Q3 2021 Organon & Co Earnings Call
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Ladies and gentlemen, thank you for standing by at this time I would like to welcome everyone to the Oregon on third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad as a reminder, this call is being recorded.
I would now like to turn the call over to Jennifer Hills Vice.
Didn't Investor Relations. Please begin your conference.
Thank you Holly good morning, everyone. Thanks for joining our third quarter 2021 earnings call with me today are Kevin Ali organized Chief Executive Officer, who will cover our strategy and operational highlights and Matt Walsh, Our Chief Financial Officer, who will review performance guidance and capital allocation today, we'll be referencing a presentation that will be vis.
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 Oregon on Investor Relations Web site.
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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.
<unk> could differ materially from those stated or implied by forward looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our form 10 registration statement and subsequent periodic filings.
In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with guests. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation.
Now I'd like to turn the call over to our CEO Kevin Ali.
Good morning, everyone and thank you Jan welcome to today's call, where we will talk about our first full quarter as a standalone company.
Also as today is veterans day in the U S and Remembrance day and other parts of the World We would like to thank all of those who have served especially our own employee veterans.
Let me start by saying I continue to be inspired by the commitment of our employees across the world. They are unified in the dedication to our vision, creating a better and healthier everyday for every woman.
Already less than six months after spinning into an independent company, we are delivering on our corporate and financial goals.
Our year to date results have shaped up very much in line with our expectations with third quarter revenues of $1 6 billion and adjusted EBITA of $636 million.
And what about seven weeks left in 2021, we have good visibility into the performance of each of our key three franchises for the remainder of the year. Accordingly, we affirmed our guidance and narrowed the ranges for revenue and adjusted EBIT margin for full year, 2021, which Matt will discuss with all of you shortly.
Accordingly, we have been active on the business development front as we told you we would be we have executed three transactions in the last six months. This underscores our stated commitment to deliver health care interventions that address unmet and under met needs in women's health.
We're partnering with or acquiring companies to advance true innovation something that has been woefully lacking in the area of women's health.
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We announced our proposed acquisition of surrender.
Our clinical stage drug development company focused on novel treatments in women's health.
This acquisition brings a pipeline of candidates, including our lead candidate for endometriosis and a secondary candidate and polycystic ovary syndrome or ptos.
Endometriosis is a high priority unmet need for us it affects up to 170 million patients or up to 10% of all women of reproductive age current therapies in development candidates target the pain associated with endometriosis, but do not address disease progression.
Existing treatments also often lead to systemic estrogen depletion, which impacts bone mineral density and triggers menopausal symptoms such treatments are therefore unsuitable beyond short term use in pre menopausal women.
Completing the acquisition of surrender will be another step in building our end to end womens health portfolio.
<unk>, our other recent additions, including a linear health and its jada system, which Oregon on acquired in June of this year.
The Jada system is aimed at controlling abnormal postpartum bleeding or hemorrhage, one of the most common complications of birth impacting up to 10% of mothers and potentially resulting in emergency interventions such as hysterectomies and blood transfusions in July we also announced the licensing of the global development manufacturing.
Factoring and commercial rights to an investigational agent chemo pit print from a fever EBIT could print is currently being studied as a first in class innovation for the treatment of preterm labor, which impacts an estimated 15 million babies or about 11% of all babies born globally. These.
Acquisitions are tightly aligned with our goal to be the leader in women's health by addressing the significant unmet needs of women. We have quickly expanded beyond contraception, and fertility, where we are well established and already hold leading market share positions.
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I want to turn my attention to fertility where.
Where we saw revenue growth of approximately 30% year to date ex FX, we don't believe the opportunity for the products in our fertility portfolio fall of stem Org, a lutron and a lot of our always well understood. These products are used in the patient friendly gnrh antagonist protocol, which requires fewer injections.
And his favorite in conjunction with egg and embryo freezing globally and fertility rates are increasing we have seen the average age for giving birth to her first child increased from 20 years 21 years old and 1970 to 29 years old today about 15% of couples worldwide experience and fertility impacting almost.
190 million people. These figures are impacted by women proactively choosing to delay parenthood until an optimal time due to advances in modern fertility protocols in egg and embryo freezing technology.
Governments are recognizing fertility rates are not just a personal family planning issue, but also have an impact on GDP in 100 countries birth rates are now below 2.1, the level needed to maintain the population low birth rates are growing threat to some very large economies such as China U.
And Japan, triggering public sector responses that serve a structural tailwind for fertility treatment recently tried to introduce the three child policy next year, Japan will introduce reimbursement for IVF treatments and the French Swiss and Spanish government recently passed bills, allowing egg freezing in IVF treatments for same.
Sex couples.
These recent changes are just the beginning of providing equal access to reproductive assistance government interest in increasing fertility rates and changing laws on access to reproductive assistance makes us optimistic for the growing prospects of our fertility portfolio.
Let's talk now about contraception and next one on the number two contraceptive worldwide by revenue, we believe excellent onto lark or long acting reversible contraceptive has block Buster potential historically, there has been a sustained shift in the hormonal contraception market away from the daily combined oral contraceptives.
This segment towards locks larks are highly efficacious and considered to be the one of the most effective forms of hormonal contraception.
<unk> or Implanon next tea as it's known in some markets as differentiated even within the large segment. It is the only single Rod sub dermal long acting reversible contraceptive comprised of a progesterone only rod inserted in a woman's upper arm average insertion time takes about a minute.
Historically nexplanon sales had been highly correlated with well visits and logically the pandemic dampened our ability to reach health care providers and patients, especially in the U S. However, as the pandemic is slowly receding we are seeing improvements in recent weeks. Additionally, since next bond has been in our hands, we have been aggressively work.
<unk> to modernize the brands marketing and our operating model. This has included a direct to consumer education campaign in television and social media with digital campaigns to drive traffic to our revamped websites where patients can find health care professionals by ZIP code trained and next one on insertion this was <unk>.
Complemented by targeted bespoke campaigns aimed at specific patient segments.
Additionally, our clinical training programs ramped up quickly once providers offices reopened we trained over 7500 health care professionals in the third quarter alone, which is above our pre pandemic baseline levels and we trained over 6000 health care professionals. In Q2. This is a steep ramp.
The ramp up from the 2000 that were trained in Q1, and we believe it's contributing to increasing demand and we are very encouraged by the results of these programs, especially given where less than six months into this journey. We continue to feel very positive about next bond path, particularly now midway through the fourth.
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Let's talk about Biosimilars, which has grown 30% year to date, and where we are well positioned with our commercial strategy in the U S. Our two offerings are run flexes, our infliximab biosimilar in entre is not our trusts to them have biosimilar infliximab.
Infliximab market continues to grow every year and we are in flux. This has benefited from that tailwind with sales still growing even four years. After launch the trastuzumab market has some of the highest adoption rates about 70% among biosimilars and the uptake advances aren't in the U S continues to show unit growth since its launch last year.
Outside the U S. Our recent launches of had Lima in Australia, and Canada had been performing exceptionally well.
We also continue to evaluate other potential pipeline opportunities with Samsung as well as other developers as we pursue the potential opportunity to presented by the estimated $100 billion plus of blockbuster biologics going off patent over the next decade.
As we now turn our attention to established brands I'll repeat what I said last quarter.
Art of the strategic timing of our spend is that 2021 is an inflection here.
It is the last year during which the portfolio is subject to significant new low risk beyond 2021, the impact from the Eloise decreases significantly.
This portfolio of 49 product and comprised of brands with significant customer loyalty that tend to respond well to promotions for example in China, our retail business now representing almost 50% of our China established brands revenue continues to grow strong double digits because of brand loyalty offsetting the impact.
Of the volume based procurement program, our V P and positioning Oregon on for sustainable growth in China post the PPP importantly, we're taking a very entrepreneurial view of this portfolio and have uncovered a number of accretive opportunities within our existing portfolio. For example, we anticipate taste taking nasal next.
OTC in Russia with that launch planned for early next year.
All three franchises are global businesses as you will see on slide seven.
There are several areas I want to highlight about our business geographically the decline in Asia Pacific is primarily related to the debt just loss of exclusivity in Japan, and the U S. CLO from Nuvaring as well as an excellent outperformance through the pandemic where factors. However, importantly, we continue to grow in China. Despite four of our products being included in the volume based procurement.
Process in the fourth quarter of last year.
Revenue from China is up 4% ex FX this quarter driven by the respiratory market recovering from the Covid impact in 2020, the favorable positioning of our fertility portfolio and continued contribution from the retail channel. Overall, we are very encouraged by our performance in this very important market now.
I'd like to turn it over to Matt to discuss our third quarter performance in more detail.
Thank you Kevin.
Before we dive into the specifics of our financial performance, let's start briefly with basis of presentation and make sure we align on exactly what numbers, we're looking at where we have apples to apples comparability and where we may have something less than that on.
On the plus side, our third quarter results marked the first time that organizes reporting an entire quarter Standalone results.
As I discussed in last quarter's call our results prior to the June 2nd spinoff date are presented on the carve out basis of accounting.
Carve out accounting as a GAAP convention, which has a lot of positives. However, it is not intended to present results as this organized we're a standalone company.
So I wanted to be clear as we discuss results for this quarter and for the next three quarters that any comparisons to prior year periods will be somewhat apples to oranges and that will be comparing Oregon on stand alone performance to pre spin carve out basis of accounting.
With that said, where we will have the best comparability is that the revenue line, so I'll be focusing attention at the top line as we discuss our performance.
So turning to slide eight revenue for the third quarter was $1 $6 billion down, 1% as reported and down about 3% in constant currency exchange rates when compared to the third quarter of last year.
And this graphic we break out the change in revenue according to key drivers.
Some of the more significant impacts.
The impact of loss of exclusivity or low during the third quarter compared to the third quarter of last year is approximately $70 billion and it's primarily related to the low <unk> in Japan and <unk> in the United States.
Continuing to read across the waterfall chart. The established brands portfolio has exposure to BBB in China.
Total impact of sales for the third quarter compared to the third quarter of last year was approximately $60 million and was associated with the third round of Edp the largest round, so far which occurred in the fourth quarter of 2020 and that included four of organized products.
You layer pediatrics pro scar Propecia and our Cox here.
In the third quarter of 2021, the negative impact of COVID-19 was estimated to be approximately $100 million.
Which is about $20 million above Q3 of last year.
Our product portfolio is comprised of physician prescribed products, which have been infected by by the shortage of qualified personnel social distancing measures and delayed medical visits.
In the third quarter, we continued to see lingering effects from COVID-19 as compared to the year ago quarter, including as Kevin just mentioned, a slower return of well visits which particularly impacts nexplanon.
We continue to observe restrictive measures, which vary by country and region. So we expect to see some further lingering negative impacts from Covid persisting into the fourth quarter. Although we believe we're starting to see encouraging trend development and U S. Nexplanon early in the fourth quarter, which could be pointing to stronger.
Performance in Q4 versus Q3.
Foreign exchange translation at about 200 basis points of fever ability for the quarter year to date that impact is more pronounced at about 350 basis points, which is not really surprising given the impact of COVID-19 on global currency markets in the prior year period, and also understanding that about 75% of our.
Revenue is derived outside the United States.
Finally on the plus side, we saw volume growth in Q3, mainly driven by growth in China.
U S biosimilars and in Europe with established brands.
So now let's take a look at performance by franchise. It will start with women's health on slide nine.
Our women's health business was down 10% as reported and 11% at constant currency in the third quarter versus the prior year.
<unk> declined 8% ex FX in the quarter as Kevin mentioned, well visits are not yet back to pre pandemic levels in the U S. And next one on site sales are largely tied to that metric.
So we know the question on investors' minds is Ken Nexplanon have a 200 million dollar revenue quarter in Q4, and while we don't provide specific guidance by product. This question is important enough to address and provide you with at least the directional answer and based on current visibility into the data that we're looking at.
We do see fourth quarter as being favorable for U S. <unk>, there's three reasons why.
Reason number one goes back to the quarter just completed.
Third quarter negative growth should be considered in the context of Q3 2020 being a tough comp from the standpoint that in September of last year, even though we were independent deneke. We saw a short lived resurgence in patient well visits that positively impacted third quarter 2020 next bond sales there.
There has been volatility in the trend of patient obgyn, well visits over the last year, but for the third quarter of last year. Those visits were almost back to a pre COVID-19 baseline in Q3 2020, Nexplanon sales were the highest since the start of the pandemic. So the message here is that the third quarter of 2020 was a tough comp for next quarter.
Second reason goes to phasing of revenues within this year. There was a tender that we were expecting in the third quarter in Mexico that was delayed and has now become signed business for us in the fourth quarter.
Third and final reason goes back to what Kevin said about our next benign DTC campaign in the United States, which began running this summer is starting to show results now as well as other new digital campaigns that are raising brand awareness for next one on and driving sizable increases in our website traffic by potential new <unk>.
Users.
Beyond Nexplanon also pressuring women's health this quarter was the continuing and expected decline of Nuvaring down 17% ex FX in the quarter related to increased generic penetration as a result of the product <unk> in 2018 in the U S.
On a positive note our fertility portfolio continues to show strength, followed and grew 18% FX ex FX in the quarter volume growth came from an increase in demand from new accounts as well as from patients returning to clinics and our observation has been that patient seeking fertility treatments are more motivated to return to <unk>.
<unk> offices than those patients seeking normal course obgyn wealth visits.
Turning to Biosimilars on Slide 10, Biosimilars grew 41% as reported in the third quarter and 39% ex FX, we have five assets in the portfolio three in immunology and two in oncology.
<unk> and <unk> are our two largest offerings and both are offered in the U S.
Globally, <unk> grew 43% ex FX in the quarter driven by strong performance in the U S and ultrasound, which was launched in the U S. In July of last year was up 47%.
The biosimilars business outside the U S, which represents about half of our total biosimilars revenue is tender driven and therefore, it's more price sensitive.
Timing of tenders can also make this business somewhat lumpy and we benefited from that in the third quarter.
So while we are coming off two quarters of about 40% year on year revenue growth in Biosimilars, we see some moderation of that growth rate for the remainder of 2021, resulting in solid double digit revenue growth year on year.
Now turning to established brands on Slide 11 revenue for established brands was down 6% as reported and 8% ex FX in the third quarter of 2021 excluding.
The impacts of <unk> revenue was down 4% ex FX <unk>.
Volumes were up incrementally, mainly driven by Covid rebound, although not as strong as it was in Q2.
As well as growth in China retail.
Price was down about 5% across the established brands portfolio.
I think given that this is a portfolio of medicines that for the most part are well beyond their eloise it may be counterintuitive to investors to hear that in the third quarter more than 50% of established brands revenue came from products for which volumes grew these.
These brands are well known they respond to promotion and we're actively managing lifecycle opportunities across the portfolio.
These factors support our May Investor day discussion that we expected erosion in this portfolio to be in the low single digit area.
Over the intermediate term.
China China.
China is an important market for established brands and part of our strategy. In this market has been to drive volumes into the retail channel versus our historical presence in the hospital channel and this effort continues to be successful the retail channel in China grew 20% in the third quarter versus prior year and now represents almost 50% of established brands revenue in China.
Up from approximately 35% a year ago.
Now turning to our income statement on slide 12.
Our GAAP income statements for Q3 and year to date are available in our earnings release and I encourage investors to look at that important information here on slide 12, we will be looking at our non-GAAP income statement for these same time periods for gross margins were excluding purchase accounting amortization and onetime items related to the spin off.
Cost of goods sold.
So making the straightforward adjustments in the third quarter 2021, non-GAAP adjusted gross profit was $1 billion representing.
Representing gross margin of 64, 9% compared with 68, 6% in the third quarter of 2020.
The decline reflects cost associated with standing up organized as independent company, including certain costs related to manufacturing agreements between Oregon, and Merck, which have lower gross margin percentages compared to product sales.
Those manufacturing agreements had an approximate 180 basis point negative impact to gross margins in the third quarter.
Also included in cost of goods sold this quarter was a $24 million onetime cost related to estimated losses associated with the vendor supply contract conveyed as part of the spin, which had a 160 basis point negative impact to gross margins.
There were some spin related accounting items that partially offset this unfavorable city, but this quarter's gross margin is a good example, actually where we have apples and oranges comparability issues with prior year comparisons and why our 2021 guidance becomes a much more useful yardstick for investors.
That said, our gross margin for the third quarter was squarely aligned with the guidance that we've communicated in the low to mid 60% range.
Adjusted EBIT margins were 39, 8% in the third quarter, which brings year to date margins to 38, 9% we.
We had told you last quarter that we expected second half EBIT margins to be lower than the first half.
The reason why our EBIT margins are running stronger than we forecasted is driven by lower operating expenses and this is mainly timing related we are onboarding, our standalone operating expenses a bit more slowly than we thought and head count costs as well as promotional spending in certain markets.
If youre doing back of the envelope math you'd likely draw the conclusion that Q4, adjusted EBIT margin would have to be markedly lower than year to date for us to finish within the EBIT margin guidance range that we'll be discussing shortly so.
So we do expect operating expenses to increase sequentially in the fourth quarter relative to the third quarter as the pace of Onboarding. Some of these expenses speeds up going into year end gift.
Given the strong EBIT performance in Q3, we did consider raising the adjusted EBIT margin guidance range for the full year, but it would've been by a relatively small amount. So instead, we elected to just narrow the range and communicate to you a high an improved level of confidence in the guidance that we are affirming.
A few words on debt capitalization on slide 13.
Timber 30, our bank debt was $9 3 billion.
Cash and cash equivalents of $1 billion.
Embedded in that cash balance is approximately $320 million that is earmarked for finished goods inventory purchases from our former parent that's really related to the spinoff transaction. So a more representative net debt number as of September 30th is closer to $8 6 billion.
If we use if we use the implied midpoint of our 2021 EBIT guidance just for illustrative purposes that will put our pro forma net leverage at about three seven times, which is a modest improvement in leverage ratio compared sequentially to last quarter.
One more item here or imputed cash flow for the third quarter is a good indicator that we are meeting our pre spin forecasting. It is representative of the cash generating power of this business.
Our capital allocation priorities remain consistent with what we laid out in our pre spinoff communications and we are reiterating them today.
Now that our board has established a dividend the dividend becomes our first priority.
We're targeting the dividend at a low twenties percentage of free cash flow, excluding one time cost of the separation a level of which we believe is very manageable.
Our second priority will be organic growth and that would include lifecycle management opportunities for existing products within our portfolio supported by capital deployed in our manufacturing plants.
And on the latter we expect to see annual Capex in the range of 3% to 4% of revenue on an ongoing basis once again, excluding separation costs.
Our third priority for capital allocation is really a time its a tie between a execution of external growth plans to develop a pipeline of new product opportunities like you've seen us announce already our lady of health and the Jada system investigational EBIT could bring for preterm labor and now surrender targeting endometriosis.
Balancing that against be debt reduction and our commitment to maintaining our double b b, a two parent rating.
We are targeting a long term leverage ratio below three five times net debt to adjusted EBIT.
Turning to guidance on slide 14, consistent with previous communications. This guidance is all non-GAAP and pro forma as if the spin off happened on January one of this year.
Beginning with revenue. This is a chart we showed at Investor day, and changes that have really been at the margin based on where we are in the year. We're narrowing our full year 2021 revenue range from six 1% to $6 4 billion.
The $6 2 million to $6 3 billion.
This revenue is essentially all organic we do include a de Minimis partial year revenue contribution from the acquisition of millennia health.
The biggest component to the year over year change in revenue as the expected low impacts impacts from <unk> were approximately $280 million year to date are primarily related to the loss of patent protection for <unk> in Japan, and Nuvaring in the U S.
We continue to expect our full year LOE impact of approximately 3% to $400 million.
As we've been careful to described previously 2021 is an inflection year for organon as regards LOE impacts. After 2021 are low exposure dissipates to approximately $300 million cumulatively over the next four years combined 2022 through year end 2000 <unk>.
25.
We now think our BBB exposure in China for the year will be on the low end of the $2 million to $300 million range. We previously communicated.
Year to date exposure has been about $150 million and we have a fairly good understanding of what will be included in the next rounds, and Pvp, which is likely to include as a troll, hi, Saar and Nasonex.
Now Covid is something that we're obviously watching very closely we updated our view on COVID-19 impact last quarter to expect that our total year impact from Covid in 2021 would be about even with what we experienced in 2020, which was about $400 million.
Year to date 2021 impact from Covid was $320 million and given the recent trends that we've seen in next one on prescriptions, which is the product where we see the most lingering COVID-19 impact we are comfortable with that implied estimate of about $80 million of COVID-19 impact in the fourth quarter.
On a yearly basis, we expect foreign exchange translation to be a modest tailwind based on year to date currency performance and where spot rates are currently.
And finally for performance, we've tweaked this bucket down a hair and this is mostly tied to my earlier commentary on biosimilars and the lumpiness of tenders quarter to quarter.
Taken as a whole year to date revenue performance is largely as we expected. Despite the uncertainties introduced by Covid. The key themes that we've been talking about in our public communications prior to spinoff and since the spin off remains very much intact and those are.
Low issues that are waiting.
Women's health, especially fertility and biosimilars that are delivering growth in China, that's performing very well despite GBP headwinds.
Turning to other guidance metrics on slide 15, the message here is that for all the items shown we're affirming prior guidance for most metrics and for revenue and adjusted EBITDA were simply narrowing the ranges in light of where we are in the fiscal year.
Reiterating a point I made earlier during 2021, we've on boarded operating expenses more deliberately than we have forecasted we're not yet at a run rate for SG&A expenses, an independent company.
No R&D expense will be increasing in 2022 and beyond as we add pipeline assets and I say this more as we start to look forward to next fiscal year, and we will provide quantitative guidance for 2022, when we report our full year 2021 results in February.
Wrapping up the financial discussion the franchises are progressing as we had expected and given our outlook for 2021, we continue to believe that we're well positioned for future organic revenue growth in the low to mid single digits on a constant currency basis. This will be driven by stabilization in the established brands portfolio and continued growth in both.
Women's health and Biosimilars, each of which has the potential to grow at low double digit CAGR in the intermediate term.
At this point I will turn the call back to Kevin for closing remarks.
Thank you Matt again, we are very pleased with how our year has been taken shape, Oregon on is very well diversified geographically and therapeutically our mix of business is uniquely aligned to our future vision. Additionally, timing is in our favor as we move out from the negative impacts of the low <unk> and can focus on building out our vision.
Further as the pandemic starts to recede, we have doubled down on our operational investments behind Nexplanon in the U S to ensure that we meet her where she is and we have started to see very positive impact of those investments in the first weeks of the fourth quarter. We've been very disciplined in our business development plans and have actions on three attractive assets two of them.
Our earlier stage products with significant downstream opportunities as well as a recently commercialized device and Jada, which is helping to address a significant unmet need all in all we are very pleased with our third quarter performance and all the evidence points to a solid fourth quarter to finish off the year. So now we're happy to take your questions.
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Holly I think we can queue up the first question.
Alright, Dan if he would like to ask a question. Please press Star then the number one on your telephone keypad. Your first question comes from the line of Chris Schott with J P. Morgan.
Great. Thanks, so much for the questions. My first one was just on EBITDA margins.
As we think about going forward I guess, given some of the comments, you're making about the timing of on boarding and the R&D step up just directionally help us in 'twenty two formal guidance, yet I guess.
I guess im assuming we shouldnt use <unk> as a run rate for margins, but when we think about your margins for next year is it fair to think about us coming down a bit from 'twenty. One is again it sounds like SG&A comes up R&D comes up so just any any directional color. There I think would be very much appreciated.
And then my second question was just on the pipeline build out you've done three deals. This year should we think about these type of transactions, which you know.
Seemed like there's some R&D elements to them they seem a bit smaller in size just kind of the sweet spot in terms of acquisitions, both near and long term or do we think about deals starting to skew towards larger transactions as you delever. So I'm trying to sense of like if there wasn't capital constraints right. Now would you be also mixing in some larger deals or again is this.
This these type of transactions more more of the go forward to think about thanks, so much.
So I'll start with EBIT margin question. Chris. This is obviously sensitive territory, because we're not providing 2022 guidance that you want to be clear on that.
Directionally, though providing maybe some bumpers.
I think the comment that you made well, let's let's back up and just repeat some of some of the prepared comments which were geared.
So you'll start to address this question, which is we know that R&D expense will be increasing in 2022 to support pipeline assets.
We believe very important for the future sustainable revenue growth of the company. So youll see R&D expenses, increasing we've been.
Very careful.
How we are adding cost at the SG&A line to reach at what we believe are run rating every dollar that we're adding we're analyzing it very carefully so.
That said you had said Chris it looks like 2020 to EBIT margin.
<unk> to be below what you're guiding for in 2021, I think directionally. That's a fair statement you also said.
How should we think about the fourth quarter EBIT margin in the context of 2022, it might not be as low as that I think thats directionally accurate I think its probably it probably makes sense to just stop there at this point and we will be providing quantitative very very transparent guidance in February.
And Chris to your second point in regards to kind of our appetite on business development look even though we're just shy of six months into this journey since we rang the bell on June 3rd.
We've been working on these assets in terms of identifying and reaching out to potential targets well over probably six months a year before that so we've been very disciplined exceptionally disciplined in the way that we've looked at our business development portfolio. We did signal early on in the investment day that we were going to kind of using <unk>.
Ballpark, let's kind of go after singles and doubles, because we do we saw opportunities like for example, with Jada to solve a significant unmet need in postpartum hemorrhage, we saw an opportunity with a <unk> product with a preterm labor a significant unmet need today in that world and now we are very excited about the <unk> acquisition because they bring.
<unk>, a new mechanism of action to treat a significant issue around the world, which is endometriosis affecting nearly 170 people 70 million women across the world. So we see great opportunities. There I've mentioned before there's about 140 assets out there in various stages of development, but having said that having said that let me be clear.
We're not saying no to to larger deals, we're not saying no to essentially anything that we believe it could be accretive ultimately down the road for organized we are open to whatever actually going to be working best for us as a company.
And so but right now what we see as opportunities that are really what we consider low hanging fruit to go after in order to be able to really round out our portfolio and be a leader in women's health.
Thanks, so much.
And your next question comes from the line of Nevadan tie with Citi.
Hi, good morning.
Can you discuss expectation loans may cause me of contraception.
Our next panel and then when do you expect.
And training programs to benefit Nextgen panels.
And then my second question is around the cash balance which was higher than expected can you discuss this free cash flow generation this quarter.
And going forward. Thank you.
So let me take that first question. It's a very important question in regards to the performance of Nexplanon.
Look I mean, the thing to keep in mind is the fact that we truly believe that <unk> will be a blockbuster for all of US we have patent protection until 2000 22027 with an opportunity to extend it to 2030 as we start to round out and look at our five year extension data that will possibly come through in rips.
<unk> out in the 2025 time frame, having said that we've invested really truly invested in the operational opportunities in the U S and I'd like to point out three key three key investments and then ultimately I'm going to lead to answering your question by after going through that clinical trial.
Programs.
These are essentially just to keep you in mind that physicians or health care providers need to be certified and trained on how to insert and remove nexplanon in order to be able to prescribe and use the product prior to the pandemic Merck would average about 18000 certifications per year since since.
Spin that would essentially be June through September we've done 10000 certifications were essentially averaging in this in the second and third quarters. Nearly 13500 certifications that is a significant proxy for next one on uptake and performance going forward direct to consumer marketing.
We've invested in a direct to consumer initiated TV and social media campaign, with a well known celebrity and more importantly, real world users of Nexplanon two observations unaided awareness of Nexplanon has increased when compared to the prior three months and our organic searches for next one on information have increased as we have made significant really.
Significant improvements and enhancements to our next one on Dot Com site, where we expect to see about 7 million visitors uniquely every year.
Finally representative activities.
The Covid pandemic receipts over the last three quarters of 2021 versus the three quarters of 2020, our representative calls face to face have increased by 60%.
All of that is leading to the fact that right now in the first five weeks of performance of the first.
Q4.
We see sales distributors have increased strong double digits strong double digits, we expect the fourth quarter to be a very strong quarter for us in next one on and ultimately as I've always been saying as we start to invest in senior management attention as we start to invest in some of these programs. We will see next one on just from the sheer.
Fact of the matter of what it can represent.
In dealing with unintended pregnancies in the U S and beyond start to really ramp up and start to go back to that double digit performance that we expect of it.
And on the second part of your question regarding free cash flow. The reason why we included slide 13 of the earnings deck in the format that we did was so that investors would be able to triangulate back to what third quarter operating cash flow was in free cash flow.
And so now the question is is there.
That is that figure for operating cash flows at representative and I would tell you that there are.
One timers that are running through that but theyre going in both directions.
Some good guys and some bad guys do use colloquial terms that we use within the company, but theyre netting out so that the Q3 operating cash flow figure that we're looking at is really pretty representative of what the company should do and I put that in my prepared comments to say that.
The cash flow generating performance in Q3 is well aligned with what we had forecasted.
So that much I can say for this fiscal year and I'll refrain from making any free cash flow commentary for 2022 at this point.
And your next question comes from the line of Omar <unk> with Evercore.
Hi, guys. Thanks for taking my few questions not one question today.
I kind of thought it'll be helpful today to focus on.
The leanest tuck in that you guys announced on for I know just given the potential optionality. So if I may perhaps a few quick ones. One could you speak to endometrial thickness changes you saw in phase one b.
And secondly can you also speak to any ECG changes and or hypertension with this molecule so far.
Third perhaps just the selectivity for 17, B HST, one versus 11 beta or other ones.
And finally would you potentially intend to develop it in oncology indications as well. Thank you so much.
Thank you for that question.
I will say that first of all we are truly excited about the <unk> announcement and potential acquisition going forward.
I mean, when you think about endometriosis, it's really under researched underfunded and misunderstood with essentially an average of eight to 10 years before a woman has actually diagnosed with with with with the diagnosis of endometriosis.
In regards to your questions of endometrial thickness.
Still we are just starting our phase II.
Proof of concept studies, we expect to report out in the 2020 for 2025 range with commercialization of this product if all goes well knock on wood by the 2027 2028 timeframe.
Yes.
Is something that we need to get back to you as we start to kind of go down deep in terms of understanding exactly the data in that respect. We can return we can return back to you on that but just to say this.
Currently as you know the treatment of endometriosis is really.
Relied on pain medication and managing the symptoms in regards to.
To endometriosis is not necessarily the underlying issues that.
That are essentially causing the problems generators for example acts systemically at the pituitary level cutting off all signals to female that the female reproductive system, which basically is plunging a woman into menopause and really causing all kinds of bone mineral density issues. So that's why it's really short term usage for six to one nine it's really targeting.
<unk>.
The estradiol pathway essentially targeting only impacting estrone estradiol conversion process and that process is exclusively responsible for endometriosis and ultimately all of the <unk>. When you see in terms of the inflammation and all the things that regarding the pain and bleeding all of the issues go on.
We are we feel very excited about about this mechanism. It is a potential and I underscore potential for disease modification as well as managing the symptoms of endometriosis.
Really at the site of where it really needs to be addressed.
In terms of endometrial thickness and in terms of any K ECG or any other cardiovascular issues will get back to you in terms of as we start to be able to get a better insight in terms of the data.
And your next question comes from the line of Steven <unk> with Cowen.
Thank you I have a few questions and then an observation.
First under the drug price reform proposal reimbursement for part B drugs would go from ASP plus six to ASP plus $1000. This would seem to potentially encourage prescribing of biosimilars over more expensive brand drugs can you put some numbers on it on that to what extent could.
<unk> similar usage increase by simply reimbursement changes.
Or do you think that that is not correct that biosimilar useful not be encouraged by any reimbursement change.
Second question is on the acquisition of <unk>. The total consideration of $954 million seems strikingly high how would how much is that attributable to the lead asset versus the follow ons.
And what happens with the existing collaboration with Novartis for chronic liver disease, and then lastly, the observation for a company that has a core strategy of business development I am surprised that business development as third or even last on the capital allocation priority list. So.
So that's it thank you.
So let's take the capital allocation question first so the business generates strong cash flow today.
The collective view.
Of our former parent Merck our board of directors is that investors should be able to share.
In that cash flow in real time and that the <unk>.
<unk> of the company at a very sensitive time around the spin.
Was that the dividend would be an important consideration in achieving the right value on the company. So that was the reason for the institution of the dividend and of course once its in it does become the number one priority.
The reason why organic growth.
Projects come in number two so Steve is because these are products that are already in the portfolio. They've got a demonstrated track record of safety and performance and so simply introducing these products in new markets or potentially for adjacent indications.
Our generally derisked.
<unk> opportunities.
And have very very attractive risk adjusted returns.
And I would also add it's not a big consumer of capital in the overall scheme of things.
So with the dividend being a relatively modest and manageable number with the organic growth plans being derisked and also modest and manageable that still leaves really a substantial amount of our available operating cash flow free cash flow available to pursue the business.
Development of <unk>.
So I hope that hope that explanation makes sense in terms of the economics around the <unk> deal.
Of the number that you cited in terms of total consideration.
$600 million of that are commercial milestones. So the product has to be successful commercially for most of the value of the deal to be realized.
And.
The considerations about $84 million upfront and then approximately $270 million of clinical milestones. So we didn't wait the deal to be back ended and dependent as much as we could justify commercial success of the product and yes most of the value.
<unk> has been described to the lead lead candidate.
And I think your last question was on Biosimilars.
And we do view the current dialogue in Washington, as very positive.
For Biosimilar, Steven it's difficult to quantify the impact for <unk> at this point.
It will certainly be articulated when we provide guidance for 2022, but we do see the dialogue in Washington, as being as being favorable for for our portfolio of Biosimilar products.
Thank you.
Sure.
And your next question comes from the line of Greg Fraser with <unk> Securities.
Good morning folks thanks for taking the questions.
Just following up on your comments around Mexico and on lithium tend to suggest that $200 million plus of sales in Q4 is achievable given the positive drivers that you mentioned.
Then on on Endometriosis is clearly an area of women's health with unmet need Fernando's assets appears promising it's relatively early development would you say that it makes sense to have multiple shots on goal for endometriosis and is this an area that more will remain a focus for BD.
You want to take the first question I will so.
We do see a $200 million plus quarter as well within the realm of achieve ability for next one on we wouldn't normally.
Make those kind of definitive statements on a forward looking basis, especially for the quarter Thats.
That we're in.
But we were we wanted to be responsive to any potential extrapolation of the Q3 results that we just announced on next to benign we do see it as <unk>.
Sort.
Sort of counter to the trend going forward for next one on and so we decided to put some definitive commentary around what we see in Q4 and so yes, we do see north of $200 million is a real.
We have high confidence in that figure for next one on Q4 sales.
Hey, Greg to your to your second question in regards to endometriosis and shots on goal.
<unk> does have backup compounds to the lead 6219 compound so.
We feel very excited and extremely.
I'm thrilled that we were able to work with <unk> and acquire this potentially acquire this company for this very exciting asset.
And.
We look forward to being able to continue to develop this product out and of course, they've got a very exciting earlier stage assets not in humans, yet in terms of PC, Pos which is another significant unmet need and I just want to I want to reiterate the fact that we started this journey, saying that there was significant unmet needs in women's health across the world.
This is the right time for a company like Oregon onto be born to take on those those challenges of being able to resolve issues like postpartum hemorrhage preterm labor endometriosis Pcos and this is the beginning of the journey in that respect so, but we do hear you end up for Endo does have backup molecule.
Thank you.
And your next question comes from the line of Jason <unk> with Bank of America.
Hi.
Asheville mall on for Jason. Thanks for taking my question I just had one in terms of contracting for Biosimilars midol than during 2022.
Expect to have a line of sight on this contracting and the company believes that the paas than to some of the deals in the first half to mid 'twenty two given the on the <unk>.
<unk> plus biosimilar in 2023.
Thanks.
Are you referring to had Lima, specifically.
Yes.
Okay. Yeah, there is ongoing right now discussions.
Early we expect to launch in June of 2023, with our head Lima, or our Humira biosimilar, it's going to be a busy year in 2023, but we expect to be second in line in terms of overall launching sequence, which is obviously a very important aspect in terms of sequence of launch and.
And right now there are discussions the unique thing about Oregon on is that the fact that the biosimilar team essentially moved over.
From from Merck and they've been working for a number of years and have significant great relationships with all the pbms as well as the ongoing discussions with them you remember that this is a pharmacy dispense product and so it's going to it's going to be controlled and it's going to move very fast we believe by the Pbms too.
Essentially take advantage of Biosimilar switch.
Thank you.
And your next question comes from the line of Charlie Yang with Morgan Stanley.
Yes.
So I just have two questions. Please one is can you just.
I'll talk a little bit more details on the biosimilar price and volume.
Dynamics going forward.
Second question is regarding the next one on.
Oh look how you need all years.
<unk> look like in terms of the county, the gross celebration and trend.
Thank you.
Yeah. So.
So Charlie I think that those are good questions. Let me take a next one on first as we've said in our last may in our Investor Day, We believe that Nexplanon is poised for strong double digit growth. It was a double digit growing product.
Prior to the pandemic, we believe that that will continue to be the case as soon as clinic start to open up as they are reopening now and staffs are coming back online.
What kind of why we made the investments we did in things like us clinical training programs direct to consumer marketing all the rep activities that are ongoing right now and many other things that we're doing right now in this space keep in mind that next time on really only has about 5% market share. So there's tremendous room for growth going forward.
We do have patent protection for some time in order to build this product out it will be a $1 billion product for us we feel very sure about that.
And as I mentioned first half of the fourth quarter looks very strong for next one on which is again it's.
It's tied to the fact that as women go back into the clinics right now theres opportunities to really be able to to utilize next one in a manner by which.
It comes along with our vision of double digit growth for this product in blockbuster potential and.
In regards to the second point I think you were mentioning in terms of price volume activity around Humira biosimilars.
Biosimilars you look we expect unlike say for example hospital products like Infliximab is in Remicade, where the price tends to move kind of kind of a lumpy fashion hospital by hospital account by account, we do expect that it's going to move very quickly not like small molecule erosion, but nevertheless, it's going to move fairly quickly in terms of <unk>.
Erosion with the loss of exclusivity of Humira and moving forward in 2023 as you start to see all the launches of Biosimilars and youre going to probably see anywhere between 7% to eight biosimilar launches in the first say year of opportunities for Biosimilars to come in so we'll see I think significant erosion again none.
Like the small molecule type of erosion, but nothing like that you see for example in a hospital dispense biosimilars that you see today.
Yeah.
Thank you.
Hum.
And your final question comes from the line of David Amoss film with Piper Jaffray.
Thanks, So just a touch.
Paul.
And on Biosimilars and this relates to <unk>.
Lima, but it's also maybe a broader question as well with Boehringer ingelheim getting into Changeability.
How do you think about the role of inter Changeability and what that means for your volume share or other products that.
And that don't have.
Interchangeability. So this is really not a question about price, but more a question of that volume share given that given.
Given the interchangeability dynamics and then the second nature.
Ex U S established brand is there a good way to think about.
What maybe steady state pricing erosion. If there is any at all could be over the long term.
It's a business that admittedly is a little more opaque.
So I'm wondering if you could help us.
The window into your thinking there. Thank you.
Okay, David Let me, let me take the first question in regards to interchange ability because I know, it's coming up recently look the way that we've really looked at this market.
And let's just take had Lima, rather the Humira biosimilars.
Boehringer does have a low dose interchange ability study that they've done that represents a very small segment of the market. The majority of the market is in high dose high dose segment. So really the following variables. We believe are very important order of entry again is very important and we're still planning to be the <unk>.
Second to the market in June 2023, the high dose citrate free formulation is exceptionally important because that is essentially what the dominant form is today without these product.
Real World experience and we have that from successful launches in Europe, Canada, and Australia for our Humira Biosimilar I had Lima, which where we've launched that product in those in those places qual.
Quality quality product from a manufacturing partner you can you can rest assure it has got top line quality manufacturing like for example, Samsung by weapons, but having said that our thinking around interchange ability, especially interchange ability and a high dose titrate free form is evolving and where we are in very active.
With our partner and Samsung right now and we will take a decision shortly in terms of what needs to be done in that space.
But we are going to be very competitive we're not going to be essentially a company thats going to have all the right variables to launch and succeed in this segment because it is an important area for us and not be competitive in regards to competitive pressures from.
From other companies, but keep in mind there are no.
No company is perfectly positioned as we look today in terms of being kind of early launching with high concentrations to trade free dose also having interchangeable designation for high concentration at launch Nobody's got that so essentially it's going to be that we launched with what we have and then ultimately you will see later post launch as many are.
The other competitor, stating the interchange ability indication coming through.
And in regards to established brands, what we do see let me, let's have Matt address that yes, so just to just to.
Ground you, Dave approximately 92% of our established brand sales are ex U S.
Across the entire portfolio, we see let's say an up over our planning horizon, So four or five years, we see price decline approximately 3% to 4% per year, we see volumes actually across the portfolio growing about 1% to 2% per year and that's what has been.
Supporting our commentary that we see the established brands business, having a low single digit CAGR in terms of glide path revenue over the foreseeable future.
Okay. All right that's very helpful. Thank you.
Kevin any yes.
Thank you thanks, everyone.
For your very thoughtful questions, but I just wanted to say as we wrap up today's call I want to conclude by saying we are exactly where we want to be.
At our first Investor day in May one month before spin we laid out our plan for delivering low to mid single digit organic growth. We are delivering on what we committed to women's health driven by excellent on in fertility remains positioned to deliver double double digit growth over the intermediate period, plus we're making the changes necessary to build a foundation for continued growth.
Going forward year to date Biosimilars are already delivering double digit growth and we expect that to happen over the planning period.
We are stabilizing the established brands business with volume increases in more than 50% of our products and we believe we have a pathway to sustained performance over the coming years. This portfolio serves as a cash generator contributing to the free cash flow that Matt referenced enabling us to build out our pipeline with targeted and disciplined.
Business development and lifecycle management activities focused on our company's purpose to it.
Dressed significant unmet medical needs in women's health with our three deals in the past six months, we have lost no time in tackling areas, where were new innovation is sorely needed. We have commercialized the jada device to address postpartum hemorrhage launched in the U S with plans to bring it to the rest of the world as quickly as possible we've licensed I'll see buzz.
The investigation of preterm labor agent, a new mechanism of action in this space with few options and our existing deal announced today are exciting deal announced today. The proposed acquisition of Sorrento brings an early stage asset with new mechanism of action being studied for endometriosis plus in earlier stage asset for pcos.
In addition, we have a number of lifecycle management opportunities underway, including the potential for a next one on five year label extension and many many more overall our company is shaping up just as we planned sustainable predictable and on strategy. So I want to thank you and we will talk again early next year.
Best.
And thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
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