Hello, and welcome to the Organon First Quarter 2025 Earnings Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Jennifer Halchak, Vice President, Investor Relations. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining Organon's first quarter earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer; and Matt Walsh, our Chief Financial Officer. Juan Camilo Arjona Ferreira, Organon's Head of R&D will also be joining for the Q&A portion of this call. 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 Investor Relations website, 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'd now like to turn the call over to our CEO, Kevin Ali.

Good morning, everyone, and thank you, Jen. Our first quarter results represented a solid start to 2025, and we're very much in line with our expectations for the year. Key growth drivers are on track. Nexplanon grew double-digit and is set to achieve more than $1 billion in revenue in 2025. The launch of Vtama in the atopic dermatitis indication has been successful, ramping just as expected, and the product is marching towards $150 million of revenue for the year. Additionally, we continue to estimate that our restructuring initiatives will yield approximately $200 million of annual savings. Given the tariff policies in effect as of today, we're affirming our revenue and adjusted EBITDA margin guidance, as well as our target of generating over $900 million of free cash flow before one-time costs in 2025. Today, we also announced that we have reset our dividend payout and will redirect those funds to debt reduction. With a reduced dividend payout, the company can redeploy almost $200 million in prospective dividend payments over the remainder of 2025 that will enable a path to achieve a net leverage ratio below 4 by year-end. Over the last year, we have established a leaner, more fit-for-purpose cost structure while increasing revenue contribution from our core growth drivers. By deleveraging more rapidly, we will continue to strengthen the future prospects of the company. Over time, this will position us to execute more of the compelling business development opportunities we've done to date, bringing in additional growth drivers to our portfolio while maintaining lower leverage. Further, the recent macroeconomic uncertainty has created a pronounced dislocation in our equity valuation relative to our earnings. To us, this is an affirming signal from the market that now is the right time to proactively take action to support our balance sheet.…

Thank you, Kevin. Beginning on Slide 9, here we bridge the 4% constant currency revenue decline in the first quarter year-over-year. Starting on the left, LOE was about $60 million for the quarter, which primarily reflects the impact of the loss of exclusivity of Atozet in Europe, which occurred in September 2024. VBP in China was de minimis in the first quarter, and we expect only a nominal impact on a full year basis for 2025. Our potential exposure this year will be more back-half weighted as we expect Fosamax will be included in round 11. Once this occurs, approximately 80% of our Established Brands portfolio will have been subjected to the VBP process. There was an approximate $40 million impact from price for the first quarter, or about 2.5%. Pricing pressure was mainly from biosimilars, certain mature products in the U.S., like NuvaRing and Dulera, and the LOE of Atozet. From a regional perspective, we continue to face expected mandatory pricing revisions in Japan and ongoing competitive price pressures related to our respiratory products in China. Volumes increased $45 million in the quarter, representing growth of a little over 2.5%. Hadlima, Emgality, Vtama, and Nexplanon were the largest contributors to volume growth and will likely continue to be the main drivers for the full year. 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 $45 million impact in the first quarter or about 280 basis points of headwind to revenue, which reflects a strengthening U.S. dollar versus most foreign currencies in the current period relative to the first quarter of 2024. The recent weakening of the U.S. dollar potentially creates a tailwind for us over the remainder…

[Operator Instructions] Your first question comes from David Amsellem with Piper Sandler. Your line is open.

Hi, thanks. So, a couple for me. First on Vtama, can you just talk through your level of confidence that you can get to that sales target that you reiterated? And I guess part of my question here is, just given the nature of the category and that it is tightly controlled, how are you feeling about access? How are you feeling about the gross to net here? Just help us understand in just overall how you think you can get to the target. That's number one. And then number two, just with your priorities regarding deleveraging, where does additional BizDev M&A fit? Is that on the back burner? Is that something where you're just going to continue to be opportunistic? How should we think about that? Thank you.

Thanks for the question, David. It's Kevin. And in regards to Vtama, we are confident that we'll achieve that $150 million that I kept mentioning. And the reason for that is that the new label, the atopic dermatitis label, really is a game-changer. The kind of advantages that we have versus competition are significant, whether it's essentially the once-a-day down to two years of age, the incredible efficacy in terms of attacking itch, which is the number one essentially symptom that you see with AD, it's been -- and the initial reports have been fantastic, not only that, but you see the NRx and TRx numbers. But you put your finger on probably the most important aspect of getting to that number, which is access. And we've got a fantastic managed care group, working on access as we speak right now. And I think all the things that I'm seeing in terms of signals are coming from the market is essentially getting really good uptake in regards to moving the needle on and getting more covered lives, moving prior off to essentially preferred and non-preferred, and just moving that whole continuum over. And that is the key point underpinning my confidence in being able to reach that $150 million. I was in the field actually doing double visits last week, and in three different cities in the states, and I -- what I can tell you is there's been a lot of momentum and a lot of good positive feedback right now because now patients are coming back after they've been prescribed the drug and kind of seeing follow-up, and what they're saying signaling to me has been outstanding efficacy and really easy to apply. So, we feel good about that. And ultimately, when we reach that number, we'll have…

Okay. Thank you.

Yes, Dave.

The next question comes from Michael Nedelcovych with TD Cowen. Your line is open.

Thank you for the question. I have one question and a follow-up. So, clearly, BD will be more of a focus moving forward. Should we think of any uptick in that area as an increase in the frequency of future deals, or could there also be an increase in the size of future deals? And as a follow-up, when we survey the assets that Organon has been licensed recently, I think it's fair to say the company has adopted a pretty flexible definition of women's health. So, what should we consider to be your option space moving forward? Is there any asset or therapeutic category that you view as outside the bounds of your strategic focus, or is pretty much everything fair game so long as it makes financial sense? Thank you.

Thanks for the question, Michael. I would say this that we have a very broad definition of women's health, first and foremost. It encompasses, I would say, three accesses. One is those conditions unique to women, like for example our Forendo acquisition, of which we'll be talking about the -- more down the road in terms of what we're doing in that space for endometriosis or polycystic ovary syndrome. Our partnership with Lilly on Emgality, two-thirds of the patients who suffer and struggle with migraine are women, which are those conditions, I would call it, disproportionately impacting women. And then the third category would be -- I would say, fall into the category where Vtama falls in, which is dermatology, specifically AD where it affects women differently, whether it's the fact that women happen to be the caregivers by and large. And so, in the pediatric space, there's nothing there that ultimately approaches from a non-steroidal perspective, patients that are two years of age and older. And by the way, we are getting started this year on studying this product for down to three months of age and older. So, that's a game-changer. And from that point of view, I mean, when you look at adults, adults typically suffer more from AD that are women than men. And so, that is kind of the more squishy, I would say, of the three definitions. But typically, we are looking at a broader perspective, but also we have a very business-oriented mindset in regards to getting assets that we feel that we're a better owner of, that we can do better with globally, whether it's plugging it into our international commercial footprint or whether it's essentially using our medical affairs teams or commercial assets teams. So, I think, overall, we're making the right use of capital, and our BD organization is doing a really good job of setting up these deals, so that it's not just a one hit where it's essentially success-based, everybody has got skin in the game, and we're paying milestones along the way. We're happy to pay those milestones because it just basically means that we're hitting on some of those achievements in terms of commercial achievements. In regards to whether it's more frequent smaller deals or larger deals, again, like I said, the key thing is delevering. And when we find the deal, the right deal like a Vtama, for example, or Tofidence that we just brought in, we'll do that, but it just gives us more room to breathe when we have a much lower leverage rate, and we'll continue to accelerate that.

Take the next question.

Thank you. The next question comes from Chris Schott with JPMorgan. Your line is open.

Hi. This is Ethan on for Chris Schott. Thanks for taking our questions. On the first question, just wanted to ask about capital allocation more broadly in your framework going forward. And maybe more specifically, how share repo might fit into that equation relative to debt paydown and business development? And then my second question is just on the potential impact of tariffs. I know you provided some commentary on 2025. But any general color on your ability to navigate this dynamic looking past 2025, although details are lacking, maybe just frame out how you're thinking about that impact? Thank you.

Yes. Ethan, I think Matt and I will ping-pong on addressing these topics. So, I'll keep the tariff issue aside for Matt to deal with. But on capital allocation, really briefly, right, look, we're doing this -- I want to be clear. We're doing this from a position in terms of what we've done with the dividend today what we announced from a position of strength. Over the last few years, we have, for example, reestablished Nexplanon where our key product, where we're going to surpass a $1 billion this year. We have stabilized the Established Brands business. We have essentially grown -- regrown our fertility business. We have also successfully launched Jada and Hadlima and Emgality and now Vtama and Tofidence. And so, we're very comfortable with the fact that going forward, some of the headwinds we faced this year with a loss of exclusivity or of our second-largest product out of that will be behind us. And essentially, going forward, we have opportunities really to accelerate our top line and bottom line growth. And so for that -- and we've done three restructurings in the last year and a half. So, we're a much more leaner, fit-for-purpose organization. This is really done in order to be able to set us up, so that in the future, we can do more business development deals like the Vtama and the other Tofidence deal that we just did recently in order to be able to continue to grow, continue to grow for the long term. And so, I believe this is a position of strength. And when it comes now to your second question around tariffs, I'll hand that over to Matt in terms of -- in regards to the fact that what we see today is not something that we feel very concerned about, but--

Yes. Yes. Thank you, Kevin. So, as we spoke of in the prepared comments, where the policy is more clear around countries like Canada, Mexico, China, we have very nominal exposure, less than $5 million in 2025 and it's one of the factors that has enabled us to affirm guidance for the year. When you look forward, Organon has six manufacturing plants, all of them outside the United States. Most of the production that ends up coming into the United States is from our plants in Europe. And since the policy around there -- around that route into the United States is still very fluid, it's really too soon to be talking about what potential impacts might be.

Do you want to address share buybacks that he had mentioned earlier, Ethan?

Sure. So, share buybacks have been a lower priority for us on our roster of capital allocation priorities. The biggest issues we face that can improve Organon's valuation in the near term relate to managing our leverage and relate to growth. And we need capital to solve both of those issues. And so, returning capital to shareholders is right now less of a priority. It's one of the reasons why we made the move that we did with the dividend announcement today. So -- and especially as long as our leverage is above 4 times, I believe we'll create more value and better positioning and overall strength for the future by rightsizing our leverage versus buying back shares.

The next question comes from Umer Raffat with Evercore ISI. Your line is open.

Hi, guys. Thanks for taking my question. I mean, look, I feel like the Dermavant deal was a surprise, but today is a bigger surprise, and there's a lot of market sentiment that they can't have confidence in consistency and decision-making process at Organon right now. So, specifically, last call, you guys said you're committed to regular dividend as the number one capital allocation priority. I think you just now said returning capital is a lower priority. And I guess the question is really for all the investors on the line, what is the priority? And how can we be sure that this will be the priority going forward because there appears to be a lot of things just moving around constantly?

Well, Umer, thanks for the question. And as -- if you noticed, things are going on in the outside, macroenvironment is changing. It's quite volatile out there. Clearly, investment community is not clearly focused on the dividend for us as much as it is on leverage. I hear it in almost every discussion that I have with investors that they're very concerned about where we are in terms of leverage in these very volatile times, it's really a risk-off type of analysis. So, for us, we're very committed to that. But when we saw the type of volatility happening, we saw the timing, we're on the verge of really having, I think, a really great year in 2026 and the second half of this year, I think we're in a much better position to say, look, we know that we can delever very quickly. And as we delever and as we have a situation where we give ourselves more of an opportunity to bring in assets like Vtama, and I will tell you that right now, if you just look at the NRx and TRxs of Vtama, it's clearly positive signaling to the fact that we made the right decision, and hopefully, we'll be able to have a discussion at the end of the year where you see that we delivered what we said we were going to deliver with the product, and ultimately, then you see the run rate of where we're going with this product and the type of label we're developing was a good use of capital. And I think there's a better use of capital in bringing in more assets in that space. And so, the combination of what's happening externally, coupled with where investors essentially are kind of telling us that they're very focused on delevering, much more so than anything else, kind of brought us to the fact -- and the initial encouraging results we're really having with Vtama and the continued strength of our core products like Nexplanon tells us that there's a better use of that capital in terms of being able to go forward and use it to be able to not only delever, but bring in growth aspects for the company.

Thank you for that, Kevin. And maybe just to clarify then, is part of your thought process in anticipation for tariffs given your manufacturing network, or was it exclusively from deleveraging perspective?

Well, right now, we don't know where -- we're pretty well set for where the tariffs are today. Let's see where they land in the U.S. It's very early to be able to determine exactly what that's going to look like. But I think we're pretty good for 2025. We brought in a lot of the inventory that -- as I said, we manage the inventory of our biggest product, Nexplanon, but the focus really is on deleveraging right now. And I think that, as I said, volatile times, investors being very clear with us, we need to delever, accelerate that process kind of took us to where we took that decision, not lightly, but I think very clear-minded.

Thank you.

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

Hi, guys. This is Bhavin Patel on for Jason. Two questions from us. First, what are your views on the Nexplanon Paragraph IV? Do you see the filer as a credible threat to launching generic in ex-U.S. markets? And where does the FDA stand on the issue of applicator similarity, which I believe was the core issue in your Citizens petition? And then my second question is regarding the expected $900-plus millions of free cash flow before one-time costs. Can you break down the anticipated one-time costs for 2025? And how should we think about free cash flow both before and after one-time costs in 2026? Thank you.

Why don't we address those questions in reverse order. Matt, why don't you deal with the cash flow issues, one-time costs, and then maybe Juan Camilo, you can address the Paragraph IV issue, which is U.S., by the way, specific.

Yes. So, with regards to this fiscal year, in the -- included in our estimates for one-time costs, it's about $150 million in round numbers related to the manufacturing separation from Merck. Recall that the one-time cost of separation on the administrative side for things like TSA activities, that number is zero. From a restructuring perspective, we were looking at something in the vicinity of $200 million to achieve the -- operating expense savings of $200 million this year, annualizing to $275 million. And then there's about $75 million of other costs, which I elucidated in the prepared comments. Now as we look forward to 2026 and really beyond, we will continue to have manufacturing separation costs for the next few years. This year is probably the largest. It will be gradually declining. And then what we will start to see is the back-end milestone payments for BD deals already signed that will probably be in the $200 million to maybe $250 million range going forward. But thankfully, the further we get from the spin-off, the less of an impact these various one-time costs are making.

And then I'll ping-pong with Juan Camilo in regards to the question on the Paragraph IV. It's not a surprise to us. And the legal process that that's going to go through will take us anyway through probably mid-2027, but we still have a patent that is -- needs to be determined in regards to legal process in regards to our applicator. We feel very confident that that's a fairly strong patent that takes us through 2030. And the issues in terms of regulatory process of being able to get the FDA approval in regards to actually having a three-year - remember, we're launching five-year indication later this year. So, there'll be -- if they overcome all the significant large obstacles, which nobody has been able to do yet with the FDA on the large [technical difficulty] then they'll be coming into the market [technical difficulty] already moved to five-year indication, but [technical difficulty]

[technical difficulty] Then you mentioned the applicator that gets to the safety. FDA is really focused on the safety of the insertion and removal of implants like this. Any changes to the applicator open the door for really questioning [technical difficulty] in detail in our Citizens petition because we know how complex it is because we've been doing it for many, many, many years to ensure the safety of Nexplanon. And so, we see that there is a very, very high bar, not only from a legal perspective on the IP of the [drug] and the applicator, but also the regulatory bar for FDA to be confident on the efficacy and safety of a new product. So, as Kevin pointed out, we continue to be very, very confident in our ability to grow Nexplanon all the way to the end of the decade, and we're excited about the potential for a five-year indication coming way before the end of the year.

Thank you.

This concludes the question-and-answer session and will conclude today's conference call and webcast. We thank you for joining. You may now disconnect.