I'd like to welcome everyone to the Organon & Co., First Quarter 2024 Earnings Call and Webcast. [Operator Instructions] I would now like to turn the call over to Jennifer Halchak, Vice President of Investor Relations. You may begin.

Thank you, operator. Good morning, everyone. Thank you for joining Organon's First Quarter 2024 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. Also joining us for the Q&A portion of this call is Organon's Head of R&D, Juan Camilo Arjona Ferreira. 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 would now like to 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 2024 first quarter results. We entered this year with a clear focus to deliver our 2024 financial targets, improving our financial position and positioning ourselves for future growth. And to that end, the first quarter was a very solid start. For the first quarter of 2024, revenue was $1.6 billion, with all 3 franchises contributing to a 7% growth rate at constant currency. I'm pleased to report that the Women's health franchise grew 12%. Our Biosimilars franchise grew 46%, and our established brands business continued its stable performance with growth of 2%. In the first quarter, adjusted EBITDA was $538 million, representing a 33.2% adjusted EBITDA margin and adjusted diluted EPS was $1.22. The strong performance in the first quarter strengthens our conviction in our financial guidance for the full year 2024, and we are affirming those ranges. We remain confident in our ability to deliver our third year of revenue growth on a constant currency basis, and we remain committed to delivering full year adjusted EBITDA margins that are in line with last year or better. From a capital allocation standpoint, we continue to believe this business can generate $1 billion of free cash flow before onetime costs, and we will be driving towards that number in 2024. That strong cash flow will provide financial flexibility to comfortably service our dividend, make progress on achieving a leverage ratio below 4x by the end of 2024 and to continue to do business development in line with the types of transactions we have completed in the last couple of years. This includes transactions in biosimilars and the recent commercial agreement with Eli Lilly to license 2 migraine assets. These transactions have solid returns, but importantly,…

Thank you, Kevin. Beginning on Slide 7. Here, we bridge revenue for the first quarter year-over-year. In February for modeling purposes, we suggested that you could consider evenly spreading revenue over the year. which would mean every quarter would be slightly under $1.6 billion in revenue, if you're working from the midpoint of our guidance range. We did a little better than that in the first quarter of 2024 driven by stronger volume especially from NEXPLANON and biosimilars, followed by recovery in injectable steroids namely DIPROSPAN, as well as continued growth from JADA. Outside of FX, the other revenue drivers were fairly neutral in the quarter. Taken in totality, these other drivers finished Q1 ahead of our expectations, which drove the margin favorability we saw in the quarter. We'll discuss margins in more detail shortly. LOE was about $5 million of impact in the first quarter, which reflects the LOE of ATOZET in Japan. The impact of VBP in China was also about $5 million in the first quarter and reflects lingering effects of the July 2023 implementation of round Round 8 that included REMERON and HYZAAR. There was negligible impact from price in the first quarter. The benefits of our NEXPLANON pricing strategy in the U.S. muted expected pricing pressure in other parts of our business, particularly in biosimilars and to a lesser degree, fertility. In Supply Other, we captured the lower-margin contract manufacturing arrangements that we had with Merck and have been declining since the spin-off as expected. And lastly, Foreign exchange translation had an approximate $30 million impact or 2 percentage point headwind to revenue, and that's a function of more than 75% of our business being generated outside the U.S. Now let's turn to performance by franchise. As has been our convention, I will target my…

[Operator Instructions] Our first question comes from the line of Umer Raffat with Evercore ISI.

I just wanted to focus on free cash flow for a quick second. it's about $109 million before onetime costs. And I guess the true free cash flow is $6 million for this quarter. So it's roughly flat, roughly neutral. And my question is, I knew the working capital was the biggest drag of about $300 million. But 1Q last year wasn't exactly similar. Wasn't it half that at $160 million. So how do we square those knowing that the ERP costs had actually come down but also knowing that maybe heading into 2025, 2026, you could potentially have NEXPLANON headwinds from a free cash flow perspective as patients switch to a 5-year regimen stead of 3-year regimen.

So we'll take the 2024 free cash flow part of your question for Umer. And in our forecasting, it's the seasonality of working capital that will start to reverse in the latter quarters of the year. And so that really enables us to recover -- to the $1 billion before onetime items that we are forecasting. Overall, onetime costs related to the spin-off, which were about $344 million last year. We do see that number coming down about 40%, and that will really all be real. You'll see that really in the back quarters of the year. So, just returning to the seasonality of that cash flow being more 70% driven in the back half really, the first quarter performance, Umer, just gives us confidence that we'll be able to hit the full year number.

And Umer, on your second question in regards to Nexplanon being a headwind in the 25%, 26% range. We don't expect the 5-year indication likely be instituted until 2026, first of all. And second of all, we see 2 reasons to believe that, that will not be a headwind first. There's always a possibility of taking price, but we haven't -- in terms of additional price in the 5-year indication, we haven't decided on that yet. There's a lot of research required, but that's definitely there on the table. And second, and probably more importantly, there's a large chunk of health care providers and patients who would prefer to actually have the 5-year indication who potentially right now are using other forms of contraception. So it is potentially a net gain for us as opposed to a significant headwind.

Our next question comes from the line of Balaji Prasad with Barclays. Our next question comes from the line of Terence Flynn with Morgan Stanley.

This is Dan on for Terence. Just 2 from us. I guess, first, just on U.S. NEXPLANON to get a little more color just on the underlying volume trends that you saw in the quarter and how you're thinking about the rest of the year. And then on HADLIMA, how you're thinking about maybe initially the opportunity in '25 at this point? And any color on some of your initial PBM contracting conversations.

Yes. Thanks for the question, Dan. It's Kevin. So I would tell you that the components of NEXPLANON growth this year in the U.S. are strong. We believe that we made the right decision in terms of moving price to Q1 within the queue, within the quarter, so ultimately, any kind of -- any type of buy-in and buyout scenario will happen in that given quarter. Also, demand is starting to really move nicely, both in the 340B channel as well as the commercial side of the things. So we feel really good and that solid. There's going to be a very solid year. Overall, I do believe it will be a double-digit growth year for NEXPLANON globally and driven by the U.S. performance. And there's just good signals coming out of a number of things that we've done on the ground in order to drive demand in NEXPLANON in the U.S. And secondly, in regards to HADLIMA, I would tell you that HADLIMA is also progressing very well. It's I keep -- I've said for -- it feels like forever now, but for the last few years that it's going to be a slow moving market formation period of time. Right now, you see, for example, more and more PBMs starting to move over to essentially prefer Biosimilars to HADLIMA. We want, of course, exclusive contract with the VA. And so there's going to be more of the market formation as you start to look at 2024 and 2025. And I think as you go through 2025 to 2026, you'll start to see much more erosion of HUMIRA. And as I've always said, as long as you're in the top 2 or 3, you will benefit from that opening of the market. And I continue to say that our peak revenues that we've signaled a couple of hundred million in the U.S. is definitely achievable -- definitely achievable. Hopefully, we'll do more than that as time progresses. But we feel very good. It's just the time continuum of being able to kind of push forward and do what we want to do on our strategy for HADLIMA, and I feel very confident about the product for the coming years.

Our next question comes from the line of Chris Shibutani with Goldman Sachs.

Two questions. Perhaps, if we think about the operating margin progression beyond 2024 based upon the progress that you're making so far? Can you give us a sense for your confidence of potential sources for where and the scope of how that could improve? Secondly, on business development, maybe update us on where you are in terms of seeing opportunities -- in particular, the opportunity that you had with Emgality was quite attractive. Are there more such opportunities do you favor certain segments of the business or geographies?

So I'll start, Chris, on the operating margin part of this. So as we look out into the future, we see margin accretion coming in a few areas. And that will be offsetting, we believe, sort of the constant issues that we face with price in our markets, which are highly competitive, as you know. On the upside, we will -- we believe that our product mix over time will be mixing towards higher-margin products as things come out of the pipeline and then become commercial. We see productivity efforts and overall cost of goods sold improvement efforts coming from the network rationalization work that we'll be doing as we transition away from Merck services. And finally, we believe that we'll be able to generate operating leverage off of our fixed costs which as you know, we're in the process of realigning this year, and you saw some of the benefits of that in the first quarter itself. So those are the margin up areas that we're really working hard to pursue and once again, as we referenced in some of the prepared comments that we believe will help us more than offset sort of that constant drumbeat of price that we see around our aggregated network.

Chris, in regards to your question around business development Yes, I mean there's going to be more and more of those type of deals that you saw with Lilly deal with REYVOW and Emgality. Our deals that we do is essentially focused on opening the aperture, as I've mentioned before, of women's health. In that case, it was migrane, which essentially 2/3 of patients who suffer from migraine are -- happen to be women. So there are opportunities. They're coming fast and furious over our desk in terms of regional specific, country specific, like, for example, China for China, we have opportunities. We do see China as being a growth country for us in the future in a number of different areas, including women's health, of course. So we'll continue to do that. We'll be very disciplined in the sense that we'll be picking out on those opportunities that clearly fit into our capacity and so that we don't really have to dedicate much operating expense to expanding that portfolio that we bring in. And essentially, it's just accretive pretty soon. And so we'll be doing more of those, and we'll always have our eye towards more of the larger deals as well that move the needle. And they are more infrequent as you would expect, but we're definitely looking there. And -- but this year, it's really all about focusing on our financial execution, on making sure that we deliver the numbers and even better, hopefully in the future in this year and working on our leverage and all those nice things that we need to do in order to be able to have more flexibility in the future to do more transformative things, and I think just stay tuned.

Helpful update on your perspective.

Our next question comes from the line of Navann Ty with BNP Paribas.

It's Jane-Marie for Navann. Can you comment more on what your expectations are for the HUMIRA biosimilar market for this year and the next considering the rise in HUMIRA [ assets ] and Rx after CVS Caremark effectively remove HUMIRA from its major formulary.

Yes, Jane. Sure, I can address that. So I do think it's what I've been essentially predicting for the last couple of years that it's going to be a slow, steady beat -- drumbeat of wins that you see across the channels, whether it's in the PBM world, and you've just mentioned 1 large PBM CVS deciding to go with a different product and obviously, the HUMIRA in terms of exclusivity which is one of the large PBMs. And then you talk about our strategy, which is really on the low net cost providers like the VA and Blue Cross Blue Shield, Medicare and Medicaid, which is about 40% -- 45% of the lives covered in the U.S. today, there looking more to try to save money quicker. And look, at the end of the day, more like -- something like about 25% to 30% of patients in the commercial plans today are still paying $1,000 or more per month out of pocket for the use of something like HUMIRA. And I think that is something that we're working to try to bring more savings to not only patients but the system so that there's more headroom for best than other innovative things that need to be done. So I do think that the market will open up slowly. It was very slow in '24, I think it will be more in '25 than I think it really will open up in '26 and beyond.

Our next question comes from the line of Jason Gerberry with the Bank of America.

Just a follow-up on some of HUMIRA. so it looks like Sandoz and Teva have had some success of these private label type deals with large insurer groups. I think Optum is still up for grabs, like is there -- do you see that as a strategy of interest to you? Because I know that at least with the exclusive to Cigna. And then another question just on next on NEXPLANON OUS, your 10-K, you talked about next year majority of countries where NEXPLANON is commercialized out by ex U.S., is this going to expire. So how do you think about that erosion profile with the loss of exclusivity in bulk of your OUS geography. Is that sort of typical OUS kind of down 30% or not a typical U.S. cliff type dynamic? Or is it better than that? Just curious how you think about the NEXPLANON OUS in '25?

Thanks, Jason. Let me take the first question, which is really around what's happening with the HUMIRA biosimilar kind of event or HUMIRA LOE event. Yes, I mean you said it right in the sense that Sandoz was able to acquire the CVS business and then Teva has announced something recently. And of course, Optum, we've got more than 50% access already in the Optum business as we speak today. And I do think that our strategy is resonating with our providers, which is, again, I'll reinforce. We do have, obviously, penetration into the Optum world in regards to a large PBM, but we also have really good pickup state-by-state level, whether you're talking about the VAs at various levels that we're talking about Blue Cross Blue Shield in various states, certain systems. And I think those are probably more resilient, more sticky business over the long term is that if you look at it as more kind of diversified the more diversified you are in the biosimilar business, the more you can retain share as it gets more competitive over time. And I still do hold the fact that I think in '25 -- '24 as the year progresses, you'll see better overall penetration into that world. But '25 will definitely open up for us in terms of what we expect to do with HADLIMA. Turning to your question about NEXPLANON. I don't foresee any market erosion for the ex-U.S. business. Look, 70% of our business is in the U.S. That's where everybody is going to be looking forward to try to penetrate first. And I think after that, you would get into the much, let's just say, less attractive pricing environment in ex-U.S., whether it's the access markets in the emerging markets or whether it's in Europe, I think that it's just too fragmented and too difficult to penetrate, unless you've got essentially the breadth of being able to get into the U.S. And I don't think, as I've mentioned earlier in my prepared remarks, I clearly think there's a lot of fact out there. This is not just suppositions, a lot of fact that would lead one to believe that this is a 2030 event. Our applicator alone globally has patent protection until 2030, and somebody would have to develop their own applicator, which in itself is not as easy as you may think because you've got to do studies around safety, around efficacy of the applicator device alone before you can actually show anything else in regards to the [ rod ] itself. So I think this is a 2030 event globally and beyond.

Our next question comes from the line of David Amsellem with Piper Sandler.

So 2 questions. One is longer term on EBITDA margins beyond control in spend, do you think there's room for margin expansion based on the top line. Anything in the established brands business that can drive margin expansion over time, anything in terms of the women's health business or just its overall footprint that can drive margin expansion over time. This is more of a beyond '24 question, number one. And then number 2 is, help us better understand long-term leverage targets, particularly with the 2028 maturities. How are you thinking about that? Looking let's say Teva, they have a leverage target in '27 at 2x. I'm not trying to pin you down on the target necessarily, but some of your peers do talk about that. So where do you get comfortable in terms of a steady-state net debt to EBITDA.

Yes. Okay, David. So we'll start with your comment on longer-term margin accretion, basically through revenue mix, I think, is your question. And really where we'll be able to achieve that is in what we have coming out of the pipeline towards the latter part of the decade and what we can acquire in during that time frame. So we -- I think we will continue to see stability amongst the portfolio of products that we have now. So I think really, the improvement in revenue mix comes from the relative mix of the things that are growing faster that are in the portfolio right now, and I'm mainly thinking about NEXPLANON, JADA and then what we bring into business development. In terms of leverage, really, since the spin, we've had the same commentary, the same view that this business can run very effectively at leverage levels underneath 3.5x. And how far underneath would be dependent on business conditions at the time or just the overall marketability of the stock in terms of investor comfort with leverage ratio on this business. So we see ourselves getting to underneath 4x by the end of this year and then by 2025, getting to that 3.5x target that we've been referring to. So our view on that really hasn't changed. I think investor sentiment around leverage has changed but really, our view in terms of where this business runs most effectively has not. So we still feel the same, and that's sort of what we're targeting as we think about the capital structure going forward.

Our final question comes from the line of Balaji Prasad with Barclays.

Thank you for taking me back on again. Apologies for missing the earlier call. And again, apologies if this has already been covered, please feel free to refer to the transcripts if so. Refer me to the transcript. A couple of things. Firstly, on the biosimilar market, clearly, the private label moves with Cardiva, Zymo and what we saw with ALVO and Teva recently with [ Simlandi ] seems to be the 1 which is shaping the market and getting greater market share dynamics. So can you comment on your thoughts or expectations around that. On a related note, can you also remind us of HADLIMA path to interchangeability or is still on track for June approval when would you have to wait till Alvotec's exclusivity ends next year for you to claim interchangeability? One. Secondly, on the established brands side, now that we see Emgality and REYVOW in contributing. Can you help me understand a bit more on the dynamics here and the expectations for these brands going forward?

Balaji, its good to talk to you. So I would say the first question in regards to biosimilars and HADLIMA, I do think that it's a good signal, by the way, that, for example, the first signal being CVS, essentially going strictly with the Sandoz product. It really is a good signal for the market formation that we keep talking about itself. But remember, the market has split into 2 pieces. It's the PBMs that are about 5-or-so percent of the overall lives covered, and it's all the other low net cost providers, as I've mentioned many times, that represent about 45% of the business. And they're really more focused -- lives rather covered. They're more focused on low net cost products, they're not laying the rebate game as well that they're just focusing on lower net costs. So I think it is going to be very dynamic as we think about what's going to happen over this year and next year. And we're continuing to be very competitive, and our strategy is pulling through. We're among the top 1 or 2 Biosimilars currently and TRx and NRx U.S. And we feel very strongly that we'll be in a very solid position as time progresses to continually grab share from the originator and to drive for our peak revenues where we've always signaled that we feel very strong about in terms of the couple of hundred millions in the U.S. In regards to established brands and where we're going with REYVOW and Emgality, look, we've just started right now in terms of promotion in the EU. Some countries still have yet to come in, in terms of that. I think that will happen in the coming months. It's a fast-growing segment actually in Europe in terms of the migraine segment. And we are really well positioned because these are 2 products that are well known, recently launched, have a good reputation, and we've got a great team that are really, really excited and very energized about being able to take over and showing what we can do with these 2 products. And look for more of these type of deals to happen that are accretive that make use of our scale and our global infrastructure, and that really makes sense in terms of fitting into what we're trying to do and generating more cash for us to be able to do more business development and a larger scale over time.

If I could just have a follow-up to it. I appreciate the detailed explanation. In light of this performance, the outlook, I thought guidance could have raised possibly, how conservative are you with the guidance retaining or reaffirming what you had said earlier?

Yes. So we were certainly encouraged by the first quarter performance really across all of our franchises, Balaji. But the thing that we were considering most when thinking about what to do with guidance was really what's going on with foreign exchange. The dollar is persistently strong. When we created our initial guidance in 2024, the euro was somewhere between $1.08 and $1.09 it since come back. And so like we said in the prepared comments, when we look at the nuts and bolts aspects of our top line revenue, we're actually up on constant currency basis. And it's really just the FX dynamic that is causing us to be a little bit reticent about raising guidance this early in the year. We'll revisit this when we issue Q2 results. But once again, the performance in first quarter gives us a lot of confidence in the initial guidance that we gave, and we're just optimistic as we leg into the second quarter here.

That concludes our question-and-answer session. I would now like to turn the call back over to Kevin Ali for closing remarks.

I want to thank you. I want to close today's call by essentially repeating what I began today's call with, namely that we came into 2024. Looking at it as a year to focus on execution delivering on our projections, improving our financial positioning and of course, building for our future pipeline. And through Q1, we can definitely say that we're progressing well towards those goals. And I want to thank all of you for a great discussion today, and we look forward to continued engagement.

This concludes today's call. You may now disconnect.