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

Good morning, everyone. Welcome to day 2 of the 37th Annual Piper Sandler Healthcare Conference. This is David Amsellem from the Piper Biopharma research team, and we've got Organon with us. We have Joe Morrissey, Interim CEO; and Matt Walsh, CFO. Thanks, gentlemen, for joining us.

And so certainly lots to talk about. And I wanted to dive right into my questions. And let's just start with the internal investigation and the completion of that. And just as a refresher for people here and listening in on the webcast, just talk about the conclusion of the investigation and then also talk about your remediation efforts.

Yes, sure. Well, it's great to be here. Yes, the conclusion of investigation was in sales practices in the United States with NEXPLANON and 2 wholesalers. And the ultimate weakness was tone at top, right, which held accountable from a CEO standpoint out of the U.S. We're good that the investigation has been fully completed at this point. We have a very detailed remediation plan that's approved by the Audit Committee on the Board. Matt and I are the cosponsors of that remediation plan. And being that with tone at the top, it really does start with the tone at the top and how we engage the organization. It goes into the training of the true ethics and integrity. But then also when you look at the weakness that we had, employees didn't escalate their concerns, right? And so we have a lot of tools and mechanisms to do that. And so we're driving that through in terms of the communication to make sure our employees know about those escalations. But then from a financial standpoint...

Yes. From a financial perspective, the investigation found the extent of revenue that we're talking about all around management of quarter end orders, not more than 1% of revenue on the year, 2% in any quarter. But when you get into the actual financial reporting impact, the numbers were smaller than that. And I would point people to the third quarter earnings call that we had Slide 5. And let's make sure that we separate the revenue recognition was all good, right? The investigation confirmed that our revenue recognition was appropriate. So nothing about the financial numbers and our audits needed to be revised in any way. So yes, that was an important point. So we -- as Joe pointed out, we do have some internal control remediation we can do, not around the financial monitoring controls, it's more just in how information and communication about management of quarter end orders flow.

But just to be clear, nothing else was uncovered regarding any other wholesaler practices. It was just specifically related to the items that you disclosed regarding NEXPLANON.

That's correct. And since the practices have ceased, they'll now wash out in this fourth quarter. And when we get to 2026, we won't be talking about the issue anymore.

Got it. Okay. Well, let's move on and just take a step back. We'll look at the organization more broadly. So one thing you've talked about is cost discipline. Another thing you've talked about is deleveraging. So -- and they're tied together, right? Improving leverage ratios certainly is tied to cost discipline. So how should we think about the extent of that cost discipline in '26? And I guess another way of asking it is, is there room for more cost savings as we look to next year?

Yes. So as you know, in the long run, all costs are variable. We're just coming off a 2025 in which we took $200 million of operating expense out of the business. That's not a net number because we have upped our investment around things like VTAMA. But $200 million was what we achieved this year. Continued cost discipline is part of the equation next year. But that said, I think maybe one talking point investors have gotten used to for management is that we would be trying to adhere to a 31% adjusted EBITDA margin. That's proving more challenging to think about for next year, we'll be guiding in February. But just given issues around NEXPLANON flattening out and our continued investment in the VTAMA launch, not just in the U.S. but globally, I think that 31% EBITDA margin is -- will be a challenge for us when we ultimately provide our guidance in February.

Okay. So let's drill down a little more. I'm particularly interested in your R&D spend. It's historically been a fairly big number. And what I guess I'm wondering here is, how do you balance these various R&D programs versus the broader goal of cost discipline and improving the capital structure?

Yes. Maybe I'll start with our priorities in R&D, right? Our #1 priority actually is supporting the products that we have today, right? So inside that number, we have a very diverse product portfolio in a lot of markets around the world. So when you start looking at medical affairs and regulatory affairs, it's not a small number, right? So our first priority is how do we maximize the value of the products that we have in our hands. That also includes newer products like VTAMA, which also you have to invest not just in like a pediatric study, but then also the launches around the world. That's our #1 priority. Our second priority then comes to any type of life cycle management that we do. And so we are deprioritizing bigger programs and those longer-term programs. We have to do that in the near term as we're prioritizing the leverage.

Yes. Okay. I guess the -- and I know it's hard to provide a complete picture of granularity surrounding R&D. But I guess, you do have a number -- I mean, you have an endometriosis program, you had -- and there are other programs, but you've talked about prioritizing the products you do have. Does that mean that over time, we're going to see pretty significant cuts in the R&D budget? I mean in other words, is Organon trying to evolve into a much more of the commercial stage focused company.

Yes. So evolve into -- yes, we need to be a more commercially focused organization. And we said that from the beginning, and those priorities ring true. When we look at any kind of decision in terms of large clinical studies, we don't have that any longer with, as you said, the endometriosis drug failed out. So our priorities are supporting the existing business. In terms of significant cost reduction, it's a large complex portfolio, right? And so that minimum critical mass is not as small as we would like it to be in order to have the product portfolio that we have.

Okay. Let's look at NEXPLANON more closely. So you've alluded to policy decisions impacting Title X funding and Planned Parenthood. So can you talk to how much of the headwind this is going to be going forward. I mean, I think you talked to flattening, but is flattening the right way to think about it? It could get worse. But how do we think about that.

Yes. So the issues around the Title X funding were discussed. There was a lot of chatter in the first half of the year. Policies got implemented in the second half. And so at a minimum, next year, we're thinking we need to annualize the issues that have now become more tangible here in the second half of the year. So just by virtue of doing that, the U.S. NEXPLANON is looking at a year, if you're reflecting the full year impact of those Title X challenges. The United States probably is at best flat next year and is more likely looking at a down year. The product continues to grow internationally. Now with the removal of the U.S. AID program, that, I would say, maybe delayed our international growth a bit, but other sources have stepped in. So the product looks to -- as we're thinking about next year on a high-level basis directionally, International continues to grow. We're probably looking at flat to declining in the United States. And let's also not forget, at least in the way that we're handicapping things, 2026 is a year where we'll probably get the 5-year label and launch that. And that was always an inflection year that would be impacting volume. But net-net, on the whole, taking all these things into consideration, Dave, we felt it was appropriate to make the comment that we did in the third quarter call that all of those things considered NEXPLANON is probably flat next year on a global basis.

And are you contemplating any ex-U.S. generic competition in that comp flat to slightly down?

So just to level set, we -- NEXPLANON lost exclusivity this year in Europe, which is a pretty big market and the generic has not been introduced. So...

And there are generics approved in Latin America in a number of countries. And I think going back to like 2024 even, none have come to the market. And for us internationally, we also had a big win just a couple of months with reimbursement in Brazil for the public and private market. So again, we see avenues for us to continue to grow internationally.

Okay. Now then there's the macroeconomic environment impacting independent health clinics and as a result impacting NEXPLANON. So is that also factored into your informal guidance on NEXPLANON for next year? And how do you see that playing out?

It's still factored in, right? If you look at that private market, the integrated delivery centers and so forth, that business is growing really, really well. And that's the majority of that business. Smaller business are those independent and smaller ones, which seem to be managing their cash flow and where they used to be bulk buys, they're moving more to specialty pharma. And we know as soon as you enter in another step of fulfillment, you start getting leakage to that. And so we're experiencing that for sure, and we're forecasting that, that will continue.

I think you made a comment on the 3Q call, it might be the 3Q call about one way to meet some of these challenges, making some concessions on price. So can you talk more about pricing headwinds or pricing concessions, if you will, in '26 versus '25 on NEXPLANON?

Yes. I think this is the first year, at least since the spin-off, where we've seen significant pricing competition in the LARC space. So we'll have to respond to that. NEXPLANON is a product that we've generally been able to raise prices, inflation, inflation plus every single year. That will probably happen again next year. And what we're -- and if we're successful in getting that, that is more of a recognition of than anything else is the move to the 5-year label and the opportunity to recognize the value that, that additional duration provide for patients.

Yes. I wanted to come back just quickly to the 5-year label. How do you think about that in terms of its impact pushing out on the LOE for NEXPLANON in the U.S?

Well, I think it differentiates itself in the marketplace, right? And you have data exclusivity on the 5-year for a number of years. And we also know through our focus groups, the 5-year indication is valued in the market. And so we look at more as it differentiates us in that market as opposed to tying to the LOE piece. When you look at long-acting reversible contraception and you're competing also in that space with IUDs, you want that 5-year indication.

All right. So let's move on to VTAMA. So you did lower your '25 sales guidance. Just remind us where you think you fell short of that $150 million worldwide target? Was it your assumptions on volume growth? Was it assumptions on the gross to net moderation? Was it a mix of both? Or are there other considerations that we should be aware of?

We're going to say yes to that. Look, from a volume standpoint, we really felt that with the strength of the label that we could overcome a lot of those headwinds you're naturally going to face in that first year. We're fourth entry to the market. Access was not well positioned in the first year. And it wasn't able to do it as much as we thought it was. And then gross to net, we had a pretty aggressive target, I would say, with gross to net. We were going to be like 6 points of improvement in gross to net, and we're -- we got about half of it. And when we look at those 2 combined, that's where we're ending up in year 1.

So gross to net, I think what you had talked about earlier this year was that the coupon program was something that was really a drag on net realized price. So that was something that you were looking to ameliorate. So can you talk to that? Is that something that is going to be less of a factor going forward? And are there other things that you can do on the contracting front to try to moderate the gross to net?

Yes. So I'll talk access first, right? And there are 2 numbers that always stick in my head with access. We entered this year less than 40% on our preferred tier with VTAMA. We're ending the year -- we're going to -- next year, we're going to enter in around 70% to 80% access on that top tier. That's a much different access profile. We think the value of the coupon card, it still is valuable inside of that marketplace. And so I think that's also part of tempering our expectations of how much we could exit that coupon card and when. So we focused on the access piece. Now we're going to be able to focus on the pull-through piece, and we think that ultimately puts us in a better position.

Can you remind us how many reps you have supporting VTAMA at present? I don't know if you disclosed that.

No, I don't think we talked about it specifically.

We don't. But relative to what Dermatan had, we're growing it both in the base level in terms of going after the psoriasis and the AD indications for, let's say, adult patients and where we're thinking about and executing on increased investments is for those patients for whom the safety part of the label really resonates most in the pediatric space.

Yes. So what's your view of the topical derm competitive landscape and how that's impacting the VTAMA. So for instant Arcutis ZORYVE, which looks like it's doing quite well. And we know that the payer landscape for topicals is not particularly easy. But you have one competitor that seems to be doing quite well and VTAMA is growing, but you fell short of your guidance. So I guess if you can talk to the competitive dynamics here and what you feel do you need to do better vis-a-vis your competition?

I think you summarized it really, really well. It's a highly competitive space, right? And it's -- derm is a very challenging space as well. We recognize that also. Again, we fall back to the label with VTAMA, and it's a highly competitive label, whether it's efficacy, tolerability, safety, we hit all of those. It's a novel mechanism of action. And when you look at all of those characteristics of the product, it is a really strong product. And so we believe we can compete in that highly competitive space and difficult space because we think we can drive that from an efficacy standpoint, tolerability as well as safety, we can hit every single one of them.

So when you bought Dermavant, you didn't have a dermatology sales force, you onboarded one where you really -- you've inherited one with Dermavant. So now you've got this leverageable asset with your derm sales force. So with that in mind, what's your appetite for adding another dermatology-focused asset or assets, given that dynamic? And I guess the second part of the question is, if you have an appetite for it, how large of a transaction could you contemplate here? Yes.

Yes. So we would love to do it. To the point you raised, now we've got a platform and the reps are carrying only one product in the bag. So there'd be terrific synergies if you're talking about adding derm products to it. So we'd love to do it. It gets to kind of the larger issue of what role can BD play from a capital allocation perspective, given our drive to improve the balance sheet and get our leverage in a much better place. And I think these things are actually consistent. We can certainly direct cash flow to absolute dollars of debt reduction. We've done it this year. We'll continue to do it when the Jada transaction closes and we receive those net proceeds. But there are certain kinds of BD we can do that actually immediately accretive, help us grow revenue and EBITDA faster, and that also helps us address the leverage issue. So from a capital allocation perspective, the kinds of deals where we're capitalizing on what we are already good at and what we're doing and where we've got assets and infrastructure in place are the kinds of deals that still make sense. And that derm is a perfect example of where we can add things with great synergies, where we can be the best owner of that asset, and we can actually attack our leverage issue faster.

Yes. Looking at the sales force at present for VTAMA, do you plan to expand the sales force? Or do you think you need to?

We are continuing to expand the sales force, right, but it is very targeted in terms of where we're adding that sales force.

Yes. So let's switch gears to established brands. So on the third quarter call, you talked about respiratory as particularly significant headwind, I think you had mentioned SINGULAIR, in particular. There's also Dulera which was -- which had pressure. So just give us a refresher on those headwinds and what we could see out of respiratory looking into '26.

Yes, there are multiple headwinds to have a number that big, right? And when you look at respiratory, the largest part of our business is outside the U.S. And certainly in Asia, it's been another weak allergy season that has affected our overall performance. The price reduction, specifically around SINGULAIR in China with provincial VBP as well as with price reductions in Japan was far greater than what has been typical and more than what we expected. There's another round of price reduction for provincial VBP for SINGULAIR in the beginning of next year in China. The next piece was new guidance came out from a health insurance standpoint around montelukast and it dropped it from its preferred tier and now second or third line, and that came out in May of this year, and we're starting to see that play out in a lot of our international markets. And then Dulera is a separate one in the United States in terms of that challenge. We lost a big contract early in the year with the PBM that affected our overall business. And then the mix has changed where the pressure on rebates has been more than what was typical in that business.

And my understanding with Dulera is it is off patent but there are no...

It's been off patent for a number of years, and we keep forecasting it may or may not have a generic entrant. And so at this point, there hasn't been.

Right. So but we don't have visibility into...

We have visibility that people have been working on them, but there's no visibility of movement of getting them to the market.

Got it. Okay. And just remind us on the guidelines on SINGULAIR. Which countries does that specifically affect? Or is that sort of...

They were more like general international guidelines and then you have different countries that are following. It is based out of Europe, and then there are different countries that follow the European guidelines and so forth that working its way out.

So then switching gears, another headwind is Atozet, which was expected. I mean that's an LOE in Japan and Europe. I know -- we know that there was a real impact this year. I guess my question is, looking at '26, how should we think about the LOE impact for Atozet in '26. I would imagine it will be more muted relative to '25, but I want to hear your thoughts.

Yes. So we have largely washed out the Atozet LOE impact this year. And actually, there are certain pockets ex-U.S. where Atozet volumes are actually going up, for example, from a life cycle management perspective, we launched Atozet in China. But when we think -- but to -- maybe to the larger question, LOE has largely washed out of the portfolio. When we think about next year, LOE impact across all of the established brands portfolio in all products combined would be less than a $75 million number, whereas just Atozet in this year was over $200 million.

Yes. So switching gears to a bright spot, Emgality has been doing well ex-U.S. What are you seeing here regarding Emgality and what countries or regions are you gaining the most traction for that product?

Yes. So this was -- our partnership with Lilly here is going very well. It started with 11 markets. That's now been doubled. We're now in 22 markets. It's doing quite well in all the markets that we're in with Lilly. And I think it's another example, Dave, of the kinds of BD we can do to capitalize on our capabilities. We've got direct presence in more than 50 countries outside. We sell into 140. So we've got regulatory and sales and marketing capabilities that could readily absorb something like an Emgality and make hay with it. So Emgality growth this year is pretty nice. You can see it in our filings and we break that product out. And that product will continue to grow in 2026.

So taking a step back on established brands. So you brought in Emgality as you referred to with the deal with Lilly. So I guess with that in mind, do you see Organon doing more of these kinds of tuck-ins for ex-U.S. rights where you can leverage your global infrastructure? I mean it seems like a no-brainer where you can be a partner, an ex-U.S. partner of choice for market-ready or early commercial stage assets. Philosophically, how do you think about that?

Yes. Important for us. And the same answer to the question around the dermatology sales force. We want to continue to invest in what we're good at, and we have core capabilities, and that's the fact that we can change our overall performance. And showing our success that we've had with Emgality is also showing what we can do with products from other companies, and it's exactly where we want to go.

Yes. So we got about a minute left, so I want to make sure I touch on biosimilars. High-level question, how do you see biosimilars within the broader organization? Is this a core business for Organon?

Yes. I think the role of biosimilars, it's a growth driver for us in this near term. And from the beginning, we felt that this was the right position for biosimilars when we would be launching HADLIMA, we'd be expanding the relationship we had with Samsung. But then we had to buy some additional biosimilars in there. We were successful with HADLIMA and our 2 launches in the United States. And this is a great growth driver. And what we're showing is we have differentiated capabilities in a number of markets, including the U.S. and Canada. And again, we'll double down just like [indiscernible] so it fits right in, limited infrastructure. You don't have to add to it and you just pop it right into your business.

Yes. And then looking more broadly, I think on the 3Q call and other calls, you started to talk a little bit about divestitures. And I guess -- and it's a hard question to answer, but how are you thinking about divestitures as a means of trying to accelerate the deleveraging process and just improving the capital structure?

Opportunistically is the word. We had the ability to capitalize on a unique opportunity with the divestiture of Jada and to the extent that we can repeat that we will. But it would be, I think, on an opportunistic basis, it's not a coordinated plan that we're talking about.

Okay. Well, I'll leave it there. We're out of time. Thanks, Joe. Thanks, Matt, and thanks, everyone, in the audience.