Organon & Co. Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 6, 2024

There are 10 speakers on the call.

Operator

Thank you for standing by. My name is Mandeep, and I'll be your operator today. At this time, I'd like to welcome everyone to the Organon Q2 twenty twenty four Earnings Call and Webcast. All lines are being placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn the call over to Jennifer Hallczyk, Head of Investor Relations. You may begin.

Speaker 1

Thank you, operator. Good morning, everyone. Thank you for joining Organon's 2nd quarter 2024 earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer and Matt Walsh, our Chief Financial Officer. Also joining us for the Q and A portion of this call is Organon's Head of R and D, Juan Camilo Arjona Ferreira.

Speaker 1

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 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 Q2 results. For the Q2 of 2024, revenue was $1,600,000,000 representing a 2% growth rate at constant currency. The women's health franchise grew 3%, our biosimilars franchise grew 22%, and our established brands franchise was down 1%. In the Q2, adjusted EBITDA was $513,000,000 representing a 31.9% adjusted EBITDA margin, which includes $15,000,000 of IP R and D expense.

Speaker 2

Adjusted diluted EPS was $1.12 We have had solid revenue growth in the first half of the year of 4% at constant currency and we're on track to deliver our 3rd consecutive year of constant currency revenue growth. Given year to date performance and our view into the rest of the year, we have narrowed our range for full year 2024 revenue around the midpoint to $6,250,000,000 to $6,450,000,000 The guidance represents constant currency revenue growth of 2% to 4.7% ex exchange for the full year. Year to date adjusted EBITDA margin was 32.5%, which includes $30,000,000 of IPR and D and milestone expense incurred in the 1st 6 months of the year. We are running at the high end of our full year adjusted EBITDA margin range of 31% to 33%, whether you look at it with or without the impact of IPR and D. Year to date EBITDA margin performance reflects actions we have taken to contain operating expenses and the first half of the year also benefited from favorable timing of spend.

Speaker 2

We expect SG and A expense to pick up in the second half of the year due to planned expenditures related to rolling out new products like the migraine medicines and further investment in Nexplanon. Given that timing, we're holding to our 31% to 33% adjusted EBITDA margin range for the full year. From a capital allocation standpoint, year to date, we're tracking well through our commitment to deliver $1,000,000,000 of free cash flow before one time spin related costs in 2024. That strong cash flow will provide financial flexibility to comfortably service our dividend, which is our number one capital allocation priority and also gives us optionality to make discretionary debt repayments and to continue to pursue sensible business development. Let's move now to discuss our franchise performance.

Speaker 2

Growth in women's health was driven by continued strength in Nexplanon, which is up 13% ex FX in the 2nd quarter. Last year, we took action to position Nexplanon for a strong 2024 and that is showing up in year to date constant currency growth of 22%. In the U. S, Nexplanon grew 8% in the 2nd quarter. We benefited from Nexplanon's leadership in the U.

Speaker 2

S. Contraception market, our pricing strategy, including management of the 340B discount program, as well as continued physician demand growth. Outside the U. S, Nexplanon grew 27% ex FX in the 2nd quarter, primarily driven by our expansion in supply capabilities, and so we are now able to better meet the demand in our access markets, which we cited as a priority for us in 2024. But we also benefited from increased demand in countries in the UK region.

Speaker 2

Given strength in performance year to date, we expect Nexplanon can achieve constant currency full year revenue growth in the low teens. This would be our best year in Nexplanon and also puts us closer to the $1,000,000,000 mark for next year. With regard to the Nexplanon 5 year study, the study met its primary endpoints showing contraceptive effectiveness and no new safety signals. Based on this data, we are beginning to prepare for regulatory submission in the U. S, EU and U.

Speaker 2

K. We continue to believe that would put us on track for a potentially U. S. Launch of the Nexplanon 5 year indication in 2026, pending FDA approval. We see this launch as an important event, because it would mean that we would have data exclusivity on the 5 year claim for 3 years.

Speaker 2

That means between 20262029, no generic with 5 year duration could come to the U. S. Market. And further, any generic would need to have a different insertion device until our device patent expires in 2,030. We remain very optimistic about Nexomon's future prospects and the expanding potential of the brand.

Speaker 2

Moving on to other women's health. Our global fertility business was down 8% ex FX in the 2nd quarter. In the U. S, we are seeing patient volume in the self pay market level off. Our business has been shifting towards the reimbursed market, which is largely dominated by PBMs and we've had good success here.

Speaker 2

In fact, you may recall that in the Q4 of last year, we secured broad access to the largest PBM in the country. Also weighing on U. S. Fertility results is that we had a very strong buy in of Follistim in the Q4 of last year that was related to both the onboarding of the large customer as well as to the exit of a spin related interim operating model. In China, our 2nd largest fertility market, we're seeing a slower than expected rollout of the province by province effort to expand reimbursement of procedures using assisted reproductive technology or ART.

Speaker 2

But going forward, we remain very optimistic about this initiative expanding to other provinces. We have seen strong double digit growth in some of the larger provinces where reimbursement has already been implemented, for example, in Beijing. Given year to date performance, we believe global fertility performance for the full year will be flat compared to our initial expectations of a high single digit increase. Still, that guide implies good growth in the second half, which will be coming from gradual uptake of ART reimbursement in China, coupled with lapping a weaker fertility market in China in the second half of last year. We also will benefit from footprint expansion in other international markets.

Speaker 2

We see 2025 as a rebound year with very strong growth for fertility underpinned by continued ART expanded reimbursement in China, international expansion and performance in the U. S. That won't have the noise of the IOM exit. Let's move now to our biosimilars franchise, which grew 22% at constant currency in the Q2 and 33% year to date. The exceptionally strong first half performance was driven by continued uptake of HADLEYMA in the U.

Speaker 2

S. Following the launch in July of last year, along with the timing of an international tender for Entrezant. For the full year, we expect the biosimilar franchise to deliver strong growth in the low teens ex FX. U. S.

Speaker 2

HEDLIMA sales were $20,000,000 in the 2nd quarter. Throughout the Q2, HEDLIMA was a leading Humira biosimilar with regard to total prescriptions, pointing to prescriber preferences for our product. From the Q1 to the 2nd quarter, total prescriptions for HADLEYMA grew over 60%, consistent with the TRx trend since launch. We are having success because our strategy is focused on stakeholders who want to lower net cost and improve patient affordability. That strategy is paying off and we are building on our momentum.

Speaker 2

Regarding the interchangeability status of HADLEYMA, in the U. S, the designation was approved on the low concentration formulation for the prefilled syringe and single dose file presentations. Samsung continues to navigate the approval of the other presentations and we continue to expect to have interchangeability on those presentations in the middle of next year as planned as pending FDA approval. On the pipeline side of things, our other partner, Shanghai Henlius Biotech, already filed in the EU for the denosumab biosimilar candidate we licensed in from them, and they plan to file in the U. S.

Speaker 2

Later this year. They anticipate making filings for pertuzumab biosimilar candidate later this year and in 2025. Organon will have exclusive global commercialization rights to these assets outside of Mainland China, Hong Kong, Macau and Taiwan regions. And then rounding out the discussion with established brands, which declined 1% ex FX in the second quarter and has grown 1% ex FX year to date. So far in the first half of the year, the $40,000,000 contribution from the recent commercialization agreement with Eli Lilly for the 2 migraine drugs led by Emgality are off to a good start.

Speaker 2

Also, the recovery in certain injectable steroid products following last year's market action have more than offset expected impacts from VDP, LOE and mandatory price revisions in Japan. Performance in those products also compensated for unfavorable timing of shipments related to our ERP implementation, which was completed in April. The pushes and pulls on the Established Brands portfolio tend to be different in every quarter, but since the spin, we have shown that the diversity of our products, geographic span and entrepreneurial focus leads to very steady results. Entrepreneurial focus encompasses business development opportunities like the migraine assets. We continue to look for those type of transactions where the assets are launch ready, complementary to our existing portfolio and can enhance the overall growth profile of the company.

Speaker 2

Moving now to Slide 6, where we take a look at revenue by geography. Yucan was down 1% ex FX in the quarter, though this region benefited the most from the addition of the 2 migraine assets and the recovery of injectable steroids. It was the region most affected by unfavorable phasing of sales related to the ERP implementation. The U. S.

Speaker 2

Was up 5% in the quarter, driven by solid performance of Nexplanon as well as uptake of both HADLIMA and JADA. These factors offset price pressure and the channel dynamics in fertility, as well as performance of Entrezon and Renflexis, which are in decline after more than 5 years on the market in the U. S. The APJ region was up 5% ex FX in the quarter, mostly due to the recovery of injectable steroids and some favorable timing in Singular. We expect it to be a challenging year in Japan as we face national price revisions for some products and work through LOEs of adizet and rosuzet in that market.

Speaker 2

The Lomaira region, which has been a significant contributor to Organon's growth since the spin, had 8% ex FX growth in the 2nd quarter, which was primarily driven by volume associated with the Entreson tender in Brazil, as well as strong growth in Nexplanon across certain excess markets and Mexico. China was down 4% ex FX in the quarter, but we expect the second half of the year to be stronger than the first driven by fertility and the continued performance in the retail and hospital channels. Overall, we're very pleased with the results through the first half of the year, and we feel confident in our ability to deliver our 3rd consecutive year of constant currency revenue growth in 2024 and higher year over year adjusted EBITDA. EBITDA growth underpins strong cash flow, which accelerates our ability to delever and to play offense when comes to executing on business development and driving revenue growth. So optimizing our cost structure and implementing efficiency initiatives across the enterprise is ever critical in creating shareholder value.

Speaker 2

Now, let's turn the call over to Matt, who will go into our financial results in more detail.

Speaker 3

Thank you, Kevin. Beginning on slide 7, here we bridge revenue for the Q2 year over year. The biggest driver in the bridge is volume growth of $55,000,000 comprised of strength in the areas we've mentioned, biosimilars, Nexplanon and the addition of Emgality. Combined with stronger volume growth in the Q1, year to date revenue growth due to volume is solid at about 4.5 percent organic growth, which rises to about 6%, including the addition of Emgality. The typical headwinds to revenue growth, which we show as the first three steps in the bridge, were all fairly light in the 2nd quarter.

Speaker 3

LOE was about $5,000,000 of impact, which reflects the loss of exclusivity of Atozet in Japan. The impact of DBP in China was also about $5,000,000 in the 2nd quarter, which reflects lingering effects of round 8 that began in the Q3 of last year and included Remeron and HiZar. There was also an approximate $5,000,000 impact from price in the 2nd quarter, overall pretty negligible. The benefits of our NEXBONON pricing strategy in the U. S.

Speaker 3

Muted expected pricing pressure in other parts of our business, particularly in biosimilars and to a lesser extent fertility. In supply other, here we capture the lower margin contract manufacturing arrangements that we have with Merck and which have been declining since the spin off as expected. And lastly, foreign exchange translation had an approximate $30,000,000 impact or 2 percentage points of headwind to revenue, which reflects a strengthening dollar relative to prior year. Now let's turn to performance by franchise. As I've done in past quarters, I will target my comments over the next three slides to those areas most relevant to your modeling.

Speaker 3

Let's start with Women's Health on Slide 8. Kevin already discussed in detail our expectations for Nexplanon. I'll add that achieving a growth rate of low teens for the full year would imply a lower, but still very robust mid to high single digit growth rate for Nexplanon in the second half of this year. That is sensible considering that the very strong growth realized in the Q1 of this fiscal year benefited from lapping a significant buyout in the prior year period. For fertility, as you phase your expectations for the second half, I'd remind you that the Q4 of 2024 will be a tough comparison since it was in the Q4 of last year that we had the buy in related to onboarding the new PBM customer and the interim operating model exit in the U.

Speaker 3

S. So globally, Q3 will be a stronger quarter for Fertility compared with the 4th quarter. With regard to other key products within Women's Health, NuvaRing was the most significant revenue offset in the quarter and likely will continue to be in the near term as that product now has 5 generic competitors in the U. S. And lastly, in Women's Health, it's worth noting the strong year to date performance in Marvellon, Merceline, up 13% ex FX.

Speaker 3

Like the migraine assets, this reacquisition of rights to the Marvellon and Mercelon assets in certain markets highlights areas of business development where we can leverage our global capabilities. Turning to biosimilars on Slide 9. For Headlima, we expect U. S. Revenues to grow sequentially every quarter this year.

Speaker 3

What isn't evident in the U. S. Revenue of $20,000,000 in Q2 is a small one time wholesaler inventory adjustment in Q1 to support the onboarding of the VA contract that we won. Excluding this inventory adjustment, U. S.

Speaker 3

Headlima growth would have been about 20% sequentially from Q1 to Q2. The low teens constant currency growth that Kevin referenced for the full year for our global biosimilars franchise will be driven by strong growth in HADLIMA that we expect will offset expected pressure in Entrezant, particularly in the U. S. And Europe. RenfLEXIS should also be a moderate contributor to the franchise for the full year, helped by good performance in Canada that has the potential to offset price pressure in RENFLEXIS in the U.

Speaker 3

S. Turning to Slide 10. If we think about the 1% year to date revenue growth in Established Brands during the first half of the year, Across the franchise, that was driven by 1% volume growth that offset very negligible pricing impact. Year to date, revenue drivers like DBP, LOE and price have all had minimal impact on Established Brands performance as we said earlier. In the back half of the year, we will see more prominent impact and we're mainly focused on 3 drivers.

Speaker 3

1st, the impact from VBP in China will pick up, driven by Fosamax's inclusion in round 10 expected late in Q4. 2nd, LOE impact will be more significant as Atoset will go through LOE in the EU in September of this year. And third, price will be more of a headwind as we expect the impacts from mandatory pricing revisions in Japan to accelerate. We do expect strength in volume growth in the second half of the year in the Established Brands portfolio coming from continued onboarding of the migraine products, which we initiated during the Q1 of this year. Additionally, when Kevin spoke about our performance in Established Brands, especially UCAN, he noted the phasing of shipments related to the implementation of our ERP system.

Speaker 3

Those impacts are largely contained in our first half performance and we have put that behind us. For the full year, we continue to expect established brands to achieve flat performance ex FX. Now let's turn to slide 11, where we show key non GAAP P and L line items and metrics for the 2nd 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 related to the spin off, which can be seen in our appendix slide.

Speaker 3

Adjusted gross margin was 62% in the Q2 of 2024 compared with 62.9% in the Q2 of 2023. In the Q2 of 2024, as with the Q1, the lower adjusted gross margin was primarily related to unfavorable product mix, foreign exchange translation and higher inflation impacts to material and distribution costs. Excluding $15,000,000 of IPR and D expense incurred during the period, non GAAP operating expenses were down 2% year over year. This is a reflection of our cost containment efforts and also favorable timing of spend. Of the $15,000,000 of IPR and D expense in the 2nd quarter, dollars 10,000,000 was related to our collaboration with Circle in on demand non hormonal contraception and $5,000,000 was related to our collaboration with Shanghai Henlius for further advancement of adenosumab biosimilar.

Speaker 3

Milestone payments are inherently difficult to forecast, so we will continue to utilize the same guidance convention that we initiated in late 2023, which is to include an estimate of ITR and 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. These factors culminated in an adjusted EBITDA margin of 31.9% in the Q2 of 2024, compared with 33% in the Q2 of 2023. Non GAAP adjusted net income was $289,000,000 or $1.12 per diluted share compared with $336,000,000 or $1.31 per diluted share in 2023. Turning slide 12, we provide a closer look at our cash flow for the first half of the year. In 20222023, our 2 full fiscal years post spin off, we generated a significant majority of our free cash flow in the back half of those years.

Speaker 3

This year, we're on track to deliver more balanced phasing of free cash flow between first half and second half. In part, this is driven by timing as our full year expectation of approximately $1,000,000,000 in free cash flow before one time items remains unchanged. With our single instance, Global ERP system now completely in place as of April, we are working to optimize business processes around cash cycle working capital, which will help stabilize free cash flow generation and of course, one time spin related cash costs, $117,000,000 in the first half, will be declining meaningfully in the second half and we expect to finish the year at a figure just north of $200,000,000 or roughly a 40% decline relative to 2023. Next year, we would expect one time spin related costs to be de minimis. In the $70,000,000 of other one time costs, here we capture headcount restructuring initiatives and manufacturing network optimization.

Speaker 3

These network optimization costs are distinct from the spin related costs and that they're associated with actions to separate our manufacturing and supply chain activities through exits of supply agreements with Merck, which will ultimately drive cost efficiency. Slide 13, our net leverage ratio has remained level with 2023 year end and is holding at 4.1 times. This is a favorable development versus our expectation at the start of the year, when we believed we would see leverage tick higher in the first half before coming down. Given our adjusted EBITDA guidance for the year, we continue to see an achievable path to ending the year with a net leverage ratio below 4 times. Now turning to 2024 guidance on slide 14, where we highlight the items driving our 2024 revenue guidance range.

Speaker 3

As Kevin mentioned, we have tightened our revenue range around the midpoint. We're showing a slightly different version of this graph compared with prior quarters to illustrate the acceleration of driver activity in the second half relative to the first half. The first takeaway from this slide is that there are only minor tweaks to the ranges for each of the drivers, all netting to a consistent view of operational performance relative to our previous guidance communication. The midpoint of our revenue guide on a nominal basis remains unchanged at 1.4% growth and the midpoint of our revenue guide on a constant currency basis remains unchanged at 3.4% growth. The objective in showing the numbers this way is that when we bifurcate the bars to show first half versus the expected impact in the second half, you can see the point we made earlier that LOE, DBP and price were all negligible drivers year to date, but their respective impacts will pick up in the second half.

Speaker 3

Importantly, you can see that we expect second half volume growth to more than offset the collective impact of the other drivers. For LOE, that approximate $70,000,000 to $90,000,000 range reflects LOE of adenosine in Japan, which is already underway, and also the LOEs of adenosine in the EU, which will occur in September, and to a lesser extent rosuzette in Japan, which will also occur later in the year. VBP impact is still expected to be in the range of $30,000,000 to $50,000,000 for full year 2024, which will be back half weighted to reflect Fosamax's expected inclusion in round 10 late in the year, as I mentioned. Our range on expected impact from price improves very modestly as we take the high end of the range down by $20,000,000 The revised range of $180,000,000 to $200,000,000 represents an approximate 3 percentage point headwind versus prior year and is in line with our longer term expectations from price impact across the entire business. Year to date, impact from pricing has been minimal, mostly due to the changes we've made in Nex Bana's pricing strategy, along with work across the Established Brands franchise to minimize the mandatory pricing revisions we expect to see in certain international markets.

Speaker 3

Impact from price will be felt more acutely in the back half as the mandatory pricing revisions in Japan accelerate. There will also be mandatory price reductions associated with the Atazit LOE in the EU. And finally, the competitive dynamics in fertility and biosimilars also pressure price. For the year, we've narrowed the range on volume to $500,000,000 to $600,000,000 with no change to the midpoint. The range for volume reflects an approximate 9% growth rate over last year.

Speaker 3

In the first half of the year, volume growth was strong at 6%, but second half volume growth is expected to be even stronger, about double that actually, with the inflection primarily driven by assets that are new to the portfolio since the spin. U. S. Headlima, Emgality, Marvellon Mercelon and the additional markets reacquired, as well as JADA. We'll also benefit from geographic footprint expansion in fertility.

Speaker 3

And finally, based on the continued strength in the U. S. Dollar using recent spot rates, we upped our range slightly on our view of the impact from FX to $110,000,000 to $140,000,000 Moving to the other components of guidance now on slide 15. For adjusted gross margin, we are continuing to guide to a range of 61% to 63% for 2024. Year to date gross margin was 62%, just right in the middle of our range and feels like a pretty good barometer for second half and therefore full year.

Speaker 3

On SG and A expense, year to date, we've been tracking on the low end of our $1,500,000,000 to $1,700,000,000 range, but that's really just timing. We expect SG and A spend to pick up in the second half of the year, tied to planned investment in product launches, the migraine products, for example, as well as Nexplanon. To provide a guidepost, we expect non GAAP SG and A expense to grow in the mid single digits in the second half of the year compared with the second half of last year. For R and D, all we did here was raise the range by the $30,000,000 of to date. Operationally, we're tracking close to the midpoint of that $400,000,000 to $500,000,000 range ex IPR and D that we said at the beginning of the year.

Speaker 3

It's worth noting that to this point, we've been able to absorb the year to date IPR and D expense within our adjusted EBITDA margin range of 31% to 33% for the full year. The $30,000,000 of expense was worth about 1 percentage point of adjusted EBITDA margin year to date. As you think about quarterly phasing, at this point in time, we believe that Q3 and Q4 should be fairly similar with regard to absolute revenue dollars and EBITDA margin. For below the line items, there's no change to ranges for interest, taxes or depreciation. Year to date, we're running a bit favorable relative to our non GAAP income tax rate guide.

Speaker 3

Our non GAAP effective tax rate in the 2nd quarter was 17.3% and is 16% year to date. The 2024 year to date non GAAP ETR was favorably impacted by the conclusion of 2 non U. S. Tax audits. For the full year 2024, we continue to view 18.5% to 20.5% as a good range.

Speaker 3

Despite our debt refinancing in May, we didn't change our point estimate of approximately $520,000,000 for annual interest expense because the sum of the accelerated amortization of previously capitalized financing costs and financing fees for the new instruments expensed in the current period is substantially offset by the lower interest rate on the new instruments. Summing up, Q2 was another solid quarter of performance that continues the strong results posted in the Q1. We're heading in the right direction on volume growth, margins, operating expense discipline and free cash flow. We are tracking to another year of constant currency revenue growth, consistent with our expectations for the year. With that, now let's turn the call over to questions and answers.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from the line of Umer Raffat with Evercore ISI. Please go ahead.

Speaker 4

Good morning, guys. Thanks for taking my question. I'm sure you've seen some of the headlines on Gardasil last week. So I have two questions off of that. Number 1 is more of a history question, if I may.

Speaker 4

So during your time at Mark, obviously there was a decision made to sell Gardasil to a local partner, but all the Organon products were sold directly in China. Could you speak to why the commercial strategy was different and if you would expect a different outcome if you had a local partner or not? And secondly, I remember last year when you had an 11% down in 3Q, you talked about healthcare budget deficit in China for the first time as well as stricter enforcement of the procurement rules and investigations. So would that or would that not affect demand? It doesn't look like it's affecting your demand, but could you speak to that dynamic?

Speaker 4

Thank you very much.

Speaker 2

Hey, Umer, this is Kevin. Thanks for the question. Let me start with your last question first. If I just kind of put it in perspective, let me just kind of narrow down on Q2. Our Q2 results in China were impacted with a very high comparator in Q2 of 2023 based on kind of a COVID rebound.

Speaker 2

And so that drove significant sales last year for example, fertility. Also we're washing through the round 8 BBP impact in Q3 of 2023. But we're seeing some really positive tailwinds to your point on established brands. In the hospital sector, we see strength post VVP as well for retail. We've had the 3rd consecutive quarter sequential growth, but we're washing through a number of those things that I've just mentioned earlier.

Speaker 2

What I do see going forward, again to your point is that we see the second half of the year returning to what I would consider mid single digit growth for China. So I don't see anything there that ultimately tells me that we're going to have any type of continuation of downdraft. I think we're going to be in good shape for the year. But I would I've always been basically said, when we finish this year, 80% of our business, Established Brands business will have gone through the VBP. So next year, we expect to have finally back to kind of what I would consider solid growth momentum for China going forward based on a number of different aspects.

Speaker 2

In regards to your first question, yes, I was in charge of the international segment for Merck, but we don't have necessarily the partner relationship that Merck does in China. So we don't have that type of exposure. So that's kind of the way I would signal to you that we don't have any issues there in regards to local partnerships that potentially could affect our forecasting opportunities.

Speaker 4

And Kevin also would there not be any inventory dynamics either because I know part of the issue on Gardasil is local CDC is not buying as much. So I wondered, could there be any hospital inventory or anything like that, which may be getting drafted down? Is there nothing like that?

Speaker 2

For us at least, our inventory is at a healthy level. It's not anything that I would consider to be too high or too low. It's basically within line what we've always had. So that's what I would signal to you in terms of where our inventories are in locally.

Speaker 4

Got it. And at the hospital acquiring channel as well, correct, the inventory?

Speaker 2

Yes. Yes,

Speaker 5

both. Thank you very much.

Operator

Our next question comes from the line of Chris Schott with JPMorgan. Please go ahead.

Speaker 6

Hi, this is Ethan Brown on for Chris Schott. Thanks for taking our questions.

Speaker 2

Can you just give us a

Speaker 6

sense of how you see operating margin progressing through the rest of 2024 and into 2025? And just directionally, do you expect you'll be able to increase margins from here? Or is the guidance range today a good proxy for margins over the next couple of years? Thank you.

Speaker 3

Thank you for the question. Yes, we see operating margins fairly stable through the rest of the year. We're making sure that our full year guidance has enough recognition as we showed on Slide 14 of the deck that we expect some amplitude more in the second half on things like LOE, VBP and price than we did in the first half. But we feel very good about what we're signaling in the guidance about our operating margins. It's a little bit too soon to talk to 2025, but we certainly see the continuation of the volume growth that we've been talking about in our key drivers.

Speaker 3

And yes, more on 2025 when we get a little bit later in the year.

Speaker 6

Thanks so much. That's all for me.

Operator

Our next question comes from the line of David Amsellem with Piper Sandler. Please go ahead.

Speaker 7

Hey, thanks. So just a couple for me. 1, can you talk about your longer term contracting strategy on Hedlina and how you're thinking about tackling the payer landscape, particularly in the context of Teva's recent execution on their significant contract. I mean, how do you think about that and help us better understand how you drive more volumes in that market? That's number 1.

Speaker 7

And number 2 is just on the R and D spend. I wanted to get your sense philosophically for how you're thinking about it long term. I know there was a change in the guidance, it's mostly on the in process R and D. But I guess the larger point is, when are we going to get more visibility on the pipeline and how are you prioritizing balancing overall pipeline spend versus margin stability or expansion? Thanks.

Speaker 2

Thanks for the question, David. In regards to the first question regarding HADLIMA going forward, I think we've always been very clear about our strategy. It's providing a really high quality, frictionless experience in terms of product to product comparison between the comparator of Humira and HEDLIMA at the lowest net cost to give the affordability so as many patients possibly can take the product as possible. And so with that, I've always signaled that about 45% of the market today is what I would call part of that low net cost segment. The rest is essentially made up of the PBMs, around 55% is PBM driven.

Speaker 2

And right now that's where we're getting our growth. We are growing in TRx is about 60% quarter 2 over quarter 1 and you can see that playing out. And I've always signaled that we'll be in the 2 or 3 biosimilars for HUMIRA when it's all said and done. I think that's essentially where you want to be over time. And we're seeing good solid growth as you've seen with our numbers and we continue to see that going forward as well.

Speaker 2

In regards to R and D, I think that's a function of the fact of what we have right now. We're very excited about we've got in the pipeline 6,219, which is our endometriosis asset. We'll hopefully be reporting out this time next year in terms of our Phase 2a2b data. And in regards to the future, I think we're being very prudent in or whether we see something that's kind of coming down the pipe that we think are really, or whether we see something that's kind of coming down the pipe that we think are really, really exciting. And there's more and more access or rather more and more interest right now in terms of the women's health field.

Speaker 2

There's a lot of activity. There's a lot of R and D going in that space, but it is a long term journey, which we'll be able to dedicate when we start to see things that are really very interesting for us. In the meantime, we do a lot of these what we consider tuck ins, which are really good hygiene. Just look at the Lilly deal that's really been very, very profitable for us just in the 1st few months. We'll continue to do those and we'll do we'll be very careful in terms of what we're going to do in regards to our R and D expenditures going forward.

Speaker 7

Thank you.

Operator

Our next question comes from the line of Jason Gerberry with Bank of America. Please go ahead.

Speaker 5

Hey, good morning guys. Thanks for taking my questions. So first one for me is just on EBITDA beyond 2024, not looking for guidance, but just directionally, your thoughts on being able to either hold the cost structure flat or keep it down in 2025 or 26 and the ability to do these Emgality type of deals, say 1 per year, just thinking about some of the tailwinds to 2024 and then how we think about that going forward? And then my follow-up question on HADLIMA is, does interchangeability at this point on high concentrate matter at all in your view and any thoughts on ability to participate in on the private label side? Thanks.

Speaker 2

Yes, Jason, I'll take the last question first and I'll hand it over to Matt to discuss the EBITDA question. So in regards to interchangeability, right now, Samsung has been able to get the designation, which was approved for the low concentration pre film syringe and the single dose of vial presentations. But to your broader question, does it really matter? I think you see currently, I mean, on the high concentration that was granted with Teva, mean, it hasn't and that was granted in May. It hasn't done anything in terms of overall performance and our overall growth.

Speaker 2

We see continued growth there. And but we feel that by the time the exclusivity period wears off in next May, we'll be ready to essentially launch or rather to get the indication as well. So I don't see any type of any roadblocks in terms of continuing ongoing performance. We are the sole winner of the VA business, for example, and interchangeably doesn't matter, because of the fact you're the single source asset that you've got there. So we've got a lot of confidence in Headlima going forward, and we'll have interchangeability when the time comes in terms of when that exclusivity period wears off.

Speaker 2

And I'll hand it over to Matt regarding the EBITDA question.

Speaker 3

Yes, Jason, in terms of talking about years beyond 2024, obviously too soon for guidance, but directionally, we see holding margins where they are is a very realistic outcome for 2025, which is a significant statement given that the relatively modest LOE exposure that we have in the Established Brands 2025. So we do see that we have the ability to hold margins through that. And then once you get beyond 2025, then you start to see the ability for Organon to actually improve gross margins as we Those opportunities are fairly substantial. And combined with the fact that we would generally see product mix improving more towards some of the growth products that we've put in place through business development since the spin contributes to that. And this all comes on top of a cost structure, which is largely now right sized in place and from which we can generate operating leverage.

Speaker 3

So we're pretty optimistic about the ability to hold margins and then grow them.

Speaker 5

Got it. Thanks so much.

Speaker 2

Sure.

Operator

Our next question comes from the line of Terence Flynn with Morgan Stanley. Please go ahead.

Speaker 8

Thanks so much for taking the question and congrats on the Nexplanon 5 year data. I was just wondering if you can give us your latest insight on how you're thinking about the pricing inputs for that product and then the ramp of conversion and would the plan be to discontinue the 3 year product? Thank you.

Speaker 2

Yes, Terence. So just for clarity, the 5 year efficacy indication is essentially the same product. It's just that now we've got the indication for 5 years of efficacy. We're very excited about that data and we're submitting the process of getting ready for submission to the FDA. And so in terms of price, we're still looking at that.

Speaker 2

Obviously, we have that optionality when the time comes. We still have time for that to discuss that. But more importantly, it really starts to give us a line of sight on the fact that this product will continue to be with us in a very robust manner till the end of the decade and possibly beyond. Just because of the fact, as I mentioned, our inserter device, which is very unique and it is a very clear differentiator, has exclusivity until 2,030. So from that perspective, if somebody were to come to market, they'd only be able to come to the market with a 3 year indication of which the whole market will be moved over to the 5 year indication by that time in 2027.

Speaker 2

And they'll have to have their own device, which is no easy thing, for FDA approval, prior to 2,030. So I think we're in great shape with regards to Phenom in the future expanding that portfolio.

Operator

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

Speaker 9

Apologies, I was on mute. Two questions if I could. International pricing dynamics, some of the regions, it's tougher for us to get a sense for what the trends are. You seem to call out Japan in particular. I believe you expressed that there were some tougher than expected dynamics there.

Speaker 9

And then if I

Speaker 2

could just follow on a

Speaker 9

little bit on the China question that Umer had asked earlier, we have seen historically enforcement of the anti bribery, anti corruption element impact different product segments. Hospitals, we saw that with vaccines brought up as a potential commentary. Is this a dynamic that your China business navigates? And then second question would be about business development. Certainly, the Lilly transaction has been quite helpful.

Speaker 9

What is your sense for the potential to do similar and other type deals from your capacity standpoint and the availability? Thank you.

Speaker 2

Thanks for the question, Chris. So, let's take that question regards to the effect of the anti corruption campaign in China. That was a short lived issue that we went through, I think, in the, I think Q3 or so of last year. We've washed through that. We don't see any essentially any remnants on any parts of our business, any parts of the portfolio of products we have in China.

Speaker 2

Things are kind of going back to what I would products we have in China. Things are kind of going back to what I would consider to be the normal state of affairs and normal business metrics and we are going to see mid single digit growth in China in the second half of this year. And I think washing out whatever we face in terms of headwinds from round 8 and VVP, for the first half and also some fertility slowdowns. But going forward, I see some more robust growth in China in 20 25 and beyond as we'll have kind of passed through this VBP storm of sorts. And in regards to the international reference pricing, that really was more of something that China was kind of pulling forward and that hasn't really affected us much so far in terms of our negotiations with the Chinese government.

Speaker 2

We've landed and I think in a very positive place when it comes to that. And finally, in regards to more of tuck ins, like the likes of which we did with Lilly, we're very pleased with the Lilly deal. I think it's off to a really solid start. And we're going to be doing more of those. But that's what I would call part of our organic business strategy, which is good hygiene.

Speaker 2

And we'll continue to be able to have plenty of capacity to do more and more of those type of tuck in deals going forward, which are I think, very nice and they prove to be very essential to our strategy going forward.

Speaker 3

Yes. And just to add to that, Chris, the reason why we're able to do those deals is because they're generally characterized by relatively modest upfront payments and most of the compensation is actually based on success based milestones.

Speaker 9

Thank you.

Operator

That concludes our Q and A session. I will now turn the call back over to Kevin Au Lee for closing remarks.

Speaker 2

Thank you, and thanks everyone for joining us today. We are, as I said in my introductory comments, we're very encouraged about our progress year to date and we're confident, very confident in our ability to deliver the performance ranges we've outlined here today and we look forward to continued investor engagements throughout the quarter and through the year. Thank you very much.

Operator

This concludes today's call. You may now disconnect.

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Earnings Conference Call
Organon & Co. Q2 2024
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