Q1 2023 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 first quarter 20, twenty-three earnings conference call all lines and placed in on mute to prevent any background noise.
After the speaker's remarks, there'll be a question and answer session in order to ask a question press star that the number one on your telephone keypad. We ask you. Please limit yourself to one question and one follow up as a reminder, this call is being recorded thank you I.
I would now like to turn the call over to Jennifer Holecek, Vice President Investor Relations. Please be getting your conference.
Thank you Mike Good morning, everyone. Welcome to organize first quarter 20 twenty-three earnings call with me today, or Kevin Ollie, Oregon, Orange, Chief Executive Officer, who will cover strategy in operational highlights and Matt Walsh, Our Chief Financial Officer, who will review performance guidance and capital application Dr. Sandra Milligan organize instead of R&D.
Will also be joining the call today at the Q&A portion.
Today 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 and the events and presentations section of our Oregon on Investor Relations website at Www Dot organized 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 do the risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission.
<unk>, including our 10-K and subsequent periodic filings. In addition, we will discuss certain non-GAAP financial measures on this call would you be considered a supplement to and not a substitute for financial measures prepared in accordance with gas a reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation.
I will now turn the call over to our CEO Kevin Alley.
Good morning, everyone and thank you Jen welcome to today's call, where we'll talk about our first quarter of 2023 results.
<unk> 2023 is also a very solid start for the first quarter revenue was $1.5 billion up 3% it caused some currency.
Adjusted EBITDA with $518 million, representing a 33.7% margin.
Given the solid performance together with our visibility into the remainder of the year, we are affirming our financial guidance for the full year.
The first quarter of 2023 represents the sixth consecutive quarter of product sales growth with all three franchises positively contributing to our performance.
Constant currency the women's health franchise grew 3% the Biosimilar franchise grew 20% and established brands franchise, which represents approximately two thirds of our business grew 1% <unk>.
Established brands franchise continues to demonstrate its durability the franchise generate sizable and predictable free cash flow, which is an important factor in our ability to take a balanced approach to capital allocation.
During the first quarter, we made progress towards reducing our outstanding debt with a voluntary $250 million prepayment on our U S. Dollar denominated term loan reducing our leverage overtime is an important goal for us we are committed to maximizing profitability in order to generate cash flow.
That supports that objective as well as to pursue business development strategies that enhances our growth profile.
We will continue to look at business development through two lenses tuck.
Tucking opportunities that have the potential to drive near term revenue as well as longer term beds that could be transformative for Oregon on and for patient care.
We are especially focused on building out our capabilities and women's health as we did in the first quarter with our strategic investment and clarity of medical which is developing an investigational medical device being studied for use during minimally invasive laparoscopic hysterectomies.
Now, let's move on to review the quarter and a bit more detail let's.
Let's start with women's health.
Women's health through 3% on a constant currency basis this quarter in.
In the first quarter of last year, we acquired rights to the oral contraceptives Marvelon and <unk> in the People's Republic of China, including Hong Kong, and Macau and Vietnam. Since then we have generated strong demand for these products, which grew 65% in the first quarter. This transaction has been very successful and it's just.
One example of how organon is leveraging its expertise to maximize the performance of assets that may have been under prioritized in the past.
Standing on contraception for a moment, let's look at the trailing 12 months performance of Nexplanon, which is the more informative way of evaluating the product's performance because customer buying patterns introduced noise on a quarterly basis.
We have changed the growth trajectory of Nexplanon since the product has been in our hands.
This long acting reversible contraceptive is a product that has been around for over a decade and relies on continuously driving new patients to the product still with the managerial focus we have put on Nexplanon. We continued to deliver very strong growth for the product <unk>.
<unk> is one of the most effective forms of contraception.
It is an arm implant and therefore does not require daily self administration like an oral contraceptive we are seeing rising patient preference for these attributes in their choice of birth control and that is leading to increasing physician demand.
In fact, this quarter physician demand in the U S is up 6% versus last year, driven by women, increasing the usage of Nexplanon.
Our strategic focus in the U S. During 2023 is to continue to grow that physician demand by driving patient request for an excellent on an increasing the depth of views among the 35000 providers currently prescribing next month.
Outside the U S. We continue to expand access and see strong payer physician in consumer demand, we anticipate particularly strong growth in both Brazil, and Canada two of the more relevant contraception markets in the world and we're in excellent on is still somewhat in the launch phase. We are also making good progress with activities to expand an excellent.
Production. This is subsequently enabling increase supply the parts of Africa Asia Pacific, where payers are expanding access to the product.
We also continued to believe that <unk> can achieve a billion dollars in revenue by 2025, which implies strong growth for the product over the coming years.
Continuing our discussion of women's health, we remained very encouraged by our opportunity and fertility families are delaying parenthood due to many social and demographic factors, including education career goals and financial barriers. This contributes to the prevalence of infertility, which in turn drives demand for I V F treatments the use.
A assisted reproductive technologies like in vitro fertilization is growing 5% to 10% annually. It as a large market impacting an estimated 190 million people around the world.
Globally, the top five markets with the highest rates of infertility, R&D Asia Pacific region, where a number of births per woman is significantly below the replacement rate required to sustain a population and GDP growth countries like South Korea are offering cash incentives for household to expand their families in Japan, Australia.
Dilantin in Singapore are expanding fertility access and or other benefits.
Over the next few years these markets will represent the largest opportunity for organon fertility business. These dynamics combined with our significant presence in the Asia Pacific in Japan region represent an attractive opportunity for organon and allows us to grow the fertility portfolio in markets outside the U S, where we are focused on expanding.
Market share and must therefore priced our products competitively.
China, where we currently hold the number two market share position and fertility will also continue to be an important market for us early in the first quarter Covid related disruptions were hampering demand for fertility treatments in China. However, we have seen solid recovery with sequential growth in both February and March we are optimistic about.
Getting back to normal in China, and the positive impact that will have on our fertility business over the intermediate term, we believe fertility can grow in the high single digit to low double digit range and we expect 2023 to deliver a similar growth profile.
Moving now to our Biosimilars business, which continues to perform very well run fluxus, our largest selling biosimilar continues to grow more than five years. After launch driven by solid performance in the U S and Canada <unk>, our second largest biosimilar had strong growth in the U S. But that growth was offset by a very competitive pricing and.
<unk> in Europe .
There is great interest centered around the July one U S launch of had Lima are biosimilar for him here.
Launched we will have the option for a high concentrations Detroit pre formulation as well as a low concentration formulation. We have also the benefit of real world evidence from our own launch of head Lima in Australia, and Canada as well as through our collaborator Samsung bio weapons from their experience with had Lima in the EU.
We are excited about our pet design, which was created with the patient in mind to insured Stempel administration. So we feel good about the attributes of our products.
Positioning that said multiple product launch mid year.
We have also.
<unk> will be a modest shrimp with the market for Biosimilars really forming in 2024 to 2025.
And surrounding out the discussion with established brands, which we believe continues to be the most under appreciated art work on story.
This brand franchise has had a number of hurdles to overcome this quarter, primarily the ongoing impact of volume based procurement initiatives in China and supply constraints associated market action, we took earlier in the year on <unk>.
We also had a significant one time benefit in the first quarter of last year related to some Japanese generic being out of the market that wasn't as prevalent in the first quarter of 2023. Despite those factors established brands was still able to show positive growth at constant currency in the first quarter.
Doubtless brands franchises comprised of products that are generally beyond.
I'll have opportunity for growth, especially in markets outside.
This was a portfolio that wasn't double digit decline prior to the spin with major risks behind us together with the entrepreneurial focus.
Managing these brands, we have seen an inflection in growth rates, we stabilize the portfolio and expect to achieve another year or flat.
Governments in 2023, a constant currency.
Within established brands, China is an important market representing about 20% of the established brands revenue. Despite multiple rounds of EVP in the last two years. The established bands revenue in China has not declined and spin we expect to achieve similar flat performance in 2023, despite the continuing GBP impact this year on our.
Largest product in China as a troll by the end of 2024, the majority of EVP impact will be behind us and we expect growth and established brands in China to accelerate in line with the expectations. We have for our total company business in China.
I think for some <unk>.
Difficult proposition to understand how portfolio of off patent brands can demonstrate continued stability. So let me share a few examples since been we've had a renewed focus on add a cardiovascular truck we have intensifier commercial promotional effort to grow that business. We have pursued many lifecycle management actions on the product and have also added.
Production capacity.
And there was the response added that had sales of $457 million in 2022 represent 11% growth X exchanged. Another example is Nathan Nathan.
Nathan.
Batori drug that was launched in 1997 cause it's been all patent in key market for almost a decade, and 2022 and delivered $260 million in revenue growing about 17%. We are pursuing a number of lifecycle management opportunities to address global demand that exist for Nathan.
We are investing manufacturing capabilities to support those plans.
These are just two examples of ways. We are locking the value that remains in these established brands. There are many more opportunities to do so among the 49.
Franchise.
So.
Across the business the year is off to a very good start thanks to the hard work of our people around the world. The business is performing the way we thought it would and each of our franchise is contributing to the success of organized.
I'll turn it over to map out to go into some more financial detail Matt.
Thanks.
They're getting on slide nine let's walk through the drivers of the 3% constant currency revenue growth in the quarter.
Starting with the impact of the loss of exclusivity Halloween was negligible in the first quarter and a small amount of that we didn't realize was related to generic competition for nuvaring in the U S.
In the third quarter, we had about a 30 million dollar impact from BBC in China.
Related to the fourth quarter implementation Brown, seven which were Organised included as a trawl, which is sold that zedillos some markets outside of China.
Moving across the price, we saw approximately $30 million in price erosion in the quarter.
Primarily driven by customer mix and pricing in the U S fertility, which was exacerbated by an unfavourable comparisons that Q1 of last year, when we had a more favorable customer mix and fertility.
In addition, the established brands portfolio is subject to mandatory pricing reductions in in the first quarter of 2023 and that was particularly the case in Japan and in some EU markets.
We continue to see strong volume increases across all of our franchises about $100 million in the first quarter. The majority of the volume increase came from established brands, particularly in China, and the AP J region, but also from Biosimilar fertility and contribution for Marvel on <unk>.
The bar for supply other represents revenue to Merck and other third party, which consists of relatively low margin sales of pharmaceutical products under contract manufacturing arrangements and which are expected to decline over time.
And finally, you can see the financial reporting headwind, we had in foreign exchange translation about 450 basis points for the first quarter, which is a function of more than 75% of our revenue being generated outside the United States.
We're on that topic, let's turn to slide 10 will take a look at revenue by geography.
In the first quarter of Kevin mentioned, China grew at constant currency, primarily due to strong performance in the retail channel and this girl was achieved despite the impact the BBC and despite the impact of Covid AD on the fertility business in China early in the year.
Asia Pacific, Japan grew 12% in the first quarter, driven by contraception, namely Nexplanon and Marvelon berthelot as well as from established brands.
For Marvelon birth line in this region. Just a reminder, that this was a marketing rights acquisition that we did in February of 2022.
And established brands, we do continue to benefit from generic being out of the market in Japan, but at a significantly lower level than we saw in the first quarter of last year.
Established brand strength for this region was mostly realizing countries outside of Japan, where we saw a pickup in demand for respiratory products associated with seasonally poor air quality.
The impact of the market action for injectable steroids differ Spanish zealous stone was most pronounced in the <unk> region, but this was offset by better pricing and some established brands products.
But you can't region on the other hand has a more competitive pricing environment tends to pressure results in that region and.
In addition, <unk> results also reflect some of a supply disruption from the market action on <unk> sell a stone.
With regard to the market actually we described in the last earnings call for different Spanish Fellas stone, it's worth noting that we restarted production earlier than anticipated and we are all ready Resupplying key markets, such as Mexico, China, and the United States, which are in the top five markets for these products.
Overall, the financial impact of the market action is being realized within the parameters that we incorporated into our 2023 annual guidance that we previously provided and that we're affirming today.
And the last in the United States, what you're seeing here is the strong performance of Biosimilars Entresol flexes fully offsetting unfavorable customer mixing the fertility business. This quarter and also covering a 10 million dollar benefit we had in the first quarter of last year related to a one time milestone payments we received from Asia.
The next few slides in the presentation layout performance by franchise I think Kevin covered very well the highlights and the details are provided into supporting earnings materials. So I'll focus on topics that may be relevant to your modeling do we think about the remainder of 2023, and we'll start with women's health on slide 11.
There are three important takeaways on this slide for women's health first and contraception Nexplanon sales in the U S and the first quarter have tended to reflect customer buying patterns around announced price increases more than they have underlying patient demand. So the first quarter of not indicative of the rest of the year.
Second we will lack the <unk> transaction next quarter. So you won't see the pronounced growth we saw here in the first quarter, but these products have performed very well for US. We are pleased with the way. This acquisition is operationalizing in Oregon, and we do expect solid performance from Marvelon and we're forlorn for the remainder of the year.
Third and final takeaway on this slide we expect to see good growth from fertility driven by the reopening of China as well as strong demand in the United States, where volume growth should outpaced the pricing pressure that received domestically.
Turning to Biosimilars on slide 12, clearly a good quarter biosimilars with 20% revenue growth year on year of constant currency, but where I would like to focus is on our upcoming launch of had Lima.
As Kevin mentioned, we continue to believe there'll be a gradual market formation for two mirror Biosimilars in 2023.
Because heavily revenues will only be a partial year contribution we expect a globally had lima will still represent no more than about 1.5% of our consolidated 2023 revenue and this is consistent with what we said last quarter. When we provided 2000 twenty-three guidance.
Turning to establish brand on Piper team. It's Kevin mentioned this franchise is performing very well and in 2023, our expectation is that we should achieve at least flat performance with last year on a constant currency basis.
Let's turn now to keep an outline items on slide 14.
For gross profit we are excluding from cost of goods sold purchase accounting amortization at one time items related to the spin off which can be seen on table for in our appendix slides.
non-GAAP adjusted gross margin was 65.2% compared with 66.5% in the prior year period.
The year over year decline in gross margins is primarily due to product mix as well as inflationary cost pressure that impacted distribution and employee related costs.
Adjusted EBITDA margin was 33.7% in the first quarter compared with 41.3% the same period of last year.
Higher product promotional costs for new and existing products as well as increasing R&D spend associated with recent acquisitions of clinical stage assets, where the primary contributors to the decline and adjusted EBITDA margin year over year.
I should also point out that in the first quarter of last year operating expense was the low point, because we were still standing up positions that were vacant as of the spinoff Contra.
Contrast that now to the current quarter, where we are essentially at steady state from a staffing perspective.
non-GAAP adjusted net income was $276 million or one dollar per diluted share compared with $420 million or $1.65 per diluted share in the first quarter of 2022.
Here over a year decline in net income was a result of course lower adjusted EBITDA, but also attributable to increase interest expense are variable rate debt, which comprises 38% of our total debt balance subject to higher rates compared with last year. We also recorded $5 million of accelerated amortization of that issue costs.
Conjunction with the $250 million voluntary prepayment in the U S dollar variable rate term loan that we completed in the first quarter.
We also experienced $9 million of foreign exchange translation losses, driven by fluctuations in certain foreign currency, which are impractical to hedge.
So together, that's about $14 million or about four cents of tax effected EPS, they likely wouldn't have been in anyone's models.
Turning to leverage on 515 is Kevin mentioned at the outset during the quarter, we made a $250 million voluntary prepayment on our U S dollars variable rate term loan.
Does the spin off we've now made $450 million, a voluntary debt repayments, which demonstrates the priority, replacing managing that leverage is a core component of overall value creation in Oregon.
That said I will reiterate a comment from our last earnings call about our leverage ratios being stubborn during 2023.
Net debt to adjusted EBITDA ratio was likely to end in 2023 close to where it was at the start of the year.
This is the impact of the inevitable math around this metric given our strong U X U S revenue base and two dynamics metric faces this year.
The first dynamic is relatively smaller and more technical relates to FX translation around a U S dollars has been weakening since the start of the year.
As this happens the numerator other leverage ratio the deck figure.
Immediately in terms of the increased translated value of our euro data on the balance sheet.
Denominator, however, image trailing 12 months figure, which exhibits a more lagged responds to FX translation.
Resulted in a leverage ratio slower to show improvement when the copper weekends, that's exactly what we saw this quarter.
The second dynamic, it's more impactful fundamentals and cuts right to brag.
For executing.
Reinvesting in the business to create pipeline of future revenue opportunities. The eight transactions that we've done since the space have all required reinvestment of some time next shows up on the income statement is either increase R&D.
For commercial promotional expenses.
G&A one.
In the near term this way down our LTM adjusted Eva but over the medium and long term. We believe this reinvestment is essential for organ on to more reliably deliver sustainable revenue growth.
Turning to Slash 16, we provide a closer look at our cash flow for the quarter.
We're probably stands out with the $200 million of working capital use of cash like.
Like many companies would December fiscal year ends Q1 free cash flow is impacted by the timing of annual incentive payments and in addition, we also typically see cash cycle working capital taking up in the first quarter and that absorbed approximately $80 million or about a 4% increase relative to year and.
Over the course of the full year. These two effects normalize.
The key take away that first quarter cash flow is not indicative of our full year expectation that we will be able to generate north of $1 billion in free cash flow before one time items. This year, which is consistent with our expectations. When we issued 2000 twenty-three guidance.
One time cash costs related to the spinoff transaction are trending in line with our expectation of about $350 million for the full year of 2023.
The single biggest component of the separation costs relates to the implementation of stand alone systems, the largest of which is our own global singled instance, ERP system with SHT.
With this complex project well underway and the finish line in sight in mid 2024, we now have a clearer picture of one time costs, and the timeframe, which approximates $950 million over three and a half years post spin.
So for those for those of new modeling. These one time costs. This would imply that we see approximately $125 million of spin offs cash outlays remaining beyond 2023, with essentially all of that figure occurring in 2024.
We expect that the composition of these remaining cash outlays will be split about 70 30 between expense in Capex, respectively.
In fact, but $450 million of discretionary payments that I referenced earlier compares with approximately $500 million of capital deployed into M&A related activity and this evidence is the balance that we had said we would be targeting.
States.
We expect the impact from VB to be in the range of $125 million to $175 million driven mostly by <unk> inclusion any implementation around seven November of last year as well as round eight implementation in the second half of this year, which will include for Oregon on the products Remeron and Haidar.
On a total company basis, we continue to expect approximately 75 million to $125 million of price erosion of this year, representing about a 200 basis point headwind, mostly related to mandatory pricing decreases in certain markets. We operate in as well as some pressure from U S fertility.
We still expect strong volume growth in 2023 of approximately $500 million to $600 million. The main drivers here will come from our multiple growth pillars, biosimilars fertility, China retail and excellent on as well as some contribution from established brands.
We're currently estimating an approximate 50 million to 100 million dollar impact from foreign exchange translation for the full year, which would represent about a one percentage point headwinds.
So that means that our guidance range implies a constant currency revenue growth of approximately 3.5% at the midpoint.
A foreign exchange rates remain where spot rates are currently this could be a factor in driving us to the higher end of that revenue range.
Moving to the other components of guidance on Slide 18, 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 had a greater impact to our cost of goods.
This year in 2023.
Because we know it's important to your modeling we will make a public statement upon achievement of that milestone. So that you can factor that payment into your quarterly phasing.
The remaining approximate $8 million VIP R&D is tied to other milestones in the portfolio that could possibly be achieved this year. So we continue to incorporate that into the guidance.
These items bridge, two and adjusted EBIT margin in the range of 31% to 33% <unk>.
First quarter adjusted EBITDA margin was 33.7% just above the high end of the guidance range.
In our in our short operating history first quarter margins has been the highest of the year with fourth quarter being the lowest.
We're starting to see that smooth that bit as we get further from the spin off.
So for 2023, we do expect first quarter margins still to be the highest of the year and if you think about the remaining three quarters. They do not look markedly different on an X milestone basis, though the second quarter does bear some incremental promotional costs related to upcoming product launches in the back half of the year.
Additionally, $25 million milestone for Evo Pip print could be triggered as early as the second quarter.
We now expect about $515 million of interest expense in 2023.
Our range for effective tax rate remains in the range of 19% to 21% in the first quarter. Our rate was 22.8%, which included a discreet item related to a true up of 2022 valuation allowance, we expect our tax rate to trend downward over the rest of the year.
The last point I'll make on this slide due to the impact of employee share awards that best in 2023, we've increased our guidance for fully diluted weighted average shares outstanding by 2 million shares.
As Kevin said and I will reiterate here in closing 2000 twenty-three is off to a solid start the business continues to perform well capital allocation is on track with a meaningful debt repayment in the first quarter as well as a completed pipeline transaction in women's health, where we continue to invest in our already strong market position.
Overall, we are pleased with the first quarter and we we remain confident about the diversity and durability of our business.
Now, let's turn the call over to questions.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad will pause for just a moment, while the Q&A roster.
Your first question comes from the line of women Rafat at Evercore ISI. Your line is open.
Oh, Hi, good morning, <unk> strange jump on Polk Omer. Thanks for taking the question. So on the first time Humira Biosimilar MTV like reported $50 million in the first quarter and a majority of it as inventory. So just wondering what <unk>. What is your expectations on the end user demand for him remember Biosimilars and secondly, excellent known what is the trend now on there will be waiting pants.
On the state level.
Thank you for the question I can address that so first.
First question in regards to our head Lima launch, we believe again as I mentioned, a number of times in previous settings that 2023 will be a modest ramp up year, it's a year of essentially competition to get on formularies.
In our discussion with various pbms, they still hold to the fact that there will probably be two to three.
As to O two to three Biosimilar short for you mirror on formulary. During this period of time, and so I think they're playing a wait and see game as we speak right now and so 24 and 2025 will be the formative years will we see more and more.
Ed Lima uptake in essentially the market for Biosimilars Humira will start to really form in that sector. So we were still fairly.
Conservative in our view in terms of what we can do this year, because it's really getting on formularies and in the years past that will start to see a more aggressive robust ramp up.
Now in regards to your second question about Nexplanon.
Right now what we see is essentially a focus on expanding demand generation for next <unk>, we see good physician growth in terms of overall demand.
Bright stars in terms of the ability to be able to continue to drive. This product. We mentioned already that 2025 will likely be the milestone point, where we reach $1 billion in overall, so it's really essentially our blockbuster product. We continue to see a lot of signals that this product is getting a lot of moment.
Mm throughout.
It's double digit growth, if we look backwards and we still feel that this is a product that will will be very important for us.
Thank you and your next question comes from the line of Jason from Bank of America. Your line is open.
And then another one I'm established brand, new tennis, which drugs Charles.
China continued to be I think very very solid very very solid in regards to the second.
China, We do have we have stood up and we do have a fertility salesforce. We've got good footprint in the in China in terms, especially the provinces that we believe has the highest return of investment in terms of what we're doing there too where are the second leading.
France will begin shortly.
Uh-huh.
Mhm.