Organon & Company (OGN) — Q1 2023 Earnings Call Transcript

Thank you, Mike. Good morning, everyone. Welcome to Organon's First Quarter 2023 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 the call today at the Q&A portion. 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. 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 press release and conference call presentation. I will now turn the call over to our CEO, Kevin Ali.

Good morning, everyone and thank you, Jen. Welcome to today's call where we'll talk about our first quarter 2023 results. 2023 is off to a very solid start. For the first quarter, revenue was $1.5 billion, up 3% at constant currency. Adjusted EBITDA was $518 million representing a 33.7% margin. Given this solid performance, together with our visibility into the remainder of the year, we're affirming our financial guidance for the full year. The first quarter of 2023 represents the sixth consecutive quarter of product sales growth with all three franchises positively contributing to our performance. At constant currency, the Women's Health franchise grew 3%, the biosimilars franchise grew 20%, and the Established Brands franchise, which represents approximately two thirds of our business grew 1%. The Established Brands franchise continues to demonstrate its durability. The franchise generates sizable and predictable free cash flow, which is an important factor in our ability to take a balanced approach to capital allocation. During the first quarter, we made progress towards reducing our outstanding debt with a voluntary $250 million prepayment on our U.S. dollar-denominated term loan. Reducing our leverage over time is an important goal for us. We are committed to maximizing profitability in order to generate cash flow that supports that objective as well as to pursue business development strategies that enhance our growth profile. We will continue to look at business development through two lenses; tuck-in opportunities that have the potential to drive near-term revenue as well as longer-term bets that could be transformative for Organon and for patient care. We are especially focused on building out our capabilities in Women's Health as we did in the first quarter with our strategic investment in Claria Medical, which is developing an investigational medical device being studied for use during minimally invasive laparoscopic hysterectomies. Now let's move on to review the quarter in a bit more detail. Let's start with Women's Health. Women's Health grew 3% on a constant currency basis this quarter. In the first quarter of last year, we acquired rights to the oral contraceptives Marvelon and Mercilon in the People's Republic of China, including Hong Kong and Macau and Vietnam. Since then, we have generated strong demand for these products, which grew 65% in the first quarter. This transaction has been very successful and it's just one example of how Organon is leveraging its expertise to maximize its performance of assets that may have been under-prioritized in the past. Staying on contraception for a moment, let's look at the trailing 12-month performance of Nexplanon, which is the more informative way of evaluating the product's performance because customer buying patterns introduce noise on a quarterly basis. We have changed the growth trajectory of Nexplanon since the product has been in our hands. This long-acting reversible contraceptive is a product that has been around for over a decade and relies on continuously driving new patients to the product. Still with the managerial focus we have put on Nexplanon, we continue to deliver very strong growth for the product. Nexplanon is one of the most effective forms of contraception; it is an arm implant and therefore does not require daily self-administration like an oral contraceptive. We are seeing rising patient preference for these attributes in their choice of birth control and that is leading to increasing physician demand. In fact, this quarter physician demand in the U.S. is up 6% versus last year, driven by women increasing their usage of Nexplanon. Our strategic focus in the U.S. during 2023 is to continue to grow that physician demand by driving patient requests for Nexplanon and increasing the depths of use among the 35,000 providers currently prescribing Nexplanon. Outside the U.S., we continue to expand access and see strong payer, physician, and consumer demand. We anticipate particularly strong growth in both Brazil and Canada, two of the more relevant contraception markets in the world where Nexplanon is still somewhat in the launch phase. We are also making good progress with activities to expand Nexplanon production, subsequently enabling increased supply to parts of Africa and Asia Pacific where payers are expanding access to the product. We also continue to believe that Nexplanon can achieve $1 billion in revenue by 2025, which implies strong growth for the product over the coming years. Continuing our discussion on Women's Health, we remain very encouraged by our opportunity in fertility. Families are delaying parenthood due to many social and demographic factors, including education, career goals, and financial barriers. This contributes to the prevalence of infertility, which in turn drives demand for IVF treatments. The use of assisted reproductive technologies like in vitro fertilization is growing 5% to 10% annually. It is a large market impacting an estimated 190 million people around the world. Globally, the top five markets with the highest rates of infertility are in the Asia Pacific region, where the number of births per woman is significantly below the replacement rate required to sustain a population and GDP growth. Countries like South Korea are offering cash incentives for households to expand their families. Japan, Australia, Thailand, and Singapore are expanding fertility access and/or other benefits. Over the next few years, these markets will represent the largest opportunity for Organon's fertility business. These dynamics combined with our significant presence in the Asia Pacific and Japan region represent an attractive opportunity for Organon and allow us to grow the fertility portfolio in markets outside the U.S., where we are focused on expanding market share and must therefore price our products competitively. China, where we currently hold the number two market share position in fertility, will also continue to be an important market for us. Early in the first quarter, COVID-related disruptions were hampering demand for fertility treatments in China; however, we have seen solid recovery with sequential growth in both February and March. We're optimistic about getting back to normal in China and the positive impact that will have on our fertility business. Over the intermediate term, we believe fertility can grow in the high single digit to low double digit range and we expect 2023 to deliver a similar growth profile. Moving now to our biosimilars business, which continues to perform very well. Renflexis, our largest selling biosimilar continues to grow more than five years after launch, driven by solid performance in the U.S. and Canada. Ontruzant, our second largest biosimilar had strong growth in the U.S. but that growth was offset by a very competitive pricing environment in Europe. There is great interest centered around the July 1st U.S. launch of Hadlima, our biosimilar for Humira. At launch, we will have the option for a high concentration citrate-free formulation as well as a low concentration formulation. We have also now the benefit of real-world evidence from our own launch of Hadlima in Australia and Canada, as well as through our collaborator Samsung Bioepis from their experience with Hadlima in the EU. We're excited about our launch, which was created with a patient in mind to ensure simple administration. We feel good about the attributes of our products and our positioning. That said, with multiple product launches in mid-year, we've also conveyed our assumption that 2023 will be a modest ramp with the market for biosimilars really forming in 2024 to 2025. Rounding out the discussion with Established Brands, which we believe continues to be the most underappreciated part of Organon's story. The Established Brands franchise has had a number of hurdles to overcome this quarter, primarily the ongoing impact of volume-based procurement initiatives in China and supply constraints associated with the market action we took earlier in the year. We also had a significant one-time benefit in the first quarter of last year related to some Japanese generics. The Established Brands franchise is comprised of products that are generally beyond the loss of exclusivity but still have opportunities for growth, especially in markets outside the U.S. This was a portfolio that was in double-digit decline prior to the spin-off, with major loss of exclusivity risk behind us, together with the entrepreneurial focus we have put behind managing these brands, we have seen an inflection in growth rates. We've stabilized the portfolio and expect to achieve another year of flat or better performance in 2023 at constant currency. Within Established Brands, China is an important market representing about 20% of Established Brands revenue despite multiple rounds of volume-based procurement in the last two years. The Established Brands revenue in China has not declined since then. We expect to achieve similar flat performance in 2023 despite the continuing volume-based procurement impact this year on our largest product in China Ezetrol. By the end of 2024, the majority of volume-based procurement impact will be behind us and we expect growth in Established Brands in China to accelerate in line with the expectations we have for our total company business in China. I think for some, it's a difficult proposition to understand how a portfolio of off-patent brands can demonstrate continued stability, so let me share a few examples. Since the spin-off, we've had a renewed focus on Atozet, a cardiovascular drug. We have intensified our commercial promotional effort to grow that business. We have pursued many lifecycle management actions on the product and have also added production capacity, which has led to an increase in sales. Atozet sales of $457 million in 2022 represent an 11% growth at constant currency. Another example is Nasonex. Nasonex is a respiratory drug that was launched in 1997. It has been off-patent in key markets for almost a decade. In 2022, it delivered $260 million in revenue, growing about 17%. We are pursuing a number of lifecycle management opportunities to address global demand that exists for Nasonex, and we are investing in manufacturing capabilities to support those plans. These are just two examples of ways we are unlocking the value that remains in these established brands. There are many more opportunities to do so among the 49 products in that franchise. So across the business, the year is off to a very good start. Thanks to the hard work of our people around the world, the business is performing the way we thought it would, and each of our franchises is contributing to the success of Organon. I'll turn it over to Matt now to go into some more financial details.

Thanks, Kevin. Beginning on Slide 9, let's walk through the drivers of the 3% constant currency revenue growth in the quarter. Starting with the impact of loss of exclusivity, loss of exclusivity was negligible in the first quarter, and the small amount that we did realize was related to generic competition for NuvaRing in the U.S. In the first quarter, we had about a $30 million impact from volume-based procurement in China, and that was related to the fourth quarter implementation of Round 7, which for Organon included Ezetrol, which is sold as Zetia in some markets outside of China. Moving across to price, we saw approximately $30 million of price erosion in the quarter. This was primarily driven by customer mix and pricing in U.S. fertility, which was exacerbated by an unfavorable comparison to the first quarter of last year when we had a more favorable customer mix in fertility. Additionally, the Established Brands portfolio is subject to mandatory pricing reductions in the first quarter of 2023, and that was particularly the case in Japan and in some EU markets. We continue to see strong volume increases across all of our franchises, about $100 million in the first quarter. The majority of the volume increase came from established brands, particularly in China and the Asia-Pacific Japan region, but also from biosimilars, fertility, and contributions from Marvelon and Mercilon. The bar for Supply Other represents revenue to Merck and other third parties, which consists of relatively low-margin sales of pharmaceutical products under contract manufacturing arrangements, and which are expected to decline over time. Finally, you can see the financial reporting headwind we had in foreign exchange translation, about 450 basis points for the first quarter, which is a function of more than 75% of our revenue being generated outside the United States. While we're on that topic, let's turn to Slide 10, where we'll take a look at revenue by geography. In the first quarter, as Kevin mentioned, China grew at constant currency primarily due to strong performance in the retail channel. This growth was achieved despite the impact of volume-based procurement and the COVID impact on the fertility business in China early in the year. Asia Pacific, Japan grew 12% in the first quarter, driven by contraception, namely Nexplanon and Marvelon and Mercilon, as well as from Established Brands. For Marvelon and Mercilon in this region, just a reminder that this was a marketing rights acquisition that we did in February of 2022. In Established Brands, we do continue to benefit from generics being out of the market in Japan, but at a significantly lower level than we saw in the first quarter of last year. Established Brands' strength for this region was mostly realized in countries outside of Japan, where we saw a pickup in demand for respiratory products associated with seasonally poor air quality. The impact of the market action for injectable steroids, Diprospan, and Celestone was the most pronounced in the Humira region, but this was offset by better pricing on some Established Brands products. The UK region, on the other hand, has a more competitive pricing environment, which tends to pressure results in that region. UK results also reflect some of the supply disruption from the market action on Diprospan and Celestone. With regard to the market action we described in the last earnings call for Diprospan and Celestone, it's worth noting that we restarted production earlier than anticipated, and we are already supplying key markets such as Mexico, China, and the United States, which are in the top five markets for these products. Overall, the financial impact of the market action is realized within the parameters that we incorporated into our 2023 annual guidance and that we're affirming today. And last, in the United States, what you're seeing here is the strong performance of biosimilars, Ontruzant and Renflexis, fully offsetting unfavorable customer mix in the fertility business this quarter and also covering a $10 million benefit we had in the first quarter of last year related to a one-time milestone payment we received for Nasonex. The next few slides in the presentation lay out performance by franchise. I think Kevin covered very well the highlights and the details are provided in the supporting earnings materials. So I'll focus on topics that may be relevant to your modeling as we think about the remainder of 2023. We'll start with Women's Health on Slide 11. There are three important takeaways on this slide for Women's Health. First, in contraception, Nexplanon sales in the U.S. in the first quarter have tended to reflect customer buying patterns around announced price increases more than they have underlying patient demand. So the first quarter is not indicative of the rest of the year. Second, we will lap the Marvelon and Mercilon transaction next quarter, so you won't see the pronounced growth we saw here in the first quarter, but these products have performed very well for us, and we are pleased with the way this acquisition is operationalizing in Organon. We do expect solid performance from Marvelon and Mercilon for the remainder of the year. Our third and final takeaway on this slide, we expect to see good growth from fertility driven by the reopening of China as well as strong demand in the United States, where volume growth should outpace the pricing pressure that we're seeing domestically. Turning to biosimilars on Slide 12, clearly, a good quarter in biosimilars with 20% revenue growth year-on-year at constant currency, but where I would like to focus is on our upcoming launch of Hadlima. As Kevin mentioned, we continue to believe there will be a gradual market formation for Humira biosimilars in 2023, and because Hadlima revenues will only be a partial year contribution, we expect that globally Hadlima will still represent no more than about 1.5% of our consolidated 2023 revenue, and this is consistent with what we said last quarter when we provided 2023 guidance. Turning to Established Brands on Slide 13, as Kevin mentioned, this franchise is performing very well. And in 2023, our expectation is that we should achieve at least flat performance with last year on a constant currency basis. Let's turn now to key P&L line items on Slide 14. For gross profit, we are excluding from cost of goods sold purchase accounting amortization and one-time items related to the spin-off, which can be seen on Table 4 in our appendix slides. Non-GAAP adjusted gross margin was 65.2% compared with 66.5% in the prior year period. The year-over-year decline in gross margins is primarily due to product mix as well as inflationary cost pressure that impacted distribution and employee-related costs. Adjusted EBITDA margin was 33.7% in the first quarter compared with 41.3% in the same period last year. Higher product promotional costs for new and existing products as well as increasing R&D spend associated with recent acquisitions of clinical stage assets were the primary contributors to the decline in adjusted EBITDA margin year-over-year. I should also point out that in the first quarter of last year, operating expense was at a low point as we were still staffing up positions that were vacant as of the spin-off. Contrast that now to the current quarter, where we are essentially at steady state from a staffing perspective. Non-GAAP adjusted net income was $276 million, or $1.08 per diluted share compared with $420 million or $1.65 per diluted share in the first quarter of 2022. The year-over-year decline in net income was a result of, of course, lower adjusted EBITDA but also attributable to increased interest expense. Our variable rate debt, which comprises 38% of our total debt balance, is subject to higher rates compared with last year and we also recorded $5 million of accelerated amortization of debt issue costs in conjunction with the $250 million voluntary prepayment on the U.S. dollar variable rate term loan that we completed in the first quarter. We also experienced $9 million of foreign exchange translation losses driven by fluctuations in certain foreign currencies, which are impractical to hedge. So together, that's about $14 million or about $0.04 of tax effect at EPS that likely wouldn't have been in anyone's models. Turning to leverage on Slide 15, as Kevin mentioned at the outset, during the quarter, we made a $250 million voluntary prepayment on our U.S. dollar variable rate term loan. Since the spin-off, we've now made $450 million of voluntary debt prepayments, which demonstrates the priority we're placing on managing debt and leverage as a core component of overall value creation at Organon. That said, I will reiterate a comment from our last earnings call about our leverage ratios being stubborn during 2023. Our net debt to adjusted EBITDA ratio was likely to end 2023 close to where it was at the start of the year. This is the impact of the inevitable math around this metric, given our strong ex-U.S. revenue base and two dynamics this metric faces this year. The first dynamic is relatively smaller and more technical, related to FX translation around the U.S. dollar that has been weakening since the start of the year. As this happens, the numerator of the leverage ratio, the debt figure trues up immediately in terms of the increased translated value of our Euro down the balance sheet. The denominator, however, is a trailing 12-month figure, which exhibits a more lagged response to FX translation. This results in a leverage ratio that's slower to show improvement when the U.S. dollar weakens, and that's exactly what we saw this quarter. The second dynamic is more impactful, fundamental, and cuts right to the strategy that we're executing. We're reinvesting in the business to create a pipeline of future revenue opportunities. The eight transactions we've done since the spin have all required reinvestment of some kind and that shows up on the income statement as either increased R&D expense or commercial launch and promotional expenses on the SG&A line. In the near-term, this weighs down our LTM adjusted EBITDA but over the intermediate and long term, we believe this reinvestment is essential for Organon to more reliably deliver sustainable revenue growth. Turning to Slide 16, we provide a closer look at our cash flow for the quarter. What probably stands out is the $200 million of working capital use of cash. Like many companies with December fiscal year-end, Q1 free cash flow was impacted by the timing of annual incentive payments, and in addition, we also typically see cash cycle working capital ticking up in the first quarter, which absorbed approximately $80 million or about a 4% increase relative to year-end. Over the course of the full year, these two effects normalize. The key takeaway is that first quarter cash flow is not indicative of our full year expectation that we will be able to generate over $1 billion of free cash flow before one-time items this year, which is consistent with our expectations when we issued 2023 guidance. One-time cash costs related to the spin-off transaction are trending in line with our expectation of about $350 million for the full year 2023. The single biggest component of separation costs relates to the implementation of stand-alone IT systems, the largest of which is our own global, single instance ERP system with SAP. With this complex project well underway and the finish line in sight in mid-2024, we now have a clear picture of one-time costs and the timeframe, which approximates $950 million over three and a half years post spin. So for those of you modeling these one-time costs, this would imply that we see approximately $125 million of spin-off cash outlays remaining beyond 2023, with essentially all of that figure occurring in 2024. We expect that the composition of these remaining cash outlays will be split about 70:30 between expense and CAPEX, respectively. The free cash flow we are able to generate on a quarterly basis allows us to service the dividend and take a balanced approach to capital allocation. In fact, the $450 million of discretionary debt payments that I referenced earlier compares with approximately $500 million of capital deployed into M&A-related activity, and this evidence is the balance that we have said we would be targeting. Looking ahead into 2023, CAPEX for PP&E of 3% to 4% of revenue remains a good range for modeling purposes as we continue to deploy that capital into our internal manufacturing and packaging capabilities, as well as our IT infrastructure to help drive cost efficiency and productivity. Now turning to our full year guidance on Slide 17, this bridge is identical to the one we showed in February. The ranges on these various drivers still hold, driving us to affirm our 2023 revenue guidance range of $6.15 billion to $6.45 billion. Though loss of exclusivity was minimal in the first quarter, we still expect an approximate $50 million to $75 million impact for the full year, which reflects the continued generic competition for NuvaRing, Atozet’s loss of exclusivity in Japan, which happens midyear 2023, and the expectation for a generic entrant for Dulera towards the end of the year in the United States. We expect the impact from volume-based procurement to be in the range of $125 million to $175 million, driven mostly by Ezetrol's inclusion and the implementation of Round 7 in November of last year, as well as Round 8 implementation in the second half of this year, which will include for Organon, the products Remeron and Hyzar. On a total company basis, we continue to expect approximately $75 million to $125 million of price erosion this year, representing about a 200-basis-point headwind, mostly related to mandatory pricing decreases in certain markets we operate in as well as some pressure from U.S. fertility. We still expect strong volume growth in 2023 of approximately $500 million to $600 million. The main drivers here will come from our multiple growth pillars, biosimilars, fertility, China retail, and Nexplanon, as well as some contribution from Established Brands. We're currently estimating an approximate $50 million to $100 million impact from foreign exchange translation for the full year, which represents about a 1 percentage point headwind. So that means that our guidance range implies a constant currency revenue growth of approximately 3.5% at the midpoint. If foreign exchange rates remain where spot rates are currently, this could be a factor in driving us to the higher end of that revenue range. Moving to the other components of guidance on Slide 18, we expect adjusted gross margin to be in the low to mid-60% range, just modestly lower than where we finished 2022. As I've talked about previously, much of the inflationary impacts from 2022 were held in inventory and therefore had a greater impact on our cost of goods sold this year in 2023. On operating expenses, our ranges for SG&A and R&D as a percentage of sales are consistent with what we laid out last quarter for our expectations for the year, and reflect continued investment in the business as we position it for future growth. Our estimate on R&D expense includes $40 million of IP R&D expense that's tied to the $8 million investment we made in Claria Medical, which we recorded in the first quarter, plus a $25 million estimate for a milestone achievement for Ebopiprant tied to the acceptance of the IND filing. Now because we know it's important to your modeling, we will make a public statement upon achievement of that milestone so that you can factor that payment into your quarterly phasing. The remaining approximate $8 million of IP R&D is tied to other milestones in the portfolio that could possibly be achieved this year, so we continue to incorporate that into the guidance. These items bridge you to an adjusted EBITDA margin in the range of 31% to 33%. First, quarter adjusted EBITDA margin was 33.7%, just above the high end of the guidance range. In our short operating history, first-quarter margins have been the highest of the year, with the fourth quarter being the lowest. We're starting to see that smooth a bit as we get further from the spin-off. So for 2023, we do expect first-quarter margins still to be the highest of the year; if you think about the remaining three quarters, they do not look markedly different on an ex-milestone basis, though the second quarter does bear some incremental promotional costs related to upcoming product launches in the back half of the year. Additionally, the $25 million milestone for Ebopiprant could be triggered as early as the second quarter. For interest expense, we're nudging up our estimates slightly to reflect the accelerated debt amortization expense recorded in the first quarter actuals associated with our term loan prepayment. We now expect about $515 million of interest expense in 2023. Our range for effective tax rate remains in the range of 19% to 21%. In the first quarter, our rate was 22.8%, which included a discrete item related to a true-up of a 2022 valuation allowance. We expect our tax rate to trend downward over the rest of the year. The last point I'll make on this slide is, due to the impact of employee share awards that vest in 2023, we've increased our guidance for fully diluted weighted average shares outstanding by 2 million shares. As Kevin said, and I will reiterate here in closing, 2023 is off to a solid start. The business continues to perform well, capital allocation is on track with a meaningful debt repayment in the first quarter, as well as a completed pipeline transaction in Women's Health, where we continue to invest in our already strong market position. Overall, we're pleased with the first quarter, and we remain confident about the diversity and durability of our business. With that, now let's turn the call over to questions.

Hi, good morning. This is Jeng Jang on for Umer. Thanks for taking the question. So first, regarding Humira biosimilars, you reported $50 million in the first quarter, with most of it being inventory. What are your expectations for end-user demand for Humira biosimilars? Secondly, what is the current trend regarding the weight impact at the state level? Thanks.

Thank you for the question. I can address that. So first question in regards to our Hadlima launch. We believe, again, as I mentioned a number of times in previous settings, that 2023 will be a modest ramp-up year. It's a year of essentially competition to get on formularies. In our discussion with various PBMs, they still hold to the fact that there will probably be two to three biosimilars for Humira on formularies during this period of time, and so I think they're playing a wait-and-see game as we speak right now. Therefore, 2024 and 2025 will be the formative years where we see more and more kind of Hadlima uptake, and essentially the market for biosimilars for Humira will start to really form in that sector. So we're still fairly conservative in our view in terms of what we can do this year because it's all about getting on formularies and then in subsequent years, we'll start to see more aggressive ramp-up. Now in regards to your second question about Nexplanon, right now, what we see is essentially a focus on expanding demand generation for Nexplanon. We see good physician growth in terms of overall demand. We see a lot of bright stars in terms of ability to be able to continue to drive this product. We mentioned already that 2025 will likely be the milestone point where we reach $1 billion overall, so it's essentially our blockbuster product. We continue to see a lot of signals that this product is gaining a lot of momentum throughout the country in terms of some of the demand signals that we're seeing out of physicians in various other sectors. So we feel very, very, very enthusiastic and very bullish about what’s going on in terms of consumer demand, market access, and what we see going forward with Nexplanon is really a healthy product. As you saw, the trailing 12 months show double-digit growth as we look backwards, and we still feel that this is a product that will be very important for us.

Hey guys, thanks for taking our questions. So, I just had a couple. So OGN has a couple of Phase 2 readouts from your in-licensed endometriosis asset. How important are the 2024 pipeline updates to driving Ebopiprant strategy as those assets will hopefully replace Nexplanon when it goes LOE? And then the second question, you mentioned the year-over-year decline in first quarter gross margins due to product mix and inflationary cost pressure, but the guidance for the full year is flat, so do you expect any pressures there in the upcoming quarters? Thank you.

So I can address the first question, Jason. In regards to Ebopiprant, as well as 6219, our endometriosis product, as you know, we initiated our Phase 2 trial last year in the fourth quarter. We'll see what happens in 2024, but so far, that is a product that we believe strongly in; it offers a new mechanism of action, treating endometriosis in a way that hasn't been achieved before. Endometriosis continues to be a major issue across the world with almost nearly 200 million women of reproductive age suffering from some of the debilitating effects of endometriosis. The field needs innovation. It needs a new mechanism of action that does not work centrally; instead, it's more locally acting. So we'll see what happens. But clearly, that's one of our strategies, and if that product makes it across the finish line in the 2028 time frame, we'll be able to deal with that issue. Regarding the Nexplanon topic, the loss of exclusivity in the United States is in 2027. But as I mentioned a number of times before, I would look at the entire kind of erosion model for Nexplanon based on what we might benchmark against, for example, Morena from Bayer, given that it's a drug-eluting device. It’s a very complex product to manufacture, and all of the downstream investments needed for training and pharmacovigilance are significant. Thus, we still believe that Nexplanon will not resemble the erosion rates you might expect in your models. Those two elements together indicate that we're on the right path moving forward. Matt?

So for the gross margin part of your question, I'll elaborate a little bit more on the commentary. Due to the production timeline cycles for our products, most of what we sell in the first half of the year was actually manufactured last year. Therefore, any inflationary impacts from 2022 are already in inventory. It appears in COGS as we sell the product. Any products that we're making this year will likely be sold next year. However, anything that happens within the year, where it's made in the year and sold in year, would continue to reflect the inflationary costs we have been seeing. But as we think about the gross margins for the rest of the year, the biggest driver of our gross margins is going to be product mix. We believe we have reflected everything appropriately based on the revenue forecast and gross margin line. What it boils down to is that gross margins are likely to be net-net lower than last year by 100 or 200 basis points, most of that driven by inflationary cost pressures that were either reflected in inventory at the beginning of the year or will continue to be realized this year.

Thank you.

Hi, good morning. Thanks for taking my questions. On Women's Health, could you tell us more about the change in customer mix and discounts in the U.S. for Follistim? And on Nexplanon, where the distributors buy-in, buy-out is more pronounced than expected, how do you see demand during the year for both Follistim and Nexplanon? Additionally, can you tell us which drugs drove strong performance in China for Established Brands? Thank you.

Let me try to address those questions, Navann. First and foremost, regarding fertility, we continue to see our fertility business ramping back up from the second through the fourth quarters of this year. The first quarter was impacted by COVID effects in China, but we saw strong results in February and March and expect Q2 to be strong as well. As for the Follistim business in the U.S., we are starting to expand our share, and we're entering competitive pricing scenarios with some accounts. As a result of that, there's increased pricing competition. Overall, everything we see in Q2 indicates it will be a very successful year for our fertility business. As previously mentioned, we anticipate growth in the high single-digit to low double-digit range for the upcoming years. All the signs and signals from our two most important markets, the U.S. and China, continue to be solid. Regarding Nexplanon in the U.S., the business acts in a predictable manner; typically, Q1 is our lowest quarter. However, physician demand remains strong, showing significant growth. Our outlook for a $1 billion achievement in 2025 stands strong due to growing physician demand and solid growth signals. The 'buy-in, buy-out' noise that we see can be rationalized in the context of the moving annual total for the business. Specifically, as for Established Brands in China, the retail growth continues to do well, especially with Arcoxia in respiratory, benefiting from a strong respiratory season. We are working through all the rounds of volume-based procurement and expect to see the retail sector continue to perform well for us moving forward.

Thank you.

Thanks. So I had a question about Biz Dev M&A and the capital structure. I think in the past, maybe a few months ago, you talked about potentially adding commercial stage assets. So I guess the question is, how do you think about that in the context of also debt pay down and maybe it's not an either/or, but what are you prioritizing in terms of bigger acquisitions versus cleaning up the cap structure? Thank you.

I think Matt and I will tag team on this. From a high level point of view, David, we made a $250 million pay down of our debt in the first quarter. So we are clearly focused on executing some balance sheet hygiene actions. However, that does not detract from our ongoing efforts to build a pipeline of assets for Organon, especially in the Women’s Health and biosimilar spaces. We are continuing to evaluate potential near-term, accretive tuck-ins. For example, the Claria Medical System, if all goes well, will have a launch by the second half of 2025, which is not a long-term proposition. As time progresses, we will have more opportunities to discuss new developments in business development. We remain open to all forms of transactions, including large deals we are considering, but we must be careful given the current competitive environment that we operate in. Matt, any additional thoughts?

That's a very complete answer, Kevin. I have nothing to add.

Good morning. Thank you for taking my questions. On the fertility business, how are you thinking about your business in China in terms of your commercial organization portfolio? Is your footprint there sufficient to drive the high-single-digit to low-double-digit growth that you talked about? And are you interested in business development opportunities that would expand your business and portfolio in China? Thank you.

Yes, Greg. Look, I've said on a number of calls that the future of our fertility business is strongly tied to growth from the Asia Pacific region. The overall fertility rates in the Asia Pacific region, including China, do not reflect sustainable growth, indicating a major issue for many countries. In regards to China, we've established a dedicated fertility sales force with a strong footprint, particularly in the provinces where we expect the highest return on investments. We are currently the second leading product group in fertility in China, where our market is not yet reimbursed, but there are signals indicating that reimbursement is forthcoming. This should create further opportunities to expand and grow our presence in China. The first quarter saw setbacks primarily due to COVID lockdowns, but February and March showed much stronger performance. We are anticipating strong double-digit growth potential in Q2 and the rest of the year. China will be a key focus for us, and we are looking at business development opportunities within the fertility sector there, as well.

Thank you.

Very good. Thank you. Today, we've conveyed to you that we're focused on two things: balance and execution. We remain committed to creating a sustainable long-term business with growth from value-creating business development. This will be balanced against good financial hygiene, which, for us, means maximizing profitability and lowering our debt leverage. I'm proud of the continued business execution and our growing track record of delivering on our commitments. Thank you. We'll speak to you soon.