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

Thank you, Mary. Good morning, everyone, and thank you for joining our fourth quarter and full year 2021 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 today for the Q&A portion of the 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 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 as 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. And welcome to today’s call where we will talk about our results for the fourth quarter and full year of 2021. Let me start by saying that our team of 9,500 employees, our founders did what we said we would do in 2021. We achieved all the financial objectives we laid out at the time of the spin and also began to build on our existing portfolio to fulfill our vision of becoming a leader in women’s health. In 2021, we delivered on our financial commitments. Full year revenue of $6.3 billion and adjusted EBITDA of $2.4 billion, equating to just below 38% adjusted EBITDA margins and are above the high end of the tightened guidance ranges we provided last November. Importantly, in 2021, our growth engines, Nexplanon, fertility and biosimilars, all grew double digits, and we continue to expect double-digit performance from all three again in 2022. Now, we exited 2021 on a very positive note. In fact, the fourth quarter marks the first time in our product portfolio as a whole has grown. Sales of our portfolio of products that is ex-supply sales grew 1% in the quarter, overcoming the headwind from loss of exclusivity and the impacts from the Volume Based Procurement or VBP initiatives in China. We’re encouraged by the progress we see in several key areas. First, let’s look at our Established Brands franchise. This is a portfolio of 49 products that includes brands with significant customer loyalty. We have said, once the impact of the most significant LOEs were behind us, that we can stabilize this business such that revenue would decline in the very low single digits, and that we would use the significant and durable cash flows to further invest in our growth engines. And…

Thank you, Kevin. As I’ve done in previous quarters, I’ll remind you that our results prior to spin-off are presented on the carve-out basis of accounting, which is a GAAP convention, and it’s not intended to present results as if Organon were a standalone company. So, I want to be clear, as we discuss results, that because our spin was June 2nd, it won’t be until the third quarter of 2022 that we can draw a true apples-to-apples comparison to prior year results where all P&L line items represent post-spin standalone financials for Organon. So, until that time, revenue is where we’ll have the best comparability to prior year periods, and that’s where we’ll start the financial discussion. So, turning to slide 7. Fourth quarter revenue of $1.6 billion was down 1%, both as reported and at constant currency. We saw solid performance from our growth franchises in women’s health and biosimilars and that was offset by the decline in Established Brands as well as a decrease in supply sales. As Kevin mentioned, the underlying portfolio of marketed products performed well. It grew 1% in the fourth quarter with volume and price contributing favorably and offsetting headwinds from LOE and VBP. And on slide 8, you can see this depicted graphically on the revenue bridge. So, in the fourth quarter, the year-over-year negative impact from LOE was approximately $50 million. The impact from LOE moderated in the back half of the year as the erosion curves continue to flatten for Zetia in Japan and NuvaRing in the U.S. And going forward, our LOE risk is very limited with remaining total exposure of about $350 million to $450 million over the next four years combined. Continuing to read across the waterfall chart, and as Kevin mentioned, the Established Brands portfolio has…

[Operator Instructions] Our first question comes from the line of Jason Gerberry from Bank of America.

Hey, guys. Good morning. Thanks for taking my questions. First one is for Matt, just curious, talking about EBITDA margins. I guess as we look out over the next several years, you’ve got some pipeline investment ongoing. And just curious if you see kind of the next few years as a period where margins should continue to erode a little bit, or do you have more of a flattish margin outlook in that period before we’d expect the pipeline to start contributing? And then, if I heard correctly, just on the modeling side, I think you’re expecting a Dulera generic, although I always kind of assumed this was probably too small of a brand for a generic to make the investment. So just curious, do you have a specific line of sight on a Dulera generic? And can you just clarify how much the China Marvelon and Mercilon contribute to 2022 guidance?

Okay. So, I’ll work backwards there. The most recent deal announced for Marvelon and Mercilon really adds a de minimis amount to 2022. It’s within the error bars of the guidance that we would have created, Jason. So, it’s just not material. On a percentage basis, right, return on capital valuation metrics, this was an outstanding deal for the Company. It’s just not that large. I think it’s a great example of what justifies the spin-off and that there’s lots of terrific opportunities that were just too small for Merck to focus on, if the business stayed within Merck. But this is just -- it’s a very sensible deployment of capital. It’s not large in terms of return on capital. It’s well in excess of our benchmarks. When you look at the acquisition multiple in terms of enterprise value to EBITDA, significantly below where the Company trades. So, it’s just a sensible deal. Over time, we expect this to be a solid contributor on a return on capital basis. But the absolute dollars are small, like I said, Jason, especially, so for 2022 because it’s only a partial year impact. As far as DULERA goes, it’s always challenging to try and time the entry of a generic competitor. So, we take just a sensible path of assuming a midyear convention and a typical erosion curve for a product of that kind. You could be right in terms of estimating that the product may not draw much generic interest, but it’s hard for us to tell. And so, we’ve been somewhat conservative as we think about Dulera, and we’re assuming a midyear convention and typical generic erosion curves around that, and maybe we’ll be surprised to the upside. On EBITDA margin. So, we have said that as we’re looking to develop…

Your next question comes from the line of Chris Schott from JP Morgan.

I guess, my first one is kind of a two-parter. But I’m just trying to get some more color around the $600 million or $700 million year-over-year volume growth that’s reflected in the guidance. I guess, on the surface, it seems like a big number. And I’m just trying to get my hands around what exactly is driving that? So how much is Nexplanon and biosimilars, some of the growth drivers you talked about versus how much of that is coming from the established product division. So, any color there would be appreciated. And maybe just kind of linked to that, as I think about the longer-term established product division, you’re talking about almost flat sales over time. Can you elaborate on the price versus volume dynamics that you need to assume to get there? So, is the 3ish percent price erosion that we saw in 2021, like a good run rate and that you’re going to need to see pretty healthy volume just to get to flat, or do you think over time, we can get a more stable price dynamic as well, as we think about the components that go into that longer-term guidance? Thank you.

Yes. Thanks, Chris. So, that number that you just cited, that 3%, that has been our recent history in terms of the average price decline that we’ve seen across the Established Brands portfolio and a number approximating that is what we have factored into 2022 guidance. And if I was sitting down to do the 2023 budget with the Company right now, that -- we would probably use a similar figure. So, that’s a good number, I think, for a price impact in Established Brands. With respect to your first question on where the volume growth is coming from, I think one of the best things about this guidance and the Company’s internal budget as we’ve prepared it, is that growth is pretty evenly distributed among those pillars that I mentioned. So, Nexplanon, double-digit growth; biosimilars, double-digit growth; fertility, double-digit growth. We’re not overly dependent on any one of those items. And it’s just one of the things that I think is confidence inspiring in the forecast is we’ve got a lot of pans in the fire this year to be able to deliver volume growth along the lines of the 10% that we’ve -- that we’re guiding to.

And if I can, just a quick follow-up on that -- sorry.

No. Chris, one thing I wanted to just kind of articulate around Established Brands is China is very important for us. It represents about 20% of our overall Established Brands globally. By the end of 2022, by the end of this year, 90% of the portfolio will have been through the volume-based procurement process. So we do see potentially, obviously, growth coming from China with the Established Brands business, given the success of our pivot to retail since 2017. So, that’s one of the areas where we’re going to be able to take volume, not necessarily price, but definitely volume growth will be very strong in China and other parts of the emerging markets. And when I start to turn my attention to Europe, we’ve dealt with pricing erosion in Europe for years. It’s been basically priced out. So, now it’s stabilized. So when you start to think about it, in my introductory comments, what I said is all the therapeutic areas in the Established Brands business grew in 2021 in the year of the pandemic and all the volume procurement stuff except for cardiovascular, where we’re still washing out from the LOE effect in Japan for the ezetimibe franchise. So, once that washes out, -- when I say -- you’re talking about two-thirds of our business, high-margin business that is essentially flat without really a lot of price and good volume growth, it really will give us the oxygen to reinvest in many of the other portfolios that are growing double digit, as Matt mentioned.

Excellent. And just my follow-up was that, on that number, I think you mentioned only about 20% or so is COVID recovery. If I then look at the remaining piece of growth, is that kind of like a reasonable assumption as we think about the longer-term model about how much volume could contribute in any given year? So, let’s take that $600 million or $700 million less 20% is kind of like a -- is there anything unusual about ‘22 versus a typical year in terms of volume growth?

When you go pillar by pillar, as I’ve described them, I don’t think that there’s anything unique about 2022. Nexplanon has a lot of runway for growth, given its relatively small market share in the United States and around the world. Fertility has the favorable macro trends that we spoke of in terms of increasing maternal age as well as governments feel like they need to address low birth rates. And biosimilars business, as Kevin described in his prepared comments, is large and growing. So off the top, I would say, absent that small piece that we believe is assigned to COVID recovery, the volume growth we’re seeing in 2022 should have legs to it out into future years. How many is hard to say. But for the near term, it does look repeatable.

Yes. And Chris, there’s nothing specific about 2021. It is -- essentially, we expect the same type of volume growth going forward. It is a new normal for us.

Your next question comes from the line of Greg Fraser from Truist Securities.

On the fertility business, how much market share do you have in China? And where do you hope to grow share to over the next few years? And will you need to bring in additional products to maximize your fertility business in China, or are you well positioned with your current portfolio? And then just one other question on business development. Do you plan to remain focused on assets within reproductive health and conditions unique to women in the near term, or are you also looking at more broadly at the products for conditions that disproportionately impact women? Thank you.

Thanks for the question, Greg. So, in regards to China, we saw some really good growth this year, 23% growth actually in 2021 versus 2020. And that’s due to the fact that there was obviously some pent-up demand, but also, we’re seeing a lot of movement in China with regards to fertility, given the fact that there’s some -- a lot of news around the three-child policy, and there are rumors out there that obviously the government is already starting to take kind of notice about the fact that maybe they need to start to do things to keep tourism in -- medical tourism inside the country, so there’s a lot more investment in that area. So currently, our share in terms of China is very strong and it’s growing actually very nicely. When I start to talk about -- in China, I don’t have the number exactly off the top of my head, but it’s close to -- closing in on almost a third -- a third -- in terms of the third of the business, split between us and the other two manufacturers in the space. And we’re adding more sales force as we speak to overall China business. So, we do see China as being a very major contributor. If I start to look at the contribution of overall, the business, U.S. is about 40% of the business for fertility, and China is about closing in on 18%. So, it is a fast-growing business. It’s a business that we want to invest in. And when I think about business development there as well as globally what we want to do in fertility, products, diagnostics, there is some really interesting things happening in the space. So, we are busy right now speaking to various companies right now in…

Our next question comes from the line of Umer Raffat from Evercore ISI.

Kevin, I’ve been thinking about some of the commentary you guys have been sharing on the four growth pillars, how they’re all sort of evenly driving that $600 million in volume this year. But then I’m also looking at consensus into next year, which is ‘23, where there’s only $100 million worth of growth being modeled in. And I’m almost wondering how -- do you guys expect the momentum to continue? I’m not necessarily asking for ‘23 guidance. I’m just saying, is there any reason you see why some of the growth numbers you’ve talked about on the base business should dampen? And how do you think about the magnitude of first year ramp on a Humira biosimilar knowing that as much as you guys will have the high concentration, there are Amgen, Alvotech, [indiscernible] and there’s a few other players that will have it too. So would really help understand sort of the direction things are heading.

So, Umer, thanks for the question. Good to hear you again. Listen, in regard -- let’s start with the last one and then we’ll work backwards. Look, Humira, the biosimilarity for Humira, it’s going to be an exciting period of time. We’re going to be second to market. You know as well as I do that there are some conditions essentially for succeeding in that business. Speed to market is critical. We’ll be second just after Amgen’s. We’re coming into that market with our collaborator, Samsung, really focusing scientifically what payers need. They want the high concentration. They want the citrate-free. They want an easy-to-use innovative pen mechanism. We have all that. Plus, we have real-world evidence because of the Biogen launch of Humira biosimilars in -- because that’s our partner in Europe as well as our own launches in Australia and Canada. So, we’ve got all of that as a package that we’re bringing to market, and we’ve initiated the interchangeability study so that we’ll be able to report out and have that as well available to us in the 2024, 2025 time frame. So, we feel very, very -- very excited about the opportunity to compete in that space given the fact that it’s going to be a $20 billion LOE at the time of LOE for the Humira biosimilars. So, I think it’s going to be rather quick. 2023, I think, at this point, PBMs are kind of doing the strategies in regards to understanding what it is that they want to do. But however, I do think that in the 2023 and 2024 time frame, it’s going to be a full out, very competitive marketplace. I think you’re going to see not small molecule price erosion but also not the earlier stuff that we saw in…

Our next question comes from the line of Navann Ty from Citi.

Hi. Good morning. Can I please ask about Nexplanon run rate, please? Can we assume that Mexico represents most of the increase ex-U.S.? And is higher demand in the U.S. from DTC and physician training? So overall, do you see Nexplanon sustainably decoupling from lower wellness visits? And then, I have a quick follow-up on Dulera. Could we see upside from Lupin’s delayed generic? Thank you.

Yes. When I look at the performance of Nexplanon in 2021, it was really an amazing year, even in spite of the pandemic. I mean, you’re talking about essentially 12% growth for the franchise, in spite of, as you mentioned, wellness visits not popping back up. We’re still seeing a 20% decline in wellness visits as we speak today. So, there is somewhat of a decoupling as you very rightly put it. We do see opportunities because of the fact that we’re working on a new go-to-market -- let’s just focus on the U.S. for the time being, and then I’ll expand my comments to being outside of the U.S. We do see opportunities in the U.S. given that we’re working on new go-to-market models; we’re working on essentially digital processing in terms of what we’re doing; we’ve really put a lot of efforts in terms of our clinical training programs to certify physicians, almost 20,000 physicians in a pandemic year. That’s way -- far more than what we’ve ever done pre-pandemic years. And so, we’ve got rep visits back up to where it used to be pre-pandemic. So, all that put together, plus our DTC campaigns and all the things that we’re doing. We’ve almost got 350,000 visitors to our internet site on nexplanon.com, that’s also starting to work. So, we feel very bullish and very good about Nexplanon in the U.S. Now, going outside of the U.S., that’s the exciting part. Because while there was attention on Nexplanon in the U.S. pre-spin, there was literally very little at all attention paid to Nexplanon outside of the U.S. pre-spin. And to that end, just before spin, it was 75% of our business of Nexplanon was in the U.S. and 25% was outside of the U.S. Today, as I speak to you, it’s changed; so, two-thirds in the U.S., and one-third outside of the U.S. The business outside of the U.S. is growing faster, but it’s choppier. The reason it’s choppier is because a lot of these markets are single-payer systems, or for that matter, in the emerging markets, where you start to see very much kind of these government tender procurement processes that makes it kind of a sawtooth type of performance. So, that’s why we don’t look at Nexplanon in any single quarter defining what happens in a given year. We have to look at Nexplanon as a kind of a longer view, of a year view. And I do believe strongly, I know that Nexplanon will be a $1 billion business. It will be a business that will continue to grow at least of what you saw in 2021. And we’re going to be doing everything in our power to continue the growth outside of the U.S., where our managing directors are focusing on it, as well as in the U.S., of which I’ve just detailed some of the things that we’ve done.

Our next question comes from the line of Steven Scala from Cowen. Your line is open.

Two questions. First on Nexplanon, was there any change in inventory levels in the fourth quarter versus the third quarter? And then, secondly, I appreciate that any business development needs to make sense. But you did four deals since the IPO out of what I think was 140 potential deals that Organon says are out there. So, rather than four deals, it seems the number should have been 10 or more deals to build this business at a decent pace. So, why haven’t there been more transactions than we have seen so far? What has been the reason? Why transactions have not gone through that you’ve kicked the tires on? Thank you.

So let’s start with your first question, in regards to Nexplanon and inventory management. Essentially, there was a buy-in in terms of price protection by the end of the year in the U.S. So, there was a little bit of volume buildup in the U.S. in the fourth quarter. As well, of course, we had the Mexico tender, which was nearly $40 million. So, that also was coming kind of a one-off in the fourth quarter in Mexico that was delayed from Q3 to Q4. So, there was a little bit of inventory, but this is not a product -- because a lot of the business in the U.S. is buy and bill, it’s a lot of clinics, and so you don’t have the inventory mechanisms that you would have in other businesses. So, it’s not a product where we really have large inventories being developed in any given place. So, we’ve got very healthy inventories. We’re managing it very well in that respect. Now, in regards to your second question…

Kevin, may I ask, can you quantify the build in the U.S.? Was it $20 million…

Yes. It’s about $15 million that essentially was the buildup in the U.S. So, not a great number.

Okay. Thank you.

Now, in terms of your second question regarding business development. If I told you the number of deals we looked at, I mean, we looked at a number, but we have a high bar. We looked at over 60 potential deals that we looked at. We’re ongoing right now. There’s more than probably a dozen we’re looking at and we’re in deep discussions with. So, we wanted to make sure that the four deals that we did, the first four, did the following. One, they either met significant unmet needs and really new mechanisms of action, like the Forendo deal as well as the ObsEva deal; or two, they had deals that we could count on today, like a launch product like JADA as well as the Marvelon and Mercilon. As we start to build it out, sure, I mean I definitely would have liked 10, but we’re going to start to increase the pace of business development. We’ve got a lot of things we’re looking at in the biosimilar space. We’ve got a lot of things we’re looking at in the women’s health space, unique to women’s health as opposed to both conditions that disproportionately impact women. So, that’s another level that we’re going to be looking at. So look for more, because we’re trying to make the best deals that both, fit the unmet needs that we talk about and that are good valuations, that our shareholders and investors can look at us and say, look, that was a good deal, that was the right price, we didn’t overpay for assets that we believe that we needed to get into. So, I think we’re taking a very balanced view. And I would tell you, look, in a pandemic, first six months of our life after launching out, and we do four deals, I’m very proud of the team that they were able to get that done in that type of chaotic time frame.

May I follow up?

Sure.

Yes. So, on the 56 deals that you didn’t do, which of the three criteria most often was the reason? Was it they didn’t fulfill a significant unmet need? Was it that you couldn’t count on them today, or was it valuation?

I think a combination of all the three. There were some deals essentially that we didn’t feel really met the unmet need. There wasn’t really a unique mechanism there that we could stand behind, or some other deals essentially where the valuations were -- essentially, we didn’t think it was worth it. And a number of other reasons. It’s quite a number of reasons we’re looking at in terms of what we’re doing. But look, we’ve got a fantastic Business Development head in Daniel Karp, who has long years of history, both at Pfizer as well as Biogen, and he’s got a team of 29 people who are really focused on this and doing some outstanding work.

May I follow up?

Sure.

So, there was 140 deals, I think, initially, and you’ve looked at 60. Does that mean, there’s 80 to go?

No, no. The 140 deals that we were looking at were specifically unique to women’s health. Now, the 60 were now outside of that where we looked at devices, we looked at Femtech, we looked at diagnostics. So, we’ve got a lot more to go down that list, and we’re actually in the later stages of doing some pretty interesting deals that you’ll hopefully see coming your way in the very near future.

The last question comes from the line of David Amsellem from Piper Sandler.

Thanks. So just a couple. So on Nexplanon, could you just remind us how you’re thinking about the exclusivity runway in the United States? That’s number one. And then, number two, regarding just the overall product mix, do you have a long-term target in mind in terms of the percentage of Established Brands as a portion of the overall mix. I mean, obviously, Established Brands is a pretty high portion of the mix. How are you thinking about diversifying down from that? And do you have a target in mind in terms of portion of the mix over, say, the next several years? Thank you.

So David, just real briefly about Nexplanon. We lose exclusivity in 2027 in the U.S. and 2025 in Europe and outside of the U.S. That’s one issue. But, as I mentioned earlier on previous calls, we have an indication we’re working on essentially to get an extension, so that we have a five-year efficacy of indication. And those studies started at the end of 2020. We expect to report out by the end of 2024. So, that gives us three years more of exclusivity in terms of marketing exclusivity, which essentially means if we launch in 2025 time frame, we could potentially and theoretically take it to 2028. Now, remember, generics can come in and market for a three-year indication in 2027, but they can’t market for a five-year indication, essentially. You can rest assured, we’ll do everything in our power to move everything over to the five-year indication because that’s what women want. They want a longer potential LARC availability to them that can take one minute to insert in the upper arm. So, we’re very excited about that five-year indication. We feel very good about it. And so, that’s essentially the status of that. In regards to the contribution of the Established Brands. Look, it’s two-thirds of our business today, somewhere in that vicinity, that range. But given the fact that it’s flattening out and we’re stabilizing that business, and I mean stabilizing, right, it will start to come down over time to probably half of our business, but good cash generation from there. And the other businesses that we have, biosimilars, fertility, contraception, JADA, all the other things that we’re doing will ultimately start to contribute more and so you’ll see a 50% split for everything else. And then, of course, in the later stages, if we’re lucky enough to be able to turn the cards over and launch 6219 for endometriosis, it’s a whole different game. That’s an exciting new future to think about.

Okay. And if I may just sneak in a follow-up question, and I may have missed this. Can you just talk about deal size? I know you’re looking at quantity, but what’s the extent to which you could do something more transformational? And I know that might have implications for the credit rating. But how are you thinking about that in terms of size, and ultimately, where you would go in terms of the rating?

Yes, David. So, right now, as we screen deals, we’re really not -- one of our screening criteria is not the size of the deal. My experience has been if you find a compelling target and you can make a good investment case around it, you can always find a way to finance it. Now, we’re operating under some, I’ll call it, goalposts from the tax matters agreement with Merck as part of the separation, but those are pretty wide. And so, we can use a number of financing pockets to make attractive deals happen. So, we’re not looking at any significant governors. We’re not turning away deals. Let me put it that way. We’re not turning away opportunities because of size.

So, if I can just summarize -- and thanks to everybody for your questions, your thoughtful questions. And just a summary comment. Our separation from Merck and our launch as an independent company has really involved a great deal of effort from every one of our employees who we consider as founders. Some like myself had really been working on this transaction for several years. To see the realization of our conviction that this portfolio in a different set of hands, with management focus and attention, can deliver the financial and operational commitments we set for 2021, is a proud moment for our team. And we look back, we can truly take stock of our many accomplishments. We delivered double-digit growth for biosimilars, fertility and Nexplanon. We stabilized our Established Brands business, which generates significant cash flow. We established a dividend, and we have wasted no time in building out a women’s health portfolio that tackles the areas of profound unmet need. All of this has been accomplished during a major pandemic, which should tell you something about how special the team we have at Organon. And I want to tell you that we’re equally committed and energized about doing the same in 2022. So, with that, I want to thank everyone for your time, and we’ll speak with all of you soon. Thank you.

This concludes today’s conference call. Thank you for participating. You may now disconnect.