, have you guys done any work just looking at states where there are automatic trigger logs banning abortion if you’re starting to see women embrace contraception at a higher rate? Just curious, I know that was sort of flagged as a tailwind, but if there was anything tangible that you could tie to that, that would be helpful. Thanks.

Thanks, Jason. So I’ll take the first part of that question, and Kevin can take the second. So we’ve been saying since even before the spin, that to position the portfolio for sustained revenue growth beyond a five-year horizon, we would need to be reinvesting. That reinvestment would show up not just in cash outlays, but it would be showing up on the P&L in our R&D line as well as our SG&A line, specifically for commercial expenses to support. So when we think about the long-term trend in margins, it would be below the 35% full year number that we’ve been guiding to on a pre-IP R&D basis. And so I think if you look at the implied second half performance versus our full-year guidance as compared to our year-to-date results, that might be more representative of what the near-term future might look like beyond 2022. Actually, the numbers that we see in the market are pretty much — reflect that.

Yes. And Jason, it’s Kevin. So thanks for your question. In regards to the change in landscape post-Dobbs, we don’t see any effect in terms of an overall view of how contraception is going to go forward. Right now, it’s still up in the air. You saw what happened in Canada just a couple of days ago in terms of what’s going on. And so as a result of that, it’s far too early to determine what exactly is going to happen. What I can tell you though is we’re getting more and more interest from consumers as well as healthcare professionals asking a lot of questions about long-acting reversible contraceptive methods and wanting to get more information. You can well imagine that if you’re a physician right now in what you consider or term the trigger state, you’re going to start to be much more careful in terms of your counseling of your patients to make sure they do not have an unintended pregnancy rate. And I made that comment earlier about the fact in my opening that there is almost a 50% unintended pregnancy rate around the world, and 40% of those were actually women on some form of contraception. So as a result of that, you can see there is inconsistency or inaccurate or incorrect use of contraceptives. And so as a result of that, I think that the focus going forward will definitely be on efficacy. Efficacy should, and I believe will rule the day in terms of getting women the kind of options they need to make sure that they do not have an unintended pregnancy.

Great. Thank you.

Guys, thanks for taking my question. I guess, first, I’m just trying to understand NEXPLANON growth trends better. I’m a little puzzled by sort of the performance in the first half, especially in the context of the broader landscape around abortion, etcetera. So I’m just curious in general, what’s going on there? And should we reasonably expect this product to be growing sort of mid-teens, which is how folks expect it to be growing in 2022, 2023, etcetera. The second one is I was quite intrigued by the Cirqle deal for the vaginal gel, but I was not quite sure sort of what was the thought process around differentiation versus a lot of the other pH-raising vaginal gels that are out there. I was just curious if you’d share your thoughts there. And then finally, maybe quickly, Kevin, I feel like in the branded sort of innovative product territory for pipeline assets, it looks like there is a very large swath of biotech that’s looking to raise capital or collaborations, whatever the case may be. And it might be a very opportune time for you guys to be more active. And it seems like between the deal last December and then this new one with Cirqle as well, they are very early stage — very early stage to the point where for the next two to four-year horizon, they are not needle-moving from a numbers perspective. And I am curious how you’re thinking about sort of branded biotech drugs in a more mid to late stage as well? Thank you very much.

Well, thanks, Umer, and great to hear your voice again, and hope all is well. And I just wanted to — first of all, let me address some of these questions that you have regarding NEXPLANON. So, it’s been a little bumpy in terms of the comparator quarters. Last year, our year of spin, there were a number of things that were happening in terms of pricing movement and some of the issues around kind of name changes and other things that were going on in terms of our spin logistics. And right now, we feel that right now moving forward, you are going to get a much more predictable pattern of demand. And right now, what we can see is that every month, post the deal we had, a large buyout ultimately in January and February. But every month subsequent to that, we have actually seen an increase in demand. And we are seeing a very, very strong increase in demand in July, double-digit demand increase in July, and that’s going to be a significant quarter. But keep in mind, there are two things that are really important with regards to understanding NEXPLANON. As I mentioned to you almost a year ago, we expect the international business to grow faster than the U.S. business, and that has held true. We see robust double-digit growth going forward with the international business. It started out as a 75-25 contribution. Now, it’s more like 65-35, and that’s moving in favor of a faster-growing U.S. market. But within the U.S., we do see some things that are coming in, in our favor. I mentioned earlier to Jason that we feel that there is going to be more of a focus on efficacy, more of a focus on convenience, given the fact that you’re talking about a 3-year efficacy. And ultimately, we are outperforming the market. The LARCs right now are in decline, high-single-digit decline, and we are growing. So, I feel very confident. As I mentioned earlier in my opening that we are going to see double-digit growth of NEXPLANON this year globally. And that ultimately, over time, we will settle things down in the U.S. as things start to clear up in regard to the Dobbs decision going forward. So, we are very confident about NEXPLANON in the future. We have got all cylinders moving in the right direction there. In terms of your second question regarding Cirqle, we believe there is a distinguished nature here because, in the preclinical work that we have seen, this is a kind of a dual mechanism of action that this product has which, at least in the initial trials, has shown nearly 100% efficacy. So much so that we really wanted to collaborate with them to explore the possibility because, as you say, some of the other agents on the market today don’t have that type of efficacy. We are looking for exceptionally high-efficacy products in this space. We have always been focused on non-hormonal on-demand methods. But I will let Sandy jump in after I finish the last point regarding business development, especially in the biotech space, as you say. Clearly, as I have mentioned and as Matt mentioned, Umer, we are taking a very balanced approach to our business development and capital allocation strategy. Think about the deals we have done. I mean, when you include the Cirqle deal, it’s been balanced. There have been probably four commercialized or near-commercialized assets, and there are three kind of earlier stage assets that we will report out as you say in the later periods. As we go forward, we are definitely going to be doing more business development because we see some really interesting assets out there for us to act on. We will continue to take that balanced approach in the way that we generate accretive deals in the near term. And then ultimately, for the longer term, we are looking at some blockbusters. I will come back to 6219 from Forendo; we believe that could be a significant mover in the long term, a real catalyst for us. But Sandy, did you want to add anything to the Cirqle deal?

Yes. That would be great, Kevin. Thank you for the opportunity to respond. So, Umer, we do believe that with today’s currently available on-demand and non-hormonal products, there is room for improvement for women in wanting increased efficacy and perhaps some differences in just some of the product characteristics. And so we think that this is a very interesting opportunity, albeit it’s very early, and we are looking forward to the partnership and collaboration that we have with Cirqle. But basically, as Kevin mentioned, it’s a two-pronged approach in the product. It’s a chitosan that creates a barrier that prevents sperm from entering the cervical canal plus the pH modulator that immobilizes the sperm. And so, we are really focused on augmenting our contraceptive portfolio with such an on-demand, non-hormonal approach. And so this is just the first one that we are incorporating into our pipeline, and we look forward to finding other opportunities to expand the differential product offerings that we can have for women as they proceed along their reproductive journey and decide how to do their family planning when it’s right for them.

Thank you.

Thanks. So, just a couple. So, number one, I wanted to get your thoughts, and I apologize if I missed this, but your thoughts on China, just with lockdowns and now emerging from lockdowns. How are you thinking about the risks, the mix of hospital versus retail, and just the overall trajectory of that business? And then secondly, just on the theme of business development, what is the extent to which you would do something transformational? I know you have said you are sensitive to leverage and the credit rating, but is that something you are willing to revisit if the price is right, particularly in the context of asset prices having come down? Just wanted to get your thoughts philosophically on that? Thank you.

Sure, David. I will address the first question regarding China. So, currently, look, we have a good outlook for China right now. There are two things happening: the lockdowns that are finally easing up, which affected our fertility business clearly because the clinics were closed down, but it also slightly affected our established brands business. But remember that right now, in terms of our year-to-date business versus prior, we are seeing essentially 8% growth in the overall market and 13% on the retail sector. And by the way, now retail for June was 50% of our established brands business coming through the retail channel. So, it is as I have always said, that we have done the right things to really invest in the retail channel that is expanding quickly. So, the headwinds were in the area of fertility and some established brands, but the tailwind is the fact that they delayed some of the rounds of the VBP, specifically around seven and eight; the timing has been delayed a bit. So, ultimately, we feel that Atozet, one of our biggest cardiovascular products, will happen much later in the year versus our original anticipation in terms of the VBP update. So, I look for a positive outlook for the remainder of the year. We are continuing to invest in retail; our women’s health business is now starting to unlock because fertility is coming back, clinics are open as well. Our Marvelon and Mercilon acquisition, or repatriation back from Bayer, has started out like gangbusters and is doing exceptionally well in the women’s health space. So, we feel very strong in the China sector. Matt, do you want to take the second question?

Yes. Thank you, Kevin. And just to close out on China; China is an important geography for us. We have well over $900 million of revenue in China. We have over 1,000 people there. So it is a key geography for us in terms of growth for the future. But moving to BD, so David, we are not out hunting for those big deals, but we certainly are assessing the landscape and the possibility for them as a potential part of Organon’s future. Right now, especially as we are standing up the company, fully separating from Merck and putting all of our own systems in place, these smaller deals are digestible and have a high degree of probability of value creation, so that makes sense for now. And once we get across the other side of all the agreements that we have in place with Merck, most of which have about a two-year duration to them, the potential for larger deals just becomes wider. But as I have said, we are not out hunting for them, but we are planning for their possibility.

Okay. Thank you.

Hi, this is Dan on for Chris. Thanks for taking our questions. Just two from us. First, I guess your commentary on NEXPLANON and the large market suggests you are taking share from IUDs? And if so, can you maybe talk a little more about the drivers of that and if you expect that to continue? And then second, just looking at your volumes year-to-date, it looks like you are tracking ahead of the $600 million to $700 million guidance. So, we know you touched on this, but could you talk a little more maybe about the outlook for volumes in the second half? And how much of the benefit in the first half was from some of the Japan dynamics and established brands? Thank you.

Sure. Dan, I can take the first question regarding NEXPLANON. We don’t have data. I mean, IQVIA data in terms of the overall market is not very robust because we have the direct to physician buy-and-bill type of phenomenon happening. But what we can see is that there is obviously in terms of LARCs, IUDs are moving in terms of the decline section, and essentially NEXPLANON is moving up. So, I think you are right. You have clearly seen what’s happening in terms of the fact that although it’s mid for the quarter, it’s mid-single-digit growth. But nevertheless, all the signs are pointing to the fact that we are going to see continuing robust growth going forward for this product, and we are doing very well outside of the U.S. But our focus really is on combined oral contraceptive pills. That’s essentially the biggest area for us because that’s the area that ultimately is most used. And our focus, again, is on reducing unintended pregnancies. So really, we need to go where the greatest need is, which is conveying the information and educating physicians on the benefits of NEXPLANON. We feel good about that product for the future. Matt, do you want to take the second question?

Yes, sure. So, Dan, if your intuition says that we are running a little bit hot in the first half on what our full-year volume guidance would be, I think you are right about that. I can point to a few things. I would say none of these are particularly large individually though. For example, on a timing basis, we had more ONTRUZANT volume in the first half actuals than we had thought might come in the second half. We had some one-time favorability for the Japan competitor GMP issue that happened in the first half, which is likely to be transitory in nature. And then we have been anticipating since the start that the VBP would be more of a back-end loaded phenomenon for 2022. We thought we might see some of it in the first half, but that number actually turned out to be really, really minimal because of the delays. So, on a full-year basis, we still feel very good about the volume growth in the business, but we did have a little bit of front-loading of it per your question.

We are ready for the next question, operator.

Good morning, guys. Thanks for taking the questions. On NEXPLANON, you mentioned visibility on customer buying patterns in the second half. Can you help us with how to think about the potential benefit from those patterns in the third quarter and the fourth quarter? And also on NEXPLANON, are there important markets where you are working to secure reimbursement that could be important future growth drivers? And then just one on the fertility business, if you could just speak about the sensitivity of those products based on your prior experience and challenging macroeconomic conditions, that would be helpful. Thanks.

Yes. So in terms of buying patterns, when I made the comment in my introductory comments, it’s really about looking at understanding the tenders that we see outside of the U.S. We know when they are coming through. We know what the sale level is, and we know what to expect. So when we think about, for example, Canada, it’s still a launch market with sales doubling from $1 million to $2.1 million; public access coverage has been attained across all provinces. France, additional sales reps have been put on, and ultimately, we are seeing double-digit growth in France as well. The UK, our second largest business outside of the U.S., is doing well. And then Mexico, our third-largest market globally, has very strong sales with over 100% growth. So we are seeing overall across the board really good ex-U.S. business. Inside the U.S., what we see as opportunities in terms of, as I mentioned earlier, that we continue to see more and more interest in LARCs and especially for NEXPLANON. We see more and more visits to our nexplanon.com site specifically increasing, and we are certifying more and more physicians and healthcare providers by the day on the successful insertion and removal of NEXPLANON. So, again, like I mentioned, that’s our key product for Organon. It has patent protection until 2027, with a 5-year indication hopefully coming in the near term, we will be able to extend that a few years longer than that. And we feel very good about the solid growth of this product going forward. In regards to— I am sorry, I didn’t get the question in regards to fertility. You wanted to understand the kind of robustness of fertility going forward in terms of whether we can deliver the double-digit growth that I mentioned earlier?

Asking more about just sensitive, how sensitive that business and demand for those types of products could be in a sort of recessionary environment?

Well, one of the things to keep in mind is that two-thirds of our fertility business is outside the U.S. and one-third is in the U.S., and both are growing very nicely. I believe what I can tell you is that the demographics are a tailwind for us right now. We are currently seeing significant demand across the world. There is clearly a rebound happening after COVID in terms of lockdowns; couples are motivated and extremely committed to starting the process of family planning. Additionally, more governments like Japan are investing in reimbursement for IVF therapies, starting at the beginning of the year, and you see other countries doing the same. So I think that you will see more tailwinds behind the fertility business. We feel very solid and good about it, and it will continue to have double-digit growth going forward.

Thank you. Thank you, operator. Well, we hope we came across today in that we are delivering on what we have committed to deliver. Our growth franchises, biosimilars and women’s health are performing really well, and we are enthused by the stabilization in our established brands business. We continue to demonstrate that these products are in the right set of hands, and we are tapping into their potential with attention and resources. Additionally, we continue to be smart with capital allocation with a business development approach that balances more immediate opportunities with future growth prospects. We are proud of the solid track record we are building, and we are confident in our ability to deliver on our objectives for the remainder of the year. I want to thank you for joining us today, and thank you for your interest in Organon.