Organon & Co. Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2025

There are 11 speakers on the call.

Operator

Thank you for standing by. My name is Celine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Organon's Fourth Quarter and Full Year twenty twenty four Earnings Call. All lines have been placed on mute to prevent any background noise. Thank you.

Operator

I would now like to turn the call over to Jen. Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone. Thank you for joining Organon's fourth quarter and full year twenty twenty four earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer Matt Walsh, our Chief Financial Officer and Juan Camilo, Arjona Ferreira, Organon's Head of R and D. Today, we'll be referencing a presentation that will be visible during this call for those of you on our webcast.

Speaker 1

The presentation will also be available following this call on the Events and Presentations section of our Organon Investor Relations website. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward looking statements. Actual results could differ materially from those stated or implied by forward looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our 10 K and subsequent periodic filings. In addition, we will discuss certain non GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation.

Speaker 1

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 fourth quarter and full year 2024 results. For the full year 2024, revenue was $6,400,000,000 representing a 3% growth rate at constant currency. This is the third consecutive year that Organon has delivered constant currency revenue growth. In fact, all three of our franchises have delivered three years of constant currency revenue growth.

Speaker 2

Adjusted EBITDA was $1,960,000,000 inclusive of $81,000,000 of IPR and D representing a 30.6% adjusted EBITDA margin. Ex IPR and D, our adjusted EBITDA margin was 31.8, about 0.5 of margin expansion over last year on that same basis. Today, we are also providing guidance for the full year 2025. For this year, we expect revenue to be in the range of $6,125,000,000 to $6,325,000,000 inclusive of an approximate $200,000,000 headwind from foreign currency. On a constant currency basis, the midpoint of this range would represent flat revenue performance in 2025.

Speaker 2

That is reflective of an approximate $200,000,000 headwind from Atazade's loss of exclusivity in Europe, which we will look to offset with growth in products like VITAMA, Emgality, Fertility and of course Nexplanon. Our adjusted EBITDA range for 2025 is 31% to 32%, consistent with prior commentary that we intend to manage to hold a 31% adjusted EBITDA margin floor ex IPR and D. This applies even in 2025 as we manage through the LOE of our second largest product. Let's move now to discuss the growth drivers within the franchises in 2024. The women's health franchise grew 5%, ex exchange led by performance of Nexplanon, which was up 17% ex FX for the full year of 2024.

Speaker 2

This was Nexplanon's best annual performance ever and positions the product to achieve at least $1,000,000,000 of revenue in 2025. In 2024, Nexplanon grew double digit both in The U. S. And in international markets. Outside The U.

Speaker 2

S, growth in the La Mera region was particularly strong, driven by increased demand, tender expansions, as well as strong performance in Brazil. We also had a strong growth in The UK, where Nexplanon is a market leader. In The U. S, we benefited from Nexplanon's market leadership coupled with our pricing strategy, which includes management of the 340B discount program, as well as continued growth in physician demand. We remain very optimistic about the future of Nexplanon, especially with the potential of a five year indication to sustain long term Nexplanon growth.

Speaker 2

In 2024, we submitted our five year study package to the FDA, which had strong results including zero pregnancies and no new safety signals. We also have collected data from the same study on women with a high BMI where there is a significant unmet need for a new highly effective option with an adequate safety profile. Late in 2024, we made our submission to the FDA putting us in a position to be ready for late twenty twenty five launch pending FDA approval. Also in women's health, JADA grew to $61,000,000 in 2024 and celebrated 100,000 units shipped since launch. Over 90% of the largest birthing hospitals in The U.

Speaker 2

S. Now stock JADA. We expect continued growth of JADA in 2025 as we drive depth in our existing base and advocate for JADA's continued incorporation into hospital protocols. Rounding out women's health, our fertility franchise was down 2% ex exchange in 2024. In The U.

Speaker 2

S, we worked through a late twenty twenty three buy in for follistim due to the exit of a spin related interim operating model. This offset growth we saw from new launches in Latin America, Japan and Turkey and strong performance in the Asia Pacific region. Our fertility products in China are performing better than the market and we are well positioned to capture growth when that market accelerates. In 2024, our biosimilars franchise grew 12% at constant currency, in part because of our ability to capture more than our contractual share of the Brazil tender for Entrezent. With Renflexis and Entrezent at the mature point in their longer than projected lifecycle, we'll likely see a decline in biosimilars in the mid single digit range in 2025.

Speaker 2

We expect continued strong growth in HEDLIMA following our U. S. Launch in July of twenty twenty three and late in 2025 pending FDA approval, we expect to launch adenosumab biosimilar in collaboration with Shanghai Henleus. We also plan to launch a biosimilar for PERJETA in The EU and in Latin America in 2026 with The U. S.

Speaker 2

Following those launches. Lastly, we continue to see further business development opportunities to build out our pipeline for biosimilars. Wrapping up the revenue discussion with Established Brands. Established Brands grew 2% ex exchange for the full year of 2024. Contributions from Emgality and DITAMA along with recovery and injectable steroids more than offset the impacts from the LOE of Atozed and an unfavorable pricing dynamic in Japan.

Speaker 2

Before turning to our R and D pipeline, let's spend a few minutes discussing our strategy and where we are at, at this point in time. Even before spin, we knew that we had substantial work to do in order to stand up this new company and build out the capabilities required for success. During this period, we established Organon as a leader in women's health, completed 11 business development transactions, achieved a double digit revenue cater with Nexplanon and drove growth in our base business. We also began to streamline our operating expenses with the goal of expanding profitability. You see the results of those actions in our full year 2024 results with non GAAP operating expenses ex IP R and D down 2%.

Speaker 2

Over the last two years, we've also tailored our business development approach to focus on transactions like Emgality and Dermavant to drive earnings accretion and enhance our revenue growth profile. We're driving a lean culture focused on profitable growth where we see our CAGR on both revenue and adjusted EBITDA accelerating through the end of the decade. That will be powered by the portfolio we have in hand as well as future business development activities. Let's talk about our specific plans in 2025 and focus on four specific strategic pillars. One, continued demonstration of resiliency in our base business.

Speaker 2

Our base business represents a material driver of value for our company. We've aggressively managed this portfolio since been driving cash flow for reinvestment and growth. Two, capturing efficiencies. When we look at our operations, we are already in the process of implementing multiple initiatives that will drive significant operating savings during the calendar year of 2025. Those savings will more than offset the $180,000,000 of expenses of Dermavant post synergies.

Speaker 2

We are reframing the way the company operates to be more nimble, eliminating reporting layers and increasing spans of control, all to position the company for profitable growth. Three, consistent deployment of capital. We're committed to our regular dividend as our number one capital allocation priority. And four, delivering on the promise of our growth products and pipeline. This includes eclipsing the $1,000,000,000 mark for Nexplanon for the calendar year of 2025.

Speaker 2

We also have a line of sight to deliver more than $300,000,000 of revenue from our recent business development transactions, specifically Emgality and the Dermavand acquisition with $150,000,000 of that coming from Vitama. We're off to a strong start with Vitama. Taking recent data ending January 31, VITAMA saw strong NRX growth of 51% over the pre AD approval thirteen week average. For comparison, our direct competitors were up only 5%. VITAMA TRX also outperformed competitors by 10 points on that same basis.

Speaker 2

We remain comfortable with our revenue estimate for VITAMA in 2025, especially following the broad favorable and differentiating label we received in December in atopic dermatitis. VITAMA is the only non steroidal topical approved for mild, moderate and severe atopic dermatitis, providing access to all segments of the market in patients as young as two years of age. VITAMA delivers systemic like efficacy, has no black box warning, no contraindications and no duration or body surface area limitations allowing for treatment across varying levels of disease severity. Early receptions of VITAMA have been very positive. From the field, healthcare professionals are telling us they have been waiting for this approval, that they have felt an obligation to expand the use of non steroidals, especially for children, and that there has yet to be a product that could treat the entire family.

Speaker 2

Overall feedback has confirmed that there is a significant unmet need in atopic dermatitis. And finally, in 2025, we also will be approaching stage gates in our R and D pipeline. Some of them like OG6299 that have the potential to be game changing programs. With that, I'll turn it over to Juan Camilo to speak more about our R and D priorities.

Speaker 3

Thank you, Kevin. Our research and development organization plays a pivotal role in shaping Organon's long term growth and fulfilling our mission. We strive to address long standing unmet needs and realize our vision of a better and healthier everyday for every woman. To accomplish this, we work to maximize the potential of our existing assets through life cycle management, advance novel therapeutics through the clinical development process and explore innovative modalities to improve health. Starting with exciting regulatory milestones, in December, we received approval for VITAMA for the treatment of atopic dermatitis in adults and children down to two years of age.

Speaker 3

Despite an extended review period through a collaborative engagement with the FDA, we achieved approval on our original timeline, reflecting our proactive approach. The approved label outlines a compelling benefit and risk profile differentiated from the labels of the other available treatment options for atopic dermatitis. With Dermavant, we also acquired DMV506, a preclinical aryl hydrocarbon receptor agonist with potential applications in immunological inflammatory diseases and multiple routes of administration. Our collaboration with Shanghai Henleus has advanced two biosimilars: HLX14, a biosimilar candidate for denosumab, Proly XGEVA for the treatment of osteoporosis and cancer related skeletal events and HLX-eleven, a candidate for pertuzumab, Perjeta for the treatment of breast cancer. Both biosimilar labeling applications have been accepted by FDA with HLX-fourteen fourteen being potentially available in The U.

Speaker 3

S. Later in 2025, pending FDA review and approval. As Kevin mentioned, we submitted robust data from our five year Nexplanon study to the FDA and if approved, we expect to be able to launch this five year indication by the end of this year. Additionally, the study included data in women with body mass index above thirty with the potential to address significant need for contraceptive options in this population. Our long acting recombinant human follicle stimulating hormone, SJO2, is under review by the Chinese regulatory agency.

Speaker 3

If approved, it will be the first of its kind in China for control of island stimulation. Organon acquired the exclusive commercialization rights for SGA02 in Mainland China from Zuzhu Pentogene Pharmaceuticals. On the clinical development side, early in 2023, Organon made a strategic investment in Claria Medical Inc, a privately held company developing an investigational medical device for use during minimally invasive laparoscopic hysterectomy. Claria is responsible for clinical development and the clinical trials to support registration are underway. Perhaps the biggest potential opportunity we have is OG6219, acquired as part of the Forendo transaction.

Speaker 3

OG6219 is a potential novel therapy for endometriosis and is currently in Phase II. Endometriosis is a chronic disease affecting up to one in ten women of reproductive age, is associated with abdominal pain among many other debilitating symptoms and is a common cause of infertility. Currently available treatments only address pain, have limited efficacy, a limited duration of use or have significant side effects including decreases in bone mineral density and menopausal symptoms. Results from the Phase II study are expected in mid-twenty twenty five with potential to initiate Phase III studies in 2026. If successful, OG619 has the potential to be a new non hormonal treatment option for endometriosis by the end of the decade.

Speaker 3

We also have a backup program, which supports our goal to deliver a product based on this novel mechanism. And finally, OG8276A is being developed for the potential treatment of dysmenorrhea in Japan. We have positive top line results from the Phase III study and expect to complete the study extension and regulatory submission in Japan later this year. We are excited by the potential of our development assets to address significant medical needs. If successful, these innovations could contribute substantial revenue over the next five to ten years.

Speaker 3

With that, I will pass it to Matt for additional details about our performance. Matt?

Speaker 4

Thank you, Juan Camilo. Beginning on Slide 11, here we bridge the 3% constant currency full year revenue growth year over year. Starting on the left, LOE was about $55,000,000 for the year, which reflects the full year impact of the loss of exclusivity of AdoZed in Japan and the impact of the LOE in Europe, which occurred in September. There was an approximate $15,000,000 impact from VBP that was really contained to the first half of the year and related to round eight that began in the third quarter of twenty twenty three and included Remeron and Khozar Hyzar. There was an approximate $115,000,000 impact from price for the full year or about 1.8%.

Speaker 4

Pricing headwinds came primarily from the September LOE of Atazette in Spain and France, as well as from certain mature products in The U. S. Like NuvaRing, DULAIR and RINFLEXIS, as well as some expected mandatory pricing revisions in Japan. Volume growth for the year was $415,000,000 representing almost 7% growth across multiple drivers. Headlima and Engality were the largest contributors to volume growth, followed by Nexplanon and the recovery of injectable steroids following a market action in 2023.

Speaker 4

In supply other, here we capture the lower margin contract manufacturing arrangements that we have with Merck, which have been declining since the spin off as expected. Lastly, foreign exchange translation had an approximate $80,000,000 impact in the year or about 130 basis points of headwind to revenue, which reflects a strengthening U. S. Dollar versus most foreign currencies during the year. Now let's turn to Slide 12, where we show key non GAAP P and L line items and metrics for the full year.

Speaker 4

For reference, GAAP financials and reconciliations to the non GAAP financial measures are included in our press release and the slides in the appendix of this presentation. For gross profit, we are excluding from cost of goods sold, purchase accounting amortization and one time items, which can be seen in our appendix slides. Adjusted gross margin was 61.6% for the full year 2024 compared with 62.7% in the full year 2023. The year over year decrease in adjusted gross margin reflects the impacts of unfavorable price as I discussed, as well as higher inflation impacts to material and distribution costs. Excluding $81,000,000 of IPR and D expense incurred during the year, non GAAP operating expenses were down 2% year over year, reflective of our cost containment efforts.

Speaker 4

Of the $81,000,000 of IPR and D expense in the year, $70,000,000 of it related to our collaboration with Shanghai Henlius for further advancement of the denosumab and fortusumab biosimilar candidates and $10,000,000 related to a preclinical milestone for Circlay, a non hormonal investigational contraceptive candidate. For the full year, embedded in the adjusted EBITDA figure is a $26,000,000 transaction loss from foreign exchange. More than half of that or $15,000,000 was in the latter part of the fourth quarter after our last update to earnings guidance and related to significant devaluation in unhedgable currencies, about half of that impact coming from the ruble. This compares favorably to full year 2023, where we realized $43,000,000 of losses on foreign exchange. These factors culminated in an adjusted EBITDA margin of 30.6% for full year 2024 or 31.8% ex IPR and D.

Speaker 4

As Kevin mentioned, that's a little more than 0.5 of margin expansion over full year 2023 adjusted EBITDA margin of 31.2%, once again, ex IPR and D. Non GAAP adjusted net income was $1,065,000,000 for full year 2024, consistent with 1,061,000,000 in full year 2023, which is logical given that both gross profit and operating expense were essentially flat. Reported net income for full year 2024 was $864,000,000 or $3.33 per diluted share compared with $1,023,000,000 dollars or $3.99 per diluted share in 2023. Net difference is due to a prior year one time benefit from the termination of a Swiss tax arrangement. Turning to Slide 13, we delivered $967,000,000 of free cash flow before one time costs in 2024, which met our expectation from the start of the year.

Speaker 4

In the top half of the table, the number that stands out in free cash flow before one time items is cash taxes, which were higher in 2024 as we expected due to the payment of certain non U. S. Taxes, as well as settlements in various jurisdictions that triggered higher cash taxes relative to 2023, which happened to be an unusually low year for cash taxes. Looking ahead to 2025, we would expect cash taxes to be similar to those of 2024. Working down this table, we had expected about $100,000,000 of working capital use in 2024.

Speaker 4

We ended the year a bit better, attributable to active cash cycle working capital management. For the full year, one time spin related costs were $160,000,000 which is better than the $200,000,000 we were originally forecasting for 2024. And in 2025, we expect these spin related costs to be essentially zero. In the January of other one time costs, about $90,000,000 relates to the ongoing restructuring initiatives that Kevin discussed aimed at leaning out our operating expense. Another $60,000,000 relates to the planned exits from supply arrangements with Merck that we have discussed in past quarters would be ramping up.

Speaker 4

These are activities that will enable Organon to redefine our appropriate sourcing strategy and move to fit for purpose supply chains, while focusing on delivering efficiencies in terms of gross margin expansion, which we expect to begin realizing starting in 2027. So while the spin related TSA costs are going to be effectively zero in 2025, we will continue to see other one time costs in both restructuring and manufacturing separation for Merck that together could be $325,000,000 to $375,000,000 in 2025. Once again, these one time costs drive value that investors will be able to see in 2025 in the form of improved operating expense efficiency and in later years related to more cost efficient manufacturing that is expected to drive meaningful margin expansion. As we think about capital allocation, the priority as Kevin mentioned is our dividend. And in the past two years, the highest and best use of the remaining cash flow has been opportunistic business development.

Speaker 4

In 2024, we made upfront and milestone payments totaling about $350,000,000 In 2025, we expect to pay a little over $200,000,000 in commercial milestones. We've already paid about $130,000,000 between VITAMA's AD approval and Emgality commercial milestones. An additional $30,000,000,000 to $70,000,000,000 would be due if milestones for Henlius and SJ02 are met. The achievement of these milestones means that we're realizing value for business development already signed and validates the path to low to mid single digit revenue growth post 2025 that we've been saying Oregonon should be able to deliver. Moving to Slide 14, we ended the year at 4.2 times net leverage ratio, up from four times at the September, primarily due to the Dermavant transaction.

Speaker 4

We assumed about $280,000,000 of Dermavant debt like instruments, which are recorded on our balance sheet at fair value. As we digest this acquisition, leverage could float up to the mid four times area at the halfway point this year before coming down closer to four times by year end when we'll be capturing more benefit from the Vitama launch. That's a strong statement about the business given that Dermavant was the biggest deployment of capital that we've done as a company. We're in the middle of a launch year with Vitama and we're also working our way to the Atozette LOE. Now turning to 2024 guidance on Slide 15.

Speaker 4

Here we highlight the items driving our 2025 revenue guidance range. Our revenue range for full year 2025 is $6,125,000,000 to $6,325,000,000 While we believe revenue could ultimately land anywhere in this range, if we look for a moment at the midpoint of the range, the midpoint is down just under 3% compared to 2024, which is essentially our estimate of the year over year impact of foreign exchange translation. Overall, we expect the uptake of VITAMA, continued solid performance in Gality and organic growth in Nexplanon and other products in our portfolio will help to offset the loss of Adozette in Europe. Even in this LOE year, there is a credible path to another year of constant currency revenue growth and that is reflected at the high end of our full year revenue guidance. For LOE, we expect an impact of 160,000,000 to $180,000,000 which is primarily driven by the LOE of Adesat in The EU.

Speaker 4

In this column, we're showing volume associated with LOE. There's also a price down component for Adesat for volume that we retain for a total of about $200,000,000 of total revenue headwind related to the LOE of Adesat in 2025. Moving to the right, we expect the impact from VBP to be approximately $20,000,000 to $40,000,000 and that relates to round $11,000,000 for Fozamax, which we expect to be implemented late in 2025. Our range on pricing impact for 2025 is $155,000,000 to $185,000,000 or approximately 2.7 percentage point headwind versus prior year, which is in line with our longer term expectations from price impact across our entire business, but higher than last year. That is driven by price declines associated with the additive LOE, as well as continuing competitive pressures in The U.

Speaker 4

S. Within mature products such as Dulyra, RENTFLEXIS and NuvaRing. For the year, we expect volume growth in the range of $380,000,000 to $500,000,000 reflecting growth in the range of 6% to almost 8% over last year. Volume growth will be driven pretty equally by our strategic growth pillars Nexplanon, Fertility, Headlima and new products such as Emgality and Vitama. And finally, based on our current view of FX, we expect about a $200,000,000 impact from FX in 2025 or a 300 basis point headwind as I said earlier.

Speaker 4

And this is a function of about 75% of our revenue coming from outside The U. S. As you think about quarterly revenue cadence in 2025, we believe this will be a story of bookends. We expect the first quarter of twenty twenty five will be our lowest revenue quarter and we expect the fourth quarter of twenty twenty five will be the highest as we TAM our ramps through the year and the additive LOE will have its greatest impacts in the first three quarters of the year. By order of magnitude, we could see more than $100,000,000 swing between the first and fourth quarter of twenty twenty five.

Speaker 4

Turning to Slide 16, where we show all components of our earnings guidance. For full year 2025, we expect adjusted gross margin to be in the range of 60% to 61%, about a point lower at the midpoint compared with last year and that's a continuation of the pressure on gross margin that we saw in 2024, especially in the back half due to price and higher manufacturing and distribution costs. On SG and A expense, we ended 2024 at 25% of revenue. That's a good barometer for 2025. On R and D, we ended 2024 at about 7% of revenue ex IP R and D.

Speaker 4

For R and D expense in 2025, upper single digit as a percentage of revenue is probably a good place to get your model for 2025. Given where our revenue guide is landing, that would imply essentially flat OpEx dollars year over year, which is consistent with Kevin's commentary that we are continuing to improve our operating cost efficiency. Those pieces culminate in an adjusted EBITDA guidance range of 31% to 32%. This aligns with prior commentary and remarks made today that we intend to hold a floor on adjusted EBITDA margin of 31% ex IPR and D. As you think about quarterly phasing of profitability, we won't be getting the full run rate benefit of the cost savings actions until later in the year.

Speaker 4

So timing of the implementation of those savings along with the uptake of VITAMA could drive 200 basis point delta in adjusted EBITDA margins between the first and fourth quarters of the year. For below the line items, our estimate for full year 2025 interest expense is about $510,000,000 which includes about $25,000,000 related to the debt like instruments assumed in the Dermovand acquisition. Payments on a portion of those instruments are tied to Btama sales. Exclusive of the Dermovand transaction, interest expense is down approximately $30,000,000 in 2025 as a result of the two refinancing events completed in 2024 and lower borrowing rates on our variable rate debt instruments. For 2025, we estimate our non GAAP tax rate to be in the range of 22.5% to 24.5%.

Speaker 4

The uptick from 2024 is largely due to the impact of the 15% global minimum tax rate required under the OECD's Pillar two. Depreciation is a touch higher than last year at $135,000,000 driven by the completion of our new ERP system in 2024. To wrap up, 2024 was a solid year for three reasons. First, we delivered revenue and EBITDA growth both as reported and at constant currency. Second, excluding IPR and D, we improved EBITDA margins year over year.

Speaker 4

And third, we improved the leverage ratio of the base business below four times going into the fourth quarter, and that gave us the balance sheet capacity to acquire Dermavant. And we now have immediate U. S. Revenue and commercial capability in dermatology with the prospect for solid growth in 2025 on the heels of the launch of the Btama in atopic dermatitis as we have discussed. We're going into 2025 with financial guidance that reflects the potential for a fourth year of constant currency revenue growth and stable EBITDA margins despite the Tama launch expenses and an LOE of our second largest product.

Speaker 4

To temper the impact of this LOE, we've identified at least $200,000,000 of OpEx savings in 2025 that have a very high probability of being achieved. And if we're successful here, we're likely to record our best operating expense efficiency metrics since the spin off. We expect these OpEx savings to benefit not only 2025, but annualized to roughly $275,000,000 which we will realize in 2026 and thereafter. As the quarters roll out in 2025, we expect our sequential P and L performance to improve throughout the year, which should provide a window into the strength of the underlying business beyond the LOE impact, which we expect to see in the near term here in 2025. 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. Your first question comes from the line of Terence Flynn with Morgan Stanley. Please go ahead.

Speaker 5

Great. Thanks for the questions. Two for me. I guess the first one I had is just on, Matt, I know you talked about some of the onetime items in 2025. Can you just provide an estimate for where you think free cash flow will likely land for the year?

Speaker 5

And then on the biosimilar opportunity for denosumab, Amgen's talked about, there will be different erosion curves for Prolia versus XGEVA, given kind of different indications in the installed base. And it sounds like they feel more confident in protecting Prolia. Just as you guys think about the commercial dynamics there for that franchise, any color on how to think about that at end of this year into 2026? Thank you.

Speaker 4

Okay. So I'll take the free cash flow part of the question first. So, we were successful in 2024 getting close to that $1,000,000,000 of free cash flow before one time items. That was a major goal for us at the beginning of 2024. As we look forward to 2025, we're going to see more of a continuation of that, but our starting point on adjusted EBIT is going to be about $100,000,000 lower and so that rolls right through.

Speaker 4

So our expectation is right around $900,000,000 of free cash flow before one time items. And then as we think about the as I said, the drivers as you go down the free cash flow will be somewhat similar to 2024.

Speaker 2

Yes, Terrence, I can address the question on the denosumab biosimilar launch. Right now, we're going to be launching probably later on in the Q4 timeframe. So it will be probably de minimis in terms of what we can expect for 2025 from the denosumab biosimilar. But going forward, look, we've got a lot of comfort in the buy and bill process. And I can tell you right now that we've had years of experience when you start to think about the last six, seven years of REMFLEXIS, REMICADE biosimilar and Nexplanon and so on and so forth.

Speaker 2

So we feel very comfortable with regards to having a product, a good solid biosimilar for denosumab in both Prolia and Nextiva and being able to get some penetration out of that product in the coming years.

Operator

Next question? Your next question comes from the line of Michael Niedelkovich with TD Cowen. Please go ahead.

Speaker 6

Thank you for the questions. I have two as well. The first is on Nexplanon. At least as of November 2025, it looks like there has still not been a paragraph four filing for Nexplanon. Can you confirm that you have not received one since then?

Speaker 6

And more broadly, when you survey the landscape, what would you say is the probability that no generic Nexplanon comes to The U. S. Market before 02/1930? And then question relates to your ambition to accelerate top line and EBITDA growth rates beyond 2026. Do you feel you already have the portfolio necessary to do that?

Speaker 6

Or is that goal predicated on the idea that you would do additional accretive deals in the future? Thank you.

Speaker 2

Michael, it's Kevin. So thanks for the questions. I'll start with the last one first and then go backwards. So we do feel very comfortable that when we get past the LOE of AtterZet in this year which is our second largest product and we feel very good about the fact that we have a line of sight to be able to still deliver some constant currency growth this year even in spite of the loss of exclusivity of our second largest product. But going forward in 2026 to 02/1930, there's every intention and confidence that we could accelerate growth both on the top line and bottom line, leverage growth that is.

Speaker 2

And And of course, we'll continue to do business development. But right now, we feel comfortable with the portfolio that we have in hand with Vitama with and I'll get to your first question in a second. With Nexplanon and other assets that we can see to accelerate growth top line and bottom line in the second half of the decade without any doubt. But of course, we will continue to do continued business development. And then in terms of your first question around Nexplanon, no paragraph four right now that we've received.

Speaker 2

And paragraph four right now that we've received. And right now I've been saying for, I don't know, for the last two years, I don't see really any risk to a large degree of a Nexplanon, three or five year for that matter, introduction in terms of a generic or biosimilar between now and the end of the decade. After the end of the decade, I mean, then we'll determine what happens then. But right now when I start to see the fact that our applicator device has got patent protection through 02/1930, when I start to see that our five year indication which we will hopefully launch by the end of this year will have exclusivity through 2029. If I start to look at all the various issues around an implant that has a product in it that there's no precedent there.

Speaker 2

When I start to think about the benchmarks of either Mirena, a medicated IUD, no generic so far. So I don't feel we'll see any generics to challenge an exponent through 02/1930. And so as a result of that, when you start to see that we've got $1,000,000,000 expectation in this year, and you put down essentially the growth expected to the end of the decade, you see how big product can be and it's our most profitable product.

Operator

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

Speaker 7

Hi. This is Ethan on for Chris Schott. Thanks for taking our questions. Just two for me. First off, on VITAMA, you've had the asset for several months now.

Speaker 7

Any surprises as you think about the competitive or commercial landscape and just would be interested in your latest thinking on the competitive positioning of VITAMA in atopic derm versus the initial psoriasis indication? And then second off, on margins and the manufacturing separation from Merck that you're doing, you talked about beginning to see that in 2027, but just any color on the magnitude of benefit we might see and how that might flow in over 2027 and looking past that year? Thank you.

Speaker 2

Thanks for the questions Ethan. I'll take the first and then hand it over to Matt to take your second question. Look, every week that goes by, I'm more and more confident, I was already confident on the acquisition of VITAMA and that what we could do with that product globally and The U. S. Of course.

Speaker 2

But when you look at NRX is in terms of week ending January 31, we've got a 51% growth versus the pre AD approval thirteen week average baseline. So really solid, NRX growth, solid growth in terms of new prescribers to the product. I mean, the label that we received from the FDA is outstanding. I mean, we're the only non steroidal topical approved for mild, moderate and severe. You're talking about from two years of age and onwards.

Speaker 2

So when you think about the competitive landscape, there's no other non steroidal topical that actually has down to two years of age. The closest is actually Zareeb that starts from six and older. You're talking about efficacy that's systemic like efficacy in terms of EZ 75 rates up to fifty nine percent. And that really beats everything in the market. And of course, you've got no black box warnings, no safety precautions or drug drug interactions, no, minimal essentially systemic absorption.

Speaker 2

So we're talking about really a phenomenal product, all in one solution once a day and no duration or body surface area limitation. So when I think about the potential of VITAMA for what we can do with that product both in The U. S. And we'll be launching in Canada later this year, it is going to be a very big contributor growth for us for not only 2025, but also going through the end of the decade and beyond. It's a fantastic product.

Speaker 4

I'll hand it over to Matt now to talk about the other question. Yes. So on the subject of gross margin improvement, so at the time of the spin, essentially all of our API and a good deal of our manufacturing services were provided by Merck, the regulated products. So it takes time to move these things. We're in the process of doing it now.

Speaker 4

The margin expansion that we expect to see would be on the order of two fifty to 300 basis points starting in 2027. It would roll in over a few years starting at that point. But that's significant improvement in our supply chain manufacturing efficiency that we look forward to realizing.

Operator

Thank you. Next question comes from the line of David Amsellem with Piper Sandler. Please go ahead.

Speaker 6

Thanks. Two quick ones for me. One is regarding your dermatology business that you now have, what are you hoping to accomplish beyond the Tama in terms of leveraging your infrastructure and adding other assets down the road? That's number one. And then number two, can you talk about your net leverage targets over the long term?

Speaker 6

Of 4x around that's been stubbornly high? Can you talk about the extent to which you want to get it down a turn or potentially more over the long term? Thanks.

Speaker 2

Good to hear, David. I can address the first question on VITAM. Look, we're concentrated in this year in 2025 our launch year most important year to really get out of the gates and not only achieve, but hopefully even surpass the numbers that we gave out in terms of what we expect to drive this year from that product. I talked a little bit earlier about the I think the best in class label that we received from the FDA. I think that was the one single risk that we were taking when we did the acquisition is what would the AD label look like, given the fact that the AD market is significantly bigger in terms of number of patients versus psoriasis and the opportunities really existed there.

Speaker 2

And what came through from the FDA is the label is just best in class label. And so, let's see how we do this year. I'm very confident that we'll do very well and we'll be on the right trajectory going forward to be able to achieve peak revenues that I think will surprise a lot of folks in the market. But nevertheless, we've got a great vertical that we're building here. The team that came over from Dermavan is our fantastic sales force, really fantastic.

Speaker 2

And we've got medical affairs groups and DTC groups that are really outstanding. And so as a result of that, I have every intention. We have every intention of being able to continue to build out our portfolio in dermatology and first and foremost to do well with Btama, globalize the product because we're going to be launching in Canada and thereafter we'll start to think about other regions like The EU and others to really kind of penetrate into those segments. But after that, we've got a tremendous opportunity across a variety of different therapeutic areas within the dermatology area that we can add to the bag in our group in The U. S.

Speaker 2

And for that, I'll pass it over

Speaker 4

to Matt now. Yes. So on leverage ratio, David, we had said at the start of '20 '20 '4 that we thought the business would delever below four times by the end of the year. Pro form a for the Dermovans transaction, that number would have been about 3.8 times. So we had we were going into the end of the year with the confidence that we could onboard a deal like Dermavant, which is sort of a manifestation of the idea that we'll delever faster through EBITDA growth than through some great debt reduction.

Speaker 4

And okay, 2025 is a launch year for Bitama. But when you think about what the business can do in 2026, we should be cleanly below four times by the end of twenty twenty six. And then that so we're getting closer by the end of twenty twenty six to the point where we're in that mid three range where we had been saying since the spin is a sensible soft target for a business like this with the kind of cash flow that it generates. So we're still very much on that line of reasoning and I think we've set up the business to get there once we work our way through 2025 and the near term issues that we're facing, which are really restricted to 2025. When you think about the things that are growing in 2025, the TAMA and GALITY, HeadLiva, Nexplanat, all of those things will keep growing in 2026.

Speaker 4

And the issues, the headwinds that we're facing are very near term in nature. And so we expect the ability to make significant progress on leverage in just a few quarters' time once we get on the other side of 2025.

Operator

Your next question comes from the line of Elahi Prasad with Barclays. Please go ahead. Elahi? I

Speaker 1

think it's Gerry Wilson.

Operator

I think you're guiding it. Understood. Your next question is coming from the There

Speaker 1

he is.

Speaker 2

There he is. We can hear you. Go ahead Balaji.

Speaker 8

Sorry about that guys. Yeah, two questions from me. Comparing on a component wise basis the variations between my estimates and the delivery, the biosimilar pricing decline seems to be higher than what I factor. I understand that the products are in the mature phase of the product life cycles and I would have expected the pricing impact to have been felt already. So if you can throw some color on what the pricing impact was and what led to this and which are the competitor what competitive dynamics led to this, that will be very helpful.

Speaker 8

Secondly, could you help us understand the quarterly cadence on the back of the multiple moving pieces that you have this year, pricing, Adlima, Vitama, Atazette? So how should we factor the quarterly cadence for the year? Thank you.

Speaker 2

Thanks, Balaji, for the question. I'll address the first. In regards to pricing with biosimilars, I think the issue really is probably centered around the 340B pricing with Renflexis, which is our largest biosimilar REMICADE biosimilar in The U. S. But as you said, I mean, we're essentially hitting that curve where we talk about more and more pricing pressures as we start to get more and more biosimilars of RENFlexus in the marketplace.

Speaker 2

So we're proud. We've had six years of significant growth for RENTFLEXIS, which is indicative I think of our ability to commercialize biosimilars and we're really looking forward for our denosumab launch later on in this year and then thereafter our Perjeta launch in Europe and in Latin America in 2026 and then followed thereafter by The U. S. And of course, as I mentioned in my opening comments, we're also doing a lot of due diligence on variety of different things we can do in buying sublers with regards to accretive business development deals that we can do in 2025 to offset some of the issues that we're looking at price in regards to RentFlexus and Entrezon. Thanks for the question.

Speaker 4

Yes. So, I'll take the second part. So, your question is very important because as you correctly point out, we've got trending during the year that has some pretty significant movements. Let's just review what that is. We've got the LOE of Adaseth, which the impacts of that are more front loaded in 2025.

Speaker 4

By the time you get to the fourth quarter, we lap it. We've got the ramp up of the BECAMA sales, approximately two thirds of our annual projection there is realized in the back half of the year. And then we've got the cost savings as a result of the restructuring, which is also back half weighted. So when you blend all that together, I'll revisit the points that we made in the prepared comments. From a revenue perspective, it could be between Q1 and Q4 and the story of the bookends of the year, as I said.

Speaker 4

There's about $100,000,000 revenue difference, we think, between where Q1 will land and where Q4 will land. So there's that delta. You can figure out the pieces in between. And then from an EBITDA margin perspective, it could be as much as 200 basis points difference between our first quarter, which will probably be our lowest quarter of the year, and the fourth quarter, which should be our best quarter of the year as we're laying out our planning for the year. And I'll leave it at that.

Speaker 2

Thanks, Balaji.

Operator

Your next question comes from the line of Jason Gerberry with BofA Securities. Please go ahead.

Speaker 9

Hey, guys. Good morning. Thank you for taking my questions. Just firstly for me, the $200,000,000 of OpEx savings, that seems like that's primarily in SG and A from the guide. It's just about a reduction of 10% to 15 of your legacy cost base.

Speaker 9

Just wondering, it seems like a pretty significant number. Wondering where those cuts are actually coming from and any commentary you can provide on opportunities beyond 2025 for further restructuring opportunities. And then just on the next one on Kevin, you've been more vocal about this potentially reaching $1,500,000,000 in revenues in the out years and having a very long tail. I would think that that implies more of like an out year growth CAGR of at least double digit. And Street obviously has it more flatlining probably on differing LOE assumptions.

Speaker 9

But just kind of curious, your guidance for '25 is greater than $1,000,000,000 but that's pretty much where you are this year. So just wondering if we should be thinking about growth in Nexplanon as more in the double digit plus territory in 2025?

Speaker 4

So I'll start out with the restructuring piece. So we've been a public company now since 02/2001. We undertook some restructuring in 2023, '20 '20 '4, I would call that belt tightening. This round of restructuring, as you point out, Jason, more significant, we did look at our organization more holistically and really did some pretty significant streamlining of our spans and layers and the way that our various functions work together. We've really tightened things up.

Speaker 4

So, the 2025 impact, $200,000,000 run rate of that, about $2,500,000 as I said in the prepared comments. The rough split in terms of how we financially report in 2025, you'd see about 75% of that $200,000,000 in our OpEx, and so that's spread over the SG and A and R and D line, and about 25% would be in COGS.

Speaker 2

Yes. Jason, in regards to your question on Nexplanon, you've heard me say many times the reasons to believe and I feel very confident that we won't see at least until the end of the decade a competitor for Nexplanon. And in 2024 as you rightfully stated it was the best year that we've actually ever had with 17% growth both outside The U. S. And inside The U.

Speaker 2

S. And we'll pretty comfortably get beyond $1,000,000,000 in 2025. I think the historical growth rate of this product has been in the high single digit range. I don't expect that to change, but there are certain years where we do certain things like for example, you start to see the benefit of the five year indication hopefully with some BMI language attached to it which will really open up a variety of new very attractive segments for us for the next put on growth opportunities. So it could be double digit low double digit in some years, high single digit in other years.

Speaker 2

But I think it's a prudent way to say, look just factor in high single digit growth through the end of the decade. It'll get you to somewhere in the neighborhood of the $1,150,000,000 which again is very different than you see in some of the models out there. But I think as time goes on, it is a show me story. As time goes on, you'll start to see the opportunities that do start to materialize for Nexplanon for us at least for the end of the decade. I see it.

Speaker 2

And thereafter, it could easily be longer. If you take the Mirena precedent, it could be significantly longer than that. But I'm going to be more responsible and say through the end of the decade.

Operator

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

Speaker 10

Hi guys. Thanks for squeezing me in. I have I wanted to focus on Fatima on a two part question. First, I saw you reported $10,000,000 for U. S.

Speaker 10

In Q4 for Vitama. Previously, I know the run rate was around $20,000,000 or so on the prior quarters that Dermovac was reporting. But I do acknowledge you have a partial quarter. There's only two months, but still I wouldn't have thought it would be $10,000,000 to be closer to perhaps $15,000,000 or so. So I wanted to understand better the $10,000,000 number knowing that it was two out of three months.

Speaker 10

Secondly, I was very intrigued by a comment made today. So specifically, I know you previously said you expect $150,000,000 in sales for Vitema in 2025. Today, you said two thirds will be back half weighted. So 100,000,000 will be in second half of the year presumably, which would imply a $50,000,000 to $60,000,000 quarter in Q4. So is it reasonable to think that your expectation is that Vatama's Q4 run rate will be $200,000,000 to $250,000,000 Thank you very much.

Speaker 2

Good to hear from you, Umer. So your first question in regards to the Q4 numbers, we look, I mean, Dermovant had this customary practice of pulling sales forward in terms of revenue forward in the end of the quarter. We for obvious reasons decided not to do that and to get a good start in 2025. And so as a result of that kind of just let it just clean in terms of the overall kind of performance in Q4 so that we could start off I think in a very solid fashion with Q1 for the remainder of the year. And you're right, when I start to think about where the opportunities lay for this product, we're going to be working on gross to net.

Speaker 2

We're going to be working on a number of areas especially around with our managed care group which is I think best in breed in the market today. And they're getting successes as we speak to get better treatment in terms of the overall formulary status for VITAMA in regards to AD. That's a very important thing to essentially lower the usage of things like coupons and other things. So yes, by the end of the year as you start to see successively quarter after quarter, you'll start to see more strength in the product based on some of our managed care work and some of the formulary work that we're doing as well as continuing growth in NRX TRX growth that we see going on for the product now. We've got a really solid first month of the year in terms of TRX growth.

Speaker 2

So we think that that will continue on to go forward for us.

Speaker 1

Okay. I think that was our last question.

Operator

That concludes our Q and A session. I will now turn the conference back over to Kevin Ali, Chief Executive Officer for closing remarks.

Speaker 2

Thank you, operator, and thanks everybody for your questions. Once again, we're really very proud of our 2024 performance. And in 2024, we achieved our third year of constant currency revenue growth and delivered adjusted EBITDA margin expansion ex IPR and D. Our 2025 financial guidance reflects the potential for a fourth year of constant currency revenue growth despite the loss of exclusivity of our second largest product out of that. As we think about 2026 and beyond, we will have that LOE behind us and we will be leveraging the cost savings we're taking out this year.

Speaker 2

Longer term, we will continue to source accretive business development deals that will drive an acceleration in our revenue growth profile, all while aggressively managing our cost structure. So thank you for your questions and we look forward to reporting on our continued progress as a company. Thanks everyone.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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