Ladies and gentlemen, thank you for standing by. At this time. I would like to welcome everyone to the Organon Third Quarter 2021 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. . As a reminder, this call is being recorded. Thank you. I will now like to turn the call over to Jennifer Halchak, Vice President, Investor Relations. Please begin your conference

Thank you, Carly (ph). Good morning, everyone. Thanks for joining our third quarter 2021 earnings call. With me today are Kevin Ali, Organon Chief Executive Officer, who will cover strategy and operational highlights. And Matt Walsh, our Chief Financial Officer, who will review performance guidance and capital allocation. 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 and presentations section of our Organon Investor Relations website at 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 Form 10 registration statement 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 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 will talk about our first full quarter as a standalone company. Also, as today is Veterans Day in the U.S. and Remembrance Day in other parts of the world, we would like to thank all of those who have served, especially our own employee veterans. Let me start by saying I continue to be inspired by the commitment of our employees across the world. They are unified in the dedication to our vision, creating a better and healthier every day for every woman. Already, less than six months after spending into an independent company, we are delivering on our corporate and financial goals. Our year-to-date results have shaped up very much in line with our expectations with third quarter revenues of $1.6 billion and adjusted EBITDA of $636 million. And with about 7 weeks left in 2021, we have good visibility into the performance of each of our key three franchises for the remainder of the year. Accordingly, we affirmed our guidance and narrowed the ranges for revenue and adjusted EBITDA margin for full-year 2021, which Matt will discuss with all of you shortly. Importantly, we have been active on the business development front, as we told you we would be. We have executed 3 transactions in the last 6 months. This underscores our stated commitment to deliver healthcare interventions that address unmet and under-met needs in women's health. We're partnering with or acquiring companies to advance true innovation, something that has been woefully lacking in the area of women's health. Today, we announced our proposed acquisition of Forendo, a clinical stage drug development company focused on novel treatments in women's health. This acquisition brings a pipeline of candidates, including a lead candidate for endometriosis and a…

Before we dive into the specifics of our financial performance, let's start briefly with basis of presentation and make sure realign on exactly what numbers we're looking at, where we have apples-to-apples compare on that. On the plus side for an entire quarter of stable loan results. As I discussed in last quarter's call, our results prior to the June second spin off date are presented on the carve-out basis of accounting. Carve-out accounting is a GAAP convention, which has a lot of positives. However, it's not intended to present results as if Organon were a standalone company. So I want to be clear as we discuss results for this quarter and for the next 3 quarters, that any comparisons to prior-year periods will be somewhat apples-to-oranges, and that we'll be comparing Organon standalone performance to pre -spend carve-out basis of accounting. With that said, where we'll have the best comparability is at the revenue line. So I will be focusing attention at the top line as we discuss our performance. So turning to Slide 8, revenue for the third quarter was $1.6 billion, down 1 % as reported, and down about 3 % at constant currency exchange rates when We have the change in revenue according to more significant impacts. compared to the third quarter of last year and it's primarily related to the LOE of Zetia in Japan and NuvaRing's LOE in the United States. Continuing to read across the waterfall chart, the established brands portfolio has exposure to VBP in China. The third quarter of last year was approximately $60 million and was associated with the third round of VBP. The largest round so far, which occurred in the fourth quarter of 2020, and that included 4 of Organon's products. Singulair Pediatrics, Proscar, Propecia and Arcoxia In…

Thank you, Matt. Again, we are very pleased with how our year has been taking shape. Organon is very well diversified geographically and therapeutically. Our mix of business is uniquely aligned to our future vision. Additionally, timing is in our favor as we move out from the negative impacts of the LOEs and can focus on building out our vision. Further as the pandemic starts to recede, we have doubled down on our operational investments behind NEXPLANON on the U.S. to ensure that we meet her where she is. And we have started to see very positive impact of those investments in the first weeks of the fourth quarter. We've been very disciplined in our business development plans and have actioned on three attractive assets. 2 of them are earlier stage products with significant downstream opportunities, as well as the recently commercialized device in JADA, which is helping to address a significant unmet need. All in all, we're very pleased with our third quarter performance and all the evidence points to a solid fourth quarter to finish off the year. So now we are happy to take your questions. Thank you.

I think we can queue up the first question.

Thank you. . Your first question comes from the line of Chris Schott with JP Morgan.

Great. Thanks so much for the questions. My first one was just on EBITDA margins as we think about it going forward. I guess given some of the comments you're making about the timing of on-boarding and the R&D step-up gears directionally help us in '22 in doing formal guidance yet, I guess at a high level, I guess I'm assuming we shouldn't use 4Q as a run rate for margins. But when we think about year margins for next year, is it fair to think about those coming down a bit from '21 as again, it sounds like SG&A comes up, R&D comes up. So just any directional before that, I think would be very much appreciated. And then my second question was just on the pipeline build-out, you've done 3 deals this year. Should we think about these types of transactions which seemed like there's some R&D elements to them. They seem a bit smaller in size, is kind of the sweet spot in terms of acquisitions, both near and long-term? Or do we think about deal starting to skew towards larger transactions as you deliver. like if there wasn't capital constraints right now, would you be also mixing in some larger deals? Or again, is this -- these type of transactions more of the go-forward to think about? Thanks so much.

So I'll start with even a margin question, Chris. This is obviously sensitive territory because we're not providing 2022 guidance. They want to be clear on that. Directionally though, providing maybe some bumpers. I think the comment that you made, well, let's backup and just repeat some of the prepared comments which were geared to start to address this question, which is we know that R&D expense will be increasing in 2022 to support pipeline assets. This is -- we believe very important for the future sustainable revenue growth of the company, so you will see R&D expenses increasing. We've been very careful about how we are adding cost at the SG&A line to reach at what we believe our run rate expense. With every dollar that we're adding, we're analyzing it very carefully. That said, you had said Chris it looks like 2022 EBITDA margin was likely to be below what you're guiding for in 2021. I think directionally, that's a fair statement. You also said, how should we think about the fourth quarter EBITDA margin in the context of 2022. It might not be as low as that. I think that's directionally accurate. I think it probably makes sense to just stop there at this point. And we'll be providing quantitative, very transparent guidance in February.

Chris, to your second point, we've been working on these assets in terms of identifying, reaching out to potential targets well over probably 6 months a year before that. So we've been very disciplined, exceptionally disciplined in the way that we've looked at our business development portfolio. We did signal earlier on in the Investment Day that we're going to kind of using baseball -- it's kind of go after singles and doubles because we saw opportunities. Like for example, with Jada to solve a significant unmet need and postpartum hemorrhage. We saw an opportunity with ObsEva 's product with Preterm labor, a significant unmet need today in that world. And now we're very excited about the Forendo acquisition because they bring a new mechanism of action to treat significant issue around the world, which is endometriosis affecting nearly a 170 people -- 70 million women across the world. We see great opportunities there. I'd mentioned before, there is about a 140 assets out there in various stages of development. But having said that, let me be clear. We're not saying no to larger deals. We're not saying no to essentially anything that we believe that could be accretive ultimately down the road for Organon. We are open to whatever is actually going to be working best for us as a company. And so -- but right now what we see is opportunities that are really what we consider low-hanging fruit to go after in order to be able to really round out our portfolio and be a leader in women's health.

Thanks so much.

Your next question comes from the line of Navann Ty with Citi.

Hi. Good morning. Can you discuss your expectation among the recovery of contraception visit and NEXPLANON and when do you expect you to see any training programs to benefit NEXPLANON sales? And then my second question is around the cash balance, which was higher than I expected. Can you discuss the free cash flow generation this quarter and going forward? Thank you.

So let me take that first question. It's a very important question regards to the performance of NEXPLANON. The thing to keep in mind is the fact that we truly believe that NEXPLANON will be a blockbuster for all of us. We have patent protection until 2027 with an opportunity to extend it to 2030 as we start to round out and look at our 5-year extension data that will possibly come through and report out in the 2025 time frame. Having said that, we've invested really, truly invested in the operational opportunities in the U.S. And I'd like to point out 3 key investments and then ultimately, I'm going to lead to answering your question by after going through that. Clinical training programs, these are essentially just to keep you in mind that physicians or healthcare providers need to be certified and trained on how to insert and remove NEXPLANON in order to be able to prescribe the product. Prior to the pandemic, market average about 18,000 certifications per year. Since spin, that would essentially be June through September, we've done 10,000 certifications. We're essentially averaging in the second and third quarters nearly 13,500 certifications. That is a significant proxy for NEXPLANON uptake and performance going forward. Direct-to-consumer art marketing, we've invested in the direct-to-consumer, initiated a TV and social media campaign with a well-known celebrity. And more importantly, real-world users of NEXPLANON. 2 observations, Unaided awareness of NEXPLANON has increased when compared to the prior three months and our organic searches for NEXPLANON information have increased, as we have made significant, really significant improvements and enhancements to our nexplanon.com site, where we expect to see about 7 million visitors uniquely every year. Finally, representative activity as the COVID pandemic recedes over the last three quarters of 2021 versus…

And your next question comes from the line of Omar with Evercore.

Hi guys, thanks for taking my few questions. Not one question today. I kind of thought it will be helpful today to focus on the latest tuck-in that you guys announced on Forendo, just given the potential optionality. So if I may, perhaps a few quick ones, one, could you speak to endometrial thickness changes you saw in Phase 1B? And secondly, can you also speak to any ECG changes and or hypertension with this molecule so far. Third, perhaps just a selectivity for 17B, HSV-1 versus 11 beta or other one. And finally, would you potentially intend to develop it in oncology indications as well? Thank you so much,

Thank you for that question. And I will say that, first of all, we are truly excited about the Forendo announcement and potential acquisition going forward. It does -- I mean, when you think about endometriosis, it's really under researched, underfunded and misunderstood, with essentially an average of eight to ten years before women is actually diagnosed with the diagnosis endometriosis. In regards to your questions of endometrial thickness, we're still -- we're just starting our Phase II proof-of-concept studies. We expect to report out in the 2024, 2025 range with commercialization of this product if all goes well, knock on wood by the 2027-2028 time frame. It is something that we need to get back to as we start to go down deep in terms of understanding exactly the data in that respect. We can return back to you on that. But just to say this, currently, as you know, the treatment of endometriosis is really relied on pain medication and managing the symptoms in regards to endometriosis. Not necessarily the underlying issues that are essentially causing the problems. GNRH just for example, acts systemically at the pituitary level, cutting off all signals to females that the female reproductive system, which basically is plunging a woman into menopause and really causing all kinds of bone metal density issues. So that's why it's really short-term usage. FOR-6219, it's really targeting the estradiol pathway, essentially targeting only impacting estrone estradiol conversion process. And that process is exclusively responsible for endometriosis and ultimately all of the sequelae when you see in terms of inflammation and all the things regarding the pain and bleeding, all the issues go on. So we feel very excited about this mechanism. It is a potential and I underscore potential for disease modification, as well as managing the symptoms in endometriosis really at the site of where it really needs to be addressed. In terms of endometrial thickness and in terms of any ECG or any cardiovascular issues, we'll get back to you in terms of as we start to be able to get a better insight in terms of the data.

And your next question comes from the line of Steven M. Scala with Cowen.

Thank you. I have a few questions and then an observation. First, under the drug price for foreign proposal reimbursement for Part B drugs would go from ASP plus 6 to ASP plus a thousand dollars. This would seem to potentially encourage prescribing a Biosimilars over more expensive brand drugs. Can you put some numbers on it -- on that? To what extent could Biosimilar usage increase by simply reimbursement changes or do you think that that's not correct, that biosimilar use will not be encouraged by any reimbursement change? Second question is on the acquisition of Forendo. The total consideration of $954 million seems strikingly high. How would -- how much is that attributable to the lead asset versus the follow - ons. And what happens with the existing collaboration with NuvaRing for chronic liver disease. And then lastly, the observation. For a company that has a core strategy of business development, I'm surprised that business development is third or even last on the capital allocation priority list. So thank you.

So let's take the capital allocation question first. So the business generates strong cash flow today. The collective view of our former parent, Merck, our Board of Directors is that investors should be able to share in that cash flow in real-time and that the valuation of the company in a very sensitive time around the spin, was that the dividend will be an important consideration in achieving the right value on the company. So that was the reason for the institution of the dividend. And of course, once it's in, it does become the number 1 priority. The reason why organic growth projects come in number 2, Steve, is because these are products that are already in the portfolio. They've got a demonstrated track record of safety and performance. And so simply, introducing these products in new markets or potentially for adjacent indications are generally de -risked investment opportunities, and have very, very attractive risk adjusted returns. And I would also add, it's not a big consumer of capital in the overall scheme of things. So with the dividend being a relatively modest and manageable number, with the organic growth plans being de -risked and also modest and manageable, that still leaves really a substantial amount of our available operating cash flow -- free cash flow available to pursue the business development agenda. So I hope that explanation makes sense. In terms of the economics around the Forendo deal, of the number that you cited in terms of total consideration, 600 million of that are commercial milestones. So the product has to be successful commercially for most of the value of the deal to be realized and the considerations about $84 million up front and then approximately $270 million of clinical milestones. So we didn't wait the deal to be back-ended and dependent as much as we could justify commercial success of the product. And yes, most of the value has been ascribed to the lead candidate. And I think your last question was on Biosimilars. And we do view the current dialogue in Washington as very positive for Biosimilars, Steven. It's difficult to quantify the impact for Organon at this point. It will certainly be articulated when we provide guidance for 2022, but we do see the dialog in Washington as being favorable for our portfolio of Biosimilar products.

Thank you.

And your next question comes from the line of Greg Fraser with Truist Securities.

Good morning, folks. Thanks for taking the questions. Just following up on your comments around NEXPLANON. Would you intend to suggest that $200 million plus of sales in Q4 is achievable given the positive drivers that you mentioned? And then on endometriosis, clearly an area of women's health that need Forendo's assets appears promising, it's relatively early development. Do you say that it makes sense to have multiple shots on goal for endometriosis, or is this an area that more focus for Thanks?

You want to take the first question?

I will. So we do see a $200 million plus quarter as well within the realm of achievability for NEXPLANON. We wouldn't normally make those kind of definitive statements on a forward-looking basis, especially for the quarter that we're in. But we were -- we wanted to be responsive to any potential extrapolation of the Q3 results that we just announced on NEXPLANON. We do see it as bucking sort of counter to the trend going forward for NEXPLANON And so we decided to put some definitive commentary around what we see in Q4. And so yes, we do see knot of $200 million as a real -- we have high confidence in that figure for NEXPLANON Q4 sales

And Greg, to your to your second question in regards to endometriosis and shots on goal, a friend who does have a backup compounds to the lead, 6219 compound. So we feel very excited and extremely thrilled that we were able to work with Forendo and potentially acquire this company for this very exciting asset. And we look forward to being able to continue to develop this product out. And of course, they've got a very exciting earlier stage assets, not in humans yet in terms of PCOs, which is another significant unmet need. And I just want to reiterate the fact that we started this journey saying that there was significant unmet needs in women's health across the world. That there is -- this is the right time for a company like Organon to be born to take on those challenges of being able to resolve issues like postpartum hemorrhage, pre-term labor, endometriosis, PCOS. And this is the beginning of the journey in that respect. But we do hear you and Forendo does have backup molecules. Thank you

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

Hi. This is on for Jason. Thanks for taking our question. I just have 1. In terms of contracting for Biosimilars might bend during 2022, do we expect to have a line of sight on this contracting as the company believes that the payers will look to up the deal in the first half to mid '22 given the early entry post-buy in 2023. Thanks.

Are you referring to Hadlima specifically?

Yes.

Okay. There is ongoing right now discussions. It's early. We expect to launch in June of 2023 with our Hadlima or our HUMIRA Biosimilar. It's going to be a busy year in 2023, but we expect to be second in line in terms of overall launching sequence, which is obviously a very important aspect in terms of a sequence launch. And right now there are discussions. The unique thing about Organon is that the fact that the Biosimilar team essentially moved over from Merck. And they've been working for a number of years and have significant great relationships with all the PBMs as well as their ongoing discussions with them. You remember that this is a pharmacy

dispense product. And so it's going to be controlled and it's going to move very fast, we believe, by the PBMs to essentially take advantage of Biosimilar switch.

Thank you.

And your next question comes from the line of Charlie Yang with Morgan Stanley.

So I just have 2 questions, please. I think one is can you just talk a little bit more details on the Biosimilar price and volume dynamics going forward? And the second question is regarding the next one on outlook, how -- in our years, what would that look like in terms of the count, the growth acceleration and trend? Thank you.

Yes. So Charlie, I think that those are good questions. Let me take our NEXPLANON first. As we've said in last May in our Investor Day, we believe that NEXPLANON is place for strong double-digit growth. It was a double-digit growing product prior to the pandemic. We believe that will continue to be the case as soon as clinics start to open up as they are reopening now, and staffs are coming back online. That's what kind of why we made the investments we did and things like clinical training programs, direct-to-consumer marketing. All the rep activities that are ongoing right now, and many other things that we're doing right now in the space. Keep in mind that NEXPLANON really only has about 5 % market share. So there's tremendous room for growth going forward. And we do have patent protection for some time in order to build this product out. It will be a billion-dollar product for us. We feel very sure about that. And as I mentioned, first half of the fourth quarter looks very strong for NEXPLANON. Which is again, it's tied to the fact that as women go back into the clinics right now, there's opportunities to really be able to utilize NEXPLANON in a manner by which comes along with our vision of double-digit growth for this product and blockbuster potential. In regards to the second point, I think you were mentioning in terms of price volume activity around HUMIRA biosimilars. We expect, unlike say, for example, hospital products like infliximab and REMICADE, where the price tends to move a lumpy fashion, hospital-by-hospital, account-by-account. We do expect that it's going to move very quickly, not like small molecule erosion, but nevertheless, it's going to move fairly quickly in terms of price erosion with the loss of exclusivity of HUMIRA and moving forward in 2023, as you start to see all the launches of the biosimilars. And you're going to probably see anywhere between 7 to 8 biosimilar launches in the first, say, year of opportunities for biosimilars to come in. And so we'll see, I think significant erosion. Again, nothing like the small molecule type of erosion, but nothing like that you see, for example, in a hospital dispense biosimilars that you see today.

Thank you.

And your final question comes from the line of David Amsellem with Piper Jaffray.

Thanks. So just had a couple -- another question on Biosimilars and this relates Hadlima, but it's also maybe a broader question as well. With getting into changeability, how do you think about the role of interchangeability and what that means for your volume share or other products that don't have interchangeability? So this is really not the question about price but more question about value share, given the interchangeability dynamics. And then the second question I have is on ex-U.S. established brands, is there a good way to think about what maybe steady-state pricing erosion if there is any at all, could be over the long term, and it's a business that admittedly is a little more opaque. So I'm wondering if you could help us get a window into your thinking there? Thank you.

David, let me take the first question in regards to interchangeability because I know it's coming up recently. Look, the way that we've really looked at this market and let's just take Hadlima rather than HUMIRA biosimilars, you're right. Boehringer does have a low-dose interchangeability study that they've done. That represents a very small segment of the market and majority of the market is in high-dose. the high-dose segment. So really the following variables we believe are very important order entry, again, is very important and we're still planning to be the second to the market in June 2023. The high-dose citrate-free formulation is exceptionally important because that is essentially what the dominant form is today without these products, real-world experience. And we have that from successful launches in Europe, Canada, and Australia for our HUMIRA, Biosimilar, Hadlima, which -- where we launched that product in those in those place. Quality. Quality product from a manufacturing partner, you can rest assure that it's got top-line quality manufacturing. Like for example, Samsung Bioepis. But having said that, our thinking around interchangeability, especially interchangeability in a high-dose citrate free form, is evolving. And we're in very active discussions with our partner in Samsung right now. And we will take a decision shortly in terms of what needs to be done in that space. But we're going to be very competitive. We're not going to be essentially a company that's going to have all the right variables to launch and succeed in this segment, because it's an important area for us and not be competitive in regards to competitive pressures from other companies. But keep in mind, there are no company is perfectly positioned. As we look today in terms of being kind of early launching with high concentration citrate -free dose. Also having interchangeable designation for high-concentration at launch. Nobody has got that. So essentially, it's going to be that we launch with what we have and then ultimately you will see later post-launch, as many of the other competitors are stating, of the interchangeability indication coming through. And then regards to established brands, what we do see -- let's have Matt address that.

Yes. So just to ground you, Dave, approximately 92 % of our established brand sales are Across the entire portfolio we see, let's say, on a -- over a planning horizon, so 4 or 5 years, we see price decline approximately 3 % to 4 % per year. We see volumes actually across the portfolio growing about 1 % to 2 % per year. And that's what has been supporting our commentary that we see the established brands business having a low single-digit CAGR in terms of glide path revenue over the foreseeable future.

That's very helpful. Thank you.

Kevin Ali, could you --

Yeah. So thanks, everyone for your very thoughtful questions. But I just wanted to say as we wrap up today's call, I want to conclude by saying we are exactly where we want to be. At our first Investor Day in May, 1 month before spin, we laid out our plan for delivering low-to-mid-single-digit organic growth. We are delivering on what we committed to. Women's health driven by NEXPLANON in fertility remains positioned delivered double-digit growth over the intermediate period. Plus we're making the changes necessary to build the foundation for continued growth going forward. Year-to-date, Biosimilars are already delivering double-digit growth and we expect that to happen over the planning period. We are stabilizing the established brands business with volume increases in more than 50 % of our products and we believe we have a pathway to sustain performance over the coming years. This portfolio serves as a cash-generator contributing to the free cash flow that Matt referenced, enabling us to build out our pipeline with targeted and disciplined business development lifecycle management activities focused on our company's purpose to address significant unmet medical needs in women's health. With our 3 deals in the past 6 months, we have lost no time in tackling areas where new innovation is sorely needed. We've commercialized the Jada device to address postpartum hemorrhage. Launched in the US with plans to bring it to the rest of the world as quickly as possible. We've licensed ObsEva's investigational pre -term labor agent, a new mechanism of action in a space with few options. And our exciting deal announced today -- our exciting deal announced today, the proposed acquisition of Forendo brings an early stage asset with new mechanism of actions being study for endometriosis, plus an earlier stage assets for PCOS. In addition, we have a number of lifecycle management opportunities underway, including the potential for NEXPLANON 5-Year label extension and many, many more. Overall, our company is shaping up just as we planned: sustainable, predictable, and on-strategy. So I want to thank you and we'll talk again early next year. All the best.

And thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, you may now disconnect.