Thank you for standing-by. My name is Mandeep, and I'll be your operator today. At this time, I'd like to welcome everyone to the Organon Q2 2024 Earnings Call and Webcast. All lines being placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Jennifer Halchak, Head of Investor Relations. You may begin.

Thank you, operator. Good morning, everyone. Thank you for joining Organon's second quarter 2024 earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer, and Matt Walsh, our Chief Financial Officer. 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 second quarter results. For the second quarter of 2024, revenue was $1.6 billion, representing a 2% growth rate at constant currency. The women's health franchise grew 3%, our biosimilars franchise grew 22% and our established brands franchise was down 1%. In the second quarter, adjusted EBITDA was $513 million, representing a 31.9% adjusted EBITDA margin, which includes $15 million of IPR&D expense. Adjusted diluted EPS was $1.12. We have had solid revenue growth in the first half of the year of 4% at constant currency and we're on track to deliver our third consecutive year of constant currency revenue growth. Given year-to-date performance and our view into the rest of the year, we have narrowed our range for full year 2024 revenue around the midpoint to $6.25 billion to $6.45 billion. The guidance represents constant currency revenue growth of 2% to 4.7% ex-exchange for the full year. Year-to-date adjusted EBITDA margin was 32.5%, which includes $30 million of IPR&D and milestone expense incurred in the first six months of the year. We are running at the high-end of our full year adjusted EBITDA margin range of 31% to 33%, whether you look at it with or without the impact of IPR&D. Year-to-date EBITDA margin performance reflects actions we have taken to contain operating expenses and the first half of the year also benefited from favorable timing of spend. We expect SG&A expense to pick up in the second half of the year due to planned expenditures related to rolling out new products like the migraine medicines and further investment in Nexplanon. Given that timing, we're holding to our 31% to 33% adjusted EBITDA margin range for the full year. From a capital allocation standpoint,…

Thank you, Kevin. Beginning on Slide 7, here we bridge revenue for the second quarter year-over-year. The biggest driver in the bridge is volume growth of $55 million, comprised of strength in the areas we've mentioned, biosimilars, Nexplanon and the addition of Emgality. Combined with stronger volume growth in the first quarter, year-to-date revenue growth due to volume is solid at about 4.5% organic growth, which rises to about 6%, including the addition of Emgality. The typical headwinds to revenue growth, which we show as the first three steps in the bridge were all fairly light in the second quarter. LOE was about $5 million of impact, which reflects the loss of exclusivity of Atozet in Japan. The impact of VBP in China was also about $5 million in the second quarter, which reflects lingering effects of Round 8 that began in the third quarter of last year and included Remeron and Hyzaar. There was also an approximate $5 million impact from price in the second quarter, overall pretty negligible. The benefits of our Nexplanon pricing strategy in the US muted expected pricing pressure in other parts of our business, particularly in biosimilars, and to a lesser extent, fertility. In supply/other, here we capture the lower-margin contract manufacturing arrangements that we have with Merck which have been declining since the spin-off as expected. And lastly, foreign-exchange translation had an approximate $30 million impact or two percentage points of headwind to revenue, which reflects a strengthening dollar relative to prior year. Now let's turn to performance by franchise. As I've done in past quarters, I will target my comments over the next three slides to those areas most relevant to your modeling. Let's start with women's health on Slide 8. Kevin already discussed in detail our expectations for Nexplanon. I'll add…

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

Good morning, guys. Thanks for taking my question. I'm sure you've seen some of the headlines on Gardasil last week. So I have two questions off of that. Number one is more of a history question, if I may. So, during your time at Merck, obviously, there was a decision made to sell Gardasil to a local partner, but all the Organon products were sold directly in China. Could you speak to why the commercial strategy was different and if you would expect a different outcome if you had a local partner or not? And secondly, I remember last year when you had an 11% down in 3Q, you talked about healthcare budget deficit in China for the first time as well as stricter enforcement of the procurement rules and investigations. So would that or would that not affect demand? It doesn't look like it's affecting your demand, but could you speak to that dynamic? Thank you very much.

Thank you, Umer. It's Kevin. Thanks for the question. Let me start with your last question first. If I just kind of put it in perspective, let me just kind of narrow down on Q2. Our Q2 results in China were impacted with a very high comparator in Q2 of '23 based on kind of a COVID rebound and so that drove significant sales last year for example, fertility. Also, we're washing through the Round 8 VBP impact in Q3 of '23. But we're seeing some really positive tailwinds to your point on established brands. In the hospital sector, we see strength post VBP as well for retail we've had the third consecutive quarter sequential growth, but we're washing through a number of those things that I've just mentioned earlier. What I do see going forward, again, to your point is that we see the second half of the year returning to what I would consider mid-single-digit growth for China. So I don't see anything there that ultimately tells me that we're going to have any type of continuation of downdraft. I think we're going to be in good shape for the year. But I would -- I've always been basically said, when we finish this year, 80% of our business -- established brands business will have gone through the VBP. So next year, we expect to have finally back to kind of what I would consider solid growth momentum for China going-forward based on a number of different aspects. In regard to your first question, yeah, I was in charge of the international segment for Merck, but we don't have necessarily the partner relationship that Merck does in China. So we don't have that type of exposure. So that's kind of the way I would signal to you that we don't have any issues there in regard to local partnerships that potentially could affect our forecasting opportunities.

And Kevin, also, would there not be any inventory dynamics either? Because I know part of the issue on Gardasil is local CDCs not buying as much. So I wondered, could there be any hospital inventory or anything like that, which may be getting drafted down? Is there nothing like that?

For us at least, our inventory is at a healthy level. It's not anything that I would consider to be too high or too low. It's basically within line what we've always had. So that's what I would signal to you in terms of where our inventories are in locally.

Got it. And at the hospital acquiring channel as well, correct, the inventory?

Yeah. Yes, both.

Thank you very much.

Our next question comes from the line of Chris Schott with JPMorgan. Please go ahead.

Hi, this is Ethan Brown on for Chris Schott. Thanks for taking our questions. Can you just give us a sense of how you see operating margins progressing through the rest of 2024 and into 2025? And just directionally, do you expect you'll be able to increase margins from here? Or is the guidance range today a good proxy for margins over the next couple of years? Thank you.

Thank you for the question. Yeah, we see operating margins fairly stable through the rest of the year. We're making sure that our full year guidance has enough recognition as we showed on Slide 14 of the deck that we expect some amplitude more in the second half on things like LOE, VBP and price than we did in the first half. But, we feel very good about what we're signaling in the guidance about our operating margins. It's a little bit too soon to talk to 2025, but we certainly see the continuation of the volume growth that we've been talking about in our key drivers. And yeah, more on 2025 when we get a little bit later in the year.

Thanks so much. That's all from me.

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

Hey, thanks. So just a couple from me. One, can you talk about your longer term contracting strategy on Hadlima and, and how you're thinking about tackling the payer landscape, in the -- particularly in the context of Teva's recent execution on their significant contract, and how do you think about that and help us better understand how you drive more volumes in that market? That's number one. And number two is just on the R&D spend. I wanted to get your sense philosophically for how you're thinking about it long-term? I know there was a change in the guidance basically on the in-process R&D. But I guess the larger point is, when are you going to get more visibility on the pipeline and how are you prioritizing balancing overall pipeline spend versus margin stability or expansion? Thanks.

Thanks for the question, David. In regard to the first question regarding Hadlima, going-forward, I think we've always been very clear about our strategy. It's providing a really high-quality frictionless experience in terms of product-to-product comparison between the comparator of Humira and Hadlima at the lowest net cost to give the affordability so as many patients possibly can take the product as possible. And so with that, I've always signaled that about 45% of the market today is what I would call part of that low net cost segment. The rest is essentially made up of the PBMs, around 55% is PBM driven. And right now, that's where we're getting our growth. We are growing and TRx is about 60% quarter two over quarter one, and you can see that playing out. And I've always signaled that we'll be in the top two or three biosimilars for Humira when it's all said and done. I think that's essentially where you want to be over-time. And we're seeing good solid growth as you've seen with our numbers, and we continue to see that going forward as well. In regards to R&D, I think that's a function of the fact that what we have right now. We're very excited about what we've got in the pipeline, 6219, which is our endometriosis asset, we'll hopefully be reporting out this time next year in terms of our Phase 2 A2B data. And in regard to the future, I think we're being very prudent in regard to how we use our capital, whether it's deals like we do with Lilly and these tuck-in deals which we think is very prudent or whether we see something that is kind of coming down the pipe that we think are really, really exciting and, and there's more-and-more access or rather more-and-more interest right now in terms of the women's health field. There's a lot of activity, there's a lot of R&D going in that space, but it is a long-term journey which we'll be able to dedicate when we start to see things that are really very interesting for us. In the meantime, we do a lot of these what we consider tuck-ins, which are really good hygiene. Just look at the Lilly deal. That's really been very, very profitable for us just in the first few months. We'll continue to do those and, and, and, and we'll do -- we'll be very judicious. We'll be very careful in terms of what we're going to do in regard to our R&D expenditures going forward.

Thank you.

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

Hey, good morning, guys. Thanks for taking my questions. So, first one for me is just on EBITDA beyond 2024, not looking for guidance, but just directionally, your thoughts on being able to either hold the cost structure flat or keep it down in '25 or '26 and the ability to do these Emgality type of deals, say, one per year, just thinking about some of the tailwinds to 2024 and then how we think about that going-forward? And then my follow-up question on Hadlima is, does interchangeability at this point on high concentrate matter at all in your view and, and any thoughts on ability to participate in -- on the private-label side? Thanks.

Yeah, Jason, I'll take the last question first and I'll hand it over to Matt to discuss the EBITDA question. So, in regard to interchangeability, right now, Samsung has been able to get the designation, which was approved for the low concentration prefilled syringe and the single-dose vial presentations. But to your broader question, does it really matter? I think you see currently, I mean, on the high concentration that was granted with Teva, I mean, it hasn't -- and that was granted in May. It hasn't done anything in terms of overall performance and our overall growth. We see continued growth there, and, but we feel that by the time the exclusivity period wears off in next May, we'll be ready to essentially launch or rather to get the indication as well. So I don't see any type of any roadblocks in terms of continuing ongoing performance. We are the sole winner of the VA business, for example, and interchangeability doesn't matter because of the fact you're the single-source asset that you've got there. So we've got a lot of confidence in Hadlima going-forward and we'll have interchangeability when the time comes in terms of when that exclusivity period wears off. And I'll hand it over to Matt regarding the EBITDA question.

Yeah, Jason, in terms of talking about years beyond 2024, obviously too soon for guidance, but directionally, we see holding margins where they are is a very realistic outcome for 2025, which is a significant statement given that the relatively modest LOE exposure that we have in the established brands portfolio, most of that's going to be hitting actually in 2025. So we do see that we have the ability to hold margins through that. And then once you get beyond 2025, then you start to see the ability for Organon to actually improve gross margins as we separate the manufacturing network away from Merck. Those opportunities are fairly substantial and combined with the fact that we would generally see product mix improving more towards some of the growth products that we've put in place through business development since the spin contributes to that. And this all comes on top of a cost structure, which is largely now right sized in place and from which we can generate operating leverage. So we're pretty optimistic about the ability to hold margins and then grow them.

Got it. Thanks so much.

Sure.

Our next question comes from the line of Terence Flynn with Morgan Stanley. Please go ahead.

Thanks so much for taking the question and congrats on the Nexplanon five-year data. I was just wondering if you can give us your latest insight on how you're thinking about the pricing inputs for that product and then the ramp of conversion? And would the plan be to discontinue the three-year product? Thank you.

Yeah, Terence. So, just for clarity, the five-year efficacy indication is essentially the same product. It's just that now we've got the indication for five years of efficacy. We're very excited about that data and we're submitting the process of getting ready for submission to the FDA. And so in terms of price, we're still looking at that. Obviously, we have that optionality when the time comes and we still have time for that to discuss that. But more importantly, it really starts to give us a line-of-sight on the fact that this product will continue to be with us in a very robust manner until the end of the decade and possibly beyond. Just because of the fact, as I mentioned, our inserter device, which is very unique and it is a very clear differentiator, has exclusivity until 2030. So from that perspective, if somebody were to come to market, they'd only be able to come to the market with a three-year indication of which the whole market will be moved over to the five-year indication by that time in 2027 and they'll have to have their own device, which is no easy thing for FDA approval prior to 2030. So I think we're in great shape with regard to Nexplanon and the future expanding that portfolio.

Our next question comes from the line of Chris Shibutani with Goldman Sachs. Please go ahead. Your line is open. Please go ahead.

Apologies, I was on mute. Two questions if I could. International pricing dynamics, some of the regions, it's tougher for us to get a sense for what the trends are. You seem to call out Japan in particular, I believe you expressed that there were some tougher than expected dynamics there. And then if I could just follow on a little bit on the China question that Umer had asked earlier, we have seen historic reinforcement of the anti-bribery, anti-corruption element impact different product segments, hospitals, we saw that with vaccines brought up as a potential commentary. Is this a dynamic that your China business navigates? And then second question would be about business development. Certainly, the Lilly transaction has been quite helpful. What is your sense for the potential to do similar and other type deals from your capacity standpoint and the availability? Thank you.

Thanks for the question, Chris. So let's take that question in regard to the effect of the anti-corruption campaign in China. That was a short-lived issue that we went through, I think in the -- I think, Q3 or so of last year. We've watched through that. We don't see any -- essentially any remnants on any parts of our business, any parts of the portfolio of products we have in China. Things are kind of going back to what I would consider to be the normal state of affairs and normal business metrics and we are going to see mid-single-digit growth in China in the second half of this year. And I think washing out whatever we face in terms of headwinds from Round 8 and VBP for the first half and also some fertility slowdowns. But going forward, I see some more robust growth in China in 2025 and beyond as we'll have kind of passed through this VBP storm of sorts. And in regard to the international reference pricing, that really was more of a -- of something that China was kind of pulling forward and that hasn't really affected us much so far in terms of our negotiations with the Chinese government. We've landed in, I think, in a very positive place when it comes to that. And finally, in regards to more tuck-ins like -- the likes of which we did with Lilly, we're very pleased with the Lilly deal. I think it's off to a really solid start and we're going to be doing more of those. But I would -- that's what I would call part of our organic business strategy. It's just good hygiene and we'll continue to be able to have plenty of capacity to do more and more of those type of tuck-in deals going forward, which are, I think very nice and they prove to be very essential to our strategy going forward.

Yeah. And just to add to that, Chris, the reason why we're able to do those deals is because they're generally characterized by relatively modest upfront payments and most of the compensation is -- it was actually based on success-based milestones.

Thank you.

That concludes our Q&A session. I will now turn the call back over to Kevin Ali for closing remarks.

Thank you, and thanks everyone for joining us today. We are, as I said in my introductory comments, we're very encouraged about our progress year-to-date and we're confident, very confident in our ability to deliver the performance ranges we've outlined here today. And we look forward to continued investor engagements throughout the quarter and through the year. Thank you very much.

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