Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Organon Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Jennifer Halchak, Vice President, Investor Relations. Please begin your conference.

Thank you, Audra. Good morning, everyone. Thank you for joining Organon's second quarter 2023 earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer, who will cover strategy and operational highlights; and Matt Walsh, our Chief Financial Officer, who will review performance and guidance. Dr. Sandra Milligan, Organon's Head of R&D, will also be joining us for the Q&A portion of this call. Today, we will 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 and 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'd now turn the call over to our CEO, Kevin Ali.

Good morning, everyone and thank you, Jen. Welcome to today's call, where we'll talk about our second quarter 2023 results. Our revenue for the second quarter was $1.6 billion, up 4% at constant currency, compared with the prior year period. In the second quarter, our women's health and biosimilars franchise grew double digit, while our Established Brands franchise achieved flat performance again demonstrating its continued stability. Adjusted EBITDA was $530 million, representing a 33% margin. Turning to the full year. Given our current view of foreign currency exchange rates we narrowed our guidance range on revenue from $6.15 billion to $6.45 billion to now $6.25 billion to $6.45 billion, which raises the midpoint of the revenue range by $50 million. We also raised the lower end of our adjusted EBITDA guidance based on our latest visibility into potential milestone payments. The new range of the full year is 31.5% to 33%, a quarter of a percentage point higher at the midpoint compared with prior guidance. Now, let's review the quarter in greater detail, beginning with women's health. Women's health grew 10% on a constant currency basis, primarily driven by 12% growth in Nexplanon. Performance of Nexplanon in the US was particularly strong this quarter, with revenue growth of 19%. This reflects the 5% increase in US physician demand and increase in distributor inventory as well as the benefit of our pricing action in the third quarter of 2022. Year-to- date, Nexplanon is up 6% outpacing the large market, which grew 3% over the same period. We expect continued demand growth in the United States, especially with the more than 35,000 healthcare professionals currently prescribing Nexplanon. We also expect increasing demand outside the US, especially in Latin America and countries like Brazil and Argentina as well as in Asia and countries…

Thank you, Kevin. Beginning on Slide nine, let's walk through the drivers of our 4% constant currency revenue growth in the quarter, starting with the impact of loss of exclusivity. LOE was negligible in the second quarter, as it was in the first quarter, and the small amount that we have realized year-to-date was related to generic competition for NuvaRing in the U.S. In the second quarter, we had about a $25 million impact from VBP in China related to last year's implementation of round seven that included our cardiovascular product, Ezetrol, which is sold in Zetia in some markets outside of China. Year-to-date impact from VBP is about $50 million, which is tracking to our expectations for the year. Moving across to price, we saw approximately $30 million of price erosion in the quarter. As Kevin mentioned, through various initiatives, we have been able to do a bit better on stemming price erosion in established brands, but given the nature of biosimilars, we will see pricing pressure in that franchise. Additionally, in the United States, we're attempting to gain share in fertility, especially in reimbursed markets, so we have to price our products competitively in that channel. We continue to see strong volume increases across all of our franchises, about $115 million in the second quarter. About 60% of the volume growth came from our growth pillars, biosimilars, Nexplanon, Fertility, JADA and China Retail. The remainder came from volume growth within established brands. The bar for supply-other primarily represents revenue to Merck, with the plus $5 million from this quarter bringing us to level with our expectations six months year-to-date. As we have advised in the past, this revenue stream is essentially a series of lower-margin contract manufacturing agreements that have been declining since the spin-off, and will continue…

[Operator Instructions] We'll go first to David Amsellem at Piper Sandler.

Okay. Thanks. So I got a question on the capital structure. I think you've said in the past that you're looking to clean up some of the variable rate debt. So I just want to get some more color on how you're thinking about that, what that means for 2024, how you're thinking about interest expense. I know it's a little early, but just help us better understand your broader thinking. And then related to the cap structure is in terms of BD M&A, how do you -- sort of square the two goals of deleveraging and adding assets? And how are your -- how are you thinking about what to prioritize? Bearing in mind that it may not necessarily be an either or, but just give us your latest thinking.

Okay. So I'll start with that one, and we'll start with the debt piece. So just a reminder, to investors that in the first quarter, the company did make a $250 million voluntary debt paydown of our variable rate debt, given recent Fed increases, the cost of that, that is now the most expensive debt in our debt stack. So as we look at future voluntary debt repayments we'll certainly be focused on that. And when we think about the 75% of our free cash flow will be generated in the back half of the year, that will be a decision that we'll be looking at in the second half, in terms of capital allocation, capital deployment, further reductions in that variable rate debt. The second part of your question, David, is really integral to it because since the spin, we've been saying that we would be looking to bring a balance between growth, external growth sourced through business development, M&A type capital deployment and balancing that against the near term and certain benefits from debt reduction. And that's exactly what we've done to this point in time. We've deployed about equal amounts of capital to growth over the eight deals we've completed. And about $450 million in total of voluntary debt repayments. And we expect to continue to do -- we expect to continue that strategy. The -- in terms of how we think about capital deployment in the BD program, the change in the interest rate environment, we've said this before as well, has raised the bar on capital deployment through BD, and causes us to think about opportunities that result in more near-term visibility into revenue and EBITDA accretion. So with those comments, Dave, I think we've addressed that question.

We'll move next to Umer Raffat at Evercore.

Hi guys. Thanks for taking my question. I'm still trying to make up my mind on reading all the details of the quarter. Clearly tracked ahead, but I know there are some one-timers in there as well. So could you lay those out? First, also, first, perhaps on the cholesterol franchise ex U.S. tracking ahead, relative to whether the trade receivables build was specifically focused on those cholesterol meds. And secondly, also, what exactly drove such a big tax lowering?

So I'll start with the second part of that, Umer. So we have a global tax structure that has a significant amount of exposure in Europe, where we have a significant presence, especially in Switzerland. So it was really a result of the -- the international tax planning structure that we have in Europe that generated that benefit. And as opposed -- to address the first part of your question, June was a strong month across the board for the company. cardiovascular played a role in that. And I think it really relates to the relatively strong global demand that we see in the Atozet franchise.

Did that answer your questions, Umer?

I guess, Kevin, I just look at it as -- your cholesterol med between Atozet and ZETIA is about $200 million a quarter. And this quarter, it was about 25% ahead, like there must be some one-off in there, no?

Yes. So we had kind of a slow kind of volume-based procurement implementation in China, which impacted one of the rounds, which kind of gave us more opportunity for the ezetimibe franchise, and Atozet is just doing exceptionally well in Europe. France, for example, is doing exceptionally well, double-digit growth with Atozet in France, it's creating a lot of uplift in terms of overall volume, and we don't really face a lot of price erosion on Atozet right now. So I think it's just very, very strong, robust quarter with regards to a couple of issues. One is, opportunity with ZETIA because of slowdown of implementation of Round 7 and Atozet growth in Europe. Does that answer it?

That's very helpful. Thank you so much.

Sure.

We'll move next to Jason Gerberry at Bank of America.

Hello. Hey guys. Thanks for taking my question. I wanted to just ask about the interchangeability commentary on Humira. It seemed like in the past, you guys maybe downplayed that as important to the commercial. And I'm wondering if there's like any kind of revised view just given how AbbVie's contracting practices have made it difficult for biosimilar adoption? And maybe now interchangeability is important. And then along those lines, then, did this become a race with Teva to be the first one to get this interchangeability designation? Thanks.

Good question, Jason. So in regards to interchangeability, it was always something where a couple of years ago, when we were starting going down the path of developing along with our partners, obviously, Samsung, this asset, it wasn't something that was on the top of minds of PBMs or others. It only came about recently because one of the competitors said, oh, we've got interchangeability designation for working on it for a lower concentration business. And obviously, the high concentration citrate-free business is about 85% of the overall business in the U.S. So you've probably seen recently that our collaborator, Samsung, published essentially our Phase IV trial with -- that shows really kind of very positive outlook for -- we met all the endpoints for the interchangeability study. So we do expect the interchangeability indication by next summer. I can't really comment on what's going on with Teva or anybody else in terms of that matter in terms of their race to get interchangeability. But what I will tell you is in our discussions with the PBM folks, what they've told us is, look, what's most important to us is obviously let's contract on price, let's see how competitive things are because there's kind of a duality of the market right now. There's about 40% of the lives covered in the PBM world, are kind of what I would consider low WACC, low rebate, in order to be able to give an opportunity for patients to have a low out-of-pocket expense experience for their biosimilar asset. And then there's the high WACC, high rebate, which really essentially is the game that AbbVie is playing in terms of being the originator. And so what I will tell you is that obviously, that's an ongoing discussion, and we feel very good about our success to date in terms of where we're going with that. But most importantly, they look for reliability in manufacturing. They want to look at the pen design. We just got the Arthritis Foundation designation as really being a very unique pen design. They look for real-world evidence. It's a very important thing. And we have seven million units sold since 2019. And in Europe, now in Canada and Australia with excellent real-world evidence. So those are the kind of attributes that one looks for in order to be able to differentiate in the market, the indication -- or rather, getting the interchangeability indication just gives an extra added boost. And I think that most PBMs know that if the studies are ongoing and now with the Phase IV study reporting out that we met end points it's just going to be basically a cost of doing business.

We'll go next to Navann Ty at BNP Paribas Exxon.

A follow-up on HADLIMA. Just wanted to hear about your dialogue with PBMs and health plans on your low WACC and high discount strategy. And do you used to expect most market formation in 2024 and 2025? And will the high concentration will be a game changer? Just a bit of a follow-up on the previous question. And then can you also give us more information on the missing data on ebopiprant and the timing of the additional clinical work.

Yes, I can give you some of the information on the first part of the question, and then I'll hand it over to Sandy to update on ebopiprant. So in regards to what's happening right now with the PBMs and with HADLIMA, as I mentioned, there's kind of a dual strategy, a dual reality that's happening in the launches as we speak. There are some, AbbVie being one of them, high WAC, high rebate and others that are kind of following that route. And then there's the other group that is essentially following the route where we basically staked out the claim because we've always believed that the value proposition of biosimilars is to provide savings to the system and also more importantly, savings to patients, in terms of their out-of-pocket costs. And keep in mind that most patients, obviously, their out-of-pocket costs are going to be related to what the WACC price is. And so that's been our focus and our strategy and far, as I've said in my script, at the beginning of this hour, we started to really see some good pull-through coming through. And I've been saying for the last couple of years that I think that 2023 and '24 will be kind of the market forming years as you kind of get on access to formularies and ultimately, then the real revenue generating and the real market formation as it pulls through is really in the late 2024, 2025 time frame as you start to see the real uptake because I believe, by then, a number of things are going to happen. For example, my estimate right now is that 40% of the lives covered to date, essentially are what I would consider the low WACC, low rebate, low out-of-pocket expenses lower as co-pay in that segment, in the Humira biosimilar segment. we will -- we're very strongly positioned there because of all the attributes I've listed out a number of times before. And you've seen some of the early successes we've had, whether it's Prime in terms of the one third of the lives covered there, whether it's UnitedHealthcare, whether it's half of the lives covered there. Now just this morning, we got notification of Centene, which is another five million lives covered. These are all areas and PBMs and areas that are focused on that. low net cost and ultimately passing on the savings to patients. So we feel really good about where we are and where we're going with this product. We've always felt really good. And I think that's kind of the way I see it going forward. We do, of course, have both concentrations, high concentration citrate-free, as well as low concentrations available for our customers, and we feel I think we're on the right track. I'll hand it over. Navann, did I answer the question? Or did you need some more clarity on HADLIMA?

Yes. Thank you for the color.

Okay. So I'll hand it over to Sandy now to address the ebopiprant question, Navann.

So Navann, to answer your question, as you know, we've been doing quite a bit of additional preclinical work to progress asset. And we've been able to take a look at that data as well as the clinical data that was obtained by ObsEva during their clinical studies and as well looking at the technical work that is necessary to get us to a clinical formulation. And it's clear that there's additional preclinical work that we need to do before we take this forward to the development phase in humans before we get to Phase I.

And we'll go next to Chris Shibutani at Goldman Sachs.

This is Roger on for Chris. Just a quick question from us. And maybe you touched a bit on this already in your earlier comments on BD, but how are you thinking about the relative scale of your biosimilars and women's health businesses, have you been seeing any more opportunities in women's health as of late?

I can address that, Roger. So we made that -- we announced that deal last year with Henlius to bring in two assets in the biosimilar space. We're being very opportunistic about it. Wherever we see opportunities, obviously, the next kind of windfall will be the IOs and that's in the 2028 time frame that we see that happening. So there's things that we're working on in that space. And so we feel good about the fact that the portfolio we have today, not only with Samsung, but with our Henlius partners now. And going forward, what do we see with women's health. Look, we've looked through a number of companies and products with our outstanding business development team. We do see opportunities in women's health. But I will underline the following. Where we started this journey, we were focused on exclusively to women in terms of the women's health space. And now we're kind of opening the aperture and looking at those conditions disproportionate to women, which can include a number of different indications and a number of different therapeutic areas that we feel could be a really nice fit with our overall structure and what we're trying to do. So we've got a lot of things we're looking at right now. We're looking at some very interesting assets, both in the ready to launch or recently launched space. as well as kind of the mid-stage development cycle as well. So very committed to that as well, Roger. I hope that answered your question.

And that does conclude the question-and-answer session. I would like to turn the call back over to Kevin Ali for closing remarks.

Well, I will just say that I want to thank everybody for tuning in, and we'll talk to you soon. We're very proud of the results of the second quarter, and we'll be speaking to you soon. All the best.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.