Q4 2022 Organon & Co Earnings Call
Ladies and gentlemen, thank you for standing by at this time I would like to welcome everyone to the Oregon on fourth quarter and full year 2022 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.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question Press Star one again as a reminder, this call is being recorded thank you.
I would now like to turn the call over to Jennifer <unk>, Vice President Investor Relations. Please begin your conference.
Thank you Dennis good morning, everyone. Thank you for joining Oregon's fourth quarter and full year 2022 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.
Dr. Sandra Milligan organize head of R&D will also be joining us for the Q&A portion of this call.
Today, we will be 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 presentation section of our organ on Investor Relations Web site at Www Dot Organon dotcom.
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.
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 including in the press release and conference call presentation.
I would now like to turn the call over to our CEO Kevin Ali.
Good morning, everyone and thank you Jen and welcome to today's call, where we'll talk about our fourth quarter and full year 2022 results.
To begin with I'm exceptionally proud of Oregon outperformance in our first full year as a Standalone company.
For the full year 2022, we delivered a 4% increase in total company revenue at constant currency.
We also demonstrated strong profitability generating an adjusted EBITDA up $2 1 billion, representing a 33, 8% margin we delivered strong growth in our women's health and Biosimilar portfolio as well as we grew our established brands business.
Starting with women's health.
For the full year 2022, the women's health franchise delivered 7% growth on a constant currency basis.
This includes $834 million of revenue from Nexplanon, which grew 11% in 2022 at constant currency.
This marks nexplanon second consecutive year of double digit growth.
That is a significant achievement for a product that has been around for over a decade and relies on continually attracting new patients to the product.
We are seeing particular strength outside the U S, where nexplanon grew 17% in 2022, especially in our La Metro region, where improved access is helping to drive demand.
In the U S. Next long grew 8% in 2022 and continues to gain share in the work of a long acting reversible contraceptive market in.
In 2022, we also trained more than 20000 health care providers to insert an excellent on and we will continue to trade more providers in 2023 importantly, we continue to hone our go to market strategy emphasizing follow on reviews with health care providers actively prescribing next one on for whom.
Training may strengthen their comfort and prescribing nexplanon.
We continue to monitor the impact of the overturn of ROE V. Wade on the contraception market.
Since July 2022, we have seen demand growth for next one on in the most restrictive states as well as protected and semi restricted states.
This speaks to the need now more than ever for highly efficacious forms of contraception in real world use nexplanon is over 99% effective in preventing pregnancies compared with some forms of short acting contraceptives, where efficacy is less than 80%.
That is in part because when women use of long acting contraceptives like next one on it takes the patient dependent aspect out of it nexplanon is inserted within minutes and currently provides efficacious continuous efficacy for up to three years. We also believe we will be successful in demonstrating the five your efficacy throughout.
Ongoing studies, but importantly, it wasn't just next model to continued growth in women's health in 2022, we continue to see good contribution from the fertility portfolio, which in 2022 grew approximately 9% at constant currency. Despite the impact of Covid in China, which limits the patient's ability to begin or continue treatment.
Fertility clinics.
The U S and China are large fertility market and together represent more than half of our current fertility business, China is a particularly important fertility market for us with the potential to grow to more than 1 million IVF cycles, a year over the next decade, the number of cycles in the China is already three times the number of cycles in the.
U S.
And as we have discussed many times before fertility as a therapy area with strong demographic tailwind women are waiting longer to start their families, resulting in higher prevalence of infertility and more governments are realizing that they need to take action to address the associated low birth rates more than 100 countries around the world.
Have a fertility rate or the number of births per woman that is significantly below the replacement rate that is required to sustain our population and GDP growth.
Countries are offering more monetary incentives for households to expand their families and many offering better facility access and benefits, Oregon on is one of the few companies with the portfolio helps serve this growing market.
The women's health franchise is also benefiting from our business development activities as we think about business development. We are striving for balance between commercialized assets and earlier stage assets that could become significant growth catalyst for organ on in the longer term.
Since spin through business development, we have added three assets to our women's health portfolio, they're already contributing or will soon be contributing to revenue growth you will recall that last year, we reacquired the rights to Marvelon in Mercury, one which are.
Buying oral contraceptives in selected territories in Asia, including China, and Vietnam, together Marvelon immerse loan grew 20% in 2022.
The success from the repatriation of these assets is just another example of how Oregon on is applying its own methodologies to maximize the performance of assets that may have been under prioritize and other companies in the past.
We are also very excited about the data system, which we added to our portfolio in 2021 with the acquisition of Olivia health data as a device indicated to provide control and treatment of abnormal postpartum uterine bleeding hemorrhage, and postpartum hemorrhage as one of the most common complications of birth requiring pharma.
Corelogic treatment and up to 10% of mothers.
Last week's annual meeting for the society for maternal fetal medicine researchers unveiled the result of the Ruby study, which examined <unk> efficacy and safety in real world use.
And the Ruby study researchers analyzed a large population of 800 women who were treated with the device from October 2020 to April 2022 at 16 hospitals across the United States.
Researchers concluded the Jada, we're quickly and was highly effective in controlling postpartum hemorrhage. After both vaginal and caesarean births. Researchers also found that the device successfully treated postpartum hemorrhage, a 92, 5% of vaginal births at 83, 7% of <unk>. In addition, the device was safe.
And only had to remain in place for a few hours after placement, allowing for a more efficient postpartum care experience.
Our goals in acquiring data included the opportunity to speed up access to this innovation in the U S and to leverage our global capability to bring this product to markets around the world. We continue to add accounts and are now at about 1000 hospitals in the U S with more than 15000 mothers having been treated with data. Additionally.
Additionally in 2022, we made our first ex U S shipments and has also submitted to the EU for approval.
We're also pursuing earlier stage assets that address the areas of highest unmet medical needs and has the potential to expand our portfolio in women's health since spin we've added for earlier stage assets in the women's health portfolio of different stages of development. The farthest along is <unk> six to $1 nine a unique new mechanism of action.
Which is a candidate to treat endometriosis locally instead of systemically.
October 2022, we enrolled the first patient in our phase II <unk> study, which is expected to be completed by the end of 2024.
Turning to Biosimilars.
Our Biosimilars franchise grew 17% on a constant currency basis in 2022, marking a second consecutive year of double digit growth Biosimilars are an important growth driver for the company and in 2022, we underscored our commitment to the to the business by adding a second R&D partner with Shanghai endless.
All five of our Biosimilars contributed to the strong performance in 2022 Red Flexes, our largest selling biosimilar grew 22% last year driven by solid performance in the U S and Canada.
<unk> already being on the market for five plus years <unk>, our second largest biosimilar grew more than 40% in the U S. But that growth was offset by competitive pressures in Europe had leaving our biosimilar for Humira had a very strong performance in 2022, reflecting a successful 2021 launch in Canada and Australia.
We expect that our success in those markets will help with provider confidence when we launch head Lima in the U S. In July of this year.
Because humira is the largest biologic to face biosimilar competition in the U S. We are frequently asked about the competitive position with had Lima.
To reiterate our messaging, we believe that the best position Biosimilars will be those that share the same attributes as the originator that includes the option for high concentration citrate free formulation as well as the low concentration formulation and we expect to have both at launch we also believe that real world evidence and.
In other markets will be something that providers will appreciate.
We have that data through our collaborator Samsung bioethics from their experience with had Lima, and EU as well as from our own successful launches in Canada, and Australia and finally, we believe our pen design can be a differentiator for patient Samsung is.
As an expert in device design and manufacturing and has designed the pen with the aim of providing a frictionless experience for new patients and those transitioning from Humira that said with multiple parties launching mid year. We have also convey our belief that 2023 will be a modest ramp up year with the market for biosimilars really forming in 2012.
Four in 2025 and beyond.
Finally.
Let's talk about established brands, which currently represents about two thirds of our overall business and generate significant free cash flow.
The portfolio continues to demonstrate the sustainability and untapped potential of these brands.
Over the longer term given the maturity of the portfolio, we expect close to flat performance for our established brands business. In 2022, we benefited from some one time events as well as from delayed <unk> implementation that helped the franchise delivered growth of 3% at constant currency for the full year.
In the near term as we think about 2023, we believe we will be able to offset the expected impact from round seven of DPP with continued focus on maximizing the potential of these well known brands through continuous demand generation and we expect the established brands to act to achieve generally flat performance.
2023 on a constant currency basis.
Briefly turning to geographic performance there are two important takeaways here, one geographic risk and our revenue is well distributed and to each of these geographic regions grew in 2020 to.
That includes China, which faced significant challenges related to Covid and 2022 as we think about 2023, we believe that strength in the retail channel growth in fertility as well as the benefits from the re acquisition of Marvelon immerse longwall together offset the expected GBP impact to our China business in 2023.
We are extremely proud of our 2022 achievements and I want to thank our 10000 founders worldwide for rising together for living our purpose and for delivering success, Oregon on hat in our first full year as a Standalone company I'd like to now turn the call over to Matt. Thank you.
Thanks, Kevin before I talk in more depth about our results I'll remind you that we haven't completely lapped. The June 2021 spin transaction as far as financial reporting is concerned so while our 2022 third and fourth quarters are apples to apples with the prior year periods first half of 2022 comparable.
<unk> is impacted by the carve out basis of accounting that we needed to employ for pre spin offs accounting periods.
Really applies more to expense items on a full year income statement, rather than revenue and I will call that out as necessary.
So with that opener will move to slide seven and discuss fourth quarter revenue.
Fourth quarter revenue was approximately $1 5 billion.
Down, 7% as reported but up 1% at constant currency and this marks our fourth quart fourth consecutive quarter of constant currency growth.
We'll spend more time talking about the individual drivers when we get to the full year, but isolating the fourth quarter for the moment, we had solid volume growth in the period, our key growth franchises women's health and Biosimilars were the main drivers of growth, but established brands also contributed for example, recently we've seen particular strength.
<unk> added that in France, and Spain, and but some generic still out of the market in Japan, we're getting some pickup there as well.
In the fourth quarter, we had about a $50 million impact from volume.
This procurement RVP in China, which reflects the implementation of round seven in November the organon product Thats impacted in this round is <unk>, which is sold as <unk> in markets outside of China.
The biggest number on this walk across this foreign exchange translation, which represented an 800 basis point headwind to revenue growth in the fourth quarter. This is the largest FX translation reporting impact of any quarter in 2022.
Might seem counterintuitive because everyone's most recent memories of the U S dollar weakening versus most foreign currencies, but the numbers show that trend started at the.
The very end of 2022.
And given that north of 75% of our revenue is outside the U S. FX translation was a significant theme for organ on in 2022, our portfolio faced a significant financial reporting headwind from the strengthening U S dollar and unfortunately that dynamic mask the operational growth in local currencies that we delivered.
In the fourth quarter and in the full year.
Speaking of the full year, we have an identical revenue bridge on slide eight for.
For the full year 2022 revenue was approximately $6 2 billion.
Down, 2% as reported but up 4% at constant currency when compared to prior year.
Starting with lots of exclusivity or low.
For the full year 2020 to low impact was modest at about $30 million and it's coming mainly from new <unk> low in the United States, We didn't have any low impact and established brands. This year.
And as we've said before the most significant low spacing the established brands portfolio washed out prior to the spin off and what we expect going forward is accumulative few hundred million dollars of impact over the next several years.
The full year impact from BBT of about $20 million, primarily reflects the November implementation of around seven as I just discussed.
We saw an approximate $140 million impact coming from price for the full year 2022, and that's consistent with our expectation that we will continue to see low single digit price erosion on a companywide basis the.
The majority of pricing pressure continues to come from established brands, where products are subject to mandatory annual price reductions in some markets as well as from Biosimilars.
For volume, we expected to see strong volume growth during 2022 across our franchises and that indeed happened. We saw volume increase is coming from what we call our growth pillars, nexplanon fertility and Biosimilars, but established brands also grew volume as well for example, Nathan extra simulator.
Drove strength year on year and as it grew in Europe , and we continue to see significant growth in the China retail channel.
We're looking at supply other the approximate $70 million impact primarily represents supply sales to Merck and other third parties, which consists of relatively low margin sales of pharmaceutical products under under contract manufacturing arrangements.
Last year, we signaled that the volumes under these arrangements would decline in 2022, which has been the case.
And finally, you can see the significant financial reporting headwind, we had in foreign exchange translation 600 basis points for the full year, which again is a function of more than 75% of our revenue being generated outside the U S.
The next few slides lay out our performance by franchise, Kevin covered very well the highlights.
And the quarterly and full year details are provided in a supporting.
Earnings materials.
So I'll focus on top of that may be relevant to your modeling as we think about 2023, we will start with women's health on slide nine.
As Kevin mentioned next one <unk> had a strong performance in 2022 was up 8% ex FX in the quarter and 11% for the full year. In fact, we set two new sales records for <unk> in 2022 first in the third quarter and then again in the fourth quarter.
Quarterly phasing for next year.
Worth reminding you that in the fourth quarter of last year next month also set a sales record, which presents sequentially followed by a weaker first quarter due in part to the buy in buyout dynamic we tend to see around the timing of price increases in the U S.
Okay.
Expect to see again in the first quarter of 2023.
Turning to Biosimilars on slide 10.
Kevin mentioned this franchise continues to be an important growth driver for us. We know investors are focused on the potential revenue contribution from our U S launch at Lima. This year based on our expectations for a gradual market for media general.
2023, and only a partial year revenue contribution given our July one launch we expect that globally had Lima will represent no more than about one 5% of our consolidated 2023 revenue.
Turning to established brands now on slide 11, I want to drill down into the fourth quarter, because it's just a <unk> implementation.
There was another items that impacted established brands fourth quarter performance and.
In January 2023, we initiated market actions for sterile suspension Injectables dipper span and stellar stone chronic dose. This was related to a purchase component used in the sterile filling process that organized hoist facility in Belgium that was determined to be non conforming.
To be clear no product quality complaints or adverse events have been reported nor are any expected.
Due to the compliance aspect it was prudent to exercise these market actions and discard inventory deemed to be impacted for.
For reference combined these two products represented about $165 million of revenue in 2022.
Turning to slide 12, you can see that this action had the effect of reducing fourth quarter revenue by $8 million for potential sales returns and we recorded a one time inventory charge of $36 million that shows up in cost of goods sold.
We're breaking out the issue in this manner to show that excluding the total $44 million that flows through to adjusted EBITDA, Our fourth quarter. Adjusted EBITDA margin would have been 28, 4% very much in line with what our expectations were for the fourth quarter. When we last provided guidance in November .
We're also showing the full year impact of reference.
Since spin off we've been very pleased with our ability to forecast our business. So all events like a market action are always a potential risk in this industry, we're confident about the durability and diversity of our business as it relates to forecasting it.
Let's now turn to key P&L line items on slide 13.
For non-GAAP gross profit we are excluding from cost of goods sold purchase accounting amortization and onetime items related to the spin off.
The market action I just discussed.
The market actually I just discussed was the major driver of the change in gross margin in the fourth quarter compared to the prior year period.
For the full year adjusted gross margin was 65, 7% compared with 64, 7% for the full year 2021.
Keep in mind that full year comparisons for items below the revenue line are less meaningful because they are only truly comparable for the second half of the year.
That said the year over year increase in adjusted gross margin is primarily result of lower supply sales in 2022, which carry lower margins as well as pre spin allocated costs related to the separation of organizing that occurred in the prior year.
Adjusted EBITDA margin was 25, 6% in the fourth quarter compared to 29, 3% in the same period of last year.
Adjusted EBITDA margin was 33, 8% for the full year 2022, compared with 36, 1% for the full year 2021.
The decline in the fourth quarter and full year was a result of costs associated with the market action that hoist as well as expenses related to positioning the company for future growth.
We've been talking about the importance of reinvestment in the business to create a pipeline of new products to drive revenue growth for a while now and you see that in higher selling and promotional costs as well as research and development spend associated with our prior acquisitions.
As we look at debt capitalization and leverage on slide 14 as of December 31, 2022, we have gross bank debt of $8 9 billion net.
Netted against cash and cash equivalents of $706 million. We ended the year with a net leverage ratio of about three eight times, which ticked up from the three six times, we reported at the end of the third quarter.
That primarily reflects the combination of the strength of the euro and the impact of the fourth quarter 2022 results.
Given our adjusted EBITDA guidance for 2023, which I'll discuss in a moment together with the currency impact on our euro denominated debt leverages likely to be stubborn in 2023 in fact, given the inevitable map of this past quarter's inclusion in our LTM EBITDA calculation during the upcoming quarters, we could see leverage.
Tick higher before leveling back down by the end of the year.
This does not have a significant impact on our capital allocation priorities given the strong cash flow characteristics of the business. So let's turn to slide 15 for a moment and take a closer look at cash flow.
When we reported our third quarter financials, there was still a lot of noise in the September year to date cash flow numbers stemming from some transient spin related items. This is washing out and you can see that in the fourth quarter, our free cash flow generation was very strong.
In the full year 2022, there was about $300 million related to nonrecurring spin related working capital build early in the year.
If you recall the discussion from last quarter, we said that a good portion of that $300 million was actually expected in late 2021, but instead landed in early 2022.
With the spin related build largely behind us and reaching what we expect to be a more normalized ebb and flow to our working capital position, we saw a significant improvement in Q4 cash generation.
The other driver was foreign exchange translation.
<unk> with weakening of the U S. Dollar we had a positive impact of $100 million in the fourth quarter from foreign currency cash balances within our global liquidity management program and that partially offset the $160 million headwind, we had experienced year to date September .
But the key message here is that putting aside the $300 million of working capital build that should not repeat in 2023, our free cash flow ex one time costs related to the spin off is in that north of $1 billion range that we communicated at the time of the spin.
Our capital allocation priorities remain consistent with past communications, we will continue to prioritize servicing the current dividend followed by pursuing organic growth through life cycle management opportunities within our current portfolio of products.
Capital expenditures in the range of 3% to 4% of revenue remains a good estimate for forecasting purposes with that capital go into modernizing and growing our production capacity standup related investments like our global ERP implementation and other strategic investments in the business.
With these priorities satisfied we expect to have significant remaining cash flow available as we continue to balanced external growth opportunities against our commitment to our double b rating.
Having a higher leverage ratio at points during 2023 likely raises the bar on business development as it competes for capital, but even without discretionary debt repayment, which we've done twice as a standalone company, we can still get deals done and stay within the parameters of our rating much as we have been doing since the spinoff.
Now turning to 2023 guidance on slide 16, where we highlight the items driving our 2023 revenue guidance range of $6, one five to $6 $45 billion.
Beginning with low.
We expect an approximate $50 million to $75 million impact for full year 2023, which reflects the continued impact of generic competition for nuvaring.
It also includes an impact from AD is that which will go low in Japan in 2023, as well as the provision for delay era, where we expected generic entrants sometime in late 2023 after not seeing one in 2022 or 2021.
We expect the impact from <unk> to be in the range of $125 million to $175 million in 2023, driven mostly by the inclusion of <unk> in this latest round.
We expect company sorry, we expect approximately $75 billion to $125 billion of price erosion in 2023 on a total company basis, we've been able to stem pricing pressure a little better than we thought at the start of last year over the longer term, we would expect pricing erosion to be in the range of two to 300 basis points of <unk>.
<unk> and that is mostly related to mandatory pricing decreases in certain markets and smaller low impacts, but also due to product mix. So for example, as biosimilars becomes a bigger business within organon that will put more pressure on price.
And for volume, we expect growth of approximately $5 million to $600 million for the full year in line with what we saw in 2022. The majority of the volume increase is expected to come from our multiple growth pillars, Nexplanon biosimilars fertility, China retail and to a smaller degree recent business developed.
Activity, including Jada.
Given where FX spot rates are trending we would expect a more modest impact from foreign exchange translation in 2023, compared with 2022, we're estimating an approximate $50 million to $100 million impact from FX for the full year, which would represent about a one percentage point headwind.
That means that our guidance range implies constant currency revenue growth of approximately three 5% at the midpoint.
Moving to the other components of guidance on Slide 17, we expect adjusted gross margin to be in the low to mid 60% range, which is modestly lower than where we finished 2022.
As I've talked about previously much of the inflationary impacts from 2022 were held in inventory and therefore have a greater impact to our cost of goods sold this year in 2023.
On operating expenses, our ranges for SG&A and R&D as a percentage of sales are in line with what we guided to and delivered in 2022 and reflect continued investment in the business as we position it for future growth.
Our estimate for R&D expense includes a line of sight to about $40 million of IP R&D expense that is tied to the $8 million investment we made in clarity of medical in January plus an estimate for a milestone achievement for <unk> in 2023.
Any upfront payments related to future business development would be incremental and we would call that out in our announcement of any such transactions.
Those opex assumptions would bridge you to an adjusted EBITDA margin in the range of 31% to 33% for 2023.
For below the line items, given the increasing interest rate environment. We have increased our estimate of interest expense for 2023 to approximately $510 million.
The knock on effect of higher interest expense also means that we hit a cap with regard to interest expense deductibility for tax purposes.
For 2022, we actually finished on the low end of our tax expense guidance range. So for 2023, our non-GAAP effective tax rate range reflects a normalization of expectations for tax expense plus the incremental expense for limitation of interest expense deductibility.
Wrapping up the financial discussion 2022 was a very solid year for the company. In addition to all the operating accomplishments Kevin mentioned as we advanced organized mission in women's health and the financial front, we delivered constant currency revenue growth of 4%, which is well aligned with the mid single digit expectation we had for the year we deployed.
Over $200 billion of capital across four promising transactions to drive future revenue growth, we proactively retired $100 million of debt and we returned $290 million in cash dividends to shareholders.
We're looking forward to 2023, where we expect to deliver continued growth and strong capital performance based on the earnings guidance, we're providing today.
With that we'll now turn the call over to Q&A.
At this time I would like to remind everyone in order to ask a question simply press Star then the number one on your telephone keypad.
Your first question is from the line of Terence Flynn with Morgan Stanley . Please go ahead.
Good morning, Thanks for all the color and thanks for taking the questions.
I guess, just as we think about <unk>.
Next one on for 2023 can you just walk us through how you're thinking about what what's embedded in guidance both on the U S side in ex U S and then <unk>.
Follow stem was somewhat soft this quarter was just wondering if there is anything of note. There and then how we should think about that product on the forward as we go into first half of this year. Thank you.
Yeah. Thanks for the question Terence I'll take that.
Look as we start to think forward in terms of what we're doing with next one while we're very pleased with two consecutive years of double digit performance of course, we had somewhat of a strong buy in in the fourth quarter of last year. So we expect the first quarter as usual to be a little bit soft, but ultimately going forward, we see really very strong at least in the.
The us as well as ex U S very strong demand growth coming in terms of physician demand growth, we're able to kind of pick up and monitor now that we feel very good about the fact that the chances of next one continuing to grow and growing in a very solid way is something that we feel very good about our ex U S business continues to grow because of the fact that it was very deep priority.
As in years past and we have opportunities to really continue to drive access and ultimately awareness of <unk> throughout the world and of course, when we start to go outside of the U S. You start to see more kind of a lumpiness to the overall orders because theres a lot more tender business thats being involved here, but when you look at the U S. We're really very happy with.
With what we're seeing in terms of our DTC campaigns, our social media campaigns and all the things that we're doing in terms of our clinical training programs and continuing focus on really kind of driving.
Prescription depth and physicians, who are currently very comfortable with an expert on it.
In terms of policy that you were asking in terms of the I guess it was the fourth quarter.
<unk> in terms of fallen.
We have very strong fault.
In the U S performance, but ultimately the softness came in Q4 from China as you can well imagine when China started locked down and then ultimately after the lockdown when you start to have a real increase in terms of Covid infections.
It really started to inhibit the opportunity for couples to go to the IVF clinics in order to be able to get their therapy, but we expect that to ultimately turnaround and this year, we expect a very strong.
Paulson business in China for this year as we start to rebound from all the Covid Lockdowns and ultimately the COVID-19 infections that are essentially kind of burning through.
China as we see it today I hope that answers your questions.
Yes.
Your next question is from the line of Umar Rockford with Evercore. Please go ahead.
Yes.
Hi, guys alright, Thanks for taking my question, maybe a couple if I may 1st on 2023 guidance could you clarify how much humira in the number or not as well as.
The ongoing China, reopening and sort of what you baked in I think that'll be very helpful.
Well, we don't.
Talk to you, but we don't usually kind of talk about exactly sales numbers from individual product from Humira I'll refer had lima, but we feel very good that this coming year will be a solid year for <unk> on a few fronts one.
Canada, and Australia continued to do very well in terms of their overall continuing progression in terms of their performance.
Strong double digit growth outside of the U S for had Lima, and second we'll have half a year of had Lima sales rumor in the U S.
I've been saying this for some time 2023 will be more of a race to get on formularies or the top pbms in the country as well as potentially some of the closed systems like Kaiser other hmos and also governance.
So it is something that we feel very comfortable about that we'll do well because of the product presentation. As I mentioned in my commentary in terms of the introductory commentary you really want a product. We believe the products that are going to win and ones that are the closest to the originator. We are about as close as one can get in terms of <unk>.
The high concentration citrate free low concentration we're.
We're talking about the frictionless experience with the device and Pan a strong ex U S. Ria.
Real world evidence of that.
<unk> can feel comfortable about the safety and security of what they are what they are using in terms of this product. So we feel very good about had Lima going forward in terms of what we're doing there and regarding China coming back.
Look we've got really good growth drivers in China as I mentioned earlier to parents, we've got fertility recovering we've got the Marvelon business that is continuing to really ramp up very very well, we've got the retail business starting to come back online because people are coming back to that we've got the online business growing very well so that will all.
Offset some of the big headwinds that we're facing with the seventh round and ultimately hopefully we'll see what happens in the eighth round.
It is estimated for the for the Q2 period, but we feel very good that we will be able to offset and we've never had a year right. Now recently with the recent rounds of GBP, where we've actually started to see a decline we continue to grow in China and as we get through 2023, we estimate anywhere between 70% to 80 <unk>.
<unk> of our business will have gone through the volume based procurement business.
Procurement impact and then we see growth really strong robust growth. After 2023, so 2024 and beyond don't be surprised if you start to see high single digit low double digit performance coming out of China.
Kevin Sorry, if I may just clarify I think on China, what I was referring to was so I understand most of the products have gone through <unk> I guess, what I was getting at was the.
The pace of Edp rollout got pause during Covid and China, So with that yes, we're still at about $300 million run rate by tour and at $100 million et cetera, I'm just trying to understand.
How are you guys thinking about step down on these sort of.
Three or $400 million franchises in China as rollout resumes on the previously conducted BBB.
Well the guidance.
Yes, well look I mean, you bring up a good point.
Round seven was delayed by a few quarters and so ultimately that benefited us last year from our <unk> business in China now it effectively went into effect November . So we are seeing the expected erosion of <unk> as we speak right now probably about a $90 million headwind this year from volume based procurement for <unk>.
Control in China, the remaining products that we expect to go through volume based procurement.
Round, eight and round nine essentially a much smaller products there is somewhere in the $40 million range. So if that as you say if there is the opportunity that those get delayed because of further ongoing COVID-19 infections or whatever could be the the things that come out come as a result of what's happened last year.
Then the upside won't be greater say for example, the delay that we saw over this call, but that's why I mentioned it could be anywhere between say, 70% and 80% depending on those rounds happening in the second and fourth quarter, but theyre much smaller products. So we went through most of the yellow most of the round.
That have kind of hit the big products have already happened.
Does that answer your question Omar Thank you so much Kevin.
Kevin just to quickly revisit for rumors benefit in the prepared comments back to head Lima for a second.
We did say worldwide sales.
Not exceed about one five points of organized consolidated revenue and while Canada and Australia are important markets. There are a lot smaller than the U S. That you can you can assume that that number is weighted towards the United States a bit.
Your next question is from the line.
Your next question is from the line of <unk> with BNP Paribas Exane. Please go ahead.
Hi, good morning, Thanks for taking my questions.
Q starting from next Glennon.
The U S. Do you expect to continue to take market share following the <unk>.
<unk> news and from both the oral pill and IUD and can you share how many health care professional do you expect to train.
Sure.
And also am I right that there was no tender.
Tender in the fourth quarter outside of the U S. Do you expect a tender in Q1.
And then separately do you have a net leverage target that you can share and could we see some term loan prepayments in 2023. Thank you.
So let me let me start with the next one on questions Youre right.
In Q4 of 'twenty, one we saw a big tender from Mexico.
That tender came through in Q3 of 'twenty two.
So thats why you Didnt see really the tender business that for the ex U S business in Q4, we do expect probably in the Q3 Q4 timeframe more.
More of the tender business kind of ramping up in the emerging markets, whether that be in Mexico, or Brazil, and others. So when you.
Look for that probably in the second half of this year, we'll start to see tender a bigger tender activity is coming through.
In the year in regards to <unk> and kind of the post ROE V. Wade opportunities, we do see and I've been able to see that actually with next one in the U S.
What I would call those states that have restrictive.
Restrictive policies around around around abortion or around access.
We're seeing about a high single digit growth for <unk> in those states. Those that are kind of more protective of the opportunities are probably mid single digit growth rates right now at least that's what we saw post the decision versus pre.
I do see that there's opportunities to continue to grow have always felt that that.
When we think about what physicians and patients are going to be wanting in states, where it's quite restrictive I would think that real world efficacy and I mentioned, 99% effective you take the decision.
Decision, making out of the daily issues in regards to.
Their contraception needs and I do feel that we will continue to see additional growth kind of accelerating from some of these states that ultimately have.
The restrictive policies and the last question in regards to clinical training programs, we did as I mentioned in.
In 2022, we we trained 20000 health care providers now that could be physicians nurses.
Many of those some of those actually were.
Retraining for people that needed to kind of get re familiarize us as the Covid Lockdown started.
People start to come back into the clinics, but we will continue to invest in clinical training programs going forward I would say theres going to be an average of anywhere between 15 and 20000 per year that we will be averaging going forward for health care providers, both new to the.
Prescribing nexplanon and those that need refresher training in order to be able to feel more comfortable with inserting and using an excellent and with follow on reviews.
And I can take the part of the question related to leverage so since the spin off we have been soft targeting.
Our net leverage figure of three five times.
The business had worked its way down to that level. During the course of 2022 mainly related.
So the favorability we saw on the euro denominated debt as the dollar strengthened and that that will that's one of the dynamics that is reversing in 2023, we called it out in the prepared in the prepared comments.
But around that three five times.
Average target as we think about 2023.
We will be balancing the benefits of a voluntary debt reduction against what we see as the business development target landscape.
Our ability to increasingly self fund our own deals.
As the.
As the.
As the year goes on our cost of debt has risen so.
We will continue I think Nevada, two to behave as we've done since the spin.
We'll look to bring balance to that as I said in the prepared comments.
The hurdle.
Bar has risen.
As business development competes for capital against the near term and certain benefits of debt reduction.
Your next question is from the line of David Absolom with Piper Sandler. Please go ahead.
Hey, Thanks, So I had a few.
On the.
The revenue bridge for 'twenty three guidance regarding the volume growth can you talk about the extent to which.
That's coming from established brands and.
Maybe talk in more detail.
About where the drivers are and established brands as you think about it.
If you think about volume.
That's number one number two is powered.
Apologize if I missed this but just remind us when do you think you can get interchange ability in the U S for headlamp.
Lima.
Just talk about.
Progress towards that and then lastly on business development I think you've talked about a lean towards the acquisition of EBITDA generating assets I wanted to pick your brands.
That and see.
What your appetite is in terms of commercial stage assets. These are the development stage assets and how you're thinking about that thank you.
So I can deal.
Can address the first two questions in regards to volume, whereas the volume growth coming in 2023 to the bridge, we did definitely see volume based procurement non volume based procurement products. So these are they're not part of the lift.
So that will continue to be a driver the retail sector in China will be continued to be a driver out as that continues to grow very well for us in Europe and now in China as well respiratory products continue to grow very nicely in terms of our overall volume growth. So you see that.
And then we've got a sundry other smaller.
Countries and from regional perspective, our Latin America, Middle East Africa and.
In Russia business continues to grow pretty robustly in terms of our own volume growth opportunities. So there are continuing volume growth up chances that we'll see that.
Continue for established brands and.
And then of course, we talked about some of the downsides in regards to the China EVP around that ultimately offset some of the growth opportunities that we have for volume. The second question that you had.
Was I believe around what was it.
Oh, the interchange ability, yes, so interchange ability.
We expect that to come probably Q2 Q3 2024.
Probably literally up one year after launch.
July of this year, which is really around the range of where everybody at least many of the major competitors are going to have.
Their interchangeability come through but I want to be clear, though in my discussions with many of the PVM.
At least in the first year or two interchange ability was not a key point of differentiation as long as you had it in process as long as you had it within that you could kind of make sure that everybody understood that you were going to be able to deliver interchange ability within a reasonable timeframe that would kind of put off the table then.
We started to get into many other.
Concepts or product delineation that ultimately means that we are much more compelling for them.
Okay.
And then on Biz Dev M&A.
Yeah.
So Matt do you want to take that in terms of EBITDA.
David.
Yes, so David we've been seeking balance in the program between early mid late stage assets, we have had a preference.
To be looking at more of a latter stage or currently marketed opportunities. So as 2023 unfolds.
Don't be surprised if you see.
Our capital deployed for business development Slant towards things that are more are more near term, especially since the last deal. We did was.
Prior year medical which is certainly early stage.
Okay helpful. Thank you.
Your next question is from the line of Chris Schott with JP Morgan. Please go ahead.
Great. Thanks, very much just two for me maybe first on Lima.
Just talk at all about how you see the market evolving in 2024 and beyond I guess, specifically has there been any changes in terms of how you think about the size of the biosimilar market Youre ultimately going to see here as you kind of think about where pricing is going to land and how much volume is ultimately going be accessible for the biosimilars.
And then my second question.
And Matt I know I've asked this in the past, but when we think about the EBITDA margins you are laying out for 2023.
Can we kind of think about the use is starting to represent kind of a trough level of margins in that.
As maybe topline growth that continues over the next few years, if we could start to see margin expansion from here or is there more investment that needs to go in the business to kind of really spun that longer term kind of growth ambition that you have in that maybe we need to think about margins still kind of under pressure over time. Thank you.
Thanks, Chris I can I can deal with the head Lima question and I'll turn it over the other question Matt.
Look as I mentioned before we believe the 2023 as you've seen from a couple of the Pbms are basically saying that.
They're going to allow obviously the originator theres no preferential treatment there for Biosimilars and so as a result of that when you are able to choose whatever you want people will likely go with the originated or at least in 2023, and so I believe that 2023 is going to be about.
Which two to three biosimilars are going to get on to those formularies.
And then we believe that our profile in terms of the high concentration citrate free and low concentration having the full profile real world evidence.
Patient centric device experienced by the way with immunology organizational rather immunology business and our deep deep knowledge of rheumatology business across a rheumatologist across the country positions us incredibly strong position to be one of those two to three products that are going to be listed on formularies now what will likely happen.
Obviously in 2023 as I mentioned that would be a lighter ramp up year youre going to be try to fighting for.
Formulary position.
We'll be obviously discounts that will be offered I'm sure that the originators will be doing that in terms of kind of being more aggressive with discounts going forward I do believe that volume will not retract I think there'll be opportunities not only for the switching of the Humira volume, but also I do believe that Pbms will look at this off.
For 284, other such products, whether you're talking about other anti TNF, where the opportunity is there to go to a biosimilar first so the potential for volume and also by the way because of the lower price youll be able to get patients, who werent really essentially all thought of for anti TNF treatment to be <unk>.
Using the anti TNF treatments.
So with high quality anti anti TNF biosimilars on the market I think volume will be there, but the question is what kind of rebates what kind of discounts that will be provided clearly as we go forward in 2024, and 2025, there's going to be more of an expectation that the originator that humira will start to move off of formularies as we see in the red.
Of the World and then you'll ultimately see bigger discounts are being provided but also ultimately the volume opportunities will still exist. That's the way I see it 2023 is a lighter ramp up year formulary accession.
And then and then 24 and 25 it will start to open up bigger bigger rebates bigger discounts, but more volume opportunities for biosimilars.
Matt I'll.
I'll take the second part of the question. So this is a dialogue that has been ongoing with investors really since the spin.
When we launched our P&L had really zero space in it for product development type expenses that could drive ongoing future revenue growth and so we've been.
Slowly and steadily reintroducing those as the quarters have.
Have evolved and Chris in direct answer to your question when I think about the 31% to 33% I think and how much lower that that might go it depends on how the.
And what kind of business development that we do but I would say as we look at the range for 2023, the low side of that range is starting to feel like.
Like the nadir because at that at EBIT margins like that we've got R&D as a percentage of revenue that is right in that 9% to 10% range. We've got promotional type expenses built into our.
SG&A that start to feel sustain.
Sustainable and ongoing in so at this point in time with the kind of scenarios, we've been running on what future business development might look like the low side of that range is starting to feel like.
The nadir as we think about.
Five year Strat plan horizon.
Great. Thanks, so much.
Your next question is from the line of Chris <unk> with Goldman Sachs. Please go ahead.
Hi, This is Dan on for Chris Thanks for taking our questions. Just a couple I guess first on just business development with regards to Biosimilars I guess should we think that you guys.
Potentially competing on some of the other biologics that are potentially.
Essentially what we've pattern over the course of the decade, and if so doing deals similar to the Samsung deal kind of 50 50 split.
And then just on cash flow for 2003.
Want to confirm should we think of this year as still kind of somewhat one time impacted but close to the $1 billion plus number and then 1 billion plus starting in 'twenty four or 'twenty.
'twenty three kind of about.
The 1 billion plus range. Thank you.
So Dan let me address the business development strategy for Biosimilars look we're very much committed.
Committed to Biosimilars.
Obviously, we're launching our humira biosimilar in a few months from now.
But we're also.
We made the deal with <unk>.
Hi, Henry.
To bringing in three other two other biosimilars and the potential opportunity to get into the <unk> Biosimilar race as well look for US It is a key.
Key is order of entry and so.
Rest assured we are looking at every major potential opportunity when it comes to.
<unk> business development, and we've got a lot of ongoing discussions as we speak it's a high probability of success in terms of getting to market as long as your order of entry is and the first tranche of our launches you can do very well and that that sales curve can last anywhere between.
Three and six years looking at rent flexes, we still grow double digit.
With rent flex this after five years of launch in the U S.
And Thats, our largest biosimilar to date in terms of our sales we expect had Lima to ultimately when peak starts to emerge for had Lima sales to be the second largest product for Oregon. So you can you can kind of see that we see an opportunity and in terms of profit sharing or rather margins, we're going to do our best as you can well imagine.
Two to.
To continue to do the best we can.
Our shareholders and the best we can for what we bring to the market.
So we'll continue to swing away at bringing more and more to the market for us for what we do with Biosimilars.
And then on the subject of free cash flow. We spent some time talking about it in the prepared comments when you look at our performance. This year were it not for that working capital build that was spin related you would have.
Seen us in the north of $1 billion range before one time items.
We think that improves a little bit during the course of.
2023, but we will still have onetime cost of about the same magnitude as we saw them in 2022 and that.
As we are as.
As we're moving into the latter stages of the TSA agreement with Merck.
Right on target, we are taking off and standing up all the activities, we need to the biggest driver now of one time costs as our global ERP.
Implementation, that's one of the biggest drivers of the one time costs in 2023.
Okay.
Your next question is from the line of Steve Scala with Cowen. Please go ahead.
Thank you very much I have two questions Nexplanon missed double digit growth expectations set early in 2022, those expectations were reiterated at mid year mid year and never stated to be a constant exchange.
Mentioned, some pushes and pulls but presumably they were anticipated six months ago.
What factors led to the shortfall in 2022 for an excellent on so that's the first question. The second question is similar to questions have asked in the past so apologies for asking again, but with the view that the future of the company is in women's health the pace of women's health business development deals is strikingly.
Strikingly low seven deals in seven quarters of public existence, I know you won't do all 140 deals originally identified.
But if you did it would take three more decades to complete them. All was this pace that we've seen always the plan or have things been more challenging than expected.
My humble opinion, I think the pace of activity in women's health needs to increase exponentially. Thank you.
Good to talk to you, Steve Let me address Nexplanon.
We always basically signal to the world that we expect a double digit growth we achieved 11%.
Growth in 2022 and that is always at a constant currency, rather ex exchange basis, because we don't know what's going to happen with currencies on a month by month basis.
It was kind of hard if you were talking about at the beginning of or rather at the end of last year to see what would happen with the dollar strengthening to the point, where it's where it was throughout the year.
On an ex exchange basis, we did grow 11%, 8% in the U S. The remainder outside of the U S. Ex U S business was responsible for 50% of our growth. So we're feeling very good about where we landed with nexplanon. It's consistent to what we essentially have guided in the language of reviews.
And in terms of your second question.
In regards to the opportunities that exist right now in the women's health space as I've mentioned earlier days.
We look at women's health.
Three points of view one.
With therapeutics.
At two with potentially devices were agnostic, whether its advisor therapeutic and those are focused primarily uniquely for women's health related conditions, but we're also looking at conditions that we would consider disproportionately impact women's health.
Our women and that would be anything from celiac disease Lupus migraine osteoporosis. The list goes on and on and on chronic cough.
So that's always a potential opportunity for us to use our capital allocation of our business development dollars now I will say to you. Though this is this is rare because most of the time that when I say, we've done eight deals in literally a year and a half that that's almost a deal every two months I would say that we feel very comfortable and as you start to <unk>.
Layer on some of these assets with the business organic business that we're driving with the opportunities that we have not only in lifecycle management opportunities, which are really a plentiful, but also with the biosimilar businesses that we're bringing in.
We see an opportunity to really continue to growth the growth momentum for the company going forward in future.
Thank you.
Your next question is from the line of Greg Fraser withdrew its securities. Please go ahead.
Good morning folks thanks for taking the question.
Following up on BD done a number of deals expand the pipeline with assets from new indications beyond your core women's health business like endometriosis in preterm labor and I know youre bullish on the potential of those programs are you looking to add additional programs for those indications that you have more shots on goal that something investors should expect our BD efforts.
South Moorefield decided.
Thank you well I got I got to say that shots on goal is always a nice thing.
The acquisitions, we had for <unk> has got a couple of molecules are 61 asset is one that is furthest along but they also have other backup compounds as well, we'd like the mechanism of action.
This new action of this new product or this new mechanism.
It has great promise.
So yes, we are.
Possible in terms of we're making acquisitions, we'll see whether they are <unk>.
The molecules that we potentially can take to the clinic, if our primary a molecule failed, but we're also expanding as you said, we went from essentially being in contraception and fertility to add a number of different therapeutic areas postpartum hemorrhage, preterm labor endometriosis polycystic ovary syndrome bacterial.
I didn't notice now with our device with <unk> for minimally invasive laparoscopic hysterectomy.
There's a number of different areas, we continually identify as opportunities that both meet a need in the market and need innovation in the market and we believe that we are really very well primed.
To take on that leadership role.
And today's final question will come from the line of Jason <unk> with Bank of America. Please go ahead.
Hey, guys. Good morning, This is Bob Patel on for Jason or Barry.
Two questions first alliance.
Our next Brian Great outlet, that's assumed in the 2023 topline guidance given that something you tried in the past still double digit growth.
And then the second question is whether it's safe to assume that for non plans to be active in M&A. This year, given net leverage ratio considerations do you expect to do a big deal in 2023.
Thank you.
Thanks for the question look I'd say that first of all I'm very happy and satisfied with the performance since we spun off two consecutive years of double digit performance.
Our focus in 2023, we're really going to be increase increasing our focus on patient demand.
We will of course be we'll be pushing for us is more robust as we can for the product. We continue to see ex U S business growing faster than the U S business.
We're continuing our clinical training programs.
Follow on reviews, our DTC campaigns. So we believe that next one on a we will continue to grow robustly over the years and second we are also focusing on the fact that this is going to be our first billion dollar product essentially by the end of 2025, that's the run rate there we're going forward, we feel very good about that.
And so this is going to be a long term asset for us.
January demand is strong in terms of our overall physician demand so feel really good about the next one I'll hand over the Alaska question too.
Yes.
Answering.
Yes, so we.
We fielded this question a few times on deal size and we've obviously had very good success with the.
Smaller deals that we've been doing there.
And they are plentiful there.
Little bit easier to integrate.
The.
The rising interest rate environment, our leverage ticking up does I would say make.
Make deals incrementally more challenging at the margin, but with respect to big deals. We've always been in the same place which is.
We're not necessarily out hunting them.
But we are aware of possibilities, we think creatively.
And we would not shy away from a larger opportunity if we really felt it was the compelling.
Compelling shareholder value creation, but we've got a lot of.
Organic growth plans.
In place for 2023, as well as execution of the eight deals that we've already done. So 2023 is going to be an exciting and busy year.
<unk>.
But like I said as far as big deals go we.
We are aware of them were open to them, but it's not necessarily something we see as either necessary.
For our success.
Or or a priority.
Thank you.
Thank you. This concludes the Q&A session I would now like to turn the call over to the company's CEO , Kevin Ali for closing remarks.
Well. Thank you for all the questions. The thoughtful questions I wanted to I do want to close by saying look today marks our seventh quarter of earnings as a Standalone company.
With the fourth quarter of 2022, we've continued our track record of delivering exactly what we set out to achieve our vision of a sustainable growing business is being realized we have confidence in the portfolio. We have in our hands today and we believe in the potential of our growing pipeline of assets with the promise to address significant.
Unmet medical needs, especially for women I want to thank you for joining us today, and we look forward to communicating our progress with you in 2023, thanks, everyone.
Yes.
You you all for joining the Oregon on fourth quarter and full year 2022 earnings Conference call. We thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
Okay.
Okay.
Yes.
Okay.
Okay.
No.
<unk>.
Yes.