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

Good afternoon, everybody. I'm Chris Schott from JPMorgan, and it's my pleasure to be hosting this fireside chat with the Organon management team. From the company, we have CEO, Kevin Ali; as well as CFO, Matt Walsh. Kevin and Matt, Happy New Year. Thanks for joining us. Yes. And looking forward to the conversation today. So I thought, Kevin, maybe just to kick off, would be interested in just some of your bigger picture thoughts on the business as we head into 2025 and then lots of different directions we can jump into from there.

Well, I'd be remiss not to say that we've had a really solid 2024. We were able to really kind of execute on all the many things that we wanted to do, namely NEXPLANON, which is our core product that we were able to grow, I think, this year, you saw end of Q3 was about 15% growth, both inside -- cumulative, both inside the U.S. as well as ex U.S. So a really strong year for NEXPLANON, our most important product. And overall, I think just a really solid year in terms of performance that I can see across the board in many different areas. BD, we did the Emgality deal with Lilly, which on a 3 quarter of year basis last -- this 2024 is probably going to deliver somewhere around $100 million. So it's been very good, and they were so happy with it. They actually signed us up for a number of other territories, including the emerging markets. So that will also be adding in for 2025. And as we start to turn our attention towards the end of 2024, we, of course, made the biggest business development deal we've done to date, which is the acquisition of Dermavant. And we were really fortunate enough that Dermavant delivered, I think, a really nice product for us where the FDA approved just a few weeks ago, the atopic dermatitis indication, and we're really happy with that label. So as we start to exit 2024, and we start to look at 2025, the most important thing to know is that as we go into 2025, we're kind of focusing on dealing with essentially a loss of exclusivity event for Atozet, which is our second largest product. And that Atozet LOE is essentially happening in many parts of Europe as well as in Japan. And so our vision right now is to essentially offset, do our best to offset that LOE event in 2025 and this year through the process of continuing growth of our key product, NEXPLANON, drive high single-digit growth of fertility, continue to grow, obviously, VTAMA now where we can have a nice discussion about what the future of VTAMA looks like and the whole dermatology vertical that we're building now. As well as continued growth of Hadlima, continued growth of Jada. And so a lot of the new products are really growing well. So it kind of tells you that we've been, I think, very prudent and smart in the way that we've done business development in order to bring in assets that can take us through these LOE periods. And then going forward into 2026, it's going to be really a great period of time for the company because LOEs only happen once and that is the last of the LOEs for -- essentially for the established brands. we're looking good.

Yes. Yes. Excellent. Maybe just jumping into VTAMA. Would love to just elaborate a little bit more on how you're thinking about competitive positioning here, what that looks like in atopic derm versus psoriasis and how we think about that rollout this year?

I think a lot of folks were disappointed with VTAMA because there was all this estimation that it's going to be a $1 billion business for psoriasis and a $1 billion business for atopic dermatitis. And actually, I'm quite relieved that they are. Because if it was going to look like a $1 billion business for psoriasis, I wouldn't have gotten the deal that we got for VTAMA in terms of being able to acquire Dermavant. So look, psoriasis is a very well saturated and satisfied market. We've got 14 biologics that are approved, very good efficacy. You've got topicals as well. And we actually had very good penetration within the topical segment within psoriasis. It's somewhere around -- we'll finish the year in 2024 around between $70 million and $80 million-ish type of business. The real opportunity is atopic dermatitis because there's only one biologic approved, which you know Dupixent. But with this new indication, the label is exceptional, and I'll tell you why. You're talking about 20 million patients in the United States alone that suffer from eczema, atopic dermatitis, 10 million of them being pediatrics, 10 million being adults. There's very little in the pediatric space. And look what's come out from the new label from the FDA for atopic dermatitis, we're talking about indicated from the years -- 2 years of age and above. We're talking about indicated for mild, moderate and severe. No other topical has that. We're talking about a product that has no black box warning, no drug-drug interaction, very few in terms of safety and precaution information. You're talking about a product that has an EASI score of nearly 75, which basically says it is as effective as a systemic. And you're talking about a product that has no limitation on usage or body surface, perfect agent to be using for the pediatric population as well as for the adult population. So right now, what we're seeing is we're only 2 weeks in. But I'm looking at the TRx levels, right? With the week ending January 3, and usually what happens in the period of holidays is you get a drop-off with most of the TRxs. And you see for ZORYVE, Eucrisa, for Opzelura, there's about an 18% to 20% reduction in TRx. It's flat for us. So it kind of tells you that there's a real robust opportunity there. And feedback that we're getting from the field is that this is going to be a breakthrough product for the pediatric population because they really don't have much to use in that space.

Help us a little bit just understand how you think about the ramp. It sounds like some obviously very encouraging trends early here. But is this one that takes time to get reimbursement in place and education in place or one that can go pretty quickly?

Well, that is the point. So -- so for us, having taken over this, where -- what synergies does Organon bring to this product, right? Well, Dermavant has something like 4 or 5 people in their managed care space. They don't have an access organization. If you look at surveys done, the group that we have at Organon, which obviously came over from Merck for me, they're in the top 10 across all pharma in terms of reputation they have with PBMs and a number of other payers. We have local, regional, state level, federal level as well as national managed care group of people who are really good. And so the opportunity now to use the atopic dermatitis indication to get further formulary acceptance, move away from, say, using coupons, getting more into essentially being able to use this product across a wide variety because the value proposition wasn't as compelling in psoriasis as it is in AD. So now I think the future is going to be looking very good for us in terms of gross to net and in terms of penetration in terms of some of these payers.

Up the conversation here. Can you just remind us in terms of revenue and expense expectations around the product for this year and beyond?

So this year, I think our revenue expectation is around $150 million and the expense expectation is around $180 million. Now we're being a bit conservative because that basically means around -- if you're saying flat on psoriasis, that's about $80 million in psoriasis so that you could see where the rest is. But the kind of expectations we have and the kind of initial indications we have, I think we feel very comfortable with the numbers.

Great. And then from there, could we expect as revenue ramps that, that OpEx piece has some leverage to it or...

I do think so. I think that this product is going to be a $500 million product for Organon within the next 3 to 5 years. Let's see how we do in year 1, and that will kind of establish the trajectory. But our increase in OpEx won't be relevant in that respect. We're where we need to be. The thing is that we've got a sales force now that came over from Dermavant with the average tenure of experience of nearly 10 to 15 years. So these are folks that came from other companies with the opportunity to be part of the start-up. And they're really good sales organization. They just didn't have a managed care organization that we can bring to bear on this.

Maybe talking more broadly about 2025. When we consider the pushes and pulls in the business, will Organon be able to grow revenues in 2025 as you look at the business today?

So our biggest issue in 2025 is 2 things, is the LOE of Atozet, which again is a onetime event. And we are starting to reach kind of the maturity level on a few of the biosimilars, TREFLEXis as well as ONTRUZANT. So those will start to migrate downward a bit, but we've got Hadlima growing as well. But overall, those are the 2 headwinds. And then, of course, the final headwind is currency. So dollar has strengthened. We've got about 75% of our business that resides outside the U.S. So a strong dollar has different issues for us to deal with in regards to that. So if we're talking about on an ex-exchange basis, okay, we believe that we might be able to offset some of these headwinds. And then in 2026, you'll see much more robust growth.

On the LOE front, can you just remind me how large of a headwind you're expecting this year?

Yes. So that LOE event is somewhere around slightly north of $200 million.

And we should expect that to -- in terms of the erosion, we expect.

It's pretty aggressive in this year, and then ultimately, it will be pretty much going forward. We've got launches of Atozet in China, but that takes time to ramp up. But the biggest -- about 85% of the business resides in those markets where we're going through the LOE.

Okay. Okay. That's helpful. And then on the growth driver side, beyond VTAMA, can you just talk about kind of what do you see as the biggest growth drivers going into next year?

So we've got growth drivers continuing in NEXPLANON. NEXPLANON, again, has had probably its strongest year it's ever had in 2024. This year, as we start to think about ex U.S. business continuing to grow pretty robustly. In the U.S., I think we really have it now down in terms of what we need to do to continue that business. growing at a mid- to high single-digit growth. We haven't -- we're not guiding yet, obviously, at this space. We'll do that in February. But we feel like 2025 will be the year we crossed the $1 billion threshold. We'll be in excess of $1 billion in 2025. And we see the runway on this through the end of the decade. So if you're talking about -- if you're just conservative about mid-single-digit growth over the coming period of time until the end of the decade, this is a $1.5 billion, $1.6 billion business. Yes.

And then you mentioned the biosimilar side. We've got Hadlima. Talk about the dynamics we should think about for that one heading into '25. I know that market is kind of a tough one, unpredictable one I'll say.

It is unpredictable, but I was here talking about where that was going to go.

We're spot on with it...

In terms of what was going on with the discount. So I think Hadlima is going to go to a place where we got -- we're going to generate probably $100 million in '24, thereabouts and continued strong growth, I think, in 2025 because there's opportunities with Hadlima in the non-PBM sector, where we're getting a lot of business, like, for example, we won the exclusive rights of the VA. We've got a number of opportunities across the country in the Blue Cross Blue Shield, state levels, all those what I would call non-PBM businesses that are more sticky, more fragmented, but we do well in that space. So that will do well. We're launching our denosumab biosimilar in the end of 2025 in this year. So probably fourth quarter, we'll be launching our denosumab biosimilar. And in 2026, '27, we'll be launching our pertuzumab biosimilar as well. So that kind of gives us a chance to say that every 1 or 2 years, we said we would be launching new biosimilar assets. We feel really good about that. We're looking at BD as well in the biosimilar space. And then, of course, in 2025, this year, by probably October time frame, we're launching the 5-year indication for NEXPLANON, which is really exciting because there's some robust data that came out of that data.

Just staying on the biosimilars, just a couple more questions. The legacy products that are kind of starting to roll over a bit, how do we think about the tail of those businesses as they mature? Are these going to be...

Look, I mean, I think since we launched the company, -- what we've seen out of the Established Brands business is flat to slightly growing. Now this LOE event takes us into a place where it won't be happening this year in '25. But going back to 2026, we see again a flattish performance where Emgality is helping to drive that business. But at the same time, the rest of the product profile is going to be pretty constant. So it's a good stream of revenue, good stream of EBITDA over time that we continue to rely on, especially in the absence of any LOEs.

Thinking about EBITDA margins for 2025, I think the low end of the guidance range currently is 31% for this year. Is that still a good floor to think about for the business going forward?

Okay. Look, we signaled some time ago that the floor that we're looking at is essentially 31% EBITDA margin. Now you could ask yourself a question and say, "Hey, well, listen, you're losing your second largest product. And you're investing in this new acquisition. So how are you going to keep the EBITDA margin where it is?" Well, we've been on this journey of restructuring and robust kind of looking at our overall OpEx exposure. And it started in mid-2023. It came into 2024. You can see that what we've done in terms of our OpEx savings and efficiency improvements. But 2025 is really the year of intense kind of restructuring efforts. And you're going to see, I think, really some restructuring costs going into overall our overall P&L and our balance sheet. But at the same time, we've got the opportunity now to maintain that EBITDA margin level at around 31%.

And that restructuring, do you see that mostly in gross margins? Or is it throughout the P&L?

Mostly throughout the P&L and regarding in terms of our overall -- looking at our efficiencies across the board.

Okay. Perfect. You mentioned FX headwind. Can you just help remind us the sensitivity and flow-through of currency to the P&L that we should be keeping in mind?

So we've got roughly 75% of our revenues are ex U.S. And if we were to lock exchange rates for guidance for 2025 today, we'd be looking at something like a year-on-year change due to just FX translation on top line revenue, about $200 million plus or minus. We'll guide on that more precisely in February. But order of magnitude, it's about $200 million at the revenue line year-on-year.

Okay. And then the flow-through of that to EBITDA historically, has that been.

It's historically around half. So from a financial reporting perspective, we've got hedges -- natural hedges down the P&L. From an economic perspective, it's even better, okay? We do all of our manufacturing outside the United States. More than half of our employees are outside the United States. So we have plenty of uses for the ex U.S. currencies that we generate.

And then beyond 2025, once you get through this LOE event, what does revenue growth look like for Organon?

Well, I can tell you that we've always kind of signaled low to mid-single-digit growth, but think about this, right? The growth drivers in 2025, NEXPLANON, VTAMA, Jada, fertility, Hadlima, the new launches of denosumab will be full year in 2026. 2026 will be a very good year for us, we believe. Because you'll -- the OpEx savings we're doing in 2025 will have a run rate that will be fully embedded in 2026, where 2025, we won't get the full benefit of it, but we will in 2026. So you'll see good solid leverage growth on both EBITDA and revenue lines.

So kind of think about that as a year where we kind of accelerate the -- digging into some products in more detail, women's health first. NEXPLANON, you mentioned the 5-year data. Just what should we expect maybe just first on the timing of that launch? How should we think about that?

So that launch should be in the October, the Q4 time frame in terms of the indication for the 5-year indication. And just to kind of just give a little commentary. Here's what we found. In the 5-year data, 0 pregnancies. So pretty effective. And in addition to that, there was a fairly large contingent of women with fairly high BMI. So 0 pregnancies, high BMI, there are typically issues in regards to being able to get effective contraception care for patients, women with high BMI. So that is a new segment that is emerging for us. And in addition to the segment of what I would call the family complete segment. These are women who want longer than 3 years of efficacy because they're finished with their family. So when you think about it, right, on any given -- we're generating a lot of new patients every year. Why? Because a patient starting on NEXPLANON in year 1, about 15% of them will be left by year 3. So there's a lot of turnover. So if you're asking me a question of like, well, if you're going from 3 to 5, will somebody just say, well, I'm not coming in to get it removed. Well, there's only 15% of those patients remaining and a percentage of them will still want to get it removed and a percentage of them will stay, but then you offset that with essentially the additional new segments. And then, of course, you have a pricing opportunity, which we haven't decided yet in terms of kind of what I would call to be determined in terms of what we can take on that.

Okay. And is that to be determined, is that still a discussion with payers of how they're thinking about...

It's a discussion with payers. It's a state-level situation sometimes in terms of how far you can go in terms of price increases. So we're looking to see where that sweet spot will be.

Okay. And would we learn about that pricing? Is that probably around the launch time line or something?

I think so. I think that's a very valid point.

It sounds like you mentioned the 15% or year 3. Is there a potential that you'd have some mismatch that whatever you get for price, some of those patients who are staying on longer could result in some volatility of revenue as we look at '26? Or is that less relevant?

I think 2026, you're going to see some puts and takes. You'll see some erosion due to the fact that patients who were going to get essentially a renewed script or renewed rod will stay for another 2 years. You'll get the opportunity for patients with high BMI to come in. You'll get patients with those family complete folks coming in, you've got price opportunity. So as it mixes in, we'll see how it goes. But I think overall, I think it's fair to say that mid- to high single-digit growth, we've had very robust double-digit growth in '24, but mid- to high single-digit growth going forward is something I feel very confident about throughout the end of the decade. And so that kind of tells you how big this product is going to be because I see some analyst models are showing that this is a $600 million business by 2030. I look at it more like a -- put $1 billion next to it.

Okay. Okay. Perfect. And then maybe kind of leads to the next question is just talk about some expectations of loss of exclusivity and how you're thinking about the duration of the NEXPLANON franchise.

Yes, that's a good question. I think the only benchmark I would use is let's look at Mirena, very similar, except it's IUD. It's a medicated IUD device. We have something that goes into the arm. Now very similar in the sense that we still don't see a generic of Mirena, 7 years post LOE. I think you'd see something similar. It's still a $1 billion product. They don't put much effort at all behind it. As a matter of fact, there might be a -- one could say that they're actually not as much interested in women's health. But nevertheless, it's a $1 billion product. Now if we end up at a $1.6 billion, that means essentially we'll be the biggest contraception that has ever essentially, we'll have set the record in that regard as a benchmark. So going forward, I'm feeling comfortable by 2030 saying, that's what I feel comfortable saying. Beyond that, we'll have to see. But there's a lot of potential longevity because as I mentioned before, if you crack the code of being able to get it onto the market, you still need a sales force, medical affairs groups to teach and train physicians on how to insert, how to remove pharmacovigilance, all the things that one would say that you would have with a branded product. So it's quite an investment to get there.

Yes. Are you aware of anyone working on a generic in the U.S. at this point?

No. I mean I've heard noises and -- but they've kind of gone quiet.

Okay. Excellent. Maybe a similar question, ex U.S. Is there expectation that you could see a generic coming in ex U.S. this year or.

Well, in Europe, we lose patent in ' 25, and we haven't seen anything. anything at all. And remember, by the way, that our applicator device has patent through 2030. So if somebody wants to come on to the market, they're going to have to do clinical studies on their own proprietary applicator in order to be able to say that the FDA that we've got the applicator now, it's our own proprietary. It takes quite a bit of effort because you have to show no deep vein insertion. You've got to be able to show the efficacy and safety, and that's not easy thing...