Organon & Company (OGN) — Q1 2025 Earnings Call Transcript

Thank you, operator, and good morning, everyone. Thank you for joining Organon's first quarter earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer, and Matt Walsh, our Chief Financial Officer. Juan Camilo Arjona Ferreira, Organon's Head of R&D, will also be joining 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 Investor Relations website, 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'd now like to turn the call over to our CEO, Kevin Ali.

Good morning, everyone, and thank you, Jen. Our first quarter results represented a solid start to 2025, and we're very much in line with our expectations for the year. Key growth drivers are on track. Nexplanon grew double-digit and is set to achieve more than $1 billion in revenue in 2025. The launch of Vtama in the atopic dermatitis indication has been successful, ramping just as expected, and the product is marching towards $150 million of revenue for the year. Additionally, we continue to estimate that our restructuring initiatives will yield approximately $200 million of annual savings. Given the tariff policies in effect as of today, we're affirming our revenue and adjusted EBITDA margin guidance, as well as our target of generating over $900 million of free cash flow before one-time costs in 2025. Today, we also announced that we have reset our dividend payout and will redirect those funds to debt reduction. With a reduced dividend payout, the company can redeploy almost $200 million in prospective dividend payments over the remainder of 2025 that will enable a path to achieve a net leverage ratio below 4 by year-end. Over the last year, we have established a leaner, more fit-for-purpose cost structure while increasing revenue contribution from our core growth drivers. By deleveraging more rapidly, we will continue to strengthen the future prospects of the company. Over time, this will position us to execute more of the compelling business development opportunities we've done to date, bringing in additional growth drivers to our portfolio while maintaining lower leverage. Further, the recent macroeconomic uncertainty has created a pronounced dislocation in our equity valuation relative to our earnings. To us, this is an affirming signal from the market that now is the right time to proactively take action to support our balance sheet. A lot of the uncertainty in the broader market obviously centers around current and future tariff policy. Based on tariffs in place as of today, we have very limited exposure in 2025. Our revenue composition is about 75% ex-U.S. Europe; Canada represents about 25% of our total revenue. China represents about 13% of our revenue, and for that revenue generated in China, a majority of the supply comes from Europe. As you think about the roughly 25% of our revenue generated in the U.S., again, most of that supply comes from Europe. Our women's health products sold in the U.S. are primarily made in the Netherlands. Nexplanon is the bulk of that, and we have already taken steps to mitigate exposure through inventory management. For U.S. biosimilars, Ontruzant, Renflexis, and Hadlima are mainly supplied from Korea and the EU. For recently acquired Tofidence, that product is manufactured in China, but we have inventory coverage offering us protection through 2025. The denosumab asset from Shanghai Henlius is not planned to launch until much further in the year. So, again, based on the tariffs in place as of today, we have very limited exposure in 2025. With those important topics addressed, let's move now to a discussion of the financial results. As I mentioned, the first quarter was very much in line with our expectations. We had guided that the first quarter would be the lightest of the year as we work through the loss of exclusivity of Atozet and as Vtama ramped up. The women's health franchise grew 12% ex-exchange, led by the performance of Nexplanon, which was up 14% in the quarter. Nexplanon grew double-digit in both the U.S. and ex-U.S. markets. This year, we expect Nexplanon to deliver more than $1 billion in sales, driven by both price increase and demand growth. For the five-year indication, we have made our submission to the FDA, putting us in a position to be ready for a late 2025 launch pending FDA approval. Fertility had a very strong quarter, growing nearly 26% globally. The U.S. grew $23 million or 70%, with about half of the growth coming from lapping a buyout in Q1 of last year. The other half was volume growth and rate favorability. Ex-U.S. fertility grew 4%, with new launches in Turkey and Japan offsetting sluggish performance in China. We expect growth in the U.S. as well as footprint expansion outside the U.S. to drive high single-digit growth in our global fertility business in 2025. Jada grew 20% in the quarter, driven by growth in shipments, especially in the U.S. among existing customers that are expanding Jada adoption. More than 94% of the nation's largest birthing hospitals now stock Jada. During the first quarter, Jada launched in South Korea and achieved the CE Mark of approval in Europe. We plan to launch in select EU markets this year, and we continue to assess future market expansion opportunities. Turning to biosimilars. Biosimilars continue to be an important part of our growth story. In 2025, though Ontruzant and Renflexis will continue to decline, Hadlima grew 57% in the first quarter with continued strong uptake in the U.S. We also recently acquired the regulatory and commercial rights for Tofidence in the U.S. for intravenous infusion. Tofidence is the first biosimilar approved for Actemra. Tofidence was launched in May 2024, but the overall Actemra biosimilar market was slow to form in the U.S., yielding a very good opportunity for future sales uptake and growth. Immunology is a market we certainly know well in the U.S., notably the physician-administered business, and as a result, we are uniquely positioned to drive Tofidence sales. And finally, we anticipate launching the portfolio of Henlius products beginning in late 2025, with the denosumab biosimilar in the U.S., followed by pertuzumab in Europe. Wrapping up the revenue discussion with established brands, in the respiratory portfolio, mandatory pricing revisions in Japan and mild seasonal respiratory complications in China weighed on their results in the first quarter. Performance in the cardiovascular portfolio during the first quarter was driven by headwinds from the loss of exclusivity of Atozet, which will abate in the fourth quarter of this year. As we have said since then, though many of the brands in this portfolio have been around for decades, we have taken an entrepreneurial approach in managing the business for profitable growth. The Established Brands franchise is starting to look different than it did at spin, now home to innovative medicines that are growth engines for the company; it looks more like a general medicines portfolio. Over the last year and a half, we have added products with patent protection to this franchise, including Emgality and Vtama. Combined, we expect those products to generate over $300 million in revenue in 2025. The Vtama launch performance has been encouraging. As it continues to outpace branded competition in NRx and TRx growth. For the week ending April 18, Vtama NRX grew 71% versus direct competitors who were up 4% compared to a pre-AD approval 13-week average baseline. TRx grew 30% compared with competitors who were up 5%. Vtama is uniquely positioned within the atopic dermatitis market. It is applied once a day, and it is the only nonsteroidal topical approved for mild, moderate, and severe atopic dermatitis, providing access to all segments of the addressable market. It is the only product approved for patients two years of age and older, offering a significant advantage over competitors. We have developed a core capability in finding opportunities like Emgality and Vtama. These are accretive transactions with deal structures heavily weighted towards success-based milestones. These are the types of assets that over time, we will have greater opportunity to pursue with the capital freed up from the dividend. I'll now turn the call over to Matt, who will review the financials in more detail.

Thank you, Kevin. Beginning on Slide 9, here we bridge the 4% constant currency revenue decline in the first quarter year-over-year. Starting on the left, LOE was about $60 million for the quarter, which primarily reflects the impact of the loss of exclusivity of Atozet in Europe, which occurred in September 2024. VBP in China was de minimis in the first quarter, and we expect only a nominal impact on a full year basis for 2025. Our potential exposure this year will be more back-half weighted as we expect Fosamax will be included in round 11. Once this occurs, approximately 80% of our Established Brands portfolio will have been subjected to the VBP process. There was an approximate $40 million impact from price for the first quarter, or about 2.5%. Pricing pressure was mainly from biosimilars, certain mature products in the U.S., like NuvaRing and Dulera, and the LOE of Atozet. From a regional perspective, we continue to face expected mandatory pricing revisions in Japan and ongoing competitive price pressures related to our respiratory products in China. Volumes increased $45 million in the quarter, representing growth of a little over 2.5%. Hadlima, Emgality, Vtama, and Nexplanon were the largest contributors to volume growth and will likely continue to be the main drivers for the full year. In supply/other, here we capture the lower-margin contract manufacturing arrangements that we have with Merck, which have been declining since the spin-off as expected. And lastly, foreign-exchange translation had an approximate $45 million impact in the first quarter, or about 280 basis points of headwind to revenue, which reflects a strengthening U.S. dollar versus most foreign currencies in the current period relative to the first quarter of 2024. The recent weakening of the U.S. dollar potentially creates a tailwind for us over the remainder of 2025, and I'll revisit this point later in the presentation when we discuss guidance. Now let's turn to Slide 10, where we show key non-GAAP P&L line items and metrics for the quarter. 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 one-time items, which can be seen in our appendix slides. Adjusted gross margin was 61.7% for the first quarter compared with 62.1% in the first quarter of 2024. The year-over-year decrease in adjusted gross margin primarily reflects the impact of unfavorable pricing, as I discussed. Non-GAAP SG&A expense was up 6% in the first quarter, driven by commercial and launch expenses for Vtama, which was acquired in the fourth quarter of 2024. Excluding expenses related to Vtama, SG&A was down versus the prior year, reflective of our efforts to contain and reduce operating expenses. Non-GAAP R&D expense before $6 million of IPR&D was down 17%, primarily due to the timing of clinical study spend. As we think about the restructuring actions to reduce operating expenses that we communicated as part of our 2025 earnings guidance in February, we began executing those plans during the first quarter, and we fully expect to achieve approximately $200 million in expense savings over quarters two through four, which is already incorporated into our earnings guidance. Our first-quarter adjusted EBITDA margin of 32% was about 150 basis points better than we expected, in part because of the timing of clinical study spend that I just spoke of. We also did a bit better on gross margin, driven by favorable product mix. Also in the first quarter, we benefited from a $4 million realized transaction gain from foreign exchange, mainly driven by currencies that we can't hedge. Turning to Slide 11, we delivered $146 million of free cash flow before one-time costs in the first quarter, about a third better than the prior year period. This is a function of active cash cycle working capital management, lower interest rates, and timing of cash interest and tax payments. As we said back in February, one-time costs related to the spin-off were completed in 2024 following the rollout of our global ERP system. We expected one-time spin-off costs to be zero in 2025, and you can see that reflected in our first-quarter results against $62 million in the prior year period. In the $75 million of other one-time costs, about $15 million relates to cash payments associated with restructuring initiatives aimed at leaning out our operating expenses, as I mentioned earlier, $20 million relates to the final payment on the Microspherix settlement, and the remaining $40 million relates to the planned exits from supply arrangements with Merck that, as we've discussed in past quarters, would be ramping up. These are activities that will enable Organon to redefine our appropriate sourcing strategy and move to fit-for-purpose supply chains while focusing on delivering efficiencies in terms of gross margin expansion, which we expect to begin realizing in 2027. Restructuring and manufacturing separation activities could together represent $325 million to $375 million in 2025. Our current view is that we could finish 2025 at the lower end of this range. Once again, these one-time costs drive value that investors will be able to see in 2025 in the form of improved operating expense efficiency and in later years related to more cost-efficient manufacturing that is expected to drive meaningful margin expansion. In 2025, we expect to pay about $200 million in commercial milestones, primarily tied to Vtama, Emgality, and the biosimilar programs with Shanghai Henlius. Through the first quarter, we have paid about $130 million towards that expected amount. The achievement of these milestones means that we are realizing value for business development deals already signed and validates the path to low to mid single-digit revenue growth post-2025 that we've been saying Organon should be able to deliver. Now turning to Slide 12. Our net leverage ratio was 4.3 times at March 31. That performance is consistent with prior commentary that leverage could float up to the mid-4 times area during 2025 as we digest the Dermavant transaction. As we capture more EBITDA benefit from the Vtama launch later in the year and realize the benefit of operating expense restructuring actions, we would naturally delever closer to 4.2 times where we ended 2024. With our revised capital allocation plan announced today that increases our retention ratio, we now have the ability to accelerate progress on deleveraging. In the near term, as Kevin stated, our priority is to reduce net leverage, given the uncertain macroeconomic environment that investors are reacting to. We see a clear path to achieving net leverage below 4 times by year-end. And over time, the capital preserved with a higher retention ratio creates a compounding improvement in financial flexibility. It offers us the opportunity to achieve meaningful deleveraging over the next few years, whether it's through outright debt repayment, accretive M&A, or some combination of the two. Now turning to 2025 guidance on Slide 13. For the operational bars on this page, everything remains the same for the full year. Our constant-currency guidance remains the same, which is about flat versus the prior year at the midpoint. We expect the uptake of Vtama, continued solid performance in Emgality, and organic growth in Nexplanon and other products in our portfolio will help to offset the LOE of Atozet in Europe, along with pricing headwinds in other parts of the portfolio. That's a pretty strong statement, given that Atozet's LOE represents a headwind of approximately $200 million alone between volume and price. So, with no changes to the ranges on the operational drivers, let's focus for a moment on foreign exchange. The guidance we provided in February was for an expected $200 million negative impact from FX in 2025, or about a 300 basis point headwind. As I mentioned, the Q1 impact was about 280 basis points, in line with that full-year estimate. Since February, however, the dollar has weakened. And if current rates persist, we would see some upside to the full-year estimate that would move us to the high end of the guidance range. Given the volatility in the currency markets, that upside could be temporary. The responsible thing to do at this point as regards guidance is to avoid chasing a very volatile currency market and for now leave that component of our guidance unchanged and simply note the possibility for favorability over the remainder of the year. We'll be reevaluating our view on FX as the year progresses. From a quarterly phasing perspective, we should deliver modest sequential revenue growth from the first quarter to the second quarter, and we continue to expect the fourth quarter to be the strongest of the year.

To address your first question, on capital allocation more broadly in your framework going forward. Our priority is to reduce net leverage, given the uncertain macroeconomic environment. We are confident that we will achieve the $150 million sales target for Vtama. The new atopic dermatitis label is a game-changer, and we have significant advantages over our competition. Our managed care group is actively working on improving access and coverage, which is essential for reaching that target. The feedback from the field has been encouraging, and we are optimistic about launching Vtama in Canada and international markets later this year. Regarding deleveraging, our focus remains on reducing leverage below 4 times by year-end while positioning ourselves for future growth through potential business development deals. We see that as a pathway to strengthen our company's future prospects.

Hi, thanks. So, a couple for me. First on Vtama, can you just talk through your level of confidence that you can get to that sales target that you reiterated? And I guess part of my question here is, just given the nature of the category and that it is tightly controlled, how are you feeling about access? How are you feeling about the gross to net here? Just help us understand in just overall how you think you can get to the target. That's number one. And then number two, just with your priorities regarding deleveraging, where does additional BizDev M&A fit? Is that on the back burner? Is that something where you're just going to continue to be opportunistic? How should we think about that? Thank you.

Thanks for the question, David. It's Kevin. In regards to Vtama, we are confident that we'll achieve that $150 million that I kept mentioning. The reason for that is that the new atopic dermatitis label really is a game-changer. The kind of advantages that we have versus competition are significant, whether it's essentially the once-a-day down to two years of age, the incredible efficacy in terms of attacking itch, which is the number one symptom for atopic dermatitis. The initial reports have been fantastic, and we see strong NRx and TRx growth. Access is crucial, and our managed care group is actively working on it. I've been in the field recently, and feedback indicates outstanding efficacy and ease of use for patients. Regarding deleveraging, yes, that’s our current focus. We believe it is right to prioritize lower leverage in the current macroeconomic environment. Once we achieve that, we'll seek more opportunities for business development like we did with Vtama, which we identify as strong assets for our portfolio.

Thank you for the question. I have one question and a follow-up. So, clearly, BD will be more of a focus moving forward. Should we think of any uptick in that area as an increase in the frequency of future deals, or could there also be an increase in the size of future deals? And as a follow-up, when we survey the assets that Organon has been licensed recently, I think it's fair to say the company has adopted a pretty flexible definition of women's health. So, what should we consider to be your option space moving forward? Is there any asset or therapeutic category that you view as outside the bounds of your strategic focus, or is pretty much everything fair game so long as it makes financial sense? Thank you.

Thanks for the question, Michael. We have a very broad definition of women's health. It encompasses conditions unique to women, like our Forendo acquisition related to endometriosis or polycystic ovary syndrome. Our partnership with Lilly on Emgality addresses conditions like migraines, which disproportionately affect women. Then there's newer assets like Vtama, which focus on dermatology and how it affects women differently. We're sure to extract maximum value from business development while keeping financial discipline. Frequency or size of deals will remain flexible depending on leverage and market conditions. We will prioritize opportunities like Vtama or Tofidence that align with our strategic focus.

Hi, this is Ethan on for Chris Schott. Thanks for taking our questions. On the first question, just wanted to ask about capital allocation more broadly in your framework going forward. And maybe more specifically, how share repo might fit into that equation relative to debt paydown and business development? And then my second question is just on the potential impact of tariffs. I know you provided some commentary on 2025. But any general color on your ability to navigate this dynamic looking past 2025, although details are lacking, maybe just frame out how you're thinking about that impact? Thank you.

Yes, Ethan. Matt and I will address these topics. So, from a capital allocation perspective, we are working from a position of strength. Over recent years, we've stabilized key products, and now we also have opportunities to accelerate both top-line and bottom-line growth. In terms of share repurchases, they take a lower priority in our capital allocation hierarchy. The right thing for us to do now is focus on reducing leverage and securing cash to support growth. As for tariffs, we currently face minimal exposure and have a well-distributed manufacturing network that mitigates risk. However, it’s very fluid, and we will continue to closely monitor developments.

Yes. Thank you, Kevin. As we spoke of in the prepared comments, where the policy is clearer regarding countries like Canada, Mexico, and China, we have very nominal exposure in 2025, less than $5 million. This is one of the factors that has enabled us to affirm our guidance for the year. When you look forward, Organon has six manufacturing plants, all of them outside the United States. Most of the production that ends up coming into the United States is from our plants in Europe. Since the policy around that route into the United States is still very fluid, it's really too soon to discuss what potential impacts may occur.

Hi, guys. Thanks for taking my question. I mean, look, I feel like the Dermavant deal was a surprise, but today is a bigger surprise, and there's a lot of market sentiment that they can't have confidence in consistency and decision-making process at Organon right now. So, specifically, last call, you guys said you're committed to regular dividend as the number one capital allocation priority. I think you just now said returning capital is a lower priority. And I guess the question is really for all the investors on the line, what is the priority? And how can we be sure that this will be the priority going forward because there appears to be a lot of things just moving around constantly?

Well, Umer, thanks for the question. The macroenvironment is changing, and there's a lot of volatility out there. Investors are significantly focused on our leverage and what it means in the current risk-off atmosphere. We've made these adjustments with that in mind. Our priority remains providing transparency and confidence to our investors. As we look forward, we expect to deleverage significantly and focus on growth opportunities, which will have positive implications for our equity.

Hi, guys. This is Bhavin Patel on for Jason. Two questions from us. First, what are your views on the Nexplanon Paragraph IV? Do you see the filer as a credible threat to launching generics in ex-U.S. markets? And where does the FDA stand on the issue of applicator similarity, which I believe was the core issue in your Citizens petition? And then my second question is regarding the expected $900-plus millions of free cash flow before one-time costs. Can you break down the anticipated one-time costs for 2025? And how should we think about free cash flow both before and after one-time costs in 2026? Thank you.

Why don't we address those questions in reverse order? Matt, why don't you deal with the cash flow issues, one-time costs, and then maybe Juan Camilo, you can address the Paragraph IV issue which is U.S.-specific.

Yes. So, regarding this fiscal year, in the estimates for one-time costs, it's about $150 million in round numbers related to the manufacturing separation from Merck. Recall that all of the one-time spin-off costs on the administrative side are zero this year following the rollout of our global ERP system. This year is probably the largest in terms of separation costs, and they will gradually decline thereafter. Free cash flow will continue to improve beyond 2025 as these one-time costs diminish.

It's not a surprise to us. The legal process that that's going to go through will take us anyway through probably mid-2027, but we still have a patent that needs to be determined regarding our applicator. We feel very confident that it's a strong patent that takes us through 2030. The regulatory challenges tied to applicator safety are significant for any new entrants. So, we see a high bar for new competitive products.