Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Organon First 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. Thank you. I would now like to turn the call over to Jennifer Halchak, Vice President, Investor Relations. Please begin your conference.

Thank you, Mike. Good morning, everyone. Welcome to Organon's First 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, guidance, and capital allocation. Dr. Sandra Milligan Organon's Head of R&D, will also be joining the call today at the Q&A portion. 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 will 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 first quarter 2023 results. 2023 is off to a very solid start. For the first quarter, revenue was $1.5 billion, up 3% at constant currency. Adjusted EBITDA was $518 million representing a 33.7% margin. Given this solid performance, together with our visibility into the remainder of the year, we're affirming our financial guidance for the full year. The first quarter of 2023 represents the sixth consecutive quarter of product sales growth with all three franchises positively contributing to our performance. At constant currency, the Women's Health franchise grew 3%, the biosimilars franchise grew 20%, and the Established Brands franchise, which represents approximately two thirds of our business grew 1%. The Established Brands franchise continues to demonstrate its durability. The franchise generates sizable and predictable free cash flow, which is an important factor in our ability to take a balanced approach to capital allocation. During the first quarter, we made progress towards reducing our outstanding debt with a voluntary $250 million prepayment on our U.S. dollar denominated term loan. Reducing our leverage over time is an important goal for us. We are committed to maximizing profitability in order to generate cash flow that supports that objective as well as to pursue business development strategies that enhances our growth profile. We will continue to look at business development through two lenses; tuck in opportunities that have the potential to drive nearer term revenue as well as longer term bets that could be transformative for Organon and for patient care. We are especially focused on building out our capabilities in Women's Health as we did in the first quarter with our strategic investment in Claria Medical, which is developing an investigational medical device being studied for use…

Thanks, Kevin. Beginning on Slide 9, let's walk through the drivers of the 3% constant currency revenue growth in the quarter. Starting with the impact of loss of exclusivity, LOE was negligible in the first quarter, and the small amount that we did realize was related to generic competition for NuvaRing in the U.S. In the first quarter, we had about a $30 million impact from VBP in China, and that was related to the fourth quarter implementation of Round 7, which for Organon included Ezetrol, which is sold at Zetia in some markets outside of China. Moving across to price, we saw approximately $30 million of price erosion in the quarter. This was primarily driven by customer mix and pricing in U.S. fertility, which was exacerbated by an unfavorable comparison to Q1 of last year when we had a more favorable customer mix in fertility. In addition, the established brands portfolio is subject to mandatory pricing reductions in the first quarter of 2023, and that was particularly the case in Japan and in some EU markets. We continue to see strong volume increases across all of our franchises, about $100 million in the first quarter. The majority of the volume increase came from established brands, particularly in China and the APJ region, but also from biosimilars, fertility and contribution from Marvelon and Mercilon. The bar for Supply Other represents revenue to Merck and other third parties, which consists of relatively low-margin sales of pharmaceutical products under contract manufacturing arrangements, and which are expected to decline over time. And finally, you can see the financial reporting headwind we had in foreign exchange translation, about 450 basis points for the first quarter, which is a function of more than 75% of our revenue being generated outside the United States. While we're…

Thank you. [Operator Instructions]. Your first question comes from the line of Umer Raffat of Evercore ISI. Your line is open.

Hi, good morning. This is Jeng Jang [ph] on for Umer. Thanks for taking the question. So first on Humira biosimilar, you reported $50 million in the first quarter, and the majority of it is inventory. So just wondering what is your expectation on the end-user demand for Humira biosimilars? And secondly, next one, what is the trend now on -- weight impact on the state level? Thanks.

Thank you for the question. I can address that. So first question in regards to our Hadlima launch. We believe, again, as I mentioned a number of times in previous settings, that 2023 will be a modest ramp-up year. It's a year of essentially competition to get on formularies. In our discussion with various PBMs, they still hold to the fact that there will probably be two to three biosimilars for Humira on formulary during this period of time. And so I think they're playing a wait-and-see game as we speak right now. And so 2024 and 2025 will be the formative years where we see more and more kind of Hadlima uptake and essentially the market for biosimilars for Humira will start to really form in that sector. So we're still fairly conservative in our view in terms of what we can do this year because it's really getting on formularies and then the years past that, we'll start to see a more aggressive robust ramp up. Now in regards to your second question about Nexplanon, right now, what we see is essentially a focus on expanding demand generation for Nexplanon. We see good physician growth in terms of overall demand. We see a lot of bright stars in terms of ability to be able to continue to drive this product. We mentioned already that 2025 will likely be the milestone point where we reach $1 billion overall, so it's really essentially our blockbuster product. We continue to see a lot of signals that this product is gaining a lot of momentum throughout the country in terms of some of the demand signals that we're seeing out of physicians in various other sectors. So we feel very, very, very enthusiastic, very bullish about what's going on in terms of consumer demand, consumer market access, and what we see going forward with Nexplanon is really a healthy product. As you saw, the trailing 12 months is it's double-digit growth as we look backwards and we still feel that this is a product that will be very important for us.

Thank you. Your next question comes from the line of Jason Gerberry from Bank of America. Your line is open.

Hey guys, thanks for taking our questions. So, I just had a couple. So OGN has a couple of Phase 2 readouts from your in-licensed endometriosis asset. How important are the 2024 pipeline updates to driving Ebopiprant strategy as those assets will hopefully replace Nexplanon when it goes LOE? And then the second question, you mentioned the year-over-year decline in 1Q gross margins due to product mix and inflationary cost pressure, but the guidance for the full year is flat, so do you expect any pressures there in the upcoming quarters? Thank you.

So I can address the first question, Jason. In regards to Ebopiprant, as well as 6219, our endometriosis product, as you know, we -- last year, fourth quarter, we essentially initiated our Phase 2 trial. We'll see what happens in 2024 but so far, that is a product that we believe strongly in, new mechanism of action, treatment of endometriosis in a way that hasn't been essentially achieved before. Endometriosis continues to be a major, major issue across the world with almost nearly 200 million women of reproductive age suffering from some of the debilitating effects of endometriosis. The field needs innovation. It needs a new mechanism of action that does not work centrally, it's more locally acting. And so we'll see what happens. But clearly, that's one of our strategies, if that product makes it across the finish line in the 2028 time frame, we'll be able to deal with that. But on the other topic of Nexplanon, the LOE in the United States is 2027. But as I mentioned a number of times before, the entire kind of erosion model for Nexplanon, I would probably look and start to look at benchmarking, say, for example, Morena from Bayer as kind of the situation because it's a device that has a drug-eluting device. It's a very difficult product to manufacture. And all of the other downstream investments that need to be made in terms of training, in terms of pharmacovigilance, in terms of all the other things that go along with the complexities of managing something like an Nexplanon in terms of your own applicator device. So we still believe that Nexplanon is not going to essentially resemble what you might have in your models in terms of the standard kind of historical erosion rates. And so those two together, I think, kind of signal that we're on the right path going forward. Matt?

So for the gross margin part of your question, the -- just elaborate a little bit more on the commentary. Just due to the production time line cycles for our products, most of what we sell in the first half of the year was actually manufactured last year. So any inflationary impacts from 2022 are already in inventory. It comes out in COGS as we sell product. Any product that we're making this year is likely to be sold next year. But anything that happens within the year, where it's made in the year, sold in year, would continue to reflect the inflationary cost that we've been seeing. But as we think about the gross margins for the rest of the year, obviously, the biggest driver of our gross margins is going to be product mix. And so we think we have reflected, based on the revenue forecast everything appropriately the gross margin line. And what all that boils down to is that gross margins are likely to be net-net lower than last year by 100 or 200 basis points, most of that driven by inflationary cost pressures that were either already reflected in inventory when the year started or we will continue to realize our activity this year.

Thank you.

Thank you. Your next question comes from the line of Navann Ty at BNP Paribas. Your line is now open.

Hi, good morning. Thanks for taking my questions. On Women's Health, could you tell us more about the change in customer mix and discounts in the U.S. for Follistim? And on NEXPLANON where the distributors buy-in, buy-out that is more pronounced than expected and how do you see demand during the year on both Follistim and Nexplanon? And then another one on Established Brands, if you could tell us which drugs drove the strong performance in China? Thank you.

Yes. So let me try to take those questions, Navann. So first and foremost, in regards to fertility we continue, as I mentioned in my opening remarks, see the fertility business ramping back up for the second through the fourth quarters of this year. The first quarter we started to see essentially some COVID effects in China that were coming through. We see February very strong and March very strong and ultimately Q2 strong. So we'll ramp very nicely back up. And when you look at the Follistim business in the U.S., as we start to expand our share, and believe me, we're starting to expand our share in terms of our volume share in the U.S., we're having to get into some competitive pricing scenarios in regards to some of the accounts that we're putting on board. And so as a result of that, there's more pricing competition. But everything we see, again, in Q2 right now, and we're midway through Q2, shows me that it's being very -- it's going to be a very successful year for our overall fertility business. As I mentioned earlier, in the high single digit, low double-digit rate for the intermediate period in terms of the coming few years, it's not going to be any different in 2023. So all the signs, all the signals that we see for our fertility business in our two most important markets, that being the U.S. and China, continue to be, I think, very, very solid, very solid. In regards to the second question, in regards to Nexplanon, specifically in the U.S., the Nexplanon business continues to act in a very kind of a predictable manner in the sense that typically in the fourth quarter of any given year, we have the buy-in. And then, ultimately, in…

Thank you.

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

Thanks. So I had a question about Biz Dev M&A and the cap structure. I think in the past, maybe a few months ago, you talked about potentially adding commercial stage assets. So I guess the question is, how do you think about that in the context of also debt pay down and maybe it's not an either/or, but what are you prioritizing in terms of bigger acquisitions versus cleaning up the cap structure? Thank you.

Well, I think Matt and I will kind of tag team on this. What I will just, from a high level, point out, David, is as I said, we made a $250 million pay down of our debt in the first quarter. So we are clearly focused on kind of some balance sheet hygiene actions that we need to take. But it never kind of detracts away from what we are doing now in terms of building out a pipeline of assets for Organon especially in the Women’s Health space and biosimilar space. We continue to look at and we are continuing to open and we continue to feel the lot of incoming as well as us kind of reaching out to various parties. We are focused on more near-term, more accretive tuck-ins that I've said earlier, and that's what we look at. For example, the Claria Medical System, if all things go well, which we believe very strongly in this device, we're talking about a second half 2025 launch. So it's not a long-term kind of proposition. And so as time goes forward, you'll start to see more and more of our opportunities to talk about the things that we're doing in VD. But we are open to all various forms, whether it's large deals that we're looking at. But obviously, given the current environment that we are competing in, we've got to be obviously very careful in terms of what we're doing in regards to what we're bringing into the company. So I'll turn it over to Matt for any additional comments.

That's a very complete answer, Kevin. I have nothing to add.

Thank you. Your last question comes from the line of Greg Fraser at Truist Securities. Your line is now open.

Good morning [Technical Difficulty] taking my questions. On the fertility business, how are you thinking about your business in China bigger picture in terms of the commercial organization portfolio, is your footprint there sufficient to drive the high-single-digit to low-double-digit growth that you talked about? And are you interested in VD opportunities that would expand your business and your portfolio in China? Thank you.

Yes, Greg. Look, I've said on a number of calls that the future of our fertility business is really the growth component that is going to come -- a lot of it will come from the Asia Pacific region. You start to look at the overall fertility rates in the Asia Pacific region, China doesn't publish it much, but we understand that it's somewhere around probably 1 when it should be 2.1 per couple -- per women. When you look at Korea, another very large market it's less than 1. When you look at Japan, it's around 1, 1.2. This is becoming a major issue for many countries in the Asia Pacific region. Now let's kind of drill down on your question in regards to China. China, we do have -- we've stood up, and we do have a fertility sales force. We've got a good footprint in China in terms of especially the provinces that we believe have the highest return of investment in terms of what we're doing there. Two, we're the second leading product -- group of products in fertility in China, and we're competing there. We see an opportunity to really do well there. The China fertility market is clearly still not reimbursed within the China market, but there are signals that reimbursement is not so far off in the not-too-distant future. So that will really kind of signal that there's opportunities to really expand and grow our business in China. The first quarter was characterized by kind of working through the COVID lockdowns, but February and March were much stronger sequentially. What we're seeing right now in the second quarter is even stronger double-digit potential expectations in the second quarter and going forward for the year. So China will be a key market focus for us. We've got the right footprint there. We're looking at also, to your point, we're looking at business development tuck-ins within the fertility sector in China, and we're also looking for China for China as well because we see opportunities there given the size of the market, given the growth of the market, given the expectation that potentially we're going to see potential some form of reimbursement potentially coming down the pipe in the not-too-distant future.

Thank you.

There are no further questions at this time. Mr. Ali, I'll turn the call back over to you.

Very good. Thank you. Thank you. Today, we've conveyed to you that we're focused on two things; balance and execution. We remain committed to creating sustainable long-term business with growth from value-creating business development. This will be balanced against good financial hygiene, which, for us, means maximizing profitability and lowering our debt leverage. I'm proud of the continued business execution and our growing track record of delivering on our commitments. Thank you. We'll speak to you soon.

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