Organon & Co. (OGN) Earnings Call Transcript & Summary

Thanks for joining us again for the next session. I'm Matthew Harrison, one of the biotech analysts here at Morgan Stanley. Very pleased to have Organon with us for the next session. I need to read a quick disclosure statement before we get started. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures are seen on Morgan Stanley public website at morganstanley.com/researchdisclosures. And very pleased to have from Organon, Kevin Ali, the CEO; and Matt Walsh, the CFO.

Kevin, I thought maybe just to start us off, since obviously, people are familiar with the company because of the spin from Merck, but may not be as familiar with the focus of the company and the key products. Maybe we could just take a minute or 2 to walk through what the vision is for the company and how you're thinking about the company post spin.

Sure, Matthew. And I appreciate the opportunity. Look, I mean, we just passed about 100 days since we rang the bell at the New York Stock Exchange. This is a business under Merck's hands some years ago that was really getting deprioritized. There are 3 parts of the business. There's an established brands business, which is essentially our all patent originals, which represent about 60%, a little bit north of 60% of the business. And then the remainder is essentially a small but fast-growing biosimilar business with our relationship with Samsung. And then the remainder is the women's health business. The focus of the future of Organon going forward is really to become a worldwide leader, global leader in women's health. We have a very, very unique portfolio of franchise of businesses in women's health currently, primarily in reproductive health with contraception and fertility. But we've made 2 acquisitions or rather 2 business development deals over the last 3 months. We've been very active, very quick. One is the acquisition of Alydia Health with the Jada System, which is essentially addressing a significant unmet need in postpartum hemorrhage, the leading cause of mortality in childbirth for women. And then the second in-licensing deal we did just a month ago was with ObsEva to get access to their new mechanism of action for preterm labor, the single leading cause of mortality for infants in childbirth. And so we've really taken a very aggressive approach to really start to address some of these unmet needs. We're agnostic of whether it's a device or a therapeutic, although we are focused on the therapeutics. We see a great amount of opportunity to grow in that sector. As well, we'll be doing work and business development work in biosimilars as there's a great amount of opportunities there because we've actually been doing this for about 8 years. We understand the complexities of country-by-country and how to commercialize and grow our biosimilars business. And we're obviously -- we've got a very productive and some iconic brands in the established brands business. The one underlying theme is in one set of hands in Merck's, the deprioritized franchises, set of franchises can do much better in a different set of hands and with additional focus, senior management focus, of course, investments in business development. We've got a strong cash flow, and that will allow us to do some meaningful business development. And the future is we see, at least for the next planning period over the next 4 to 5 years, is low to mid single-digit growth. And we're off to a good start on that, and we feel very confident about the future of this company.

Right. Perfect. Maybe I thought we could just start on some of the business outlook here for the remainder of the year. You touched on a couple of things on the second quarter, including COVID headwinds as well as some of the costs associated with the spin. So maybe just give us sort of what you're thinking about in terms of the outlook here for the second half.

Matt, do you want to address that?

Yes. Sure, Kevin. So prior to the spin, we gave guidance on a full year basis pro forma as if the spin-off had occurred on January 1. We affirmed that guidance in our second quarter earnings call, and we continue to feel that the numbers that we have out there for guidance incorporate certainly some -- or at least all of the COVID-related issues or impact that we are aware of. So -- and I think what that speaks to, the fact that we haven't really needed to move our guidance in the face of continuing COVID impact just speaks to the diversity of the business, both from a product perspective. Our largest product is NEXPLANON, that's only 15% of revenues, and also the geographic diversity of the business. Approximately 80% of our revenues are outside the United States, and that's broadly realized across all of the 58 countries that we have a direct presence in, commercial infrastructure. And I think it's 140 in total countries that we sell to.

Okay. Perfect. And then, I guess, the second question that I get a lot is just if people look at sort of the results for the first half and compare that to what's expected based on guidance for the second half, it seems like EPS is lower, and there's sort of a slight increase in revenue. I think people are wondering, is that conservative? Or are there a couple of reasons that maybe isn't clear when you just look at the top line numbers that people should be aware of?

Yes. So our business doesn't evidence a significant amount of seasonality at the top line. But on the expense side, at least for this fiscal year, we are seeing some phasing-related or timing-related spending issues that will push some cost into the second half. That's mainly related to the integration of Alydia Health. That's the acquisition that Kevin mentioned earlier. And then we've just got some -- just by virtue of when the spin-off occurred, we'll be initiating some spending related to life cycle management. This is basically organic growth initiatives to expand revenues for products that are already in the portfolio. Just by virtue of when the spin-off occur, that spending is phased in the second half of the year. And also just some COVID-related timing, money that wasn't being spent earlier in the year that just got pushed to the back half.

Okay. Perfect. Perfect. That's very clear. And I think that's helpful for a lot of people. Great. So why don't we talk about products since that's what we should probably use the bulk of the time for. I mean, I think as people are starting to get used to the business and know what to look at, obviously, NEXPLANON comes up a lot. So maybe we could just spend some time in detail talking about life cycle management for that, what you're investing in and what the real growth outlook is for that product?

So Matthew, NEXPLANON is our key product with patent protection in the U.S. until 2027 with an extension potentially to 2030 as we've done life cycle management work. To your point, we started last year, late last year, to get the extension from 3 years to 5 years. We expect that to read out sometime in the 2024 time frame, which would essentially say that we could launch that new indication in 2025 and give us data exclusivity until 2030 as opposed to the 2027 focus right now that everybody's got. So there is that one obvious opportunity there that exists for NEXPLANON. Clearly, NEXPLANON was growing double digits in the U.S., which, by the way, represents about 3/4 of the current today's business. And that was very significant double-digit growth prepandemic. Obviously, the pandemic and the subsequent COVID in regards to the variants currently have reduced the number of wellness visits of women to their OB/GYN offices. And essentially, what we've done in order to be able to stimulate and work towards getting back to that double-digit growth rate, which we have every intention of being able to realize, is we started a direct-to-consumer campaign with a celebrity spokesperson in July and televisions -- and on television as well as we've got major social media channel involvement and investments as well. We have clinical training programs that are accelerating far beyond what Merck was able to do prepandemic, prespin. We have a number of things that we're doing on the commercial front to really stimulate that -- the product to continue to go forward because the underlying theme here is that unintended pregnancies were sitting around 42% prior to the pandemic. The actual -- the pandemic has actually created a more acute situation, where unintended pregnancy rates are starting to migrate up a little bit again. And that is a rate that really needs to be addressed, especially for the community of women who are socioeconomic -- lower socioeconomic status and/or communities of color. And so there's a great opportunity to really drive this product forward since it's 0% -- 0 co-pay under the Affordable Care Act in the U.S. Now that's the U.S. business. Outside of the U.S., we've gotten some good news. We've got essentially Brazil that after years of trying, we finally got Brazil at the beginning of this year to reimburse for certain patient populations for women in Brazil, which is the second largest contraception market in the world. We're going to get that going and get that online. In Canada, we've been working for years. And luckily, at the end of last year, beginning of this year, we got regulatory approval. And we're starting gaining provincial reimbursement and federal reimbursement. That will be a second country that's online. We're going to start to focus our efforts in Europe, where we've got a lot of reimbursement already, but just no attention in the years past to really start to put efforts in terms of our commercial infrastructure and to give us an opportunity to really grow this business. And so over time, we think that the ex U.S. business will likely grow faster than the U.S. business. But overall, we'll always have a predominant majority share of our business in the U.S.

And maybe can you just address like the phasing of some ex U.S. growth or how people should think about that in terms of contributing over the next few years?

Yes. We believe that probably by the end of the planning period, in the 2025 range, we'll probably end up having about 2/3 in the U.S. and 1/3 outside of the U.S. where currently, it's about 75% of the U.S., 25% outside of the U.S. So you can kind of work out in terms of the overall contribution of growth over that period of time just because new markets, new launches, new reimbursement.

Okay. Okay, good. And then in terms of life cycle management, just people probably aren't as familiar with the product. So maybe just give people some details on exactly what you're doing. And I think the important question is, how much risk is there involved in actually having that life cycle management plan to play out?

Yes. So it's a great question. So essentially, what got us interested in the 5-year indication is some years ago, the WHO, on their own, did a trial. And they found actually in that trial, although it wasn't powered for such, that the efficacy really lasted around 5 years. And essentially, when we started that, it was under Merck, we started the process of essentially ramping up and doing the study designs and working with the FDA to better understand what type of trial design that they were looking for. And essentially, we started that last year. And we have a fairly good -- because of -- how should I say, the proof-of-concept has already kind of materialized, we think we've got a pretty good chance, we're confident that we're going to be able to do this. Now keep in mind, it's not a new rod. This is a new indication. This is not a new formulation. This is a new indication. But that indication will give us another 5 years of exclusivity with the launch in, hopefully, the 2025 range. And that's something that we feel is a very appropriate use of capital in investing in life cycle management. But that's not the only life cycle management opportunities we have. We have other life cycle management opportunities in the U.S. For example, launch of Zoely, our oral contraception that we're working on regulatory approvals, 2025 probably time range. We have ELONVA, which is our fertility drug. It's a once-weekly follicular stimulating hormone that we've invested in regulatory studies, both in China and the U.S., somewhere around the 2025 range. So there's more life cycle management that we've initiated on our own.

Okay. Okay. Perfect. You touched on business development and M&A at the beginning. I guess just give us the outlook there in terms of how much focus that is in terms of growing the business, especially new women's health products? And given the number of deals that you've already done already, I mean, how should people look at your outlook in terms of focus there versus what you've already completed?

Yes. So putting the life cycle management stuff aside, of which we have a high probability of success of achieving and managing, and then putting aside those 2 assets that we've already actioned on our business development, one that's already commercialized in the U.S., the Alydia deal, which is essentially Jada, already gotten FDA approval. We've got sales force behind it. We're just getting started, and the reception has been very positive. Again, postpartum hemorrhage is really a major issue to go after. We're going to turbo boost that and put that into our regulatory hopper for the rest of the world in terms of ex U.S. potential launches and regulatory approvals. Now it's really -- it's great that we actually can have a much more truncated and faster approval process outside of the U.S. for a device like Jada as opposed to, say, therapeutics. So we expect to start to get more online with the Jada System. And then you look at ObsEva, and that's probably somewhere roughly conservatively in the 2027, 2028 time frame that we potentially can have access to that. Phase II trial in Europe has already been done and showed really promising efficacy and safety. Now we're obviously discussing with the FDA in order to be able to ramp up and design the trials so that we can do a global effort across the world because obviously, preterm labor is a global issue, not just a U.S. or European issue. And then beyond that, there's probably -- we've done our kind of our landscape of sorts and done our due diligence. There's well over 140 assets in various stages of development. Again, for major pharma, for big pharma, $250 million to $400 million of peak revenue is not going to ring their bell. But for us, at a $6.5 billion, mid-$6 billion business, it is meaningful. Those kind of assets and those kind of -- as we start to acquire and aggregate those kind of assets -- and by the way, it's not just acquisitions, but it's partnerships, it's in-licensing and a number of other things on the business development front that Matt and his team of business development professionals, of which we have almost 28 people in that space, are doing a lot of work right now. We're busy. We're very active in the business development front.

Okay. Perfect. Yes. Why don't we spend a moment or 2 just on some of the recent deals? So Jada, just maybe you could just talk about the market opportunity there because I think people are probably not as familiar there. And the geographic expansion outlook that you briefly touched on, where is the real opportunity there?

Sure. So it's estimated, Matthew, that 10% to 11% of all deliveries result in postpartum hemorrhage or, let's say, abnormal bleeding. It is the single biggest mortality associated for women in childbirth. There is a woman that dies every 4 minutes, every 4 minutes, somewhere in the world from postpartum hemorrhage, not counting those that are having to stay in the hospital longer, ICUs, a number of other sequelae that comes as a morbidity associated with this. Now currently, Jada is in the U.S., as I mentioned. The opportunities in terms of what we looked at for peak revenue when we made the deal, when we actually went public with the deal, we believe, were far more conservative than what we currently see as the outlook going forward. We're doing better than our expectations. So stay tuned. I think that we'll hopefully have some more information to share as we start to aggregate and gain more and more information and data in terms of hospital systems across the U.S. that are putting it into their formulary listings. And keep in mind that the difference between, say, first line and a third line is a matter of hours, minutes sometimes, because things are really kind of dynamic in this space. And so we just believe that what we're getting right now back from physicians, treating physicians, they see this as an elegant, simple solution that works within 3 minutes, has a more than 90% efficacy. And it's so simple and elegant that we feel that this is going to be a sleeper, to use a different terminology. And it's going to do better for us than what it was initially anticipated. Now ex U.S., obviously, we're looking at Europe. We're looking at Japan. We're looking at China, getting it into the regulatory system. And that's one of the benefits of having Organon with a global infrastructure that we have. We have the same footprint nearly as much as Merck does. And so our footprint is not only obviously commercial, but we have a regulatory footprint. We have a medical affairs footprint. We have a development footprint that we're able to just align in and give us an opportunity to kind of accelerate the launch of something like Jada. And I think that's one of the reasons that the Board of Alydia was so keen to be able to get us to be their partners because they see an opportunity in the low- and middle-income countries to really make a dent in things like postpartum hemorrhage.

Okay. Perfect. And then update -- I guess there are 2 sort of key questions for me. So the first question is, obviously, the standard of care and the approved products in Europe are different than what's approved in the U.S. So how does that impact the clinical development plan and what you need to do in terms of translating that data even to the U.S. market?

Well, honestly, Matthew, there's really nothing in the space, at least in the U.S., that has a broad-based indication for preterm labor. There's a lot of kind of anecdotal -- people are just using whatever they can in order to be able to solve some of these -- the needs and the issues around this. So we're going to have a global study design that will ultimately have a kind of a global protocol. We're not going to do country-by-country variations and differences in the way that we structure our studies because this is going to be a global study. And we're still early in the process of determining exactly what that's going to look like, what, if any, comparators are going to be there. We're actually going to be in discussions with the FDA to better understand what type of study they need in order to ramp up and get this product approved as fast as we can because so many children -- we're talking about 1 million children a year dying from complications due to preterm labor from 0 to year 5. And those that survive have lifelong of difficulty. So even if we're able to extend 48 hours, 72 hours before a woman gives birth, those hours are very valuable in terms of being able to save and improve the opportunities and chances for children to survive.

Okay. Perfect. And then, I guess, what I was referring to, Kevin, was I believe atosiban is not approved in the U.S., and that was used as a combination in the Phase II data. So I'm just wondering, like how you translate that data and have confidence that you can have a positive outcome in a U.S. study?

No, I understand what you mean, Matthew. And I think that's still yet to be determined with our discussions with the FDA. And I think we'll come to a place where we feel comfortable that we can ramp up a global study.

Okay.

Because I can tell you one thing, the FDA, from what all my understanding, is they are keen to be able to get a product that's safe and effective for the treatment of preterm labor in the U.S. It's gone long, too long an unmet need that's causing too much pain and suffering.

Okay. Okay, good. And then, I guess, the second question. So in terms of -- I guess, maybe just go about the market for people is basically what I want to ask. I think people understand that it's large, but maybe just give some statistics around just the current costs and just what people can expect in terms of the market size here.

You're speaking about preterm labor? Or are you speaking about in general? Preterm labor?

Preterm labor, yes.

Yes. So nobody really understands how large the market is because there are just such desperate uses of different things. I mean, for example, they use corticosteroids for trying to get lung development for preterm babies in terms of not losing it. So it's hard to pin down exactly how big it is, but I will say this, though, in our assessments, if we get a kind of -- if we get a solid label, this is going to be a solid product for us. It's going to be a solid product for us. It will be a contributor, but we're so early in the process. So much can go right and wrong in this process, but at least of which, hopefully, we're getting credit in the OB/GYN community for tackling something that's so incredibly important for some that they say is a holy grail in terms of being able to resolve and solve some of these issues.

Okay. Okay. Great. Good. I was hoping maybe we could also spend a few minutes on biosimilars. I guess I would say, maybe you won't agree with this assessment, but moderately sized business, especially compared to some other people that are focused on biosimilars. And so I'm just wondering, what's your outlook there in terms of how you can grow that business? And maybe more importantly, how aggressive you want to be in that business in terms of trying to be first to market with some assets that are not -- that have upcoming sort of expiry dates?

Yes. So look, I mean, Matthew, we obviously inherited this business from Merck. And as an anecdote, I was actually the one who brought that business into Merck some 8, 9 years ago. More, almost 10 years ago now, because we -- at that time, we saw an opportunity in the biosimilar business, but Merck and for that matter, Organon was not willing to invest in greenfield or brownfield manufacturing capacity and all the development work that needs to go in there. We've got a good business partner, a good partner in Samsung that has proven manufacturing know-how and capability in biosimilars because obviously, what you want to do as you bring biosimilars to the market is have biosimilars at the highest level of quality, the highest level of manufacturing know-how and speed to market, as you said. Those are things that really, you need to have access to. We have great confidence in Samsung. We've had a long-term relationship with them. We'll continue to have a long-term relationship with them. But if I'm looking at kind of one of my key responsibilities as the CEO of Organon is capital allocation, where do I want to put the money of Organon? I'd rather put it into women's health rather than building manufacturing facilities and all that goes in it to be able to line up a stable of products in the biosimilar space. I'd rather go after unique new mechanisms of actions, of which we've seen there's more than 140 assets out there, Matthew, various stages of development that would love to partner up or get acquired by a company that has our infrastructure, our global footprint. So to the point of biosimilars, it is an opportunistic part of our portfolio that is a growth component. You've got $200 billion of originators coming off-patent in the next 10 years. We've got great relationship with Samsung. We're developing relationships with other developers in the space. Look, I mean, I think it's really a nice business to be in as long as you're not putting risk out there. And the kind of risk we're putting is limited. We've got our reimbursement folks. We've got our marketing folks. We've got our commercial folks that really know how to do this. And we're a great partner for a lot of biosimilar developers in the space.

Okay. Okay. Perfect. That's very helpful. And then maybe just talk about the outlook for biosimilar, Humira, and -- because that obviously is a very large market opportunity? And what kind of contribution you think you can get there?

So it's a huge market opportunity. It's the largest of any biologics coming off patent, at least up until now. We're going to be launching second to market sometime in the summer, around June of 2023. We're in a very unique position with Samsung because what the -- the reason that this is so unique, unlike, say, for example, a hospital, say, where it's hospital by hospital, you don't necessarily have the networks that can take formulary listing unless you're talking about a Kaiser, for example, on one hand. But PBMs have national force. They can make formulary additions and subtractions pretty quickly. They can move swiftly and efficiently. We think price is going to move pretty quickly down, but not necessarily like the small molecule erosion, but opportunities ahead. So Humira and our biosimilar called HADLIMA, we're going to have 2 things that are very important to have. First, as PBMs look at potential biosimilars, they're going to want to make sure that the biosimilar that they bring on formulary will have the least amount of resistance from their prescriber base. And the only way you're going to do that is by having an exact biosimilar, same high dose, same citrate-free, easy application applicator. We've got -- Samsung has got a great applicator. It's got a citrate-free dose. It's got a high dose of 100 milligrams. You put those 3 things together, we feel very enthusiastic and very confident that we'll be able to get good share as much as one can get in that kind of environment, but it's a $14 billion behemoth. So I think it's going to be a major contributor for us in 2023.

Okay. Good. And then one of the questions that obviously comes up a lot is interchangeability. Any thoughts on how that plays out in the marketplace or has a significant impact on which brand, which biosimilar is favored over others?

Yes. Look, I mean, the first 2, 3 players in this space, us and Amgen, we don't -- as far as I can see, we don't have interchangeability. That's been done. We've been -- we've talked to people, what they're most interested in. Citrate-free, high dose, come to market fast, early. And that's essentially what we've checked off those boxes.

Okay. Great. Good. Maybe in the last minute that we have here, we obviously haven't spent a lot of time on established brands for good reason. But maybe just talk a little bit about the outlook there in terms of some of the headwinds that they might face and whether it's VBP or otherwise?

Yes. So look, I mean, if we had done this spin 5 years ago, and by the way, we're kind of looking back then on whether we should do something like this, the LOE impact would have been significant. But now spinning out as when we have, we passed through most of the LOEs, most recently with the established brands being the ezetimibe franchise in Japan. So pretty much, we've gone through most of -- we scraped out most of the LOEs. Now our business is primarily in terms of the opportunities for it to be really dynamic. Southern Europe, the emerging markets, China obviously being a key contributor for us going forward. We see very low, low, very low single-digit erosion, mostly due to price, not due to volume throughout the world in terms of these are well-known brands. And we're firmly placed in cardiovascular, respiratory, pain, dermatology. And so we're really in a good space. No single product really represents more than 10%, 15% of our business in the established brands business, and no single country represents more than 20% of our business in established brands. And so ultimately, what I can tell you is we're very diversified, so we can withstand shocks to the system. We've got little opportunities, rays of lights, like, for example, dermatology in Southern Europe. Atozet, our fixed-dose combination of ezetimibe plus atorvastatin in Europe. As you say, China is a great opportunity going forward. 60% of the business has already been through the volume-based procurement process, leaving 40%. 10% is fertility. That really is not part of the volume-based procurement. Of the 30% remaining, 20% will go through next year in 2022. And then essentially, the remaining 10% will be in the years following. So for 2020 -- '22 over 2021, in China, we're going to stabilize the business. And from there, we're going to be able to grow because the retail channel, which we've shifted about 50% of the business already, is growing 25% year in and year out. And so there's an opportunity over time to do well with the established brands in China, as it still has a really a stronghold in patient retention and knowledge and trust.

Okay, perfect. Great. Well, Kevin, Matt, thank you very much for being here. Thanks for the thoughts. We appreciate it.

Thank you very much.

Good to be with you, Matthew.