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

Hello, everyone. Thank you for joining us. It's a pleasure to have Organon management join us for the very first time. I was actually hoping to do it on a more dedicated NDR setting and not in a broader conference, but I do think it's a great form to get this first meeting off the ground. So great to have you guys.

Pleasure.

Thank you.

Excellent. Before we begin, I thought it might be helpful just to turn it over to you, Kevin and Matt, to kick it off and maybe lay out your priorities and what's on top of your mind?

Yes. Thanks, Umer. Listen, I mean we're 6 months into the spin. We're exceptionally proud of what we've been able to achieve so far. We remarkably, I think, done a really good job of spinning out. This is not a normal spin where essentially you have a stand-alone business unit that's easy to just kind of cut off from the parent company. This was a very complicated spin that we were able to spend a couple of years to really get it ready so that we ultimately can flawlessly execute on the fundamentals of blocking and tackling of the company. We're doing that. We're long impact of where we wanted to be in terms of the delivery of the business. We feel very strong about the fact going forward, we're going to generate organically low to mid-single-digit growth from this company because the overall value proposition that these assets in a different set of hands could do much better because of focus, because of investment, because of senior management attention, where I know full well because I came from the other side that these products were essentially deprioritized, suboptimized and not really given the attention and the focus they deserve. So they've got really an opportunity ahead. We've got 3 pieces of the business that are operating exactly that we thought -- the way that we thought they would in terms of stabilizing our established brands as we started to move past the LOEs of regrowing, essentially growing double digit for our biosimilar business as well as kind of really putting our efforts in our shoulder behind the women's health business, which is where we're really focused on becoming a leader -- a global leader in women's health. We started out 6 months ago, just being in 2 areas: contraception and fertility. Since those 6 months have passed, we've added postpartum hemorrhage with our JADA acquisition. We've added preterm labor and earlier asset with our ObsEva in-licensing and then we've added essentially endometriosis as well as polycystic ovary syndrome with our acquisition of Forendo all within the first 6 months. We're not finished. We generated a lot of good free cash flow that we can put to work in being able to be an aggregator of some of these very interesting assets both late stage like the JADA product, earlier stage. And then we also have other things we're looking at in not only in women's health, but on biosimilars that are going to be a balanced approach to having both late-stage marketed products, mid-stage as well as early stage as we build out the pipeline. So we're very excited going forward. It looks like we're going to deliver. We feel very good about the fourth quarter as well.

Sounds good. Excellent. As we think about one of the big themes into next year for a lot of companies, which don't have a 90% plus margin, the theme is inflation on the manufacturing side. And one of the feedbacks I'm hearing is sort of raw material prices being at all-time highs. How should we think about that in the context of headwinds on your margin profile into next year?

Well, at this point, Umer, we anticipate that we will be seeing some of that, but we have the ability to offset it with other activities that we're undertaking and just normal course operational excellence, productivity improvements. So I think any increases we might see would be captured within that and we'll have to see what '22 brings, but that is what is in our forecasting at the moment.

Got it. So some pressure, okay. Is there an ability in your business, Matt, to pass on some of the inflation?

So we are, generally speaking, on annual, either on annual purchase orders or contracts or where they're longer term, we would have the ability to look at pricing on an annual basis in multiyear agreements. So we would have the ability to embark upon a discussion, let's just start there. And then just remind folks, we do operate in pretty competitive environments around the world. So to the extent that there's broad-based movements within health care to recover supply chain increases in price, we would be able to -- we would have an opportunity to execute on that.

Got it. And Matt, would you remind us where are the expectations for your margins into next year on the numbers you're looking at?

Well, so we will be providing guidance early in '22. So we don't have any '22 guidance out there right now, Umer. But I think that the margins that we posted in the third quarter were obviously quite strong based on historical standards. And for folks that listen to the Q3 earnings call, there was conversation around at least directionally how to think about margins going forward. And one we talked about 2 aspects of our cost structure that will be growing over the next several quarters. One would be quite obvious. As we're filling out our pipeline with new candidates, we'll be moving those candidates through the clinical pipeline, and so our R&D expense would be growing to accommodate growth in the pipeline. The other piece of it is we are still working our way up to our steady state or sort of run rate operating expense profile that has gone a little bit more slowly over than we thought. And so that led to an expansion of Q3 margins, which I would want to caution folks is something that will be coming back to the trajectory that would be consistent with our run rate of operating expense, which will probably happen into the fourth quarter here, but really more mainly in '22.

Got it. On top line then, Matt, how should we think about sort of any meaningful hit or established products in 2022, the established products? Because I feel like that's one of the line items where there's less of visibility, just it's $3.5 billion of your $6.5 billion.

So yes, we've been communicating , as you know, low to mid-single-digit revenue growth for the company on a constant currency basis that excludes M&A, that's all organic. Over the next 4 to 5 years, we do believe that, that number would be more or less evenly spread amongst those years. So as we sit down in our budget process right now, we would be looking for consistency with our prior forecasts, which would say low to mid-single-digit revenue growth organically at constant currency. One thing we're getting a glimpse of that the paint is starting to dry that currency -- foreign currency translation impacts are probably going to be a headwind year-on-year. And maybe that's something plus or minus maybe 1 or 1.5 of growth that we would be seeing in constant currency that wouldn't make its way all the way through to reported because we report in U.S. dollars.

Got it. And is there any possibility top line growth could be closer to mid-single digits in '22, given women's health was still in the process of coming out of COVID, and I think that tailwind continues into next year now more so than in 2021?

Yes. So that's a good question. When we budget, we don't just do 1 budget, right? We do many sensitivities and some of the iterations we're running of our budget model have organic revenue growth in the range that you're describing. A lot of things have to go right for that to occur. But it's -- while it's not out of the question, it's possible. It's not likely we guide to it, though.

Got it. Okay. Makes sense. Let's turn next to one of your key line items NEXPLANON. Let me turn it over to my colleague, Eric, to kick things off on that.

Yes. So on NEXPLANON. We were just curious how you were characterizing the trajectory of that product, especially how we should model it post 2025.

I can address that, Eric and Umer. It's an important question and I need to give you kind of reasons to believe that I believe the long-term sustainability and future of NEXPLANON is going to be very good because of the following reasons: one, we have now full focus of this product in terms of the fact that senior management focus and attention and investments, everything from DTC in the U.S. to significantly turbo thrusting our efforts behind clinical training programs for thousands more health care providers that can do it, to social media engagements and the things that we're doing will drive the resurgence, I believe, of this business so that it will be a $1 billion-plus business when we're talking about kind of in the foreseeable future. But beyond loss of exclusivity, which is 2027. 2027 is essentially when we lose exclusivity for the 3-year indication for NEXPLANON in the U.S. We currently have a 5-year indication ongoing in terms of study that would provide us essentially by 2025, that 5-year indication. So anybody who's right now trying to do work, to try to do a generic of NEXPLANON would probably be doing the 3-year indication. They would have to do additional work to get to the 5-year indication. And that would ultimately take us to 2030. But keep in mind that I believe the proxy that you should use in terms of off patent loss of exclusivity or erosion will probably be more akin to Mirena. Mirena lost exclusivity, I don't know, 6, 7 years ago, they returned -- they retained about 80% share of the overall IUD -- medicated IUD market. There's still a $1 billion product somewhere in that neighborhood. I believe, given the fact that you need to have certification and training on how to insert NEXPLANON like the IUDs, you need to actually have a dedicated specific or specialized designed applicator like in the case of an IUD, you need to have a dedicated distribution system in order to be able to maintain and understand what you're doing in that space, you need to have a very highly capable and technically capable manufacturing system to be able to deal with hot melt extrusion and the combination of these things into an applicator. So I think that the barriers, like, for example, in the case of Mirena are significant enough. And the kind of indications we're working on will give us a kind of a line of sight on NEXPLANON well past LOE date.

Got it. And you mentioned you have a 5-year study ongoing. Do you plan on taking a price increase after this 5-year data?

Nothing on that yet. That will lead that up from the time that we actually are getting closing in on being able to launch that product. But clearly, it's on the table. Keep in mind, if the same essential application, it's just that we've done the studies. Now to give you a sense of confidence the WHO had done a study, but the study wasn't empowered to the approval of what the FDA was looking for. So we essentially did the proper studies in order to get the 5-year indication. And they showed 5-year efficacy in that. So we have a fairly good sense that it should actually work.

So Kevin can I ask because I remember we had this conversation when you guys were first coming public and my question was if 3-year duration becomes a 5-year duration for dollar for dollar to keep all else equal, that should imply a 66% price increase. I guess, are you implying that a price -- a step function price increase of that potential is on the table now?

I do think, Umer, that is on the table to look at price as a potential lever, especially in the U.S. But keep in mind, there are significant segments of the population right now with only 5% share that we're not essentially approaching, let's say, for example, take an example of the family complete section. Family complete sector, which these are women who've actually finished with giving birth and essentially want to focus on longer than 3-year duration, maybe 5, 6 years of protection, that will then come in to the group of different segments that we can work on. So we'll get some volume uptick, we'll get some erosion, but we also have the opportunity to pull the price levers we do choose to do so.

Got it. Sorry, Eric, please continue on.

Yes. And just touch on one thing you mentioned earlier about potential competitors. Are you aware of any other competitors making a similar LARC?

I don't have any information to that. I don't -- I'm not aware of that right now. They are only really essentially 2 LARCs available. There are -- there is NEXPLANON as an insertable LARC in terms of the arm insertion; and then, of course, there are the IUDs, the medicated IUDs and the copper IUDs.

And do you expect the FDA to put out any product guidance for generic NEXPLANON in coming months?

That's a good question. Not certain about that, not certain about that. I think that, that is something that's possibly on the table. But again, like I said, in terms of the erosion models, as you start to look at the models that you're going to be looking at for a key product for Organon, which is NEXPLANON, I would likely more lean towards the medicated IUD erosion model as one to be looking at going forward. There's just a lot of similarities.

Got you. And were you considering using this implantable technology with any other women's health products or maybe combining NEXPLANON with anything?

That's on the table, but we haven't really pursued anything beyond that in terms of that. We've got other life cycle management opportunities we're pursuing right now, like, for example, launching some products that we have across the world that we haven't launched in the U.S. in the fertility space, in contraception space, a number of other areas that are more near term and that have a significant potential material upside as well.

Kevin, can I ask sort out of the box question as a follow-up on this? So correct me if I'm wrong, but my sense was that [indiscernible] program at Merck was a very, very, very high priority pipeline drug, perhaps even in top 3. And there's obviously a big step back that's happening because some of the observations on their dosing studies. But if you focus on it, the data where they're having some of the challenges where the dose on an oral pill had to be very high to make it look like a weekly or a monthly drug. But on the daily dosing, where the dose was only 0.75 milligrams, they're not quite seeing much of that. There was a sense that they were going to package [indiscernible] in a NEXPLANON device to deliver a very tiny dose every day for an any implant of sorts, et cetera. To the extent Merck down the road deprioritizes this program or it's no longer a $5 billion drug type potential, will there be a possibility for Organon to have a disproportionate advantage versus any other company to get access to that any NEXPLANON-like device or something along these lines for a prevention indication, something like that?

Well, I will tell you that Merck does still have access to especially the IP and whatever -- what they need to do with the NEXPLANON device, the applicator device and the insertable. So I'm sure that they're working on that HIV compound as we speak right now in terms of being able to have more of a sustained release. I'll let them answer that. But only I can tell you, Umer, is we've got really good relationships with our old parent company. We're working on a number of things together, and we've got -- we're talking, we're talking.

Can you actually, Kevin, that's really important because can you expand on that? Because the perception on The Street is that sort of Organon got these set of assets for Merck, and that's that. But maybe can you expand on that? You're working on things? What is that? Is that more on the pipeline side?

No, it's more of the fact that we've got significant transition agreements set up and MSA setup. And we've -- 85% of our people have come over from Merck. So there's a lot of connectivity and ties. I'm very close to their CEO as well, Rob Davis. So in the sense that if there are opportunities in the future, Umer, to work together on joint projects, the relationship is already there. We don't need to be making a new relationship.

Got it. Okay. Okay. That makes a lot of sense. That makes a lot of sense. And maybe 1 last thing just to close this out, follow-up to Eric's question. It doesn't sound like you have a sort of generic women's drug in your mind right now, which you want to package into NEXPLANON to make a new impact?

No. We're not looking at new mechanisms of action in terms of products that we want to insert into a device, the long-term device like NEXPLANON. We're looking at, as I told you, getting the extension from 3 years to 5, maybe even beyond 5 years as we go forward because people are looking for long duration that's reversible immediately if you want to reengage in getting into -- in starting a family. So we're very comfortable with the active substance and the NEXPLANON rod and we're going to continue with that.

Got it. Okay. Outstanding. Maybe let's switch gears to biosimilars for a quick second then. And I guess the first question is perhaps lay out for us the top opportunities for you guys. I know it starts with HUMIRA, but lay out sort of the cadence of those key launches?

Yes. So HADLIMA or HUMIRA biosimilars clearly going to be our most important biosimilar launch in the U.S. I think the shift is moving. We've got a lot of business in Europe, especially with our trastuzumab biosimilar and Avastin biosimilar. But we also -- it's shifting now in terms of the U.S. market because it had -- because of the HUMIRA biosimilar. But beyond that, we've got ongoing discussions with Samsung as well as many other developers in the space to fill out more assets in the immunology space, more assets in the oncology space. You know better than myself what's coming on patent over the next decade. This is a nice business to be in that potentially can give us continued revenue growth over the long term. And so needless to say, we've got ongoing discussions. Very, very good discussions on right now.

Got it. And is it fair to say that on the Samsung side, there might be a potential opening on some of the geographies that were previously partnered with Biogen, which is so much more focused on their branded business right now?

Well, we've got -- Umer, we've got discussions with the Samsung Bioepis folks on a number of different fronts, most importantly, new assets. That's obviously front and center for us. We haven't really discussed necessarily the geographical split right now. But definitely, new assets is where we've focused all our attention. Both the Samsung by the way and outside of Samsung, which there are a number of players in the space that would love to have a partner that has our capability and knowledge base over the last 8 years.

Makes sense. And is there interest in sort of these ongoing discussions with Samsung to change the agreement to being more than just a 10-year agreement, so it doesn't clip off.

Right now, no. Not at this present moment. We've got the original agreement. As you know, Umer, 10 years on the date of first launch in a given country, geography we'll have protection over. Now if you know -- I mean, if you see what's happening with the biosimilar industry or essentially the segment, after a certain number of years, because of the number of entrants that come in, price starts to get very destabilized. And that's why the key is to constantly have new launches that are first, second or third to market.

I guess, Kevin, what would be your assumption on. If a product starts at $100 million, let's say, in their first year, year 10 it eroded by 80%, 90% or 40% to 50%?

It depends on the product. So let's take, for example, a hospital product like RENFLEXIS, which is the Remicade biosimilar. J&J still has a majority share, but they're losing it every year, and we continue to grow double digit every year. So that's kind of a more linear type of thing that you see going on over time. Where I think where the HADLIMA launch will be, it will be everybody feast or famine. I think within the first 3 to 5 years is where a lot of the value will be retained. And then #10, #11, #12 , #8 that comes in, they'll just have smaller share to buy from. So what's going to happen, price is going to start to get pressured. So I would imagine by year 10, yes, I'm thinking probably it ranges anywhere between 50% to 80%.

Got it. By year 10, 50% to 80% erosion. Okay. Got it. And hence, no necessarily not a high priority to renegotiate that 10-year term with Samsung?

Not in -- my focus is all on getting new assets. There's so many that are going off patent soon that we need to get a hold of.

Makes sense. Okay. Excellent. And then perhaps the China business, quick comment there. How are things looking? Should we assume that the retail will stay reasonably stable?

Yes. The retail sector has been growing double digit for us every year, strong double-digit growth for us every year. It represents about 50% of our overall established brand business today, which is about 85%, 90% of the business there is established brands. And we started that unit or let's call it, that group of people in 2017. So we've been at this for some time when I was running the international business, including China. We saw that kind of coming down the pipe. So we're very confident that 2022 will be a year where we see the remaining products kind of going through the volume-based procurement. And by 2023, will be up and running, and you can see some pretty robust growth coming out of China. But even so, if you look back, a number of assets have gone through the volume-based procurement. We haven't declined, essentially been able to stabilize the business because of the offset of the growth in retail.

Got it. Got it. And there's no more rumblings or anything that the retail segment could get jinxed in China anytime soon?

No, not so far. I think that the Chinese government is very focused on where they're spending their money, which is in the hospital sector. And there's about 380 million people or maybe even more now that are in the middle term or middle class in China that want more convenience, more access to be able to get what they need when they want it. Telemedicine is starting to emerge in China. So there's a lot of changes ongoing in the health care sector.

Got it. Okay. Makes sense. And in terms of just the launch opportunity as we roll the cards into next year. I feel like you mentioned NASONEX OTC in Russia, et cetera. Could you maybe remind us what the opportunities are? And also maybe frame for us what the opportunity looks like because NASONEX in Russia, if you ask me to guess, I don't know if I'll have a good guess.

Well, funny enough the OTC business in general, the OTC segment in China -- in Russia is something like the second, I believe, are the third largest OTC segment in the world. Russia, just that's the way it tends to work. We think that NASONEX can be a really nice contributor to our overall business in Russia, we still have to assess how big of a business it's going to be. But these are just examples of some of the launches that we're doing in terms of life cycle management, geographic expansion into launches that we hadn't had before. Bringing back, repatriating businesses from certain partnerships that we think could do better in our hands. Working on life cycle management opportunities like the 5-year indication, like the launch of a number of other assets in the U.S. So these are just part and parcel of what's going on. But the main thing to keep your focus on is 2 things. One is, can we bring the women's health business back to really growing? And I think if NEXPLANON in the U.S. is any proxy, we feel very good about that. We're already seeing really robust growth of our fertility franchise around the world. Second thing is, can we make the right decisions on the BD front, both near term midterm and early stage? You had a chance to talk to one of the CEOs, I think, that -- of the company that we're planning to acquire Forendo. We feel really excited about some of the things that we've done in the -- over the last 6 months in terms of some of the assets we bring in, and we're going to do more over the coming period of time.

Kevin, I have to ask you since you just said it. You said I have the opportunity to talk to one of the CEOs that you guys are in conversation with. It sounds like there's multiple acquisitions I hear in conversation with.

Well, we are in conversations with a number of companies right now. And again, like I said, we're going to have a very balanced view to our BD. First deal we did, it's commercialized. It's working in the U.S. Second, third deals we did we're early stage. The deals to come, we'll probably be more focused on mid- to late stage. And so we're going to be very balanced in the way that we approach the use of capital.

Got it. It sounds like you see opportunities in women's health space from an acquisition perspective.

We do. We do.

Excellent. And maybe just spending the last 5 to 10 minutes on Forendo then. Kevin, when I look through the data and I look through sort of the opportunity and the lack of competitiveness. It seems like the exact area where pharma just doesn't spend a lot of time. So there's much more opportunity from that perspective. But when I sort of step back from having looked at the data and having thought about indications and everything and just thinking about something very basic, which is Forendo ran the trial. And then they kind of like waited for 12 to 18 months to try to partner it off. I just -- I feel like programs that come in with a lot of steam, they move forward, irrespective of partnership discussions. So I struggle to reconcile those 2 things. Or maybe it's just a very European thing, and they were going step by step and COVID happened and then everybody just went home.

I think like you heard from Risto that COVID was a real issue because the U.K. was one of their tests or rather their clinical sites that just stopped in terms of their ability to continue to recruit more patients into the Phase I studies. Secondly, clearly, they were looking for partnerships in order to be able to get resurgence of investment so that they can continue to do the studies. We came along at the right time in order to be able to say, hey, look, we'll be your partner here and take this asset forward. But I mean, look, I mean, we have looked at this asset since the 2021 JPMorgan Conference of last January. And we've looked at it from a number of different perspectives. We think there's a lot of potential and a lot of promise in the mechanism and what we're trying to do in terms of tissue specificity in regards to the delivery of medication.

Sorry. Can you expand on that a bit more?

Like, for example, you're looking at a product that essentially is focused on the endometrium in terms of the endometrial tissues as opposed to being systemic in the way that we approach -- the way that you approach treating endometriosis.

Got it. Okay. That makes a lot of sense. Anything off of efficacy and safety you're in a position to discuss on Forendo right now?

Well, whenever we get the data that we can feel comfortable about talking publicly. I'll be sure you'll be one of the first people to know because I know that you've taken a special interest in really kind of understanding this mechanism and this acquisition, but we'll let you know. Right now nothing more than we were able to share with you earlier or rather what they shared.

Got it. And in terms of clinical development speed and plans around that, could you just expand on that?

Yes, we're definitely looking at that. One of the promises of having a company like Organon is that we weren't going to necessarily operate in the same construct as say, Big Pharma does, that we're willing to be able to fail fast if that needs to be in order so that basically, we can move our programs along in a much faster space. I'm not here to tell you that exactly where -- what we're doing right now. But we're definitely -- that is a hot topic for all of us to talk about in terms of our development pacing.

Outstanding. Maybe just some conclusion that, Matt, let me just ask you. I know we went through sort of all things Organon. But in the end, I will only get 1 question from investors sorry, what did the sale on margins? So I'll just let you say that in a very direct way so I can repeat that.

So Q3 margins were very strong. They benefited from the fact that we're still ramping up into our long-term OpEx structure and that we will be adding to R&D expense to drive revenue growth in the future. And those investments to drive that sustainable revenue growth do -- will cover the expense of the strong margins we recorded in Q3, but investors should expect that we'll be delivering transparent guidance in early '22 on what the '22 fiscal year will look like.

And sorry, Matt, most of the other aspect? I remember you had said 2 aspects. One was R&D growth into 2022 and the other was just the COGS inflation?

The other was the notion that when we separated from Merck, we didn't have all of the personnel in place. We still had over 1,000 people to hire to get to our pre-spin operating expense structure that we had forecasted. And the timing of that has just gotten a little bit slower than we had forecasted. That's what led to the expanded margins in Q3. But ultimately, we will get there. And the '22 numbers that we'll be posting will be very much indicative of what the company's long-term OpEx structure would look like. And from that, we can then talk about margin expansion.

I guess maybe just so we're all clear then. Just so we're all clear then, Matt. Your entire SG&A is about, I don't know, $1.5 billion, $1.6 billion in that range. And 1,000 people is probably lower than $20 million worth of an impact. So am I on the right path there?

Yes. Those -- that's about right, Umer. But I think the important thing to appreciate about what our management team is going through right now is we are trying to stand up the company, complete the separation from Merck, close out all of the TSAs that are part of the various transition service agreements that we have. And so that will be occupying a considerable amount of management effort here over the next 1.5 years or so. So just something the investors should be aware of also.

Okay. Got it. So clearly, no margin expansion, perhaps there might be some margin year-over-year headwinds because of the 2 things you laid out and then you'll quantify what they are in factor.

Yes. Just to provide some goalposts, and we spoke to some of this in the Q3 earnings call. You can back -- investors get back into the math of what our Q4 EBITDA margin is. And our guidance for the fourth quarter is on the conservative side. And then you can look at what we've guided to for the full year. And part of the discussion we had in the Q3 earnings call was that our '22 margins would be likely to be somewhere in the middle of those 2 goalposts, and we're finalizing our budget now, but I think that information should be very helpful to investors as they're thinking about putting pencils to paper on the '22 model, at least in advance of the company coming out with its guidance.

So slightly lower margin, but EBITDA in absolute dollar is probably stable, fair statement on that?

It looks like that could be the case.

Excellent. That is super, super clear. Thank you so much.

Pleasure.

Thank you, Umer.

Fantastic, guys. Thank you again.

Thanks, everyone.