Kevin Ali
CEO at Organon & Co.
Good morning, everyone, and thank you, Jen. Welcome to today's call, where we'll talk about our second quarter results. For the second quarter of 2024, revenue was $1.6 billion, 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 second quarter, adjusted EBITDA was $513 million, representing a 31.9% adjusted EBITDA margin, which includes $15 million of IPR&D expense. 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 third 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 $6.25 billion to $6.45 billion. 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 million of IPR&D and milestone expense incurred in the first 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&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.
We expect SG&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 to our commitment to deliver $1 billion of free cash flow before onetime 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. It 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. Growth in Women's Health was driven by continued strength in NEXPLANON which is up 13% ex-FX in the second 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 second quarter. We benefited from NEXPLANON's leadership in the U.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 second quarter primarily driven by our expansion and 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 U-Can region.
Given strength and 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 billion mark for next year. With regard to the NEXPLANON 5-year study, the study met its primary endpoint, 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 UK. We continue to believe that would put us on track for a potential 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. That means between 2026 and 2029, 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 2030. We remain very optimistic about NEXPLANON's future prospects and the expanding potential of the brand.
Moving on to other women's health. Our Global Fertility business was down 8% ex FX in the second 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. In fact, you may recall that in the fourth quarter 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 [ Falistom ] in the fourth quarter 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 second 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. 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. 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 second quarter and 33% year-to-date. The exceptionally strong first half performance was driven by continued uptake of Hadlima in the U.S. following the launch in July of last year, along with the timing of an international tender for ONTRUZANT. For the full year, we expect the Biosimilar franchise to deliver strong growth in the low-teens ex-FX.
U.S. Hadlima sales were $20 million in the second quarter. Throughout the second quarter Hadlima as a leading HUMIRA biosimilar with regard to total prescriptions, pointing to prescriber preferences for our product. From the first quarter to the second quarter, total prescriptions for Hadlima grew over 60%, consistent with the TRx trend 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.
Regarding the interchangeability status of Hadlima, 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. 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 million contribution from the recent commercialization agreement with Eli Lilly for the 2 migraine drugs led by Emgality are off to a good start. Also, the recovery in certain injectable steroid products following last year's market action have more than offset expected impacts from VBP, 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.
Moving now to Slide 6, where we take a look at revenue by geography. U-Can 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 also the region most affected by an unfavorable phasing of sales related to the ERP implementation. The U.S. 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 ONTRUZANT 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 ATOZET and Rosuzet in that market.
The LAMERA region, which has been a significant contributor, Organon's growth since the spin had 8% ex FX growth in the second quarter which was primarily driven by volume associated with the ONTRUZANT tender in Brazil as well as strong growth in NEXPLANON across certain access 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 of the first half of the year, and we feel confident in our ability to deliver our third 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 it comes to executing on business development and driving revenue growth. So optimizing our cost structure and implementing efficiency is ever critical in creating shareholder value.
Now let's turn the call over to Matt who will go into our financial results in more detail. Thank you, Kevin. Beginning on Slide 7. Here, we bridge revenue for the second quarter year-over-year. The biggest driver in the bridge is volume growth of $55 million, comprised of strength in the areas we've mentioned, biosimilars, NEXPLANON and the addition of Emgality. Combined with stronger volume growth in the first quarter, year-to-date revenue growth due to volume is solid at about 4.5% organic growth, which rises to about 6%, including the addition of Emgality. The typical headwinds to revenue growth, which we show as the first 3 steps in the bridge, were all fairly light in the second quarter. LOE was about $5 million of impact, which reflects the loss of exclusivity of ATOZET in Japan. The impact of VBP in China was also about $5 million in the second quarter, which reflects lingering effects of round 8 that began in the third quarter of last year and included REMERON and HYZAAR. There was also an approximate $5 million impact from price in the second quarter overall, pretty negligible. The benefits of our NEXPLANON pricing strategy in the U.S. muted expected pricing pressure in other parts of our business, particularly in Biosimilars and to a lesser 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 million 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 3 slides to those areas most relevant to your modeling. 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 first quarter 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 remind you that the fourth quarter of 2024 will be a tough comparison since it was in the fourth quarter last year that we had the buy-in related to onboarding the new PBM customer and the interim operating model exit in the U.S. So globally, third quarter will be a stronger quarter for Fertility compared with the fourth 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 Marvelon and Mercilon up 13% ex-FX. Like the migraine assets, this reacquisition of rights to the Marvelon and Mercilon assets in certain markets highlights areas of business development where we can leverage our global capabilities. Turning to Biosimilars on Slide 9. For Hadlima, we expect U.S. revenues to grow sequentially every quarter this year. What isn't evident in the U.S. revenue of $20 million in Q2 is a small onetime wholesaler inventory adjustment in Q1 to support the onboarding of the VA contract that we won. Excluding this inventory adjustment, U.S. Hadlima 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 ONTRUZANT 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.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 VBP and 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 three drivers. First, the impact from VBP in China will pick up, driven by Fosamax inclusion in Round 10 expected late in the fourth quarter; second, LOE impact will be more significant as ATOZET 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 first quarter of this year. Additionally, when Kevin spoke about our performance in Established Brands, especially U-Can, he noted the phasing of shipments related to the implementation of our ERP system. 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&L line items and metrics for the second 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 onetime items related to the spin-off, which can be seen in our appendix slide. Adjusted gross margin was 62% in the second quarter of 2024 compared with 62.9% in the second quarter of 2023. In the second quarter of 2024, as with the first quarter, 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 million of IPR&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 million of IPR&D expense in the second quarter, $10 million was related to our collaboration with Circle in on-demand, non-hormonal contraception and $5 million was related to our collaboration with Shanghai Henlius for further advancement of denosumab biosimilar. 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 IPR&D and milestones to be recorded in the quarter in our earnings day press release. which will be posted as soon as practical after the close of each quarter. These factors culminated These factors culminated in an adjusted EBITDA margin of 31.9% in the second quarter of 2024, compared with 33% in the second quarter of 2023. Non-GAAP adjusted net income was $289 million or $1.12 per diluted share compared with $336 million or $1.31 per diluted share in 2023. Turning to Slide 12. We provide a closer look at our cas h flow for the first half of the year. In 2022 and 2023, our two full fiscal years post spin-off, we generated a significant majority of our free cash flow in the back half of those years. 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 billion in free cash flow before onetime 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, onetime spin-related cash costs, $117 million 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 million or roughly a 40% decline relative to 2023. Next year, we would expect onetime spin-related costs to be de minimis. In the $70 million of other onetime costs, here, we capture headcount restructuring initiatives and manufacturing network optimization. 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. 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, VBP and price were all negligible drivers year-to-date, but their respective impacts will pick up in the second half. 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 million to $90 million range reflects LOE of ATOZET in Japan, which is already underway and also the LOEs of ATOZET in the EU, which will occur in September and, to a lesser extent, Rozalet in Japan, which will also occur later in the year. VBP impact is still expected to be in the range of $30 million to $50 million for full year 2024, which will be back half weighted to reflect Fosamax as expected inclusion in around 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 million. The revised range of $180 million to $200 million 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 NEXPLANON'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. 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 ATOZET 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 million to $600 million with no change to the midpoint. The range for volume reflects an approximate 9% growth rate over last year. 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. Hadlima, Emgality, Marvelon and Mercilon and the additional markets we acquired as well as JADA. We'll also benefit from geographic footprint expansion in Fertility. 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 million to $140 million. 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. On SG&A expense, year-to-date, we've been tracking on the low end of our $1.5 billion to $1.7 billion range, but that's really just timing. We expect SG&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&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&D, all we did here was raise the range by the $30 million of IPR&D incurred year-to-date. Operationally, we're tracking close to the midpoint of that $400 million to $500 million range ex-IPR&D that we set at the beginning of the year. It's worth noting that to this point, we've been able to absorb the year-to-date IPR&D expense within our adjusted EBITDA margin range of 31% to 33% for the full year. The $30 million 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 for depreciation. Year-to-date, we're running a bit favorable relative to our non-GAAP income tax rate guide. Our non-GAAP effective tax rate in the second 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 two non-U.S. tax audits. For the full year 2024, we continue to view 18.5% to 20.5% as a good range. Despite our debt refinancing in May, we didn't change our point estimate of approximately $520 million for annual interest expense because of 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 first quarter. 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.
