Organon & Company (OGN) — Q1 2024 Earnings Call Transcript

Thank you, operator. Good morning, everyone. Thank you for joining Organon's First Quarter 2024 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 and guidance. Also joining us for the Q&A portion of this call is Organon's Head of R&D, Juan Camilo Arjona Ferreira. 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 press release and conference call presentation. I would now like to turn the call over to our CEO, Kevin Ali.

Good morning, everyone, and thank you, Jen. Welcome to today's call, where we'll talk about our 2024 first quarter results. We entered this year with a clear focus to deliver our 2024 financial targets, improving our financial position and positioning ourselves for future growth. And to that end, the first quarter was a very solid start. For the first quarter of 2024, revenue was $1.6 billion, with all 3 franchises contributing to a 7% growth rate at constant currency. I'm pleased to report that the Women's health franchise grew 12%. Our Biosimilars franchise grew 46%, and our established brands business continued its stable performance with growth of 2%. In the first quarter, adjusted EBITDA was $538 million, representing a 33.2% adjusted EBITDA margin and adjusted diluted EPS was $1.22. The strong performance in the first quarter strengthens our conviction in our financial guidance for the full year 2024, and we are affirming those ranges. We remain confident in our ability to deliver our third year of revenue growth on a constant currency basis, and we remain committed to delivering full year adjusted EBITDA margins that are in line with last year or better. From a capital allocation standpoint, we continue to believe this business can generate $1 billion of free cash flow before onetime costs, and we will be driving towards that number in 2024. That strong cash flow will provide financial flexibility to comfortably service our dividend, make progress on achieving a leverage ratio below 4x by the end of 2024 and to continue to do business development in line with the types of transactions we have completed in the last couple of years. This includes transactions in biosimilars and the recent commercial agreement with Eli Lilly to license 2 migraine assets. These transactions have solid returns, but importantly, they're also aligned with our mission of offering solutions in women's health beyond the narrow definition of reproductive health. Moving on to discuss our franchise performance. The first quarter growth in women's health franchise was led by NEXPLANON. Last year, we took the appropriate actions to position NEXPLANON for successful 2024 and the long-term growth opportunity we see for the product. We remain confident that the product can achieve robust revenue growth in 2024. NEXPLANON's first quarter, constant currency growth was 34%. The U.S. was up 35%, and the rest of the world was up 34%. Year-over-year growth in the U.S. reflected a shift in timing of our list price increase, which brought stability to distributor buying patterns. As a result of this shift, going forward, we expect less volatility quarter-to-quarter in NEXPLANON results. For the full year, we expect growth to be driven by NEXPLANON's leadership in contraception, the benefits of our pricing strategy, including list price in the U.S. and management of the 340B channel as well as physician demand growth. Outside the U.S., NEXPLANON grew 34% ex-FX in the first quarter driven by the increased demand in the Lamera region and in the larger markets in the U.K. region like France, the U.K and Canada. Outside the U.S. for the full year of 2024 growth will be driven by continued strong performance in those markets as well as our ability to better meet increased demand in our access markets, which we cited as a priority for us in 2024. As I mentioned nearly every quarter, we believe NEXPLANON will be on a $1 billion annual run rate in 2025. And beyond 2025, we believe there is still significant runway for growth up until the loss of exclusivity for NEXPLANON in the U.S., which, in our view, will not occur until 2030 for 3 specific reasons. First, our 5-year study is on track to close this year and pending FDA review and approval, our planning assumption is that we will be able to market it with a 5-year label in 2026. A differentiated label will give us 3 years of data exclusivity on that 5-year duration of use claim, which we know from our market research is preferred by women and providers. Second, we have IP protection on aspects of the applicator device until 2030. We believe that any generic coming to market before then would have to develop their own device and training programs to go along with it. So it's not until 2030 when IP protection on both implant and device would have expired that we might see the market start to alter with a similar 5-year product and applicator. And third, complex drug-device combinations have demonstrated strong post-LOE performance, which could be due to the fact complex drug-device development can pose significant challenges in terms of showing therapeutic equivalents. So overall, we're confident in the sales longevity of Nexplanon and further, when competition does come, we do not expect a traditional generics erosion curve. Moving on to our fertility franchise. As expected, our global fertility business was essentially flat this quarter, down about $2 million or about 2% ex-FX. You'll recall that in the fourth quarter of 2023 in the U.S., we exited a spin-related commercial arrangement, and we onboarded a significant customer, resulting in a very strong buy in FOLLISTIM at the end of last year that we have largely worked through in the first quarter. Offsetting U.S. performance was strong growth in fertility in China, which grew double digits, benefiting from strong demand. We expect continued momentum in our fertility business in China in 2024, with growth supported by solid demand especially in key provinces like Beijing, where reimbursement for assisted reproductive technologies has been implemented. Together, the U.S. and China make up north of 50% of our fertility business, strong demand in those markets, coupled with new launches and footprint expansion in other markets are supportive of the high single-digit revenue growth we expect to see in fertility on a global basis for the full year of 2024. Let's move now to our biosimilar business, which grew 46% in the first quarter and continues to be a solid growth pillar for Organon. We expect 2024 should be another year of double-digit growth on a global basis for our Biosimilars franchise. In the U.S., the growth driver in 2024 for Biosimilars will primarily be the uptake of HADLIMA for getting very good traction with HADLIMA with Veterans Affairs, who within 60 days of exclusively carrying HADLIMA managed to convert more than 50% of the patients from HUMIRA to HADLIMA. This is a strong indicator of payers' ability to rapidly convert utilization which is a critical factor for accelerating conversion to Biosimilars in this market. Behind the U.S., 2 other key markets in our Biosimilar business are Brazil and Canada. In Brazil, we are seeing strong performance from ONTRUZANT, in particular. The fourth quarter of 2023 was very strong for ONTRUZANT, driven by favorable timing of a tender in Brazil, but in Q1, we saw incremental volumes come through that we would characterize as opportunistic upside. In Canada, we continue to see strong performance, especially in HADLIMA and RENFLEXIS as the government mandated province-by-province transition to Biosimilar progresses. As we have previously talked about, our aim in Biosimilars is to launch a new asset every couple of years. We are well positioned to execute on that beyond 2024. A great example of this is our collaboration with Shanghai Henlius Biotech, where we licensed commercialization rights for 2 investigational products, PERJETA or pertuzumab and Prolia and XGEVA or denosumab biosimilar candidates. Organon will have exclusive global commercialization rights to these assets outside of Mainland China, Hong Kong, Macau and Taiwan. Clinical trials on both molecules have been progressing. In fact, we just recently announced that the Phase III comparative clinical trial for the denosumab biosimilar met primary endpoints. We expect regulatory filings for our 2 denosumab biosimilar candidates to occur during 2024 in certain markets, including the U.S. and EU followed by filings for the pertuzumab biosimilar candidate in the U.S. in late 2024 or early 2025. And then rounding out the discussion with established brands, which grew 2% ex FX in the first quarter demonstrating the resilience of this business. Impact from VBP in China was more than offset by the initial contribution from the recent commercial agreement for the 2 migraine drugs Emgality and REYVOW. We also saw a recovery in our injectable steroid products following last year's market action. For full year 2024, we expect established brands to achieve flat performance on an ex-FX basis and Matt will go into more detail about the pushes and pulls on the established brands portfolio for 2024. Moving now to Slide 6, where we take a look at revenue by geography. EUCAN grew 10% ex-FX in the quarter driven by the addition of the 2 migraine assets and the recovery of injectable steroids, both of which I just mentioned. We're still having solid growth in ATOZET in Europe which should be the trend for the 9 months of the year until it loses exclusivity in late third quarter of this year. U.S. was up 14% in the quarter, driven by performance in NEXPLANON as well as uptake of both HADLIMA and JADA post-launch. These factors offset rate pressure and the channel dynamics in fertility, which benefited the fourth quarter of last year as well as U.S. performance of ONTRUZANT. The LAMERA region has been a significant contributor to Organon's growth since spin. The 36% ex-FX growth in the first quarter was primarily driven by opportunistic volume associated with the ONTRUZANT tender in Brazil as well as strong growth in NEXPLANON across the access markets in Mexico. The APJ region was down 7% ex-FX this quarter. We expect it to be a challenging year in Japan as we face some national pricing revisions lack of favorability from last year when some competitors were out of stock and work through the LOEs of ATOZET and ROSUZET. China was down 5% ex-FX in the quarter. But for the full year 2024, we expect China to grow particularly as we lap the economy-related challenges in China as we saw in the back half of last year. Overall, we are very pleased with the results through the first quarter of the year. Operational execution is progressing very nicely. We also have our eye on smart deals that fit within our desired financial profile while moving us forward as a company. And finally, there is potential value yet to be unlocked in our clinical portfolio. In life cycle management, in addition to the NEXPLANON 5-year study and the 2 biosimilar assets with Shanghai Henlius that I spoke about earlier, we're making progress in the development of Mercilon for Primary Dysmenorrhea in Japan. On the innovative side, both assets we acquired through Forendo are progressing well, and our OG-6219 study investigating a novel approach for treating endometriosis is progressing towards a Phase II readout next year. We're also awaiting first in human dosing for our OG 719 program targeting the symptoms related to PCOS later this year, for which there is no current treatment. Additionally, we are anticipating preclinical data related to our collaboration with Cirqle, which is a novel method for nonhormonal contraception. It's great to see progress not only happening on the commercial execution side of things, but also in positioning Organon for future growth through our innovative therapies. Now let's turn the call over to Matt, who will go into our financial results in more detail.

Thank you, Kevin. Beginning on Slide 7. Here, we bridge revenue for the first quarter year-over-year. In February for modeling purposes, we suggested that you could consider evenly spreading revenue over the year, which would mean every quarter would be slightly under $1.6 billion in revenue, if you're working from the midpoint of our guidance range. We did a little better than that in the first quarter of 2024 driven by stronger volume especially from NEXPLANON and biosimilars, followed by recovery in injectable steroids namely DIPROSPAN, as well as continued growth from JADA. Outside of FX, the other revenue drivers were fairly neutral in the quarter. Taken in totality, these other drivers finished Q1 ahead of our expectations, which drove the margin favorability we saw in the quarter. We'll discuss margins in more detail shortly. LOE was about $5 million of impact in the first quarter, which reflects the LOE of ATOZET in Japan. The impact of VBP in China was also about $5 million in the first quarter and reflects lingering effects of the July 2023 implementation of Round 8 that included REMERON and HYZAAR. There was negligible impact from price in the first quarter. The benefits of our NEXPLANON pricing strategy in the U.S. muted expected pricing pressure in other parts of our business, particularly in biosimilars and to a lesser degree, fertility. In Supply Other, we captured the lower-margin contract manufacturing arrangements that we had with Merck and have been declining since the spin-off as expected. And lastly, Foreign exchange translation had an approximate $30 million impact or 2 percentage point headwind to revenue, and that's a function of more than 75% of our business being generated outside the U.S. Now let's turn to performance by franchise. As has been our convention, I will target my comments over the next 3 slides to those areas most relevant to your modeling as we think about where we ended the quarter and what the near-term future may hold. Let's start with women's health on Slide 8. As Kevin mentioned, we expect robust growth for NEXPLANON in the full year. With such strong growth in the first quarter and the benefit of our annual price increase in the U.S., which we took in January, NEXPLANON could achieve double-digit growth this year on a constant currency basis. For fertility, growth will be skewed towards the second half of the year. In the first half, we'll be absorbing the two Q4 2023 issues that Kevin referenced. First, the buy-in that resulted from exiting a temporary spinoff-related commercial arrangement in the U.S. and second, initial supply chain stocking related to the large contract initiation, which is also in the U.S. In the second half of the year, we will have the benefit of lapping what was a difficult fertility environment in China last year plus, we expect volume growth from the provincial expansion of reimbursement and new launches in other markets, as Kevin referenced. Turning to biosimilars on Slide 9. With ONTRUZANT, we have had competitive success as a key supplier of a biosimilar of HERCEPTIN in Brazil. And in the quarter, we had the benefit of incremental upside coming from additional volume through that tender. I would note that ONTRUZANT growth would have been down this quarter, if not for the incremental upside we had from these additional volumes in Brazil. In fact, on a global basis, we expect ONTRUZANT will be declining this year due to competition in other markets. And on U.S. HADLIMA, we had a strong first quarter, but given that this market has been difficult to predict and continues to evolve, we'll only say that it is our objective to grow that product sequentially each quarter this year. Turning to Slide 10. Let's talk about pushes and pulls on established brands for the full year 2024. We'll see VBP impacts pick up later in the year, driven by FOSAMAX's inclusion in round 10 expected late in the third quarter. ATOZET will go through LOE in the EU in September of this year, and that product has been doing very well for us in that market. We expect those headwinds to be offset by continued volume growth. For example, contribution from the new migraine assets in Emgality and REYVOW. We expect injectable steroids to continue to recover and you already see that here with 19% ex-FX growth in the Non-opioid Pain and Bone & Derm portfolio. These factors should result in about level performance for the established brands portfolio in 2024 FX change. Now let's turn to Slide 11, where we show key non-GAAP P&L line items and metrics for first quarter performance. For reference, GAAP financials and reconciliations to the non-GAAP financial measures are included in our press release and the slides in the appendix of this presentation. For gross profit, we are excluding from cost of goods sold, purchase accounting amortization and onetime items related to the spin-off, which can be seen in our appendix slides. Adjusted gross margin was 62.1% in the first quarter of 2024 compared with 65.2% in the first quarter of 2023. In the first quarter of 2024, the lower adjusted gross margin was primarily related to unfavorable product mix, foreign exchange translation and higher inflation impacts to material and distribution costs. Despite being below last year, gross margin actually came in stronger than we expected in the first quarter, mostly driven by better performance in price across the aggregated portfolio. Total non-GAAP operating expense was down 3% in the quarter, excluding IP R&D, reflective of our cost containment efforts. That is especially the case in R&D, where we have reprioritized clinical spending and rationalized headcount to better align with the types of business development programs we've recently completed and plan to pursue in the near term. IP R&D expense was $15 million in the first quarter compared with $8 million in the prior year period. The $15 million of milestone expense in the first quarter was related to development progression of a denosumab biosimilar. Milestone payments are inherently difficult to forecast, so we will continue to utilize the same convention that we employed this quarter, and that is to include an estimate of IP R&D and milestones to be recorded in the quarter in our earnings date press release, which will be posted as soon as practical after the close of each quarter. Foreign exchange losses were modestly lower $6 million in the first quarter of 2024 compared with $9 million in the prior year period. In both periods, these are foreign exchange losses primarily driven by normal course business activities in countries where it's not feasible to hedge movements in the local currency. These factors culminated in an adjusted EBITDA margin of 33.2% in the first quarter of 2024 compared with 33.7% in the first quarter of 2023. Non-GAAP adjusted net income was $315 million or $1.22 per diluted share compared with $276 million or $1.08 per diluted share in 2023. Turning to Slide 12. We provide a closer look at our cash flow for the quarter. For the last 2 years, our free cash flow generation has followed the approximate pattern of 30-70. 30% of our free cash flow was generated in the first half of the year and 70% is generated in the back half. In 2022, we generated $875 million of free cash flow before onetime charges. In 2023, that figure rose to $940 million. And in 2024, we expect to reach approximately $1 billion of free cash flow before onetime items underpinned by our financial guidance. Like many companies with December fiscal year-end, Q1 free cash flow was impacted by accrual runoff, largely related to the timing of annual incentive payments, and that represented about 1/3 of that working capital consumption number. Typical to the first quarter, we also see seasonal fluctuations in working capital, which drove the remainder of the change. For onetime cash costs related to the spin-off, in February, when we gave full year 2024 guidance, we said to expect about a 40% reduction from 2023, which would put us in the $200 million ballpark. The $68 million you see here is consistent with that expectation. Of note, we have completed the implementation of our global ERP system as of April, which was the main driver of onetime costs up until this point. Next year, we would expect even lower onetime spin-related costs and beyond 2025 and we expect onetime spin-related costs to be de minimis. In the $36 million of other onetime costs, here, we capture headcount restructuring initiatives and the transition of our manufacturing network related to the spin-off. These costs are distinct from the spin-related standup costs and that they're associated with actions, which will ultimately drive cost efficiencies. Some of which we realized in Q1 and which are already incorporated into our earnings guidance for 2024. Moving to Slide 13 now on debt and leverage. When we provided guidance in February, we were bracing ourselves for leverage to tick higher in the first half of the year before coming down in the second half, ending the year better than 2023 with a view to ending the year below 4x. With stronger-than-expected EBITDA performance in Q1, our net leverage ratio has remained level with 2023 year-end and is holding at 4.1x. This solid result gives us greater confidence in our February commentary around lowering our net leverage ratio during the year. Now turning to 2024 guidance on Slide 14, where we highlight the items driving our 2024 revenue guidance range of $6.2 billion to $6.5 billion. Some of the individual drivers have changed, but our top line revenue guidance is remaining unchanged. For LOE, that approximate $70 million to $90 million impact for the full year 2024 incorporates ATOZET, both Japan and in the EU later this year. We also have a provision for DULERA, where we have been expecting a generic since its LOE in 2020. VBP impact is still expected to be in the range of $30 million to $50 million for 2024. By the end of the year, we expect approximately 85% of the portfolio to have gone through VBP. Though minimal in Q1, we expect the impact from price to be in the $180 million to $220 million range, which is up $25 million at the midpoint from the $150 million to $200 million range we talked about in February. Overall, this represents a bit over a 3 percentage point headwind versus prior year and is more in line with our longer-term expectations of price impact across our entire business, given pricing pressure in Biosimilars and U.S. fertility and the mandatory pricing revisions we expect to see in certain international markets. And for volume, we are raising our estimate by $75 million at the midpoint to $450 million to $650 million to primarily reflect the upside we saw in Biosimilars in the first quarter. Overall, that almost 9% volume growth we expect over last year will be coming from our growth pillars: NEXPLANON, Fertility and JADA within women's health, Biosimilars and China retail as well as the latest addition of Lilly's Emgality and REYVOW in Europe. And finally, based on current spot rates, we think we could see an increasing headwind from FX, now at 160 to 200 basis points, paired with 80 to 160 basis points that we were forecasting back in February. We've absorbed that impact with an improved view of volume growth. So our constant currency revenue guide effectively went up a bit. Moving to the other components of guidance on Slide 15. For adjusted gross margin, we are continuing to guide to a range of 61% to 63% for 2024. On OpEx expense, even though we are tracking to the lower end of the ranges for SG&A and R&D expense, if you simply annualize Q1, it's a little too early in the year to be calling those ranges down. For SG&A, we have some expense in the second half related to product launches. The migraine products, HADLIMA, XACIATO and JADA internationally to cite a few examples. And that will be partially offsetting the favorable impact of our restructuring cost containment efforts. For R&D, the $400 million to $500 million range still feels good, even inclusive of IP R&D to date, but we'll continue to evaluate this as the year progresses and milestone achievement becomes more clear. Interest, tax and depreciation expense ranges are all unchanged. All things considered, Q1 was a solid start to the year. We're heading in the right direction on volume growth, margins and operating expense discipline, and we're tracking to another year of constant currency revenue growth. With that, now let's turn the call over to questions and answers.

I just wanted to focus on free cash flow for a quick second. It's about $109 million before onetime costs. And I guess the true free cash flow is $6 million for this quarter. So it's roughly flat, roughly neutral. And my question is, I knew the working capital was the biggest drag of about $300 million. But 1Q last year wasn't exactly similar. Wasn't it half that at $160 million? So how do we square those knowing that the ERP costs had actually come down but also knowing that maybe heading into 2025, 2026, you could potentially have NEXPLANON headwinds from a free cash flow perspective as patients switch to a 5-year regimen instead of a 3-year regimen.

We will address the 2024 free cash flow aspect of your question for Umer. Our forecasting indicates that the seasonality of working capital will start to reverse in the latter quarters of the year, allowing us to recover to the $1 billion target before one-time items that we are projecting. In terms of overall one-time costs associated with the spin-off, which were approximately $344 million last year, we anticipate that figure decreasing by about 40%. You will see this reflected in the latter quarters of the year. To reiterate, the seasonality of that cash flow is predominantly driven by around 70% in the second half, and Umer, the first quarter performance gives us confidence that we will achieve the full year target.

Umer, regarding your second question about Nexplanon potentially being a headwind in the 25% to 26% range, we don't anticipate the 5-year indication to be established until 2026. Additionally, we have two reasons to believe it will not be a headwind. First, there is always a possibility of adjusting the price, although we have yet to make any decisions on additional pricing for the 5-year indication. Extensive research is needed, but it remains an option. Secondly, and perhaps more importantly, there is a significant number of healthcare providers and patients who would prefer to have the 5-year indication and are currently using other contraceptive methods. This could lead to a net gain for us rather than a notable headwind.

This is Dan on for Terence. Just 2 from us. I guess, first, just on U.S. NEXPLANON to get a little more color just on the underlying volume trends that you saw in the quarter and how you're thinking about the rest of the year. And then on HADLIMA, how you're thinking about maybe initially the opportunity in '25 at this point? And any color on some of your initial PBM contracting conversations.

Thank you for the question, Dan. It's Kevin. The components of NEXPLANON growth this year in the U.S. are strong. We believe we made the right decision to adjust the price in the first quarter, allowing for any buy-in and buyout scenarios to occur within that quarter. Demand is really picking up, both in the 340B channel and on the commercial side. We are confident that it will be a solid year, and I expect double-digit growth for NEXPLANON globally, driven by our performance in the U.S. We are seeing positive signals from various initiatives aimed at boosting NEXPLANON demand here. Regarding HADLIMA, it's also progressing well. I've mentioned before that it's been a slow market formation period. Currently, more pharmacy benefit managers are starting to prefer biosimilars to HADLIMA. We aim for an exclusive contract with the VA, and we anticipate ongoing market formation as we approach 2024 and 2025. Between 2025 and 2026, we expect to see significant erosion of HUMIRA. As long as we remain in the top 2 or 3 positions, we will benefit from this market opening. I continue to believe that our peak revenues, which we've estimated to be a couple of hundred million in the U.S., are definitely achievable, and hopefully, we will exceed that over time. We feel positive about our strategy for HADLIMA moving forward, and I'm confident about the product in the coming years.

Two questions. First, could you discuss the progression of your operating margin beyond 2024 based on your current progress? What is your confidence level regarding potential sources and the scope of this improvement? Second, can you provide an update on business development and any opportunities you are currently exploring? Specifically, the opportunity with Emgality was quite appealing. Are there more opportunities like that, and do you favor certain segments or regions of the business?

I'll start with the operating margin aspect. As we look to the future, we anticipate margin improvement in several areas which we believe will counterbalance the ongoing pricing challenges we face in our highly competitive markets. We expect that our product mix will gradually shift towards higher-margin offerings as new products are launched. Additionally, we foresee enhancements in productivity and cost of goods sold from our network rationalization efforts as we move away from Merck services. Lastly, we believe we can achieve operating leverage from our fixed costs, which we are currently realigning, as evidenced by some of the benefits we observed in the first quarter. These are the margin improvement strategies we are diligently pursuing, and as mentioned in our prepared comments, we think they will help more than counter the persistent pricing pressures we experience across our network.

Chris, in response to your question about business development, I can confirm that we will be pursuing more deals similar to the recent ones with Lilly regarding REYVOW and Emgality. Our focus is on expanding our efforts in women's health, particularly in migraine treatment, where approximately two-thirds of migraine sufferers are women. We are consistently receiving numerous opportunities, especially in regions and specific countries like China, which we view as a growth market for us, particularly in women's health. We will remain disciplined in selecting opportunities that align with our capabilities and ensure that we do not incur significant operating expenses while expanding our portfolio. We anticipate that these initiatives will be accretive in the near future. Additionally, we will continue to seek larger deals that can significantly impact our business, even though they occur less frequently. This year, our primary focus is on executing our financial strategy effectively to meet and exceed our targets, improving our leverage, and laying the groundwork for greater flexibility in the future to engage in transformative opportunities. Please stay tuned for updates.

It's Jane-Marie for Navann. Can you comment more on what your expectations are for the HUMIRA biosimilar market for this year and the next considering the rise in HUMIRA assets and Rx after CVS Caremark effectively removes HUMIRA from its major formulary.

Yes, Jane. I can address that. I think it's what I've been predicting for the last couple of years: a slow and steady stream of wins across various channels, particularly in the PBM sector. You've mentioned a large PBM, CVS, opting for a different product, which highlights the exclusivity of HUMIRA in that market. Our strategy focuses on low net cost providers like the VA and Blue Cross Blue Shield, Medicare, and Medicaid, which together cover about 40% to 45% of lives in the U.S. These organizations are looking to save money more quickly. Currently, about 25% to 30% of patients with commercial plans are still paying $1,000 or more out of pocket for HUMIRA. We are working to provide more savings for both patients and the healthcare system, allowing for more room for further innovations. I believe the market will gradually open up, starting slowly in 2024, picking up in 2025, and really starting to expand in 2026 and beyond.

I just wanted to follow up on HUMIRA. It appears that Sandoz and Teva have had some success with these private label agreements with large insurance groups. I think Optum is still available; do you see that as a strategy of interest? I know there's an exclusive deal with Cigna. Additionally, regarding NEXPLANON outside the U.S., your 10-K mentioned that in the coming year, most countries where NEXPLANON is sold outside the U.S. will lose exclusivity. How do you view the erosion profile with this loss of exclusivity in the majority of your international markets? Is it typical for international markets to see a decline of around 30%, or do we expect a more significant drop like the U.S.? I'm just interested in your thoughts on NEXPLANON outside the U.S. in 2025.

Thank you, Jason. I will address the first question regarding the HUMIRA biosimilar situation. You mentioned correctly that Sandoz acquired the CVS business and that Teva has made a recent announcement. We currently have over 50% access in the Optum business. I believe our strategy is connecting well with our providers. We have established a strong presence in the Optum network and are also seeing good adoption at the state level, including with various VAs and Blue Cross Blue Shield plans in different states. These relationships tend to be more stable and sustainable over the long term. The more diversified we are in the biosimilar market, the better we can maintain our market share as competition increases. I remain confident that in 2024, we will see improved penetration into this market, and 2025 will provide further opportunities for HADLIMA. Regarding your question about NEXPLANON, I do not anticipate any market erosion for our ex-U.S. business. A significant portion, 70%, of our operations is based in the U.S., which is the primary focus for market penetration. The ex-U.S. market is less attractive due to pricing dynamics and fragmentation. Unless a company has substantial access to the U.S. market, it’s challenging to penetrate. I believe there is substantial evidence indicating that the relevant developments will occur around 2030. Our global applicator is protected by patents until 2030, and creating a new applicator involves extensive safety and efficacy studies, making it a complex task. Therefore, I view this as a 2030 event and possibly beyond.

So 2 questions. One is longer term on EBITDA margins beyond control in spend, do you think there's room for margin expansion based on the top line. Anything in the established brands business that can drive margin expansion over time, anything in terms of the women's health business or just its overall footprint that can drive margin expansion over time. This is more of a beyond '24 question, number one. And then number 2 is, help us better understand long-term leverage targets, particularly with the 2028 maturities. How are you thinking about that? Looking let's say Teva, they have a leverage target in '27 at 2x. I'm not trying to pin you down on the target necessarily, but some of your peers do talk about that. So where do you get comfortable in terms of a steady-state net debt to EBITDA.

Yes, David. To address your question about longer-term margin growth through revenue mix, we believe we can achieve this with what we have planned for the latter part of the decade and through acquisitions during that period. We expect to maintain stability within our current product portfolio. The improvement in revenue mix will likely come from the faster-growing products we have now, particularly NEXPLANON and JADA, along with potential additions from business development. Regarding leverage, since the spin, we’ve maintained that this business can operate efficiently at leverage levels below 3.5x. The exact level will depend on business conditions and investor sentiment towards our leverage ratio. We aim to be below 4x by the end of this year and reach the 3.5x target by 2025. Our perspective on this hasn't changed, although investor sentiment around leverage may have shifted. We still believe this is the optimal range for our business as we look ahead at our capital structure.

Thank you for taking me back on again. Apologies for missing the earlier call. And again, apologies if this has already been covered, please feel free to refer to the transcripts if so. A couple of things. Firstly, on the biosimilar market, clearly, the private label moves with Cardiva, Zymo and what we saw with ALVO and Teva recently with Simlandi seems to be the one which is shaping the market and getting greater market share dynamics. So can you comment on your thoughts or expectations around that? On a related note, can you also remind us of HADLIMA path to interchangeability or is still on track for June approval when would you have to wait till Alvotec's exclusivity ends next year for you to claim interchangeability? One. Secondly, on the established brands side, now that we see Emgality and REYVOW in contributing. Can you help me understand a bit more on the dynamics here and the expectations for these brands going forward?

Balaji, it's great to speak with you. Regarding biosimilars and HADLIMA, I believe the recent decision by CVS to exclusively choose the Sandoz product is a positive indicator for the market development we've been discussing. However, it's important to note that the market is divided into two segments. One segment consists of PBMs, covering about 5% of the total lives, and the other segment includes various low net cost providers that account for around 45% of the business. These providers tend to prioritize low-cost products and do not heavily rely on rebates. As we look ahead, it's likely to be very dynamic this year and next. We're maintaining a competitive edge, and our strategy is effective. Currently, we rank among the top one or two biosimilars in terms of total and new prescriptions in the U.S., and we are confident in our ability to capture market share from the originator, driving towards our peak revenue goals, which we estimate to be in the hundreds of millions in the U.S. Regarding established brands like REYVOW and Emgality, we have just begun promoting them in the EU, with some countries still set to launch in the coming months. The migraine segment is rapidly growing in Europe, and we are well-positioned because these two products are well-recognized, recently launched, and carry a strong reputation. Our team is very enthusiastic and motivated to demonstrate what we can achieve with these products. Expect to see more accretive deals that leverage our scale and global infrastructure, which will help us generate more cash for further business development on a larger scale over time.

If I could just have a follow-up to it. I appreciate the detailed explanation. In light of this performance, the outlook, I thought guidance could have raised possibly, how conservative are you with the guidance retaining or reaffirming what you had said earlier?

Yes. So we were certainly encouraged by the first quarter performance really across all of our franchises, Balaji. But the thing that we were considering most when thinking about what to do with guidance was really what's going on with foreign exchange. The dollar is persistently strong. When we created our initial guidance in 2024, the euro was somewhere between $1.08 and $1.09 it's since come back. And so like we said in the prepared comments, when we look at the nuts and bolts aspects of our top line revenue, we're actually up on a constant currency basis. And it's really just the FX dynamic that is causing us to be a little bit reticent about raising guidance this early in the year. We'll revisit this when we issue Q2 results. But once again, the performance in the first quarter gives us a lot of confidence in the initial guidance that we gave, and we're just optimistic as we leg into the second quarter here.

I want to thank you. I want to close today's call by essentially repeating what I began today's call with, namely that we came into 2024. Looking at it as a year to focus on execution, delivering on our projections, improving our financial positioning and of course, building for our future pipeline. And through Q1, we can definitely say that we're progressing well towards those goals. And I want to thank all of you for a great discussion today, and we look forward to continued engagement.