Tuniu Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 16, 2023

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Organon Fourth Quarter and Full Year 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. As a reminder, this call is being recorded.

Operator

Thank you. I would now like to turn the call over to Jennifer Halcyk, Vice President, Investor Relations. Please begin your conference.

Speaker 1

Thank you, Dennis. Good morning, everyone. Thank you for joining Organon's 4th quarter and full year 2022 earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer, who will cover strategy and operational highlights and Matt Walsh, our Chief Financial who will review performance, guidance and capital allocation. Doctor.

Speaker 1

Sandra Milligan, Organon's Head of R and D will also be joining us for the Q and 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 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 ks 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.

Speaker 1

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.

Speaker 2

Good morning, everyone, and thank you, Jen. Welcome to today's call where we'll talk about our Q4 and full year 2022 results. To begin with, I'm exceptionally proud of Organon's performance in our 1st full year as a standalone company. For the full year 2022, we delivered a 4% increase in Up $2,100,000,000 representing a 33.8 percent margin. We delivered strong growth in our women's health and biosimilars portfolios as well as we grew our Established Brands business.

Speaker 2

Starting with women's health. For the full year 2022, the women's health franchise Delivered 7% growth on a constant currency basis. This includes $834,000,000 of revenue from Nexplanon, which grew 11% in 2022 at constant currency. This marks Nexplanon's 2nd consecutive year of double digit growth. That is a significant achievement for a product that has been around for over a decade and relies on continually attracting new patients to the product.

Speaker 2

We are seeing particular strength outside the U. S. Where Nexplanon grew 17% in 2022, especially in our Lomaira region where improved that is helping to drive demand. In the U. S, Nexplanon grew 8% in 2022 and continues to gain share in the Lark of the long acting reversible contraceptive market.

Speaker 2

In 2022, we also trained more than 20,000 healthcare providers to insert Nexplanon And we will continue to trade more providers in 2023. Importantly, we continue to hone Our go to market strategy emphasizing follow on reviews with healthcare providers actively prescribing Nexplanon for whom additional training may strengthen their comfort in prescribing Nexplanon. We continue to monitor the impact of the overturn of Roe v. Wade on the contraception market. Since July 2022, we have seen demand growth for Nexplanon in the most restricted states as well as protected and semi restricted states.

Speaker 2

This speaks to the need now more than ever for highly efficacious forms of contraception. In real world use, Nexplanon is over 99% effective in preventing pregnancies compared With some forms of short acting contraceptives where efficacy is less than 80%. That is in part because when women use a long acting like Nexplanon, it takes the patient dependent aspect out of it. Nexplanon is inserted within minutes and currently provides efficacious continuous efficacy for up to 3 years. We also believe we will be successful in demonstrating the 5 year efficacy through our ongoing study.

Speaker 2

But importantly, it wasn't just Nexmo that continued the growth in women's health in 2022. We continue to see good contribution from the fertility portfolio, which in 2022 grew approximately 9% at constant currency Despite the impact of COVID in China, which limits patients' ability to begin or continue treatment at fertility clinics. The U. S. And China are large fertility markets and together represent more than half of our current fertility business.

Speaker 2

China It's a particularly important fertility market for us with the potential to grow to more than a 1000000 IVF cycles a year over the next decade. The number of cycles in the China is already 3 times the number of cycles in the U. S. And as we have discussed many times before, Fertility is a therapy area with strong demographic tailwinds. Women are waiting longer to start their families resulting in higher prevalence of infertility And more governments are realizing that they need to take action to address the associated low birth rates.

Speaker 2

More than 100 countries around the world Have a fertility rate or the number of births per woman that is significantly below the replacement rate that is required to sustain a population and its GDP growth. Countries are offering more monetary incentives for households to expand their families And many are offering better fertility access and benefits. Organon is one of the few companies with the portfolio help serve this growing market. The Wyndham's Health franchise is also benefiting from our business development activities. As we think about business development, we are striving for balance between commercialized assets and earlier stage assets that could become significant growth catalysts for Organon in the longer term.

Speaker 2

Since then, through business development, we have added 3 assets to our women's health portfolio that are already contributing or will soon be contributing to revenue growth. You will recall that last year we reacquired the rights to Marvellon and Mercillon, which are combined oral contraceptives in selected territories in Asia, including China and Vietnam. Together, Marvellon and Mercilong grew 20% in 2022. The success from the repatriation of these assets is just another example of how Organon is applying its own methodologies to maximize the performance of assets that may have been under prioritized in other companies in the past. We are also very excited about the JADA system, which we added to our portfolio in 2021 with the acquisition of Alidya Health.

Speaker 2

JADA is a device indicated to provide And postpartum hemorrhage is one of the most common complications of birth requiring pharmacologic treatment in up to 10% of mothers. At last week's annual meeting for the Society For Maternal Fetal Medicine, Researchers unveiled the results of the RUBY study, which examined JADA's efficacy and safety in real world use. In the RUBI study, researchers analyzed a large population of 800 women who were treated with the device from October 2020 to April 2022 at 16 hospitals across the United States. Researchers concluded that JADA worked quickly and was highly effective in controlling Postpartum hemorrhage after both vaginal and cesarean births. Researchers also found that the device successfully treated postpartum hemorrhage in 92 and only had to remain in place for a few hours after placement, allowing for a more efficient postpartum care experience.

Speaker 2

Our goals in acquiring JADA included the opportunity to speed up access to this innovation in the U. S. And to leverage our global capability to bring this product It's around the world. We continue to add accounts and are now in about 1,000 hospitals in the U. S.

Speaker 2

With more than 15,000 mothers having been treated with JADA. Additionally, in 2022, we made our first ex U. S. Shipments and have also submitted to the EU for approval. We're also pursuing earlier stage assets that address the areas of highest unmet medical needs and have the potential to expand our portfolio in women's health.

Speaker 2

Since then, we've added 4 earlier stage assets in the women's health portfolio at different stages of development. The farthest along is OG6 219, a unique new mechanism of action, which is a candidate to treat endometriosis locally instead of systemically. In October 2022, we enrolled the 1st patient in our Phase 2 ELENA study, which is expected to be completed by the end of 2024. Turning to biosimilars. Our biosimilars franchise grew 17% on a constant currency basis in 2022, marking its 2nd consecutive year of double digit growth.

Speaker 2

Biosimilars are an important growth driver for the company. And in 2022, we underscored our commitment to the business by adding a second R and D partner with Shanghai Henness. All 5 of our biosimilars contributed to the strong performance in 2022. RenfLEXIS, our largest selling biosimilar grew 22% last year, driven by solid performance in the U. S.

Speaker 2

And Canada, Despite already being on the market for 5 plus years, OntraZen, our 2nd largest biosimilar grew more than 40% in the U. S, But that growth was offset by competitive pressures in Europe. Hadlima, our biosimilar for HUMIRA Had a very strong performance in 2022, reflecting a successful 2021 launch in Canada and Australia. We expect that our success in those markets will help with provider confidence when we launch HEDLIMA in the U. S.

Speaker 2

In July of this year. Because HUMIRA is the largest biologic to face biosimilar competition in the U. S, we are frequently asked about the competitive position with HEMIRA. To reiterate our messaging, we believe that the best positioned biosimilars will be those that share the same attributes as the originator. That includes the option for high concentration citrate free formulation as well as a low concentration formulation and we expect to have both at launch.

Speaker 2

We also believe that real world evidence and experience in other markets will be something that providers will appreciate. We have that data through our collaborator Samsung BioEpid from their with Hadlima in the EU as well as from our own successful launches in Canada and Australia. And finally, we believe our pen design can be a differentiator for patients. Samsung He is an expert in device design and manufacturing and has designed a pen with the aim of providing a frictionless experience for new patients and those transitioning from Humira. That said, with multiple parties launching mid year, we have also conveyed our belief that 2023 will be a modest ramp up year With the market for biosimilars really forming in 2024 2025 and beyond.

Speaker 2

Finally, Let's talk about Established Brands, which currently represents about 2 thirds of our overall business and generates significant free cash flow. The portfolio continues to demonstrate the sustainability and untapped potential of these brands. Over the longer term, Given the maturity of the portfolio, we expect close to flat performance for our Established Brands business. In 2022, we benefited from Some one time events as well as from delayed DBP implementation that helped the franchise deliver growth of 3% at constant currency for the full year. In the near term, as we think about 2023, we believe we will be able to offset the expected impact From round 7 of BBP, with continued focus on maximizing the potential of these well known brands through continuous demand generation And we expect the established brands to achieve generally flat performance in 2023 on a constant currency basis.

Speaker 2

Briefly turning to geographic performance, there are 2 important takeaways here. 1, geographic risk in our revenue is well distributed And 2, each of these geographic regions grew in 2022. That includes China, which faced significant challenges related to COVID in 2022. As we think about 2023, we believe that strength in the retail channel, growth in fertility, as well as the benefits from the re acquisition of Marvellon and Mercilon will together Set the expected BBP impact to our China business in 2023. We are extremely proud of our 2022 achievements And I want to thank our 10,000 founders worldwide for rising together, for living our purpose and for delivering the Seth Organon had in our 1st full year as a standalone company.

Speaker 2

I'd like to now turn the call over to Matt. Thank you.

Speaker 3

Thanks, Kevin. Before I talk in more depth about our results, I'll remind you that we haven't completely lapped The June 2021 spin transaction as far as financial reporting is concerned. So while our 2022 3rd and 4th quarters are apples to apples with the prior year period's first half of twenty twenty two comparability is impacted by the carve out basis of accounting that we needed to employ for pre spin off accounting periods. And that really applies more to expense items on the full year income statement rather than revenue And I'll call that out if necessary. So with that opener, we'll move to Slide 7 and discuss 4th quarter revenue.

Speaker 3

4th quarter revenue was approximately $1,500,000,000 down 7% as recorded, but up 1% at constant currency And this marks our 4th consecutive quarter of constant currency growth. We'll spend more time talking about the individual drivers when we get to the full year, But isolating the Q4 for the moment, we had solid volume growth in the period. Our key growth franchises, women's health and biosimilars were the main drivers of growth, but established brands also contributed. For example, recently we've seen particular strength in Atazette in France and Spain. And with some generics still out of the market in Japan, we're getting some pickup there as well.

Speaker 3

In the Q4, we had about a $15,000,000 impact from volume based procurement or VBP in China, which reflects the implementation of round 7 in November. The Organon product that's impacted in this round is EZETROL, which is sold as ZEDIA in markets outside of China. The biggest number on this walk across is foreign exchange translation, which represented an 800 basis point headwind to revenue growth in the 4th quarter. This is the largest FX translation reporting impact of any quarter in 2022. This might seem counterintuitive because everyone's most Recent memories of the U.

Speaker 3

S. Dollar weakening versus most foreign currencies, but the numbers show that trend started at the very end of 2022. And given that north of 75% of our revenue is outside the U. S, FX translation was a significant theme for Organon in 2022. Our portfolio faced a significant financial reporting headwind from the strengthening U.

Speaker 3

S. Dollar and unfortunately that dynamic masked The operational growth in local currencies that we delivered in the Q4 and in the full year. And speaking of the full year, We have an identical revenue bridge on Slide 8. For the full year 2022, revenue was approximately $6,200,000,000 down 2% as reported, but up 4% at constant currency when compared to prior year. Starting with loss of exclusivity or LOE, for the full year 2022 LOE impact was modest at about $30,000,000 and it's coming mainly from NuvaRing's LOE in the United States.

Speaker 3

We didn't have any LOE impact in Established Brands this year. And as we've said before, The most significant LOE spacing the Established Brands portfolio washed out prior to the spin off and what we expect going forward is a cumulative Few $100,000,000 of impact over the next several years. The full year impact from BBP of about $20,000,000 primarily reflects the November implementation of Round 7 as I just discussed. We saw an approximate $140,000,000 impact coming from price And that's consistent with our expectation that we'll continue to see low single digit price erosion on a company wide basis. The majority of pricing pressure continues to come from Established Brands, where products are subject to mandatory annual price reductions in some markets as well as from biosimilars.

Speaker 3

For volume, we expected to see strong volume growth during 2022 across our franchises And that indeed happened. We saw volume increases coming from what we call our growth pillars, Nexplanon, fertility and biosimilars, But Established Brands also grew volume as well. For example, Nasonex and Singulair drove strength year on year, Adezeq grew in Europe and we continue to see significant growth in the China retail channel. When looking at supply other, the approximate $70,000,000 impact primarily represents supply sales to Merck and other third parties, which consists of relatively low margin sales of pharmaceutical products under contract manufacturing arrangements. Last year, we signaled that the volumes under these arrangements would decline in 2022, which has been the case.

Speaker 3

And finally, you can see the significant financial reporting headwind we had in foreign exchange translation, 600 basis points for the full year, which again is a function of more than 75% of our revenue being generated outside the U. S. The next few slides lay out our performance by franchise. Kevin covered very well the highlights, and the quarterly and full year 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 2023.

Speaker 3

We'll start with Women's Health on Slide 9. As Kevin mentioned, Nexplanon had a strong performance in 2022, was up 8% ex FX in the quarter and 11% for the full year. In fact, we set 2 new sales records for Nexplanon in 2022, first in the Q3 and then again in the Q4. As you think about quarterly phasing for next year, it's worth reminding you that in the Q4 of last year, NEXVON also set a sales record, which was then sequentially followed by a weaker Q1 due in part to the buy in, buy out dynamic we tend to see around the timing of price increases in the U. S.

Speaker 3

This is a dynamic we would expect to see again in the Q1 of 2023. Turning to biosimilars on Slide 10. As Kevin mentioned, this franchise continues to be an important growth driver for us. We know investors are focused on the potential revenue contribution from our U. S.

Speaker 3

Launch of HADLIMA This year, based on our expectations for a gradual market formation in 2023 and only a partial year revenue contribution given our July 1 launch, we expect that globally, Headlima will represent no more than about 1.5% of our consolidated 2023 revenue. Turning to Established Brands now on Slide 11. Here I want to drill down into the 4th quarter because in addition to VBP implementation, There was another item that impacted Established Brands 4th quarter performance. In January 2023, we initiated market actions for sterile suspension injectables, diprospan and Cellastone Cronodose. This was related to a purchase component used in the sterile filling process at Organon's Hyst facility in Belgium that was determined to be non conforming.

Speaker 3

To be clear, No product quality complaints or adverse events have been reported nor are any expected. Due to the compliance aspect, It was prudent to exercise these market actions and discard inventory deemed to be impacted. And for reference, combined, These two products represented about $165,000,000 of revenue in 2022. Turning to Slide 12, you can see that this action had the effect of reducing 4th quarter revenue by $8,000,000 for potential sales returns And we recorded a one time inventory charge of $36,000,000 that shows up in cost of goods sold. We're breaking out the issue in this manner to show that excluding the total $44,000,000 that flows through to adjusted EBITDA, Our 4th quarter adjusted EBITDA margin would have been 28.4%, very much in line with what our expectations were for the 4th quarter when we last provided guidance in November.

Speaker 3

We're also showing the full year impact for reference. Since spin off, we've been very pleased with our ability to forecast our business. So while events like a market action are always a potential risk in this industry, We're confident about the durability and diversity of our business as it relates to forecasting it. Let's now turn to key P and L line items on Slide 13. For non GAAP gross profit, we are excluding from cost of goods sold, purchase accounting amortization and one time items related to the spin off.

Speaker 3

The market action I just discussed was the major driver of the change in gross margin in the Q4 compared to the prior year period. For the full year, adjusted gross margin was 65.7% compared with 64.7% for the full year 2021. Keep in mind that full year comparisons for items below the revenue line are less meaningful because they're only truly comparable for the second half of the year. That said, the year over year increase in adjusted gross margin is primarily a result of lower supply sales in 2022, which carry lower margins, as well as pre spin allocated costs related to the separation of Organon that occurred in the prior year. Adjusted EBITDA margin was 25.6 percent in the 4th quarter compared to 29.3% in the same period of last year.

Speaker 3

Adjusted EBITDA margin was 33.8 percent for the full year 2022 compared with 36.1% for the full year 2021. The decline in the Q4 and full year was a result of costs associated with the market action at HEIST as well as expenses related to positioning the company for future growth. We've been talking about the importance of reinvestment in the business to create a pipeline of new products to drive revenue growth for a while now. And you see that in higher selling and promotional costs as well as research and development spend associated with our prior acquisitions. As we look at debt capitalization and leverage on Slide 14, as of December 31, 2022, We have gross bank debt of $8,900,000,000 netted against cash and cash equivalents of $706,000,000 We ended the year with a net leverage ratio of about 3.8 times, which ticked up from the 3.6 times we reported at the end of the third quarter.

Speaker 3

That primarily reflects the combination of the strength of the euro and the impact of the Q4 2022 results. Given our adjusted EBITDA guidance for 2023, which I'll discuss in a moment, together with the currency impact on our euro denominated debt, Leverage is likely to be stubborn in 2023. In fact, given the inevitable math of this past quarter's Inclusion in our LTM EBITDA calculation during the upcoming quarters, we could see leverage tick higher before leveling back down by the end of the year. This doesn't have a significant impact on our capital allocation priorities given the strong cash flow characteristics of the business. So let's turn to Slide 15 for a moment and take a closer look at cash flow.

Speaker 3

When we reported our Q3 financials, there was still a lot of noise in the September year to date cash flow numbers stemming from some transient spin related items. This is washing out And you can see that in the Q4, our free cash flow generation was very strong. In the full year 2022, there was about $300,000,000 related to Non recurring spin related working capital build early in the year. And if you recall the discussion from last quarter, We said that a good portion of that $300,000,000 was actually expected in late 2021, but instead landed in early 2022. With the spin related build largely behind us and reaching what we expect to be a more normalized ebb and flow to our working capital position, We saw a significant improvement in Q4 cash generation.

Speaker 3

The other driver was foreign exchange translation. Consistent with weakening of the U. S. Dollar, we had a positive impact of $100,000,000 in the 4th quarter from foreign currency cash balances within our global liquidity management program. And that partially offset the $160,000,000 headwind we had experienced year to date September.

Speaker 3

The key message here is that putting aside the $300,000,000 of working capital build that should not repeat in 2023, Our free cash flow ex one time costs related to the spin off is in that north of $1,000,000,000 range that we communicated at the time of the spin. Our capital allocation priorities remain consistent with past communications. We will continue to prioritize servicing the current dividend followed by pursuing organic growth through lifecycle management opportunities within our current portfolio of products. Capital expenditures in the range of 3% to 4% of revenue remains a good estimate for forecasting purposes. With that capital going to modernizing and growing our production With these priorities satisfied, we expect to have significant remaining cash flow available as we continue to balance external growth opportunities against our commitment to our BBBBA2 rating.

Speaker 3

Having a higher leverage ratio at points during 2023 likely raises the bar on business Development as it competes for capital, but even without discretionary debt repayment, which we've done twice as a standalone company, We can still get deals done and stay within the parameters of our rating much as we have been doing since the spin off. Now turning to 2023 guidance on Slide 16, where we highlight the items driving our 2023 revenue guidance range of $6,150,000,000 to $6,500,000,000 to $75,000,000 impact for full year 2023, which reflects the continued impact of generic competition for NuvaRing. This also includes an impact from Atazette, which will go LOE in Japan in 2023, as well as a provision for DILERA where we expect the generic entrants sometime in late 2023 after not seeing 1 in 2022 or 2021. We expect impact from VBP to be in the range of $125,000,000 to $175,000,000 in 2023, driven mostly by the inclusion of EZETROL in this latest round. We expect company sorry, we expect Approximately $75,000,000 to $125,000,000 of price erosion in 2023.

Speaker 3

On a total company basis, We've been able to stem pricing pressure a little better than we thought at the start of last year. Over the longer term, we would expect pricing erosion to be in the range of 200 to 300 Basis points of headwind and that is mostly related to mandatory pricing decreases in certain markets and smaller LOE impacts, but also due to product mix. So for example, as biosimilars becomes a bigger business within Organon that will put more pressure on price. And for volume, we expect growth of approximately $500,000,000 to $600,000,000 for the full year in line with what we saw in 2022. The majority of the volume increase is expected to come from our multiple growth pillars: Nexplanon, biosimilars, fertility, China retail and to a smaller degree, recent business development activity, including JADA.

Speaker 3

Given where FX spot rates are trending, we would expect a more modest impact from foreign exchange translation in 2023 compared with 2022. We're estimating an approximate $50,000,000 to $100,000,000 impact from FX for the full year, which would represent about a 1 percentage point headwind. That means that our guidance range implies constant currency revenue growth of approximately 3.5% at the midpoint. Moving to the other components of guidance on Slide 17, we expect adjusted gross margin to be in the low to mid-sixty percent range, which is 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 have a greater impact to our cost of goods sold this year in 2023.

Speaker 3

On operating expenses, Our ranges for SG and A and R and D as a percentage of sales are in line with what we guided to and delivered in 2022 and reflect continued investment in the business as we position it for future growth. Our estimate for R and D expense includes line of sight to about $40,000,000 of IP R and D expense That's tied to the $8,000,000 investment we made in Clari Medical in January, plus an estimate for a milestone achievement for evopiprant in 2023. Any upfront payments related to future business development would be incremental and we would call that out in our announcement of any such transactions. Those OpEx assumptions would bridge you to an adjusted EBITDA margin in the range of 31% to 33% for 2023. For below the line items, given the increasing interest rate environment, we have increased our estimate of interest expense for 2023 to approximately $510,000,000 The knock on effect of higher interest expense also means that we hit a cap with regard to interest expense deductibility for tax purposes.

Speaker 3

For 2022, we actually finished on the low end of our tax expense guidance range. So for 2023, our non GAAP effective tax rate range reflects a normalization of expectations for tax expense plus incremental expense for limitation of interest expense deductibility. Wrapping up the financial discussion, 2022 was a very solid year for the company. In addition to all the operating accomplishments Kevin mentioned, As we advance Organon's mission in women's health, on the financial front, we delivered constant currency revenue growth of 4%, which is well aligned with the mid single digit expectation we had for the year. We deployed over $200,000,000 of capital across 4 promising transactions To drive future revenue growth, we proactively retired $100,000,000 of debt and we returned $290,000,000 in cash dividends to shareholders.

Speaker 3

We're looking forward to 2023, where we expect to deliver continued growth and strong capital performance based on the earnings guidance we're providing today. With that, we'll now turn the call over to Q and A.

Operator

Your first question is from the line of Terence Flynn with Morgan Stanley. Please go ahead.

Speaker 4

Good morning. Thanks for all the color and thanks for taking the questions. I guess just as we think about Nexplanon for 2023, can you just walk us through how you're thinking about what's embedded in guidance both on the U. S. Side and ex U.

Speaker 4

S? And then, follistim was somewhat soft this quarter. I was just wondering, if there's anything of note there and then how we should think about That product on the forward as we go into first half of this year. Thank you.

Speaker 2

Yes. Thanks for the question, Terrence. I'll take that. Look, as we start to think forward in terms of what we're doing with Nexmo, we're very pleased with 2 consecutive years of double digit performance. Of course, we had somewhat of a strong buy in in the Q4 of last year.

Speaker 2

So we expect the Q1 as usual to be a little bit soft. But ultimately going forward, We see really very strong, at least in the U. S. As well as ex U. S, very strong demand growth coming in terms of physician demand growth we're able to kind of Pick up and monitor now that we feel very good about the fact that the chances of Nexolone continuing to growing in a very solid way is something that we feel very good about.

Speaker 2

Our ex U. S. Business continues to grow because of the fact that it was very deprioritized in years past and we have opportunities to really continue to drive access And ultimately awareness of NexoBridon throughout the world. And of course, when we start to go outside of the U. S, you start to see more kind of a lumpiness To the overall orders because there's a lot more tender business that's being involved here.

Speaker 2

But when you look at the U. S, we're really very happy With what we're seeing in terms of our DTC campaigns, our social media campaigns and all the things that we're doing in terms of our clinical training programs and Continuing focus on really kind of driving prescription depth in physicians who are currently very comfortable with Nexplanon. In terms of follisten that you were asking in terms of the, I guess, with the 4th quarter, softness in terms of follisten. Look, we have very strong growth in the U. S.

Speaker 2

Performance, but ultimately the softness came in Q4 from China. As you can well imagine, when China it started to lock down and then ultimately after the lockdown, when you start to have a real increase in terms of COVID infections, it really started to inhibit the opportunity for couples to go to the IVF clinics in order to be able to get their therapy, but we expect that to ultimately turn around in this year. We expect a very strong Follow some business in China for this year as we start to rebound from all the COVID lockdowns and ultimately the COVID infections that are essentially kind of burning through China as we see it today. I hope that answered your questions.

Operator

Your next question is from the line of Umer Raffat with Evercore. Please go ahead.

Speaker 5

Hi, guys. Sorry. Thanks for taking my question. Maybe a couple, if I may. First, On 2023 guidance, could you clarify how much Humayra is in the number or not as well as The ongoing China reopening and sort of what you've baked in, I think that will be very helpful.

Speaker 2

Well, we don't, Umer, it's good to talk to you, but we don't usually kind of Talk about exactly sales numbers from individual products from HUMIRA or for Hadlima, but we feel very good that this Coming year will be a solid year for Ad Limon on a few fronts. 1, Canada and Australia continue to do very well in terms of their overall Continuing progression in terms of their performance, strong double digit growth outside of the U. S. For HADLIMA. And second, We'll have half a year had Lima sales, Umer, in the U.

Speaker 2

S. I've been saying this for some time. 2023 will be more of a race to get on Formularies of the top PBMs in the country as well as potentially some of the closed systems like Kaiser, other HMOs and also government visits like the VA. So, it is something that we feel very comfortable about that we'll do well, because of the product presentation. As I mentioned in my commentary in terms of the introductory commentary, you really want a product and we believe the products that are going to win are ones that are the closest to the originator.

Speaker 2

We are about as close as one can get in terms of having the high concentration SIF rate free, low concentration. We're talking about the frictionless experience The device and pen, strong ex U. S. Real world evidence so that PBMs can feel comfortable about the safety and security of What they're using in terms of this product. So we feel very good about HADLIMA going forward in terms of what we're doing there.

Speaker 2

And regarding China coming back. Look, we've got really good growth drivers in China. As I mentioned earlier, to Terence, we've got fertility recovering. We've got the Marvellon business that is continuing to really ramp up very well. We've got the retail business starting to come back online because People are coming back to that.

Speaker 2

We've got the online business going very well. So that will offset some of the big headwinds that we're facing with the 7th round And ultimately, hopefully, we'll see what happens in the 8th round that is estimated for the Q2 period. But we feel very good That we'll be able to offset. And we've never had a year right now recently with the recent rounds of the BBP where we've actually started to see a decline. We continue to grow in China.

Speaker 2

And as we get through 2023, we estimate anywhere between 70% to 80% of our Business will have gone through the volume based procurement business procurement impact and then we see growth, really strong Growth after 2023. So 2024 and beyond, don't be surprised if you start to see high single digit, low double digit performance coming out of China.

Speaker 5

Kevin, sorry. If I may just clarify, I think on China, what I was referring to was, so I understand most of the products have gone through VBP. I guess what I was getting at was, The pace of VBP rollout got paused during COVID in China. So with ZEDIA sort of still at about $300,000,000 run rate by Torin at $100,000,000 etcetera. I'm just trying to understand, how are you guys thinking about step down on these sort of $300,000,000 $400,000,000 franchises in China As rollout resumes on the previously conducted VBP and what is the guidance?

Speaker 2

Yes. Well, look, I mean, you bring up a good point. The round 7 was delayed by a few quarters. And so ultimately that benefited us last year from our ESITROL Business in China. Now it effectively went into effect November.

Speaker 2

So we are seeing the expected erosion of Esitrol as we speak right now, About a $90,000,000 headwind this year from volume based procurement for ESETROL in China. The remaining products that we expect to go through volume Base procurement, round 8 and round 9 essentially are much smaller products. They're somewhere in the $40,000,000 range. So if that as you say, if there is the opportunity that those get delayed because of further ongoing COVID infections or whatever Could be the things that come out come as a result of what's happened last year, then the upside won't be Great to say for example the delay that we saw with this call, but that's why I mentioned it could be anywhere between say 70% 80 Depending on those rounds happening in the second Q4, but they're much smaller products. So we went through most of the rounds

Speaker 3

Kevin, just to quickly revisit for Umer's benefit. In the prepared comments back to Hadlima for a second, Umer, we did say worldwide sales Would not exceed about 1.5 points of Organon's consolidated revenue. And while Canada and Australia are important markets. They're a lot smaller than the U. S.

Speaker 3

So you can assume that that number is weighted towards the United States a bit.

Operator

Your next question is from the line of Navantay with BNP powered by Exane. Please go ahead.

Speaker 6

Hi, good morning. Thanks for taking my questions. I have a few starting on next plan. In the U. S, do you expect to continue to take market share following the Dobbs news and from both The oral pill and IUDs.

Speaker 6

And can you share how many healthcare professionals you expect to train this year? And also, am I right, there was no next tenant tender in the Q4 outside of the U. S? And do you expect a tender in Q1? And then separately, do you have a net leverage target that you can share and could we see some term loan prepayment in 2023?

Speaker 6

Thank you.

Speaker 2

So let me start with the next question. You're right, Nivon. In Q4 of 2021, we saw a big tender from Mexico. That tender came through in Q3 of 2022. So that's why you didn't see really the tender business for the ex U.

Speaker 2

S. Business in Q4. We do expect probably in the Q3, Q4 timeframe More of the tender business kind of ramping up in the emerging markets, whether that be in Mexico or Brazil and others. So you look for that probably in the second half of this we'll start to see bigger tender activities coming through in the year. In regards to Nexplanon and kind of the post Roe v.

Speaker 2

Wade opportunities, we do see and I've been able to see that actually with Nexplanon in the U. S, What I would call those states that have restrictive policies around abortion or around access, We're seeing about high single digit growth for Nexplan in those states. Those that are kind of more kind of protective of the opportunities are Probably mid single digit growth rates right now. At least that's what we saw post the decision versus pre. So I do see that there's opportunities to continue to grow.

Speaker 2

I've always felt that, that when we think about What physicians and patients are going to be wanting in states where it's quite restrictive? I would think that real world efficacy, And I mentioned 99% effective. You take the decision making out of the daily issues in regards to There are contraception needs and I do feel that we'll continue to see additional growth kind of accelerating From some of these states that ultimately have restricted policies. And the last question in regards to clinical training We did, as I mentioned, in 2022, we trained 20,000 healthcare providers. Now that could be physicians, nurses, PAs, many of those some of those actually were retraining for people that needed to kind of get refamiliarized As the COVID lockdown started or as people start to come back into clinics, but we'll continue to invest in clinical training programs going forward.

Speaker 2

I would say there's going to be an average of anywhere between $15,000 $20,000 per year that we'll be averaging going forward for healthcare providers, both new to prescribing Nexplanon and those that need refresher trainings in order to be able to feel more comfortable with inserting and using And the follow on reviews.

Speaker 3

And I can take the part of the question related to leverage. So since the spin off, we've been soft targeting A net leverage figure of 3.5 times, the business had worked its way down to that level during the 2022 mainly related to the favorability we saw on the euro denominated debt as the dollar strengthened and That will that's one of the dynamics that's reversing in 2023. We call that out in the prepared comments. But around that 3.5 times leverage target, as we think about 2023, We will be balancing the benefits of a voluntary debt reduction against What we see as the business development target landscape and our ability to increasingly self fund our own deals As the year goes on, our cost of debt has risen. So we will continue, I think, Navan to behave as we've done since the spin And we'll look to bring balance to that.

Speaker 3

As I said in the prepared comments, the hurdle, sort of the bar has risen As business development competes for capital against the near term and certain benefits of debt reduction.

Operator

Your next question is from the line of David Absalom with Piper Sandler. Please go ahead.

Speaker 7

Hey, thanks. So I had a few. First, on the revenue bridge for 'twenty three guidance. Regarding the volume growth, can you talk about the extent to which that's coming from established brands And maybe talk in more detail about where the drivers are in Established Brands As you think about volume, that's number 1. Number 2 is, apologize if I missed this, but just remind us When you think you can get interchangeability in the U.

Speaker 7

S. For HEDLIMO and just talk about progress towards that? And then lastly on business development, I think you've talked about a lean towards the acquisition of EBITDA generating assets. I wanted to pick your brands on that and see what your appetite is in terms of commercial stage assets vis a vis development stage assets and how you're thinking about that? Thank you.

Speaker 2

So I can deal I can address the first two questions in regards to volume. Where's the volume growth coming in 2023 to the bridge? We did definitely see volume based procurement non volume based procurement products. So these are out there. They're not part of the list.

Speaker 2

So that will continue to be a driver. The retail sector in China will be continued to be a driver. AtorZet continues To grow very well for us in Europe and now in China as well. Respiratory products continue to grow very nicely in terms of our overall volume growth. So you see that and then we've got in some other smaller countries.

Speaker 2

And from regional perspective, our Latin America, Middle East Africa And Russia business continues to grow pretty robustly in terms of our own volume growth opportunities. So there are continuing volume growth Chances that we'll see that continue for Established Brands. And then of course, we talked about some of the downsides in regards The China VBP rounds that come ultimately offset some of the growth opportunities that we have with volume. The second question that you had Was I believe around what was it? Oh, the interchangeability, yes.

Speaker 2

So interchangeability, We expect that to come probably Q2, Q3, 2024. So probably literally 1 year after launch as of July of this year, which is really around the range of where everybody at least many of the major competitors Are going to have their interchangeability come through. But I want to be clear though, in my discussions with many of the PBMs, At least in the 1st year or 2, interchangeability was not a key point of differentiation. As long as you had it in process, as long as you had it within that you could kind of make sure that everybody understood That you were going to be able to deliver interchangeability within the reasonable timeframe that was kind of put off the table. Then we started to get into many other Concepts or product delineations that ultimately means that we're much more compelling for them.

Speaker 7

And then on biz dev M and A?

Speaker 2

Yes. So Matt, do you want to take that in terms of EBITDA

Speaker 3

Yes, a question that David has. Yes, yes. So David, we've been seeking balance In the program between early mid late stage assets, we have had a preference To be looking at more latter stage are currently marketed opportunities. So as 2023 unfolds, Don't be surprised if you see our capital deployed for business development slant towards things that Our more near term, especially since the last deal we did was Clari Medical, which is certainly early stage.

Speaker 7

Okay, helpful. Thank you.

Operator

Your next question is from the line of Chris Schott with JPMorgan. Please go ahead.

Speaker 8

Great. Thanks very much. Just 2 for me. Maybe first on Hudhead Lima, can you just talk at all about how You see the market evolving in 2024 and beyond. I guess, specifically, have there been any changes in terms of how you think about the size Of the biosimilar market you're ultimately going to see here as you kind of think about where price is going to land and how much volume is ultimately going to be accessible for the biosimilars?

Speaker 8

And then my second question, and Matt, I know you've asked this in the past, but when we think about the EBITDA margins you're laying out for 2023, Do these can we kind of think about these as starting to represent kind of a trough level of margins and that as maybe top line growth Over the next few years, we could start to see margin expansion from here or is there more investment that needs to go in the business to Kind of really fund that longer term kind of growth ambition that you have and that maybe we need to think about margins still kind of under pressure over time? Thank you.

Speaker 2

Thanks, Chris. I can deal with the head Lima question and I'll turn over the other question to Matt. Look, as I mentioned before, We believe that 2023 as you've seen from a couple of the PBM's are basically saying that they're going to allow obviously the originator. There's no preferential treatment there for biosimilars. And so as a result of that, when you're able to choose whatever you want, People will likely go with the originator at least in 2023.

Speaker 2

And so I believe that 2023 is going to be about Which 2 to 3 biosimilars are going to get on to those formularies? And then we believe that our profile In terms of the high concentration citrate free and the low concentration having the full profile, real world evidence, patient centric device Experience by the way with the immunology organization or rather immunology business and our deep, deep knowledge of rheumatology business Rheumatologists across the country positions us in incredibly strong position to be one of those 2 to 3 Products that are going to be listed on formulary. Now what will likely happen, obviously in 2023, as I mentioned, this will be a lighter ramp up year. You're going to be trying to fight fighting for Formulary position, there will be obviously discounts that will be offered. I'm sure that the originators will be doing that in terms of kind of being more aggressive with discounts.

Speaker 2

Going forward, I do believe that volume will not retract. I think there will be opportunities not only for the Switching of the HUMIRA volume, but also I do believe that PBMs will look at this opportunity for other such products, Whether you're talking about other anti TNF, where the opportunity is there to go to a biosimilar first. So The potential for volume and also by the way because of the lower price, you'll be able to get patients who weren't really essentially Thought of for anti TNF treatment to be using now anti TNF treatments. And so with high quality anti TNF biosimilars on the market, I think volume will be there, but the question is what kind of rebates, what kind of discounts that will be provided. Clearly, as we go forward in 202420 5, there's going to be more of an expectation that the originator, the HUMIRA will start to move off of formularies as we see in the rest of the world.

Speaker 2

And then you'll ultimately see bigger discounts being provided, but also ultimately the volume opportunities will still exist. That's the way I see it. 2023 is a lighter ramp up year, formulary accession. And then 2024 and 2025 it will start to open up, Bigger rebates, bigger discounts, but more volume opportunities for biosimilars.

Speaker 3

Matt? I'll take the second part of the question. So This is a dialogue that has been ongoing with investors really since the spin. When we launched, Our P and L had really zero space in it for product development type expenses that could drive ongoing future revenue growth. And so we've been slowly and steadily reintroducing those as the quarters Have evolved.

Speaker 3

And Chris, in direct answer to your question, when I think about the 31% to 33%, I think And how much lower that might go? It depends on how the how and what kind of business development that We do. But I would say, as we look at the range for 2023, the low side of that range is starting to feel Like the Nadeer, because at that at EBITDA margins like that, we've got R and D as a percentage of revenue that's right in that 9% to 10 Percent range, we've got promotional type expenses built into our SG and A that start to feel sustainable and ongoing. And So at this point in time with the kind of scenarios we've been running on what future business development might look like, The low side of that range is starting to feel like the nadir as we think about 5 year strat plan horizon.

Speaker 9

Great. Thanks so much.

Operator

Your next question is from the line of Chris Shibutani with Goldman Sachs. Please go ahead.

Speaker 10

Hi, this is Dan on for Chris. Thanks for taking our questions. Just a couple. First on just business development with regards to biosimilars. I guess, We think that you guys as potentially competing on some of the other biologics that are potentially who's patent over the course of the decade and if so doing Deals similar to the Samsung deal kind of the fifty-fifty split.

Speaker 10

And then just on cash flow for 2023, just Want to confirm, should we think of this year as still kind of somewhat one time impacted, but close to the $1,000,000,000 plus number and then $1,000,000,000 plus starting in 24 Or is the 23 kind of above the in kind of the 1,000,000,000 plus range? Thank you.

Speaker 2

So Dan, let me address the business development strategy for biosimilars. Look, we're very much committed to biosimilars. Obviously, we're launching our HUMIRA biosimilar in a few months from now. But we're also we made the deal with Shanghai Henleyus To bring in 3 other 2 other biosimilars and the potential opportunity to get into the Yervoy biosimilar race as well. Look for us it is a key.

Speaker 2

The key is order of entry. And so rest assured we are looking at every major potential Opportunity when it comes to doing business development and we've got a lot of ongoing discussions as we speak. It's a high probability of success in terms of getting to market As long as your order of entry is in the 1st tranche of launches, you can do very well. And that sales curve can last anywhere between 3 6 years, look at RENFLEXIS, we still grow double digit with RENFLEXIS after 5 years of launch in the U. S.

Speaker 2

So and that's our largest biosimilar to date in terms of our sales. We expect HADLIMA to ultimately when peak starts to emerge for HADLIMA sales to be the 2nd largest product For Organom. So you can kind of see that we see an opportunity. And in terms of profit sharing or rather margins, we're going to do our best As you can well imagine to continue to do the best we can for our shareholders And the best we can for what we bring to the market. So we'll continue to swing away at bringing more and more to the market What we do with biosimilars.

Speaker 3

And then on the subject of free cash flow, we spent some time talking about it in the When you look at our performance this year, were it not for that working capital build that was spin related, You would have seen us in the north of $1,000,000,000 range before one time items. We think that improves a little bit During the course of 2023, but we will still have one time costs of about the same magnitude as we saw them In 2022. And that as we're moving into the latter stages Of the TSA agreement with Merck, we are right on target. We are ticking off and standing up all the activities we need to. The biggest driver now of one time cost is our global ERP implementation.

Speaker 3

That's One of the biggest drivers of the one time cost in 2023.

Operator

Your next question is from the line of Steve Scala with Cowen. Please go ahead.

Speaker 11

Thank you very much. I have two questions. Next plan on missed Double digit growth expectations set early in 2022. Those expectations were reiterated at Year, mid year and never stated to be a constant exchange. You mentioned some pushes and pulls, but presumably they were anticipated 6 months ago.

Speaker 11

So, what factors led to the shortfall in 2022 for Nexplanon? So that's the first question. The second question is similar to questions I've asked in the past, So apologies for asking again. But with the view that the future of the company is in women's health, the pace I know you won't do all 140 deals originally identified, but if you did, it would take 3 more decades to complete them all. Was this pace that we've seen always the plan or have things been more challenging than expected?

Speaker 11

In my humble opinion, I think the pace of activity in women's health needs to increase exponentially. Thank you.

Speaker 2

Good to talk to you, Steve. Let me address next, Panaan. We always basically signal to the world that we expect a double digit growth. We achieved 11% growth in 2022 and that is always at a constant currency rather ex because we don't know what's going to happen with currencies on a month by month basis. And it was kind of hard if you're talking At the beginning of or rather at the end of last year to see what would happen with the dollar strengthening to the point where it's where it was throughout the year.

Speaker 2

So on an ex exchange basis, we did grow 11%, 8% in the U. S, the remainder outside of the U. S. Ex U. S.

Speaker 2

Business was responsible for 50% of our growth. So we're feeling very good about where we landed with Nexplanon. It's consistent To what we essentially have guided in the language that we've used. And in terms of your second question In regards to the opportunities that exist right now in the women's health space, as I've mentioned earlier days, We look at women's health from 3 points of view. 1, with therapeutics 2, With potentially devices, we're agnostic or whether it's a device or a therapeutic and those are focused primarily uniquely for women's health related Conditions, but we're also looking at conditions that what we would consider disproportionately impact women's health And women and that would be anything from celiac disease, lupus, migraine, osteoporosis, the list goes on and on and on, chronic cough.

Speaker 2

So that's always potential opportunity for us to use our capital allocation, our business development dollars. Now I will say to you though, This is rare because most of the time that when I say we've done 8 deals in literally a year and a half, that's almost a deal every 2 months. I would say that we feel very comfortable. And as you start to layer on some of these assets with the business organic business that we're driving with the opportunities that we have, Not only in life cycle management opportunities, which are really plentiful, but also with the biosimilar businesses that we're bringing in, We see an opportunity to really continue to grow the growth momentum for the company going forward in the future.

Speaker 11

Thank you.

Operator

Your next question is from the line of Greg Fraser with Truett Securities. Please go ahead.

Speaker 9

Good morning folks. Thanks for taking the questions. Following up on BD, you've done a number of deals to expand the pipeline with assets for new indications beyond your core women's health business like endometriosis and preterm labor, and I know you're bullish potential of those programs, are you looking to add additional programs for those indications so you have more shots on goal? Is that something investors should expect or are your BD efforts in women's health more focused on new air? Thank you.

Speaker 2

Well, I got I got to say that shots on goal is always a nice thing. The acquisition we had for Ferendo Has got a couple of molecules. Our 6,219 asset is the one that is furthest along, but they also have other backup Compounds as well. We like the mechanism of action of this new action of this new product, of this new mechanism. It has great promise.

Speaker 2

So yes, I mean wherever possible in terms of we're making acquisitions, we'll See whether there's backup molecules that we potentially can take to the clinic if the our primary molecule fails. But we're also expanding as you said. We went from essentially being in contraception and fertility to add a number of different Therapeutic areas, postpartum hemorrhage, preterm labor, endometriosis, polycystic ovary syndrome, bacterial vaginosis, now with our device with CLARIO For minimally invasive laparoscopic hysterectomies, so there's a number of different areas we continually identify As opportunities that both meet a need in the market and need innovation in the market and we believe that we're really very well primed to take on that leadership role.

Operator

And today's final question will come from the line of Jason Gerberry with Bank of America. Please go ahead.

Speaker 9

Hey, guys. Good morning. This is Bhavan Patel on for Jason Gerberry. Just two questions. First, I wanted to get a sense of Nexplan growth outlook that's assumed in the 2023 top line guidance given that's something you've provided in the past.

Speaker 9

Yes, is it still double digit growth? And then the second question is whether it's safe to assume that Aurignon plans to be active In M and A this year, given net leverage ratio considerations, do you expect to do a big deal in 2023? Thank you.

Speaker 2

Thanks for the question. Look, I'd say that, first of all, I'm very happy and satisfied with the performance Since we spun off 2 consecutive years of double digit performance, our focus in 2023, we're really going to be increasing Our focus on patient demand. We'll of course be pushing for as more robust as we can for the product. We continue to see ex U. S.

Speaker 2

Business growing Faster than the U. S. Business. We're continuing our clinical training programs, follow on reviews, our DTC campaigns. So we believe that NEXPLANOM, a, will continue to grow robustly over the years.

Speaker 2

And second, we are also focusing on the fact that this is going to be 1st $1,000,000,000 product essentially by the end of 2025. That's the run rate that we're going forward. We feel very good about that. And so this is going to be a long term asset for us. January demand is strong in terms of our overall physician demand.

Speaker 2

So we feel really good about Nexplanon. I'll hand over the last question to Matt for answering.

Speaker 3

Yes. So we fielded this question a few times on deal size. And we've obviously had very good success with the smaller deals that we've been doing. They're plentiful. They're a little bit easier to integrate.

Speaker 3

The rising interest rate environment, our leverage ticking up does, I would say, make deals incrementally More challenging at the margin, but with respect to big deals, we've always been in the same place, which is We're not necessarily out hunting them, but we are aware of possibilities. We think creatively And we would not shy away from a larger opportunity if we really felt it was a compelling shareholder value creation. But we've got a lot of organic growth plans in place for 2023 As well as execution of the 8 deals that we've already done. So 2023 is going to be an exciting and busy year. But like I said, as far as big deals go, we are aware of them, we're open to But it's not necessarily something we see as either necessary for our success or a priority.

Speaker 9

Thank you.

Speaker 2

Thank you.

Operator

This concludes the Q and A session. I would now like to turn the call over to the company's CEO, Kevin Ottley for closing remarks.

Speaker 2

Well, thank you for all the questions, the thoughtful questions. I want to do I do want to close by saying, look, today marks our 7th quarter of earnings as standalone company. With the Q4 of 2022, we've continued our track record of delivering exactly what we set out to achieve. Our vision want to thank you for joining us today and we look forward to communicating our progress with you in 2023. Thanks everyone.

Operator

Thank you all for joining the Organon 4th Quarter and Full Year 2022 Earnings Conference Call. We thank you for your participation. You may now disconnect.

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