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

Okay. Good morning. Welcome to the 34th Annual Piper Sandler Healthcare Conference. I'm David Amsellem from the specialty pharma team, Eric Piper. Our next company, fireside chat is Organon and we're delighted to have Kevin Ali, CEO and Matt Walsh, CFO. Thanks so much for joining us and lots to talk about. So, let's just dive right in if that's okay.

Sure.

So, I like to start off with a couple of high level questions. And the first is, as we move into '23 -- and I know you get this a lot, what are your biggest priorities in terms of BD M&A? More specifically, is the goal to bolster the pipeline or a commercial stage assets or mix of both? And the reason I started there is, I guess, it's something that you've talked about a lot on in previous conferences, in previous calls. Obviously, lots to talk about with the business but I think that would be a good place to start.

Sure. Well, we said it a number of times, David, that we're taking kind of a balanced approach to BD where, you know, we're focused on being a leader in women's health as a focus of the vision for the company. And so we've done some -- we've actually done 7 deals since the start of this company a little over 18 months ago, or 18 months ago. And so, the focus is some early stage assets that have absolutely blockbuster potential, which I'm sure we'll talk about them in a few minutes. And some kind of, you know, mid ready to launch assets, as well as some commercialized assets. So, across the spectrum, we're looking for a balanced view in order to be able to kind of prop up our overall revenue lines as well as our -- get things as creative as possible, as quickly as possible in our hands. So essentially, that's the way that we're approaching it.

All right, that's helpful. So, given the rate environment and your past commentary regarding the credit rating, what's your appetite for a larger transaction or what I would call something, perhaps, transformational?

Well, so we've had good success out of the gate with the smaller deals that we've been doing. We're not specifically targeting larger deals, David, but if we came upon one that was very strategic, very -- it fills a gap that we think we need to fill, we wouldn't hesitate. We are committed to our BB rating. We do have a lot of flexibility within that rating. And so in our discussions with the agencies, you know, they could see us taking on leverage to do a larger deal like that, taking it up into the mid 4s, provided we provide -- provided that we also communicated a trajectory to get that leverage down below 4 within about 24 months. So with that kind of flexibility, we could certainly do something larger if the opportunity presents itself.

And then one more question on BD M&A before we move on other topics.

Sure.

So you've talked about further bolstering the women's health segment and we're going to go into more specifics on the women's health vertical. But you've commented in the past, this was closer to the spin from Merck that there are other disease categories that, I'm going to use your phrase, disproportionately impact women that could be of interest. So can you elaborate on that and what that might look like?

Well, look, right now we're focused primarily on those conditions uniquely affecting women. At the same time, we're also using our capital to expand our biosimilar partnerships as well. We've done that as well. And we're -- by the way, we're not completely ignoring the established brands business either. There's potentially -- we're very opportunistic in that space as well. It's reacted very, very well over the period of time that we've had these products. So I would tell you this that, we're going to be focusing. We've still got some room to grow in terms of potential partnerships, acquisitions of the like, with those conditions unique to women. But if we start to open the aperture a bit, as you're kind of saying to those conditions disproportionately impacting women. Then we'll be very opportunistic, because here's the thing. We have a global structure. We're clearly up. We've got the same footprint as big pharma does. We're in almost 60 markets, can reach about 140, primarily built around the women's health area. So for example, if we bring things that are outside of that, say, another therapeutic areas like in neurology or in other specialty diseases, then we'd have to actually be very thoughtful in terms of what type of expense that we wouldn't necessarily need to bring to that opportunity in order to be able to fully utilize that or fully leverage it. So for right now, we're focusing on the OB/GYN area, especially in the U.S. But again, we've got opportunities in biosimilars established brands and then occasionally, we'll be very opportunistic in those conditions. I'll give you some. Like, for example, migraine, osteoporosis, celiac disease, a number of others that -- menopause symptoms -- well, not menopause symptom, but osteoporosis would be the ones that would be -- come to mind.

Makes sense. That's helpful. So let's talk about margins. I'm sure this is a topic that comes up a lot in your meetings and I get a lot of questions on it. So on the third quarter cycle, you bumped up your EBITDA margin guidance for '22. Can you talk about the drivers of that? And that sort of leads me to the next part of the question, which is what you're thinking for '23? And specifically, EBITDA margin guidance and what -- how we should think about the trajectory of EBITDA margins for next year?

Yes. So, we'll start with the more targeted questions first. So, we did raise our EBITDA margin guidance for the year. That was largely based on year-to-date favorability. And I'm really focused on things that were above the gross margin line. So we had good revenue mix. We had good performance in our manufacturing plants. And so based on the year-to-date, favorability of 9 months it made sense, given the short window for the rest of the year, that we felt comfortable raising it. But stepping back now -- and we've been communicating for some time that as of the spin, we had a portfolio of products that we were very competent, could grow low to mid-single digits for the next 5 years. But beyond that, that growth starts -- it starts to trail off. And so we've been focused on putting in place the capabilities and the pipeline to be able to deliver revenue growth beyond the 5-year horizon after the spin. So that required reinvestment in the business, and we see it happening in 2 ways. An obviously, of course, it would be the R&D line as we bring in new molecules like ebopiprant and the acquisition of Forendo and the 6219. But we also have commercial stage assets. So, the reacquisition of the rights to Marvelon and Mercilon in the Asian countries from Bayer, XACIATO which will launch sometime here in the first half of 2023, those sort of reinvestment expenses show up on the SG&A line. And so shareholders are getting something for the lower margins that we're asking them to accept, because it's all reinvestment in revenue growth beyond 2025.

And part of that SG&A is -- and I know we'll come to this later, but part of that SG&A is also support of NEXPLANON or additional support if NEXPLANON, is that right?

Yes, I would say it's -- we've significantly increased our efforts in promotional activity, training of physicians. So we've certainly upped that expense for NEXPLANON which is a terrific product, unique in its class as a LARC, and implantable LARC. And so that product has a lot of runway, both in the U.S. and globally.

So it's fair to say that 2023 is going to be something of an investment year when you think about R&D, and when you think about promote -- overall promotional spend. I mean, every year is an investment year if we think about it. But I mean, '23 in particular, was that the right way to think about it?

Yes. And we were -- we've been trying to communicate to investors even before the spin as to what would be the composition of that reinvestment and as it's got more clear what the impact would be on margins, we've been trying to communicate that as well. So, in the last earnings call in our prepared commentary, and there were some Q&A around it as well, we had told people to expect directionally speaking, because we're not through our budget process yet, but directionally speaking we could see margins lining out next year at about where the second half average EBITDA margins were for this year. So if you're doing that math, it's a little bit over 31% EBITDA margins for the company in the new way that companies like ours are required to report adjusted EBITDA, embedding all of the in process R&D and milestones. So that's an inclusive number, but that's what we've been directionally encouraging people to think and we'll provide formal guidance sometime in early 2023.

Okay. I want to move on to established brands, it's at a high level here. And bearing in mind that vast majority are ex-U.S. Why did these products tend to be sticky? Investors and analysts, this is more of a statement, tend to struggle with how to model these products in the absence of losses of exclusivities. So, help us understand what erosion would look like longer term if there's erosion at all.

Yes, and I think that was one of the biggest sticky points that we needed to get over at the time of spin. To try to convince investors that this large piece of business that represents about 60% of our overall revenue base, and really good margins -- consolidated margins, was going to stabilize, because historically, they were declining pretty fast. And the thesis was that these products, in a different set of hands on investment and focus on senior management attention, would stabilize. Now, that was the original thesis. And why was I kind of so confident about it? Because I was the one who was running all of the ex-U.S. business for Merck prior to the spin. So I knew these products well. I grew up with them. I knew what I had done to them or rather not done to them, which is essentially use them as cash cows to reinvest in KEYTRUDA and all the other things that we're doing. So, I knew with some investments that these products would do well. Now, fast forward now, a 1.5 year later, what's happened? This year will actually show some growth to this portfolio. And that has thrown a wrench in the system, because it's hard for people to -- how come you guys are different from everyone else? Well, first of all, there are no additional LOEs. We've kind of washed through most of the LOEs. So that's no longer an anchor on us. Second of all, we've had some nice tailwind this year. We've had companies in Japan in the generic space that have kind of had quality issues. We've had strong AR seasons or kind of seasonal allergy seasons for respiratory. We've had good performance in our cardiovascular brands across the world. And so as a result of that some of those tailwinds have kind of taken it from, what we've kind of said is, a long-term view of flattish to actually growing this year. And that is, to me, it kind of proves the point of what I originally said before the spin. This business will generate the oxygen for us to continually reinvest in our business development portfolio, in our pipeline that it can stabilize. And so much of it is significantly outside of the U.S., like 90% plus is outside of the U.S. These are out of pocket markets. These are markets like the old emerging markets that we used to know, right, so -- including China, by the way, where people pay for quality because they don't trust local brands. People are willing to pay out of pocket for products that they've come to know that have kind of an iconic nature to them, in the sense of people know what SINGULAIR is, and Arcoxia and so on and so forth. And so as a result of that, we are kind of guiding for this group of products, very important for us, flattish performance over the coming period of time. Some years like this year, we'll get lucky. We'll see some low single digit growth. Couple of years, we may see some small declines, and then one year, we'll see just very flat performance. So overall, it's just going to be a very flat, but that's a big achievement, considering what others are kind of having to deal with in this space.

Well, they're off patent, so…

Yes. Exactly.

You mentioned China, and that's an area where there's been a lot of focus. So volume based procurement is something that comes up and we've had multiple rounds. So you haven't had a lot of impact this year. What should '23 look like relative to '22 in terms of VBP impacts?

Yes. So, so far, we've gone through 6 rounds of VBP in China, but not one year did we actually decline as a business. And that is for a simple reason that in 2017, when actually I was running those markets, we decided to put money into establishing a retail sales channel. And that retail sales channel is now about -- represents about 40%, 45% of our overall -- growing almost 50% of our overall established brands businesses going through the retail channel and it's growing double digit. So, it's been able to kind of offset in the first 6 tranches of the volume based procurement issues that have kind of affected us. Looking forward, as we speak right now, our largest product, cardiovascular product, ezetimibe is now in the Round 7 of the volume based procurement in China. And so as a result of that, next year will be another year where we ultimately get some headwinds going off of what happens with the volume based procurement and overall, the price reduction and volume reduction on that brand. By the end of 2023, nearly 75% -- 3/4 of our business will have gone through the volume based procurement process. In a way, think of it as an LOE process, because it's like 90% or it used to be at 80% of the business across the industry. But now, because of the emergence of the retail sector, because of the emergence of the, kind of, e-commerce in terms of people ordering online, especially with the pandemic people are getting locked down, so ultimately, delivery to the homes. Those type of channels are kind of offsetting what we have -- that's happening in the hospital sector, which is volume based procurement. So once the 75% go through by the end of '23 going forward and '24 and beyond, we expect China to be potentially a low double digit growth business for us because we'll have washed through most of the headwinds.

That's helpful. So I want to move on to women's health and make sure we talk about that. So, NEXPLANON, looking backwards, quite a bit of strength in the third quarter. So, can you just talk about how much of it was recovery as we move away from the pandemic and how much of it is just giving the product the TLC that it needs?

Little bit of both. Although I would say to you, though, one of the troubling facts that I've seen come across my desk is the fact that health visits for women are still below the 2019 pre-pandemic levels. So, it hasn't kind of returned back to normal, the normal state. But what I will say is the following, that there are long queues for -- up to 6 months where women actually get their health checks because it's hard for people -- many of those offices actually went out of -- took a kind of a respite of sorts, and now they're trying to rehire personnel back. So that recovery that we expected post pandemic has not come back as strong because of the fact of all these kinds of structural limitations, but they're coming back slowly. It's really physician demand that's really been driven in the third quarter, at least in the U.S., which represents about 65%, about 2/3 of our businesses in the U.S., 1/3 is outside of the U.S. And that 1/3 outside the U.S., by the way, is growing faster than the U.S. so overall, it's a double digit growing business. But what I will say is that the future looks very bright. Unintended pregnancies continue to hover around 50% in the U.S. And given with the Dobbs decision on what recently took place, especially in what you would consider red states, physicians are very keen about not having an accident happen. And so I think over the long term when you have something like a long acting reversible contraceptives that's easy to insert, takes about one minute to insert like in NEXPLANON and works for 3 years with about 98% efficacy. That is something that I think more and more people, more healthcare providers and patients will be drawn to.

Can you say how many OB/GYNs in the U.S. are trained on the product? And I think Matt, you alluded to training more OB/GYNs. So I guess the question is, how many have you trained and how penetrated are you in terms of training?

Yes. Well, that's a good question, David. You're probably one of the only people who actually asked that. So I got to answer that question, because I came prepared. I knew that -- I knew you're going to ask that question. And it's a good question to ask, because it uncovers something which is. Look there's about half -- there's about 500,000 potential prescribers of contraceptive products in the U.S. that includes OB/GYNs, primary care physicians, even some pediatricians, potentially they're dealing with teenagers, RNs, nurses, PAs. Put all that together, we've probably trained about 200,000 physicians and healthcare providers since -- and about 16,000 year to date, okay. So how come back that's not equaling? Because we've probably got about a prescriber base of about 50,000 in the U.S. Well, here is what happens. There's 2 -- it's kind of a leaky bucket of sorts. If you train someone, if they don't start to insert within, say, the couple of weeks after, it's all about the level of confidence that people feel in terms of being able to administer this product. So, training is an ongoing part of what we do to create more comfort level with actually inserting and removing NEXPLANON. And so as a result of that, I think going forward, what we do is physicians who kind of off and on prescribe NEXPLANON need retraining so that they get more confidence. Physicians who are kind of coming out of medical school, kind of seeing that that's an opportunity coming out of residency and seeing that's an opportunity as a potential area of them being prescribers, they need constant kind of education. So, we'll continue to educate. That's one of the areas as Matt said that we invest in for our overall promotional SCA spend -- SG&A spend, but it is something that is not necessarily one for one. It's not as if you train and you'll get that person as a prescriber. You've got about 50,000 and of those, probably I would venture to guess 10,000, 15,000 are really high, high prescribers. The rest are kind of medium to low prescribers. And it's a leaky bucket. You've got to constantly work to get people more into it.

And obviously, the contraceptive broadly speaking is a massive category, a lot of options.

Yes. Exactly.

So we've got about 4 minutes left. I wanted to skip over to biosimilars and I have to ask about HUMIRA.

Sure.

So, that's obviously on everybody's minds as we moved to 2023. So, how should we think about -- this is broadly speaking, just contribution from the biosim in '23 given how AbbVie appears to be quite competitive on the payer contracting front? Or maybe I'll just ask it another way. What's your view on HUMIRA biosim market formation in the back half of '23?

Here's what's going to happen. By summer of next year, you're going to see probably anywhere between 4 to 6 products that are in the biosimilar space come in to take up the HUMIRA battle. I agree with you. Look, I mean, right now as we speak, some PBMs are getting involved in contracting for 2023 as you might expect. So, I would expect there's going to be a slow ramp up in '23, more opening in '24, and a full open in '25. That's the first thing. So, I am not predicting there's going to be this huge windfall. But you talked about a $20 billion net revenue product, the largest ever to go off patent in the United States. And of course, AbbVie is going to work hard. I would too, in order to be able to retain as much share, but it is going to be something where it's going to get very dynamic. I've met with a number of the top PBMs in the country. And what they're telling me is the following. What they're saying to me is that '23 will be a light ramp, '24 will be definitely much more aggressive, and '25 will be full on. Now the closed systems like the VA, government systems, HMOs like Kaiser, they'll be, I think, more aggressive. That's the way they work. They'll be much more aggressive. They'll be much more -- much greater switch probabilities there. But here's the thing. This is our relationship, our partnership with Samsung. They have been able to do a fabulous job in developing this biosimilar because -- and that's what ultimately the PBMs are telling us. Not all biosimilars are exactly the same. Not all of them have the low concentration and high concentration citrate-free form. We do. Not all of them have real-world evidence. This will be the first country they launch in. We've launched in Europe or rather their partner there launched in Europe, we launched in to Australia, Canada. We've got a lot of experience that we can bring to payers to say, "Here, be comfortable with this in terms of safety and efficacy." The pen device, Samsung is very good at engineering and pen manufacturing. And so the pen device really creates a frictionless experience for patients where actually, they've tested them and patients feel very good about this device. So as a result of that, all of that in total gives us a really good chance that we'll be among the 2 or 3 that are probably chosen because they're not going to go beyond that. There's a lot of training that you need to do. The 2 or 3 that will be chosen to get on formulary to essentially be a biosimilar competitor. But I don't expect a lot of noise. I expect a lot of noise, but I don't expect a lot of shifts in the PBM segment in '23, but you'll start to see it open up in '23…

And you actually answered my next question, which was on how many would get on formulary. So that was helpful. Which sort of leads me speaking of biosims to sort of my next question, which is on in-licensing. So, you did a deal where you in-licensed pertuzumab, denosumab biosims. So, should we expect more of these kind of transactions? And more specifically, is the strategy ultimately to be a commercial partner of choice? I mean is that how we should think about it?

Yes. So we've been -- we are, as you know, a spin-off from Merck. And ultimately, the relationship with Samsung was about 9 years. So I'm the one who actually brought Samsung into Merck, because I saw it as an opportunity. It just took longer for the U.S. to take hold in biosimilar business. So as a result of that, what I'll tell you is this. We did the deal with Henlius for the 2 assets that you talk about, but we've got a third option now on YERVOY, so we will be in the IO segment as well. There's about $100 billion to $150 billion of originator assets coming off patent in the coming 5 to 7 years. So we have developed such a knowhow and experience in the biosimilar segment across the world that we see this as a real nice addition, great revenue generator. And for the kind of return on capital invested, it's pretty good because our SG&A expenses are not significantly proportional for that. You just have to have some key account management. You've got to have some hospital folks pricing. And then you're good to go, you can run. And so ultimately, I think we've developed a skill set that others don't have. We'll use that because I'm not telling you that in 10 years from now, biosimilars are going to be as robust of an opportunity as they are today. But we're right on the cusp of it. And I think for the next 5 to 7 years, it's going to be a really good business to be in.

Okay. Great. Well, we're out of time. I wish we could keep going. Kevin, Matt, thank you for joining us. Thank you to the audience.

Thank you for the invitation. Thank you.