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

Good morning, everybody. I'm Chris Schott at JPMorgan, and it's my pleasure to be hosting a fireside chat this morning with the Organon management team. From the company, we have CEO, Kevin Ali, as well as CFO, Matt Walsh. So Kevin and Matt, Happy New Year, and thanks for joining us this morning.

Thank you.

I thought maybe to kick things off, the company just completed its first full year as a standalone company. And at a high level, I'd love just to hear your thoughts of kind of what's gone well and maybe whether this surprises us as you've stopped the company and operate as an independent entity here?

Well, good morning, Chris, and good to be here. And yes, I think from a high level, what I can say very briefly is the fact that we've been incredibly happy with the performance of our first full year out. We set out to do a few things at the beginning of this journey. First of all, folks didn't really recognize that the established brands business, which is 60% of our overall business, there was an assumption that it would continue to decline. And what we've been able to do, what the team has been able to do, I'm fiercely proud of what they've been able to do is actually stabilize that business. And in this first year, in 2022, we actually saw growth in that franchise. Secondly, we said we were going to grow our strategic pillars by double digit. We grew biosimilars by double-digit rate and we grew our women's health franchise, including fertility, and of course, NEXPLANON, our key product by double digits. So that was actually in the midst of the traditional things that one has to do in spending a company out with all the TSAs and all the nuts and bolts of that. So I'm incredibly proud of what the team has done. And I think that we're well on the way. And of course, now just last week, we announced our 8th deal. So we've done 8 deals in literally 18 months. So we're very serious about ramping up essentially our pipeline, both in terms of early stage, mid-stage and as well commercialized assets. So we're really excited about our pipeline that we've built in a very short period of time. And so we're really thrilled. I think that you mentioned what was unexpected, I guess. I think what was unexpected is I was probably a bit naive to think that you could build Rome in a day. So realizing it does take time, and you do have to be patient, and we're only 1.5 years into it. But we've met every commitment we set in terms of our guidance. Every quarter, we've actually met our guidance and exceeded in many instances, and we're really on track.

Great. I know you've talked about becoming a leader in the women's health space. There's 1 question from investors is why women's health? And why do you think the company can succeed in this vertical when it seems like others have maybe struggled a bit to get the type of traffic they want here?

We know they say that timing is everything. And I tell you right now, if it was 5 or 10 years ago, I probably wouldn't have decided to go in the direction of women's health. But so much of what we do in this industry is contingent upon what's available in the R&D space. And so over the last 5 to 10 years, there's been some really interesting developments, a lot of grass -- green shoots kind of popping up all over the place and not only in the U.S., but in Europe, which we've done a number of deals as well as the Asia Pacific region. So there's been more emphasis put on the R&D area. Secondly, there's no other company in the world today that actually focuses on being a women's health leader. So being in that space, we're actually kind of -- we're magnetizing it. So a lot of the folks that are working around the world on some early stage, mid-stage and late-stage assets are coming to us now because we've kind of stimulated. We've kind of catalyzed the whole area of women's health. And the timing is right. I mean societally, the timing is right. And the focus on the fact that the R&D efforts around women's health have been woefully underfunded, I mean I don't want to go into the statistics of it in terms of what you see in terms of what's being approved year-by-year, but really, really a lot of need, a huge amount of gaps and a great amount of opportunity for us to kind of step into that space and take a leadership role.

So if I think about where others have struggled, was it the lack of pipeline? Is that -- was that -- do you think the -- or is it just more that it wasn't as focused and it was just kind of disparate assets?

Yes. I think if you're -- so I'll look at it this way. If you're a large company, a large pharma company, which many of us came, as all of you know, as a spinout from Merck. If you're a large company, a $300 million to $400 million to $600 million peak revenue business is not going to get you out of bed really. But for a $6.5 billion business, a number of $300 million to $400 million assets start to become very material and actually can become transformative for us. So those assets -- so if you're a large company, the reason that they weren't really enthusiastic because they didn't see the multibillion-dollar opportunities and everybody, of course, started to migrate towards where currently, they're migrating in terms of oncology or for another CNS and other areas. So that's one aspect. The second aspect, if you're a small company, you probably didn't have what we have, which is a base of business like the established brands business and the biosimilar business, that sheds off a lot of cash. I mean our free cash flow every year provides us an opportunity to do meaningful business development. As I've said, we've done 8 deals. So we can be an aggregator of these assets. And finally, because there's not a rush from large pharma to get in there, valuations are reasonable. So we can actually start to do more in that space. And so as a result of that, I would say, if you're a small company, you don't have our global footprint. We're in -- we're just like big pharma. We're in 60 markets across the world. You may not have essentially other parts of the business that can fund that journey. If you're a large cap pharma, you're not really interested in $400 million or $500 million business. So that's a kind of a nice niche that we've been able to build for ourselves.

Great. I think you mentioned double-digit growth in '22. I guess we think about he women's health business for '23, do you think the portfolio is positioned for another year of double-digit growth. And as part of that, is it coming from the core assets? Or do we start to think about BD being or some of the recently acquired and in-licensed products being a bigger contributor?

Yes. So I'll answer that, Chris, in 2 ways. First is that double-digit growth has been essentially what we've been experiencing with our women's health franchise. Specifically, if I split it out between our fertility franchise, which we consider a double-digit growth therapeutic area for years to come because just the need is so incredibly great. And there's not a lot of companies in that space. It's just us and 2 other companies that will really kind of dominate or rather 85% share of that space. If I look at our biggest product, NEXPLANON, we're on track to be a $1 billion product in 2025 for NEXPLANON. And we've got essentially patent protection until 2027 with the opportunity to stretch it out to 2029, 2030 with a life cycle management opportunity we're pursuing right now, which we feel is highly likely of actually giving us an opportunity to stretch it that far. This will be a $1 billion franchise. It's our first $1 billion franchise with good runway in terms of patent protection. So what I would say is, yes, we're going to be seeing consistently strong growth momentum from our women's health franchise. Now that's organically. The inorganic acquisitions that we've made the Jada System, which is doing exceptionally well, we'll start reporting out on the performance of Jada this year in 2023. We're going to be launching XACIATO, which is our partnership with Daré for bacterial vaginosis, that's going to be a nice little addition, maybe not in '23, but in '24 and '25, you'll start to see more contribution. And then, of course, our earlier-stage assets are really starting to be very nice. Our Forendo acquisition, which gave us an opportunity for a new mechanism of action in endometriosis, 6219 -- OG-6219 has actually started Phase II, first patient in, in October of last year. So we expect to report out our data probably in the 2024 time frame for our Phase II data. This is a completely new mechanism of action, has tremendous growth opportunities. If we -- that comes to the market in the 2028, 2029 time frame, it's going to be a major, major contributor for our future. So growth is really going to be there. What I would consistently say to you, Chris, is our baseline business of established brands will continue to be a stable business. Nobody thought we could do that -- and now it's stabilized. It's actually growing this year. Our 2 growth momentums of biosimilars, which we've added more to that franchise as well as women's health will continue to grow double digit. Women's health will -- NEXPLANON will be a $1 billion product in 2025. So overall, when you start to feather in all of these BD activities we're doing, we're signaling low to mid-single digit growth. Actually, it's more mid-single digit growth right now that we see kind of coming up in the years to come, start to feather all that stuff in and you start to see the opportunities exist to start to really accelerate growth.

Yes. Great. You mentioned biosimilars kind of their growth pillar here. Just talk about how, I guess, strategic that franchise is to organize to Organon, because I feel like the strategy now, you've got a number of partnerships. So does -- at some point, does it make sense to more vertically integrate, how core is this to the business? Just help us a little bit on that.

Well, we started out Organon as being essentially a value-added partner, a commercial partner, access partner, pricing partner, government affairs partner, regulatory partner, to a number of developers. Our first relationship really was transferred over from Merck, which is a Samsung relationship that gave us 5 assets. Subsequent to that, in the last year, we actually did a deal with Henlius a very well-known biotech company that does biosimilars in China, that has done international work already for biosimilar Prolia and Perjeta and now basically an option to do a deal with them for YERVOY. So we're starting to expand, obviously, in different areas. It's very strategic. I can tell you why because if you're vertically integrated, you may miss the most important point, which is that -- in order to participate and compete and succeed in biosimilars, you've got to be first, second or third. You've got to be in that first tranche of launches. If you miss that window, it gets to be much more difficult to succeed in the biosimilar space. So by being a value-added partner, we can pick who we want to partner up with based on our due diligence to better understand where they're launching. How -- are they going to be in the first tranche or not? That's first. Secondly, I really don't know what the biosimilar business is going to be in the next decade. After you get the IOs after the KEYTRUDAs and OPDIVOs and all the others start to see the biosimilars introductions, what happens beyond that? So that's why I'd say it's a really good strategy for contribution to growth now. And on a return on invested capital is very good because we don't invest a lot of expenses on it. But for the future, we'll have to see. But by that time, we hope and we feel very confident that our -- the introductions that we have with our women's health business will take us continuing going forward.

So the strategy kind of maximize your optionality, Yes. I know we've had a lot of conversation at this conference around biosimilar Humira. It's kind of a big opportunity. So we'd love to hear your thoughts about how you see this market developing as we go through 2023 and beyond.

Well, any meeting would not be complete without a question on Humira biosimilar. So yes, we are actually in the first tranche with our Samsung partners. And the first tranche of launches, we'll be launching next summer -- this summer, actually, with a few others. When you look at the U.S. market, you've got to basically say, this is a pharmacy benefit product. So what's going on with the PBMs? And essentially, as I meet with PBMs, what I understand from their point of view is put rebate structure, put pricing aside for a moment. Just talk to us about what are your needs. A, do you have high concentration citrate-free? And by the way, do you have a low concentration doses? well, we do, so check that box. B, is this the first country you're launching your biosimilar? Or have you actually had real-world evidence so that we know it's safe and tolerable in other populations of use. Check, because we've actually launched it in Canada and in Australia and Samsung is through their partnership with Biogen has launched it in Europe. So we've got plenty of safety data. Three, do you have a manufacturing network that can satisfy whatever demand we throw at you because it could be huge volumes you're talking about. Samsung happens -- rather Samsung happens to be one of the largest, if not the largest toll manufacturer in the world for biologics. So check that box on. Four, do you -- what's your pen device like? Because we like to use the word frictionless. Is it easy? Is it elegant? And Samsung has got a long heritage in device manufacturing. And so it's a fantastic device as well. And finally, where are you in terms of interchangeability? When is that indication coming? So as you start to check off all the boxes and you realize many of the other competitors may check 2 or 3, but not all of them, you start to realize that you're very strong -- in a strong position to do 1 very important thing. Most PBMs will have 1, 2, 3 maximum biosimilars on formulary, plus the originator. You need -- in 2023 -- in the second half of 2023, when you're going to see a lot of launches, you need to be 1 of those 2 or 3. And then when the dust settles in '24, you'll be able to see, okay, who's going to win this race. So we're in a good position.

Can I ask just when I think about '23, it does seem like AbbVie has locked up quite a bit of formulary access that's effectively parity to a biosimilar, should we think about this being an interesting commercial market this year? Or is it more '24 and beyond the sales opportunity?

I would guess it will be more in '24 and beyond. I think this year, most PBMs will go to parity. So if you're a physician, you're -- if you've got parity, which means you can pick whatever you want, they'll go with their knee-jerk reaction, which is HUMIRA. But going forward, as things start to change in the marketplace, and I can tell you what I -- when I meet with PBMs, they want biosimilars for succeeding. They don't want to see a future where originators essentially evergreen the field, in terms of continuing to do that. So if you're talking about a $20 billion, the largest LOE in the history of the pharma industry, a $20 billion net revenue in the U.S., going from $20 billion to, say, $4 billion or $3 billion, right? Then it starts to become less interesting probably for the originator because you're getting a lot of pressure on the price. So '23, I think, will be a slow ramp-up year with really focused on formulary inclusion, '24 and '25 will open up.

And with those initial formulary kind of decisions, do you expect those to be fairly sticky? So if you're kind of there at the start, it's kind of almost like your business to lose going forward when the volume comes around? Or could we see as more changes as we go forward?

That's a great question. I think it depends on 2 things. One is, it depends on the PBM's appetite to reeducate physicians on how to use the pen device and what to look for and all the things associated with that biosimilar. But secondly, what it depends on is what kind of discounts are provided in the early stage? And is the PBM going to shift for 1 or 2 percentage points? And probably not because if they're comfortable, they'll settle in, in terms of when you're meeting their criteria in terms of the kind of discounts that you're getting.

And maybe the final question is, I think you've mentioned that market compression over time, just thoughts in general of where pricing or what kind of TAM we ultimately kind of pursuing here for the industry? For the biosimilar, yes. So look, we all know the branded sales, but what's the kind of really like the biosimilar opportunity you're going to be...

I think by my view, and this is just number 1. I think by 2025, 2026, you might range anywhere between 80% and 90% discounts potentially.

Just given all the players involved?

Yes. I think that's just a natural course of events.

Yes. Okay. Perfect. Maybe going over to the established brands division. I think as you kind of talked about earlier, I think you were originally talking about this as a business that could erode over time. Looking at 2022, obviously, a lot better performance there. Can you talk about just what's driven the strength in that business so far and maybe what we can expect in 2023 from the franchise?

Well, I wish I could give you on the established brands business, which is, again, 60% of our base of our business. I wish I could give you some nuggets to say, if you do these 3 things and you have these kind of global products you'll succeed with established brands, where others have not because most of the others have actually continued to decline. What I can tell you is the following. We don't have, in our portfolio of established brands, any commoditized generics, which are -- these are the originals. These are the original products like SINGULAIR or others like PROSCAR or Arcoxia and others. These are the original products that have gone off patent. In many countries outside of the U.S. that will be China, parts of the emerging markets, of course, Southern Europe they still have a tremendous kind of value for patients. And it ranges from completely out of pocket, like, for example, what's starting to emerge now in China, all the way to kind of higher co-pays in Southern Europe, but people will go for it. Now the second point is you really have to have an incredibly entrepreneurial group in each country because I can tell you, across the world, in all the subsidiaries we have in the 60 countries we actively participate in, no one country is like the other in terms of the contribution of the portfolio. That tells you that folks are looking under every stone to drive this business. We took a business, and again, as I said, I'm fiercely proud of what they've been able to do, we took a business that was in double-digit decline and now it's single-digit growth year-to-date through Q3. So when I signaled to the investment community that the long-term aspect and people were kind of shaking their heads, long-term forecast for this part of the business, and it's important because this throws off a lot of cash that we can reinvest. It provides oxygen so that we can reinvest in women's health and some biosimilar business is that it will be a stable business. So 1 year, we might grow by 5%. 1 year, we might decline by 2%. Next year, we might be 0%. The next year, we might be 1%. Put a line through it, put a regression line through it and you see, "Oh, that's a flat business." Once you establish that, that's a stable business that throws off -- good margin business throws off a lot of cash, then you can start to say, okay, now I can start to look at other -- their growth aspirations. Because they don't have this leaky bucket that's driving everything down. It's anchoring their business. So I think so far, what I understand from investors and a number of other analysts, I think they are starting to believe that this is a stable business. Somehow something going on different at Organon, where they've been able to do this.

Yes, absolutely. And I guess in that context, I mean, the growth you've seen year-to-date, it does seem directionally the business is trending at a good place. Should we think of there being anything that was particularly strong this year that might be harder to replicate next year?

Yes, there was a couple of onetime benefits, tailwinds in Japan. They had a number of generics that were withdrawn because of quality issues. The Japanese regulatory authorities are very conservative. So I don't know if some of them may not come back, some of them may. So that tailwind will decrease, but it still might -- a little bit of it might be there. We had a delay of a launch of an inhaled product, the DULERA in the U.S. Generic didn't show up. So essentially, we had the benefit of that. We had a couple of other kind of onetime benefits that helped us. VBP which is essentially the volume-based procurement process in China, that's their way of kind of rationalizing price and moving forward in the public sector, didn't happen, the round that we thought when it's supposed to happen. So it just happened round 7 in October of last year. So now we're starting to get back into kind of the normal routine of things. So going forward, what I can tell you is it's a flattish business.

Okay. Okay, great. You mentioned China. I know it's an important geography for this business. Can you just talk about what COVID shutdowns have meant to that kind of, I guess, region or country? And as we think about reopening, is that a tailwind for...

I think it will be. I can tell you that, Chris, that over the years where other competitors have had these huge products, the Lipitors of the world, and $1 billion product franchises in China, they got just massacred, where essentially, we're very diversified. There's no single product in China that represents more than 15% of our business. So each round, I think we're up to around 7 now. We finished in the rounds of VBP, we've had something happen. So currently, 50% of our business has gone through by the end of this year and '23, 75% of our products will have gone through. In the meantime, in 2017, actually, we started -- at that time when I was at Merck, we started kind of a retail business unit because we saw that there was things happening in retail sector, activity happening. And now the retail sector represents 50% of our business, growing double digit, and that's been able to offset many of these kind of hits that we've had from volume-based procurement. Through 2023, we'll still face some downfall, but not in a single year have we ever declined in China. So once we pass through '23 and we start to go to '24, we'll have gone through most of the kind of the leaky bucket of sorts. And we'll move on to really more solid growth.

Okay. Perfect. And you mentioned VBP, some impact this year. Can you just help quantify what products and maybe the size and scale of those they are hitting this year?