Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Organon Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question- and-answer session. [Operator Instructions] As a reminder, this call is being recorded. Thank you. I would like now to turn the call over to Jennifer Halchak, Vice President, Investor Relations. Please begin your conference.

Thank you, Michele. Good morning everyone and thank you for joining Organon's third quarter 2022 earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer; and Matt Walsh, our Chief Financial Officer; Dr. Sandra Milligan, Organon's Head of R&D, will also be joining us for the Q&A portion of this call. Today, we'll be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call on the Events & Presentations section of our Organon Investor Relations website at www.organon.com. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements. Actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our 10-K and subsequent periodic filings. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation. I would now like to turn the call over to Kevin Ali.

Good morning everyone and thank you Jen. Welcome to today's call where we will talk about our third quarter 2022 results. Beginning on Slide 4, Organon continues to perform very well. For the third quarter of 2022, revenue was $1.5 billion, up 3% at constant currency. This marks our third consecutive quarter of revenue growth at constant currency rates. And if we exclude supply sales and just look at product sales, it is the fourth consecutive quarter of product growth on a constant currency basis. We also demonstrated strong profitability. Organon generated adjusted EBITDA of $546 million in the third quarter representing a 35.5% margin. Turning to Slide 5. We're building a company that we believe can deliver sustainable growth driven by the contributions of each of our three key franchises. During the third quarter, the Women's Health franchise delivered 23% growth on a constant currency basis. This includes $229 million of revenue in Nexplanon, which beat the record we set in the fourth quarter of 2021. This was also the first quarter during which we delivered more than $150 million of Nexplanon in the U.S. where the product grew 26% and that is driven primarily by increased physician demand. Execution of the promotional strategy continues to support the Nexplanon growth trajectory this year. This includes training. We continue to train more physicians across the U.S. and year-to-date we have trained over 16,000 providers. It also includes educational and direct-to-consumer campaigns, which are reaching millions of women and driving more patients to the product. The steady penetration of this product is evident when you look at Nexplanon's global performance on a trailing 12 month basis, which takes out the noise of the timing of tenders and pricing actions. We've added a slide in the appendix to illustrate the steady pickup…

Thank you, Kevin. I'm pleased to go into further detail on our results for the third quarter, not just because the performance was solid but also because we reached an important milestone in financial reporting this quarter. Organon was a standalone entity in both the current and prior year periods, which means this is the first earnings call that we can discuss performance with apples to apples comparability to the prior year period without being obstructed by the carve out basis of accounting that we needed to employ for pre-spinoff accounting periods. And with that opener, we'll start the financial discussion on Slide 7. I'm showing this slide for two reasons. First to highlight operational performance by geography and second and really more important to provide a basis for understanding just how much Organon's results are subject to foreign exchange translation. On an operational basis, our best performance in the third quarter came from the United States and Asia Pacific, Japan regions. The U.S. is an important market representing a quarter of our business, so the 6% growth in that market during the quarter was meaningful and was primarily driven by growth in Nexplanon and also Ontruzant and Renflexis, the two biosimilars that we offer in the United States. On a constant currency basis, the APJ region grew 13% during the quarter. We continue to benefit in Japan where generics since – really since the start of the year have been having structural supply issues related to GMP conformance and quality issues. Now this presents an opportunity for Organon and we've been able to flex our manufacturing and supply chain capabilities to meet market demand. We've also seen growth in Southeast Asia and Thailand and, as Kevin mentioned, we shipped our first order of Marvelon to Vietnam in the third…

[Operator Instructions] Your first question comes from the line of Terence Flynn with Morgan Stanley. Your line is now open.

Great. Thanks for taking the questions. I guess two for me. Maybe Matt, you could help us think about what your outlook is for China heading into 2023. You mentioned some of the variables you've seen here playing out over the last couple quarters. But as you think about 2023 how are you thinking about the growth outlook there? And then the second question I had is on your biosimilars HUMIRA or HADLIMA, I'm assuming you've had some initial conversations with U.S. payers at this point. I know you're not launching till July. But maybe just how are you thinking about second half of 2023 in terms of both share and then price point. Thank you.

Okay. I'll take the first part of that question, which relates to China. So we expect to see growth in China in 2023. That's mainly coming from the strategic shift that we've been executing from the hospital channel to the retail channel. We do expect VBP will certainly be at play and will limit the growth that we expect, but we do expect growth in China in 2023, so directionally I can give you that much.

And Terence, I can address the second part of your question in regards to biosimilars. I have personally met with a number of the larger PBMs in the U.S. And I think that 2023 will obviously be kind of a light ramp up year as people are – as PBMs are kind of locking in some of the contracts for 2023 as we speak now. And so I do believe that where you have closed systems like government business VA, large HMOs like Kaiser, they could be potentially more aggressive in terms of the switch. But I think in terms of overall on the PBM side, you'll see more of that business start to fold in, in 2024 and then ultimately really open up in 2025. But we feel very, very good after discussing with those PBMs that our product profile and our offerings everything from the real world evidence to the low and high citrate-free high-concentrations that we have got coming plus they were very excited about obviously our pen device and I keep using the term frictionless experience for many of the patients. And so I think the general sense – the general assumption is that what I'm hearing is that they'll accept maybe two at best three, but probably more likely two biosimilars on formulary and ultimately I think we're in good shape when it comes to that.

We can take our next question, operator.

Next question.

Your next question comes from the line of Umer Raffat, Evercore ISI. Your line is now open.

Hi, guys. Thanks so much for taking my questions. Maybe a couple here if I may. I wanted to – there's one of your pipeline programs, which looked very interesting based on its prior data, ebopiprant. But the pace of development really confuses me, especially since it looks like there's been almost no progress since you guys licensed it mid-last year. And my understanding is you're trying to file an IND, but I'm more confused sort of over the course of 12 to 18 months if an IND has not filed, is there something more significant that's folding it up just so we understand it better. And then secondly, just on the comments on biosimilar HUMIRA, you said it will be a light ramp up year. PBMs are locking up contracts. But it looks like the estimates and The Street expectations are all over the place. On some players, there is as much as $2 billion plus in the biosimilar HUMIRA. I think in your case, you're talking it down and you're implying more of 2024, 2025 and most investors read that as more of a sort of $300 million to $500 million type opportunity. Could you just list some parameters for us because I feel like this is one of those line items that could get mismodeled, especially in the context of the overall timeline you guys have? Thank you.

Thanks, Umer. I can start with the second part of your question and then I'll hand it over to Sandy to address the issues that you brought up on ebopiprant. In regards to biosimilars, look it is going to be a kind of a lot of dust, a lot of things throwing up in the air because it's hard to really understand right now because PBMs are still trying to develop their strategies. And overall, I think what we're guiding to is essentially what you've seen out there. And you're right, we're guiding to a lower number versus the billions that you see out there. I do think there is going to be some pretty aggressive discounts, discounting taking place, obviously nothing on the level of small molecule discounts that you see, but obviously – but there will be some. And I think because it's a pharmacy dispense product and it's the largest biologic coming off patent, there's a lot of questions obviously as you can imagine in that area. But again, Umer, we feel very good about where we are. We've got – we've checked all the boxes off. A lot of the PBMs we're talking to feel that 2023 will be a kind of a light takeoff in terms of the fact that the originator will still be there, obviously in full force, but then 2024 it will start to open up and 2025 be much more aggressive. And over the years you'll see price erosions starting to hit. We feel very good about the consensus that's been put out there on HADLIMA. It is going to be a successful product for us and we'll have to see what 2023 brings, but I do think it will be a like live path and then ultimately it will open up in 2024 and 2025. Sandy?

Sure. Thanks for the question. So as you probably recall, we brought over the ebopiprant asset from ObsEva close to spin. And to your point ObsEva initially did a Phase 2 study againstAtosiban as an add-on therapy and select European and other countries. The preclinical data package that was put together by Aviva satisfied the individual country requirements for the clinical trial application. However, we anticipated would not satisfy the requirements to pass the muster of the FDA in order to get a move forward on IND submission. Therefore, right after we acquired the asset, we started out contracting and doing our pre-clinical work with our providers. And it has taken a little bit longer in the sense of the contracting. We were just starting up as a company, but we're fully online and we have the initial results from many of those studies. We've already had a pre-IND meeting where we've discussed not just the preclinical data, but our development plan initially, and we had a very robust interaction with the FDA to think about that clinical development program ahead. So we are anticipating after the finalization of the data readout in the study reports that we will be able to file this IND and pass muster early in 2023.

Thank you.

Next question. Thanks, Umer.

Your next question comes from the line of David Amsellem with Piper Sandler. Your line is now open.

Thanks. So just had one question on Nexplanon and one on Established Brands. So Nexplanon, I'm trying to get a better sense for how we should think about adoption growth in a more normalized post-pandemic environment. And more specifically, what portion of OB/GYNs have already been trained and how much remaining is out there to train going forward? So that's number one. And then on Established Brands, you sighted cardio and respiratory is being particularly resilient. I'm just wondering how sticky those products are? And even just beyond those therapeutic verticals, just thinking about these ex-U.S. markets, what's your view on, I guess, for lack of a better term brand loyalty or relative stickiness of these products going forward? Thanks.

Sure. Thank you, David, for the questions. Let me start with Nexplanon. I do believe that the pandemic clearly as we've seen has created a lot of confusion in the market. I mean, we still see a 25% reduction in regards to Women's Health visits that have never bounced back versus pre-pandemic and so – pre-pandemic level. So I would say to you that it is a slow moving process in terms of getting everyone back. That's a kind of an issue that needs to be addressed, obviously. And but when you speak about long acting reversible contraceptives Nexplanon is gaining share because what we do is, what we see is the IUDs are losing favor. We see that. Obviously, it's hard to get that from IQVIA data because it's a buy and bill model, but nevertheless we see that from other companies report outs that large IUD manufacturers are seeing declines in that business, but we continue to see increases. I see we see increases in physician demand quarter by quarter. We had a really strong quarter, as you said, as I mentioned earlier, in terms of the third quarter with 26% growth in the U.S. alone. And we do see that we're starting to gain share there. So I do agree with you that some of the noise is going to have to come out of the system. And I believe as we go forward in 2023 and 2024, you're going to start to see more stickiness as to use your binocular in terms of Nexplanon kind of really getting more into the mainstream of a lot of OB/GYNs using that product because there is a demand. I mean, when you start to think about it, what is the need? The need is the fact that we've got…

Thank you.

Your next question comes from Chris Scott with JPMorgan.

Hi. This is Katerina on for Chris. Thank you so much for taking our questions. So the question is on margins. So can you just help us or rather elaborate on some of the drivers of the better than expected kind of margin trends this year? How much of that is delayed spend versus something that you think can carry over to future periods? And then you’ve talked a little bit about 2023, but more wondering, should we thinking about 2023 as kind of a floor for margins, or is there kind of potential for another step up in operating process we think about 2024 or 2025? Thank you so much.

Yes. So the better than expected performance on margins this year is a function of a few things. You can’t just tie it to one driver, but what we have seen is better than expected price performance, right, price still went down across the portfolio, but not by as much as we had thought at the beginning of the year. Our product mix has been a little bit more favorable than we thought in our overall manufacturing performance in the plants. Now, in terms of margins going forward, I think the sort of early directional indicator that we gave about margins, second half margins being a directional indicator for 2023 encompasses everything we know at this time about the amalgamation of forces that will be impacting us in 2023. So in that directional indicator, that includes at least to the extent we know now, right? We’re in the middle of our budgeting process for the company, which has yet to conclude. But product mix will always be one of the most significant drivers of our margins year-on-year. What we know about that now is bake into that directional indication. On a margin up basis, we continue to improve productivity in our manufacturing plants. What we do expect to see some hits on, of course, is inflation for next year. That is impacting our numbers this year, but to a lesser extent, we expect to see a bigger impact of that next year. And once again, we’ve got the steady drum beat year-over-year of price pressure across the portfolio, given the age of the products. But all of that has been considered in the directional indicator that I provided.

Great. Thank you so much.

Your next question comes from the line of Chris Shibutani with Goldman Sachs. Your line is now open.

Hi, this is Dan on for Chris. Thanks for taking our questions. I guess just first on HADLIMA, could you guys maybe talk about how impactful you see interchangeability being once you ultimately receive it to both being on formulary and commercially versus other biosimilars? And then second on capital allocation. And you guys discussed maybe more potentially near-term accretive deals. Could you maybe just give kind of the current thinking on views across segments and areas of focus on women’s health? Thank you.

Sure, Dan. I can address the first question on biosimilars on HADLIMA. In my discussions with all the PBMs that I’ve interacted with and they are large ones. Interchangeability does not come up as a key point. It is something that I think they’d like to see that is underway, and we will have our interchangeability indication likely in the 2024 timeframe. So that’s fine. That’s kind of check the box. They’re more focused on a number of other issues. Number one is, do you have the manufacturing capability to make sure that whatever is ordered, because there’s large volumes will be met. Do you have a pen? [ph] Again, I use the term frictionless experience. Look, you don’t want – they don’t want to give their healthcare providers a reason to move off because patients don’t have the ability to be able to inject seamlessly. And so we feel really good about the device that Samsung has put forward for us. Do you have real world evidence? Because we don’t want to be the first country that you actually sell and provide and commercialize your product in. And finally, do you have the high concentration citrate-free and the low concentration? Because there are some customers, approximately about 20% of customers in the U.S. do around the 20% of the business in the U.S. is moving towards a low concentration form. So both of us [ph] got that box as well checked off. So we’re fairly very comfortable with our position in terms of the profile. And regarding capital allocation, what we have been seeking to do since the spin really is to bring balance in our capital allocation between innovative assets that address large areas of unmet needs in women’s health, where the commercial opportunity is also strong. Those tend to be longer duration product development cycles. And so we’ve been trying to match that with either immediately accretive or imminently accretive deals that can effectively keep the business and the operating margin for posting within a range that it’s just representative of a well run business. So we’ve recently put in some longer, some more early phase assets. And so as we think about balance, that would suggest that some of the next deployments that we do should be either immediately accretive or imminently accretive. Once again, just to bring balance to the overall program.

Your next question comes from the line of Jason Gerberry with BofA. Your line is now open.

Oh, hey, good morning. Thanks for taking my questions. Just wanted to come back one question on HUMIRA. You mentioned that PBMs are locking in contracts now. We heard from Teva earlier this morning that per the settlement agreement, you can only contract when you launch. So just trying to reconcile those discrepant viewpoints. And ultimately, another thing I was curious about your one month order of entry advantage versus that sort of next wave of biosimilars. I realize it’s kind of a small time differential, but wondering mechanically, does this potentially give you a leg up that you think investors might be under appreciating? And that could be potentially from a contracting perspective an advantage that could be material? Thanks.

Thanks for the question, Jason. What I was saying, at least in my script, and ultimately in the discussion with Umer, is the fact that PBMs are now kind of looking at their business for 2023. They’re not kind of locking it in now. And you’re right. I mean, what Teva said earlier is correct that we can’t start to really negotiate and contract based on the agreement that we have with AbbVie. But nevertheless, what I will tell you is the fact that we believe that 2023, the glide – the ramp kind of the ramp up will not be as dramatic because it’s – you’re coming in half the year. By that time, the contracts will obviously be in place. The originator will be on formulary, obviously. There will be kind of a fight in terms of getting on formularies. And so there’s a lot of that kind of tactical set of activities. But I do believe that 2024 will be a much what I’m understanding from all the TBMs that I talk to as well as government business like the VA, as well as the Kaiser system, those closed systems will move faster to replace and potentially have business switched over in more in an aggressive fashion PBMs will take their time. And ultimately that’s what I’m signaling is that it’s going to be more of a 2024 and 2025 timeline where you really start to see a lot of movement we believe away from the originator and essentially what happens to price in the marketplace.

Okay. Fair enough. Thanks so much.

Operator, I think our last question?

Your last question comes from Greg Fraser with Truist Securities. Your line is now open.

Good morning. Thanks for taking the questions. My first one is on [indiscernible] category. Curious how much of the pressure on IUD demand has been tied to temporary COVID related headwinds versus drivers that could be more durable over time? And then on established brands, if you think about 2023 and beyond, where do you still have exposure to VBP, your comments on longer-term growth, should we expect greater pressure on 2023 sale tied of VBP versus future years? Thank you.

Yes. So Greg, let me address some of those questions, so in regards to your second question regards to VBP, we do believe that VBP round seven will happen in November of this year, this month. And essentially one of our cardiovascular products EZETROL will be on that list for round seven. But by the end of 2023, we see that more than three quarters of our business will have gone through the volume-based procurement process. And so you offset that with the growth that we have right now where more almost 50% of our business is going through the retail channel. And more and more of that business is now starting to go through the e-commerce channel. We will still see basically China with a high single digit growth opportunity and potential going forward into the 2023, 2024, more 2024 time frame, where we see that there’s opportunities to actually grow the business. Sorry, your first question, IUDs.

On the stickiness of IUDs and what’s happening in regards to the pandemic?

It’s hard to, look, I can’t answer the question in terms of what physicians and patients are thinking in regards to their acceptability of IUDs. But I can’t say that the unique thing about Nexplanon is it literally takes one or two minutes to insert, and it takes the same amount of time to remove. It is much more convenient in terms of being able to use it as a long-acting reversible contraceptive that can fit in so many different settings. In addition to that, it has the same basic efficacy as an IUD does. The difference is that you’re talking about a product that is currently works at efficacy for three years. We’re working on the five year extension. So that means we’ll have efficacy for duration for five years that will be launched in probably the 2025 timeframe. So we do see a long and productive runway for us for Nexplanon, and we do see more and more patients coming online and higher demand for Nexplanon as a reasonable alternative when a woman wants to have a long-acting reversible contraceptive. And currently that there’s all the signals, all the signs that we see in the marketplace, especially in the U.S. and ex-U.S., which is growing actually even faster than the U.S. is that it is a – or a form of contraception that people are getting much more attached to it. Because again, back to the basic principle, in our hands, we’ve been able to give it the right type of attention, the right type of senior management attention, the resourcing ultimately kickstart and get that business to be $1 billion business in the very near future. It’ll be our first $1 billion blockbuster for Nexplanon probably in the 2024, 2025 timeframe.

Thank you.

So I think Kevin has a couple closing remarks.

Yes, just in closing for all those. Thanks for the questions by the way. Just in closing, Organon has really had a strong third quarter with all three franchises continuing to make really important contributions. We’re building a business as you all can see, that it’s sustainable and it’s a sustainable growing concern. Our track record to date supports what we have said from the very beginning of the spin. That in our hands, this portfolio of assets can generate sustainable growth. So I want to thank you for joining us today, and we look forward to continuing to communicate our progress with all of you as time permits. Thank you very much.

Ladies and gentlemen, this concludes today’s call. Thank you for attending. You may now disconnect.