Q3 2023 Organon & Co Earnings Call
Ladies and gentlemen, thank you for standing by at this time I'd like to welcome everyone to the Oregon in third quarter 2023 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question answer session.
During that time, you can simply press star one on your telephone keypad to ask a question in star one on your telephone key pad to withdraw from acute.
As a reminder, this call's being recorded.
I would now like to turn the call over to Jennifer halt chop.
Vice President Investor Relations. Please begin your conference.
Thank you operator, and good morning, everyone. Thank you for joining organized third quarter 2023 earnings call with me today are Kevin Ali organized Chief Executive Officer, who will cut.
<unk> strategy operational highlights.
Matt Walsh, our Chief Financial Officer, who will review our performance in that.
Dr. Sandra Milligan, Oregon on head of R&D will also be joining us for the Q&A portion of this call.
Today, we will be referencing a presentation that will be visible during this call for those of you on the webcast. The presentation will also be available. Following this call on the events and presentations section of our Organon Investor Relations Web site at Www Dot organ on Dot com.
Before we begin I would like to remind 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 Companys filings with the Securities and Exchange Commission, including our 10-K in <unk>.
Subsequent periodic filings.
In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation, I would now like to turn the call over to.
Our CEO Kevin Ali.
Good morning, everyone and thank you Jen and welcome to today's call. We will talk about our third quarter 2023 results.
In the third quarter, we navigated some external factors impacting the business the strength of the U S. Dollar persists, we are navigating a challenging economic and policy environment in China.
But we have said from the very beginning that we expected the biosimilars market for humira to be a slow formation. It has been slower than we thought still in the third quarter. We delivered product sales that grew 1% at constant currency that represents our eighth consecutive quarter of product growth total revenue was.
This includes lower margin product sales to Merck was down 1% at constant currency compared with the prior year.
In the third quarter ex FX, our women's health was down 7%, our Biosimilars franchise grew 10% and the established brands franchise, which represents nearly two thirds of our business grew 3% again, demonstrating its continued stability.
Adjusted EBITDA was 447 million, representing a 29, 4% margin and adjusted diluted EPS was <unk> 87.
With these results in mind, we are lowering our revenue guidance by $150 million at the midpoint to a range of $6. One 5 billion to $6. Two 5 billion about $100 million of this is from FX rates that have worsened since we last guided in August.
The remaining impact primarily reflects the operational factors I just described plus changes we are making to our go to market model for <unk>.
We are also revising our range on our adjusted EBITDA margin to 35% to 31, 5% to reflect the lower gross margin stemming from the impacts of foreign exchange on revenue unfavorable product mix and the timing of manufacturing costs.
Now, let's start by reviewing revenue beginning with women's health.
The women's health franchise was down 7% on a constant currency basis in the third quarter.
Primarily driven by Nuvaring, which went low in 2018 and now have five generics in the market.
The fertility business is flat year to date, but we anticipate a very strong fourth quarter driven by identifiable market tailwind in China as well as the Onboarding of a large new customer win in the U S. A strong finish in the fourth quarter underpins our expectation that the fertility business.
We will deliver high single digit revenue growth for the full year on a constant currency basis.
In China, we are seeing IVF cycles pick up after a slower third quarter stemming from the Chinese government's ongoing review of healthcare practices, which commanded significant physician attention.
This is a transient issue impacting the entire industry.
The fourth quarter of 2023, we'll also benefit from an easier year over year compare as the fourth quarter of 2022 was impacted by Covid year to date, the fertility business in China has been a growth engine up 15% FX, we are doing very well in that important market and we have been gaining market share in China.
In the U S. The fertility market is growing and demand is very strong strategically we are working on an evolution of our go to market strategy into the reimbursed market segment, which is rapidly growing over the past three years the percentage of employers providing fertility benefits has increased from 30%.
40% to compete in the reimbursed market, we are traded price for volume we are having success and we're excited about some of the significant accounts. We have recently secured that will start to benefit the business in the near term in fact, a recent win in the reimburse book of business represents our largest customer.
When since becoming an independent company inventory build from this customer will help to drive what we expect to be a strong fourth quarter for futility in the U S.
Particularly encouraging is that we as we head into 2024, we expect Oregon on fertility products will be the preferred brands and a significant percentage of covered lives in the U S.
Let's now turn to Nexplanon, which declined 3% ex FX in the quarter and is up 2% year to date on a constant currency basis, we expect a robust fourth quarter nexplanon, resulting in full year performance in line with that low single digit growth year to date, we've made some key strategic decisions to <unk>.
Better position Nexplanon in the U S and to accelerate growth globally.
Initiatives undertaken will position Nexplanon for strong growth in 2024, and we expect to reach a $1 billion run rate in 2025.
First we have made some changes to our U S go to market model, we will not take effective price and next bond in the U S. In 2023, our future U S pricing increases will now be aligned with when health plans update their pricing and reimbursement schedules. This timing update will make a meaningful difference to the VAT.
<unk> physician see from carrying an implanting nexplanon. Additionally, we see a healthy uptick in customer purchases ahead of when a new price increase goes into effect. So by postponing our price increase until next year, we anticipate about $20 million of customer buying will shift into 2024.
Also as we have signaled in the last couple of quarters. Our next one on mix in the U S has been skewing more heavily towards higher discount. The channels. We are adapting to this industry wide dynamic by removing voluntary discounts on these federal programs, which we believe will benefit the fourth quarter and going forward.
Secondly, we limited our participation in the annual Mexico tender on the basis of price that represents about $20 million of negative impact to next one on revenue in 2023 lapping this impact will be a tailwind to <unk> results next year.
Thirdly overall demand outside the U S has been strong Asia and in Africa. In fact, so strong that we've invested in expanding our nexplanon supply capacity.
Satisfy these fast growing international markets.
We have visibility to approximately $20 million of throughput related to that demand that we expect to be realized in 2024.
So I've talked about three factors that will drive <unk> growth next year, which together represent $60 million or about seven points of growth that we have high visibility into for next year.
Turning to other women's health products, let's talk about Jada, our device for postpartum hemorrhage. This is the first time, we're publicly breaking out revenue per jada and so youll see that year to date Jada has generated $31 million more than double the revenue for the same period last year data is now available in over 80.
85% of the largest berthing hospitals in the U S and more than 36000 mothers had been treated with data since launch.
Given our progress in making data available in the majority of hospitals in the U S. Our focus will now shift to supporting hospitals and users and the incorporation of data into their standard PPA readiness and response protocols.
We believe jada can achieve a peak of up to $150 million in the U S and more than $250 million peak when layering in the potential sales outside the U S. Globally. There are over 100 million births annually and less than $4 million of those are in the U S. Jada is a great fit for our.
Global footprint.
Finally in October we made our first U S shipment of Zasyadko and FDA approved medication for the treatment of bacterial vaginosis in patients 12 years of age and older developed by our collaborator Dr. <unk> Bioscience.
Our go to market strategy Leverages, the knowledge and experience of the Nexplanon commercial team.
Our skilled market access team continues to meet with customers to reviews, our shadow and obtained competitive managed care formulary status in the bacterial vaginosis marketplace.
Let's move now to our Biosimilars business, which grew 10% ex FX in the third quarter and 15% year to date.
Understandably, we get the most investor questions on the recent launch of had Lima in the U S. So let's focus the discussion there.
At an 85% discount we priced had lima to enable expanded access and to bring the economic benefits of biosimilars directly to the patient we've emphasized thats, where we believe we can offer the highest value to patients. We have focused our commercial efforts on payers, who want to bring lower net costs.
The patients we estimate that together those plans represent about 40% of the covered lives in the U S.
While not as rapidly as we may have hoped for we are having success.
Among the July cohorts of entrants.
Prescribing our next closest competitor by a factor of over three times.
We are winning in both the commercial and managed Medicaid space across the competitive set and we are rapidly closing in on the GAAP on Amgen's <unk> Vita despite their six month lead in the market.
Consistent with comments, we made around head limas launch there is a market need for simple single price strategy and we believe that product attributes will be a key to uptake, we're well positioned with a product that has high concentration citrate free formulation as well as the low concentration formulations of user.
Friendly Pan backed by the Arthritis Foundation, a wealth of real world evidence from over 20 studies and interchange ability expected by mid 2024.
We view the slower market formation for Biosimilars as a clear missed opportunity to pass on savings to patients right now about a third of patients on humira pay at least a thousand dollars a month that is more than they would pay for had Lima out of pocket without insurance coverage. We believe it is not a matter of.
But when this market starts to meaningfully form.
Our very intentional focus on the low cost segment of the market together with our product profile could very well help the market convert much faster.
Rounding out the top line discussion, let's move to established brands year to date. The established brands franchise has grown 1% ex FX over the past quarters. We've highlighted some fundamentals of our established brand strategy, which explains why the franchise has been performing ahead of external expectations since spin.
In the first quarter, we talked about manufacturing optimization for nasonex and out of that to meet increasing demand, resulting from heightened promotional activity last quarter, we talked about adapting our commercial model to compensate for payer pressure and to mitigate pricing declines in select markets through our policy work.
What bears repeating this quarter is the product and geographic diversity of the portfolio and the way we have been managing these assets has led to very stable results during any given quarter, we are navigating and capitalizing on geographic and competitive complexities that can vary widely across our five geographic regions and 49.
<unk> products.
Stable results and established brands, we have delivered since spin had been a testament to the diversity of the portfolio as well as the solid execution by the team.
Now, let's turn to slide nine where we can take a look at revenue by geography, let's focus on China because that is the region. That's currently moving most dynamically this quarter.
As you probably understand the Chinese economy has had a slower than expected recovery post COVID-19. The general economic slowdown is impacting Chinese consumers, which for our business head read through to the retail business.
We've had a long operating history in China, and our experienced in navigating this dynamic market, we have implemented initiatives that help us reach the consumer more directly for example through E. Commerce. In addition in recent weeks our traditional retail business that is through pharmacies has also started to improve.
The other macro issue of play in China is that for the first time in recent history. The healthcare budget in China isn't a deficit. The authorities are seeking options to offset this decline, which includes stricter enforcement of the volume based procurement rules and investigations into prescribing patterns at the hospital level, our portfolio has seen a very.
Very muted impact from these particular initiatives.
We have strong diversity in our China business no product represents more than 16% of revenue in China also most of our portfolio has already been through DPP and has whether those impacts and because we have a long operating history in China. Our team is experienced and has reallocated resources to other.
Areas less impacted by this campaign overall, we believe that we will see a return to a more normal level of engagement in the hospital and retail channels by the beginning of next year. In fact, we're already seeing growth in China in the fourth quarter.
Since spin we have given new life to established brands and have expanded our pipeline in both Biosimilars and women's health.
As we move into 2024, we will be working to reduce leverage and maximize the power of our existing portfolio. We will also look to bring in assets and enhance our growth profile. We are currently creating our own opportunities were overturning every stone to unlock value for.
The transient headwinds we saw in 2023 will serve as a tailwind for US next year. We believe we are well positioned to build from here and deliver mid single digit revenue growth over the medium term.
Now, let's turn the call over to Matt who will go into our financial results in more detail.
Thanks, Kevin beginning on slide 10, let's walk through the drivers of our 1% decline in revenue at constant currency for the third quarter.
Starting with the impact of loss of exclusivity <unk> was about $10 million in the third quarter and a small amount that we have realized year to date has been related to generic competition for nuvaring and the U S.
In the third quarter, we had about a $30 million volume impact from <unk> in China consistent with the first two quarters of the year as the impact continues to be related to last year's implementation of round seven that included our cardiovascular products <unk>, which is sold azalea in some markets outside of China as well as the July.
Implementation of round eight that included Remeron Anheuser.
We experienced a 25 million dollar price erosion in the quarter in prior quarters established brands was the franchise contributing most significantly to this area, but as Kevin just referenced we've been able to stem price erosion and established brands to the low end of our expectations.
What we saw in Q3 was price pressure being driven within other franchises.
Given the nature of Biosimilar competition, we're seeing pricing pressure broadly across back franchise. Additionally.
Additionally, two issues within women's health in the U S first.
Customer mix and excellent on has been skewing towards the 340 <unk> channel.
Within fertility, we are seeing price pressure as we competitively position ourselves to grow volume in the attractive market for reimburse fertility services.
We had about $70 million of volume growth in the third quarter, primarily from established brands, particularly in our La Metro region, and non <unk> products in China.
Setting aside the slow market formation for Humira biosimilars in the U S, which Kevin covered in detail our Biosimilars volume was up nicely in the U S, Canada, and Brazil due to volumes from new customers as well as greater depth of purchasing from existing customers.
The bar for supply other primarily represent sales to Merck are off $15 million for the quarter compared to prior year as.
As we've discussed in the past this revenue stream is essentially a series of lower margin contract manufacturing arrangements that have been declining since the spin off and will continue to decline going forward.
And finally, you can see the financial reporting headwind, we had a foreign exchange translation about 65 basis points for the third quarter.
In August when we last updated guidance, we raised our revenue guidance based on where spot rates were at that time.
With the benefit of hindsight late July early August happens to be the most favorable point in the year in terms of FX spot rates versus the U S. Dollar. Since then the dollar has strengthened as much as 6% across some of our most significant currencies, which has caused us to give up the second half favorability we were anticipating based.
On August spot rates and then some.
I'll remind everyone our sensitivity to foreign exchange and financial reporting is a function of more than 75% of our revenue being generated outside the United States.
Now, let's turn to performance by franchise as has been our convention I will target my comments over the next three slides to those areas most relevant to your modeling as we think about where we will end the year, let's start with women's health on slide 11, as Kevin covered in some detail at the outset nexplanon is experiencing headwinds in <unk>.
<unk> thousand 23 that we don't expect will recur next year.
The math on those headwinds, especially those in the second half indicate that it's hard to envision a scenario, where <unk> doesn't return to strong growth in the high single digits next year.
Demand for fertility is solid and that therapy area continues to have strong structural tailwind even if we have to continue to give up some price as we did in the third quarter in order to gain greater market share.
Yes.
In the area of new products, the Jada device for postpartum hemorrhage hemorrhage is now hitting a steeper part of its revenue curve post launch and <unk> is now in the channel as of last month, and we're looking forward to what that launch will yield in 2024.
Turning to Biosimilars on Slide 12, Biosimilars grew 10% ex FX in the quarter and has grown 15% ex FX year to date rent.
<unk> grew 15% in the quarter and it's on track for its sixth consecutive year of annual revenue growth in the U S.
<unk> continues to operate in a competitive environment in both the U S and Europe. However, volume remained strong in the <unk> region, mainly in Brazil, and this was offset in competitive pricing dynamics.
With regard to head Lima, our original expectation for global had Lima sales in 2023 was that it would represent just under one 5% of full year 2023 revenue.
Given the slower market formation in the U S for Humira Biosimilars that Kevin discussed global Humira revenue mix will be significantly less than that in 2023 and in fact this is one of the key factors driving our 2023 revenue guidance revision.
Turning to slide 13 established brands grew 3% ex FX in the third quarter and it's still in positive territory for the year at 1% growth year to date.
We've talked about the durability of established brands. This year as a case in point that 3% growth ex FX was delivered despite three pretty significant headwinds first GDP in China, which is currently capturing our largest product <unk>.
<unk> seven and now we have around eight underway.
Second the economic slowdown and challenging policy environment in China.
And third we grew despite the market action that occurred at the very beginning of the year for injectable steroid products.
Given year to date performance and the outlook for the fourth quarter, we expect established brands to deliver at least level performance year on year at constant currency.
Now, let's turn to slide 14, where we show key non-GAAP P&L line items metrics for the third quarter and year to date performance for.
For reference GAAP financials, and reconciliations to the non-GAAP financial measures are included in our press release and in the appendix slides of this presentation.
For gross profit we are excluding from cost of goods sold purchase accounting amortization and one time items related to the spinoff, which can be seen in our appendix slides.
non-GAAP adjusted gross margin was 62, 6% compared with 67, 1% in the prior year period.
The year over year decline in gross margin is primarily due to foreign exchange translation and inflationary manufacturing and distribution costs.
Product mix and pricing erosion were also factors, but to a lesser extent in this quarter.
With respect to the foreign exchange impact on cost of sales third quarter. Adjusted gross profit margin reflects the timing of FX recognition related to inventory purchases, which has impacted us unfavorably versus the prior year and this will continue into the fourth quarter.
Moving down the P&L.
In October we were able to reach agreement in principle on the key terms of a settlement with micro <unk> to resolve patent infringement claims for <unk> that predated the spinoff.
We reserved an amount of $80 million to cover the settlement.
The settlement will be paid out over three fiscal years $35 million in 2023 $25 million in 2024 and $20 million in 2025.
That total of $80 million in legal reserves was the main driver in GAAP SG&A increase year over year.
On a non-GAAP basis as you can see SG&A increased 4%, mainly due to higher employee related costs.
Total non-GAAP R&D, excluding IP R&D expense increased 7% in the quarter the.
The increase was primarily due to continued investments into our pipeline and higher costs associated with the development of these assets <unk>.
Including IP R&D R&D expense was actually down 2% year on year, we had $10 million of IP R&D expense in the third quarter of 2022 against no such expenses in this quarter.
These factors culminate in an adjusted EBITDA margin of 29, 4% in the third quarter of 2023 compared to 35, 5% in the third quarter of last year.
non-GAAP adjusted net income was $223 million or 87 per diluted share compared with $337 million or $1 32 per diluted share in 2022.
The year over year decrease in net income was a result of lower adjusted EBITDA as well as higher interest expense.
Turning to our net leverage ratio on slide 15, as we've previously discussed we expected upward pressure on our net leverage ratio. This year with the peak expected to be in the third quarter and this has played out.
Next quarter, we will be lapping a low adjusted EBIT quarter last year due to last year's market action on injectable steroids and that should drive a decline in the net leverage ratio in Q4, all else equal.
Turning to slide 16, we provide a closer look at our cash flow.
For full year 2023, we expect to generate between $700 million to $800 million in free cash flow before one time charges at the midpoint of the range. This was about $250 million below what we expected earlier in the year and the difference is attributable to lower expected EBITDA as well as working capital use on the <unk>.
Ladder, we're now deepen the implementation of our new global ERP system that is temporarily tied up cash and current accounts to mitigate potential disruptions to normal operations as.
As a reminder, in 2022, we generated just over 75% of our annual cash flow in the second half and we expect this year to follow a similar pattern.
Onetime cash costs related to the spinoff transaction are trending in line with our expectation of about $350 million for the full year 2023.
The single biggest component of separation costs relates to the implementation of the global ERP system that I, just referenced and we're on track to complete that in the second quarter of 2024.
As a result, these one time costs associated with the spin, especially those that are related to transition services agreements as opposed to the longer tail manufacturing services agreements should decline meaningfully next year.
For Capex PP&E of 3% to 4% of revenue remains a good range for forecasting purposes.
As we continue to deploy that capital into our internal manufacturing and packaging capabilities as well as our technology infrastructure to help drive cost efficiency and productivity.
Turning to revenue guidance on slide 17, we bridge, our expected revenue change year on year.
We have revised the number of these ranges based on how we expect to finish the year.
Low impact has been minimal so far in 2023, we expect the year to finish similarly, with small amount realized was related to the impact of generics for nuvaring.
We lowered our range to $10 million to $20 million down from $50 million to $75 million as we do not anticipate a generic entrant for dulera in the U S. This year and in addition, the impact of generic competition for <unk> in Japan on that LOE event has been lower than anticipated this year.
Turning to GBP, we now expect the annual impact to be slightly lower than what we guided to in the second quarter as we're tracking better with both as a troll, which was in the implementation around seven in November of last year as well as the recent round eight implementation in July of this year, which included our Remeron and high as our products.
<unk>.
We're lowering our estimated potential price erosion to $90 million to $100 million.
Down from $100 million to $150 million, an improvement from the bridge that we showed you last quarter.
Here, we're seeing the momentum of our established brands portfolio being able to manage price erosion better than expected across several markets.
We've lowered our outlook for volume growth for the year and that underpins our revision to the revenue guidance, we lowered our range to $370 to $400 million or about 6% year on year growth at the midpoint down from the 9% we were forecasting last quarter as a result of changes we've made to our go.
The market model for <unk> on a slower than expected uptake of had Lima, and macroeconomic and policy headwinds in China.
When we reported our second quarter results in August the U S. Dollar had been steadily weakening over the first seven months of 2023, and we saw favorability in our forecast if rates simply held at where spot rates were in early August.
Since then FX has retraced, we gave back all of those gains and then some.
We are now raising our FX exposure to $120 million to $130 million, representing about a 200 basis point headwind for the full year 2023.
Compared with the zero to 80 basis points of headwind, we expected for the full year back in August.
Together. These factors result in revising topline guidance to $6, one 5 billion to $6 $25 billion.
Which represents growth of one 6% to three 3% growth on a constant currency basis.
Moving to the other components of guidance on slide 18.
We're revising our range unexpected gross margin to the low 60% range, which reflects the impacts from foreign exchange on revenue unfavorable product mix and timing of manufacturing costs.
We're in the midst of our budget planning process for 2024, so while we aren't providing 2024 gross margin guidance today, we can say directionally that the factors that have impacted gross margin in 2023, especially in the back half will be factors for us in 2024 as well for example, inflationary pressures.
We will likely persist at the Cogs line.
Also the fed dialogue around higher for longer as regards its influence over short term interest rates in the U S suggest that the strong dollar is likely to continue to be a headwind given our significant X U S revenue exposure.
For operating expenses or ranges for SG&A and R&D as a percentage of sales are consistent with what we laid out last quarter for our expectations for the year and reflect the investments, we're making in the business to position it for future growth.
In closing bright spots in the third quarter performance included the continued steady performance of established brands, our largest revenue segment and within women's health the strong performance of Jada and the launch of <unk>.
The 2023 guidance revision was necessary in light of the macro issues around economic and policy conditions in China, and FX translation as well as the slow market formation for Humira Biosimilars, even with this we believe organon will post constant currency revenue growth in the low single digits and on a reported basis.
We're likely to post revenue growth for 2023 that exceeds the revenue growth rate of last year.
With that we can now turn the call over to Q&A.
And 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, we ask that you limit yourself to one question one follow up question. Please.
For just a moment to call any questions.
Again, if you'd like to ask a question. Please press star one on your telephone keypad now.
Our first question comes from the line of Nevada tie with BNP Paribas.
Please go ahead.
Hi, Hi, good morning.
<unk>.
I have three question. Okay can you hear me okay.
Yes, we can.
Okay great.
Could you clarify.
Change in the go to market model.
What drove the change and whether it's the key.
Quantity Kevin next.
Next slide on revenues.
And then on <unk>.
Have you seen biosimilar competition pressure intensifying and also curious about what level of discount.
And provide one.
Onboarding accounts in Q3.
And then just one overall issue if you do still expect a long term high single digit low double digit growth with Kevin Women's health portfolio.
Thank you.
Thanks, <unk> good to hear your voice and I'll try to address those three questions. You had first question on next one on.
It was historical that.
Many years pre spin that the increase in price for Nexplanon always happen sometime in the fourth quarter. So you'd see this very lumpy.
<unk> in the third and fourth quarter taking.
Taking advantage of the eventual price increase price protection and so.
You'd end up having this very difficult <unk> type of thing in the first quarter of every year.
In addition to that physicians and systems, usually just kind of get online in terms of updating their reimbursement schedules in the first quarter of every given new year and so there was a point in time, they're aware physicians actually were.
It's challenged US let's call it stressed in terms of the difference in pricing versus the reimbursement.
Schedules, so by changing into being able to take price in the first quarter. We do two things we align with the rest of the large industry in terms of when they take up price, we align with when the schedules of reimbursement actually hit the width with physicians at the state level and finally, we.
We ended up taking away some of this lumpiness and get more of a smoother.
More predictable.
Casting trends for you all and for us as well to be able to.
0.2, So I think we wanted to take away some of this unpredictability and the volatility of the buy in and buyout phenomenon that we talked to we want to be able to speak more in terms of the opportunities that exist just to look at any given year. That's essentially why we took the change in the go to market model for <unk> and we believe it will.
I'll have an impact.
At the very least of which it will smooth things out for us.
In terms of your second question around the Biosimilar penetration in the U S. We really haven't seen any additional biosimilar penetration as a matter of fact.
What we do see is clearly up more of a movement of patients moving over to the reimburse segment, just because of essentially a company sponsored the benefits that our uptake in terms of the fertility sector and so with that you really kind of trading off price for volume and we've just we're not we can't do.
Ounce that right now, but ultimately what we've been able to do a secure a very large win in that reimbursement sector will probably be talking more about it obviously in our next earnings call.
And so youll see some buy in in the fourth quarter four for inventory purposes.
But that is essentially what's happening is essentially we're getting more and more opportunities to really be on some of these plans in regards to kind of a ppm driven process with with the reimburse market segment and finally, yes. Our long term goal really is to see continued growth in our women's health portfolio, we see fertility.
It will be high single digit growth. This year, it will likely be kind of following the same trends of next year and we assume we assume that <unk> will have a very very good year next year in terms of the ability to kind of course, correct with regards to the go to market model and to be able to take price in in next year and the beginning of next year.
From Exelon and finally the issue of.
Regarding the ex U S business, we've got supply kind of opening up so that we can meet more demand outside of the U S, especially in Latin America, and Asia Pacific and in the African regions, because robot the supply actually demand has been very robust.
And so that gives us a lot of confidence in the future growth opportunities for our women's health business and not dimension data now we're reporting it out its doing extremely well and we'll be launching zasyadko as we speak right now so that will continue to be a contributor in the future.
Okay.
Yes.
Okay.
Okay.
Our next question comes from the line of <unk> <unk> with <unk>.
Please go ahead.
Oh, Hi, this is Cheng Cheng former thanks for taking our questions. Just wanted to ask you about your China business. Previously it was estimated that 70% to 80% of business will have gone through the VP for end of this year. So with some of the new dynamics. You. Just described how should we think about the China business going into 2020 for especially in the first half.
For the year and also how much impact have you seen from the government and review campaign happened in the health care sector. This year and Jonathan Thank you.
Thanks for the question. So China is obviously, our second largest market in Oregon on very important market. We've had a long history in China. It continues to be a very important market for us to focus on the first question in regards to the BP impact by the end of this year, probably three quarters, 75% of our business will have gone through this.
<unk> brands business will have gone through the volume based procurement process, which basically means now our focus and our strategy to move the business over to the retail sector and all the various forms of the retail sector, whether it's e-commerce, whether it's actually pop folks going into the pharmacies into the retail sector is really starting to take hold and we continue to see.
An opportunity to grow our business in many different sectors of the retail sector, whether it's e-commerce, whether it's pharmacy dispensing.
And we're working with all of the top pharmacy pharmacy chains in China, and we've got good ongoing programs going with that as well in regards to the policy framework that you talk about in your second question. Yes, I believe if you are a company that has what I would consider.
Ration risks.
Too much business in the in the.
Public sector and the volume based procurement process that is exposed you will have more problems, but we actually no single product of ours represent more than 16% of our overall business and we've shifted essentially most of that business to the retail sector. So out of the control of that so it has been disrupted there's no doubt for the <unk>.
Summer period of time, we're coming out of that as we speak right now we feel we're in a very good position, we're seeing growth in the fourth quarter. We've increased access in the retail sector and we feel that next year will be a healthy year for us in China definitely overcoming some of the issues that we saw this year and I feel very strongly about that.
Thank you.
Okay.
Our next question comes from the line of David <unk> with Piper Sandler. Please go ahead.
Thanks, just two for me broadly speaking just given the headwinds you cited are there any initiatives that you're considering.
To try to boost EBITDA margins as you think about 2004.
And longer term.
That's number one number two is.
Thinking broadly about biosimilars, what's the role of that segment in the organization and is that something.
You might look.
To monetize in some way either as a way to pivot to.
The acquisition of brand assets or to address that.
That balance how do you think about that thank you.
Thanks for the question David on the first part I'll take that one so.
And have been managing the business pretty tightly.
From a <unk>.
From a cost perspective, most of the increases that you've seen.
Our reported results whether it's in the SG&A line or the R&D line have been for revenue producing activities.
In the future. So that we can sustain our long term revenue growth rate that said as regards what you might refer to as infrastructure costs administrative costs et cetera. We are we're going after those hard to manage those as tightly as we can.
And so just.
Rest assure that we're really examining the cost structure hard to make sure that were differentiating from revenue producing cost that represent investments in the future.
And any cost related to running the business from an administrative perspective, we are clamping down on those.
And David in regards to your second question regarding Biosimilars I've always maintained that Biosimilars is really an opportunistic.
The opportunity for us in the short to medium term I look through I guess the end of the decade. When you. When you have say for example, iOS coming off of patent there's going to be still a very robust market there.
Lima, our Humira Biosimilar is definitely slower than we had anticipated, but when you start to think about kind of our share of total prescriptions were three times greater than our nearest competitor that launched in the July timeframe. So to me. It is a question more question.
Of when not if.
This market will start to open up.
You are talking about the fact that a third of the patients. Currently today are spending about $1000 out of their pocket every month for co pay cost for Humira still to this day, even after low.
And when you consider the fact that two thirds of its estimated that two thirds of Americans today are living check the check I truly believe that over time is that market will start to open up on its own.
And it's it.
It will be something where we are talking about more of a linearity to our head Lima business going forward as opposed to that kind of quick peak and then on the other side coming straight down so.
It is something that we believe in the Biosimilar franchise, it's very opportunistic for us and we'll continue to treat it as so because remember the return on invested capital is very good we don't spend a lot of money in regards to our Biosimilar franchise in regards to boots on the ground or any other type of resources. So.
It is very it's a very healthy return on that so we feel good about it by the time, Inc.
Okay.
Thank you.
Yes.
Our next question comes from the line of Jason <unk>.
With Bank of America. Please go ahead.
Hey, guys. This is pavan.
<unk> aggregation carberry two questions from us.
First is on free cash flow it seems like the lower.
$700 million to $800 million free cash flow target from 1 billion previously is mainly due to net working capital use as well as lower EBIT outlook. So how likely is this net working capital used impacted carryover into next year do you think that we should start thinking about $700 million to $800 million free cash flow.
As the annual.
Benchmark or do you see possibly getting back to a $1 billion.
Next year and then the second is on capital allocation.
Noticed these plans for further debt paydown in 2024, so can you frame any sort of leverage ratio target or at least how you've made balance the debt paydown with business development and paying dividend.
Thank you.
Okay. So we'll take the free cash flow question first.
We.
We started the year with.
With an anticipation of in round numbers about $1 billion of.
Free cash flow, we've had to take that back.
Given developments this year as we noted related to a lower EBITDA as well as.
The investment in networking capital now that the latter is temporary that will come back out of the business, we will be fully through the implementation of our global ERP system in the second quarter of next year. So working capital should work its way back into our bank accounts as cash.
Sort of.
More or less ratably.
Over that timeframe.
And so we do see that the business should return to a higher level of free cash flow generation next year and when you combine that with the fact that we expect to see lower onetime costs from the separation next year, we're actually quite optimistic about what next year's free cash flow number will look like and when we go.
Good to that.
In February.
Curious in terms of capital allocation.
We've been since the spin off trying to achieve a balance.
Of capital allocation between investments in growth for the future.
And balancing that against the near term and certain benefits of leverage reduction.
That equation has been tilted a little bit more.
Given where interest rates have gone.
The near term benefits of debt reduction look more attractive so as we've said in the past a few times.
It raises the bar on the type of business development and M&A transactions that we would execute and Thats one of the reasons why <unk> seen a relatively speaking lower level of activity in BD in 2023 than you saw in 2022.
We continue to believe that the business.
The cash flow profile that the business exhibits.
Ports a dividend certainly.
At the level that that we have there's no plans to change that in the near term.
Thank you.
Our next question comes from the line of Chris <unk>.
Tommy with Goldman Sachs. Please go ahead.
Hi, This is Roger on for Chris just one quick question from our end.
So just given the update the statements from the FDA recommending that all labeling for Biosimilars include one statement.
Similarly statements can you comment on how you view this change in weather this acts as a tailwind or headwind for the uptake of Lima.
Yes, so thats a draft statement right now it's in draft form it's not necessarily going out in terms of what people need to do right now, but I think it's eventually going to take hold what I do believe as we've already made the investment and interchange ability.
The data is already very strong with our partners at Samsung <unk>, We believe that we'll be able to launch our interchange ability indication probably sometime in the second quarter ended the second quarter beginning of the third quarter of next year. It will definitely I think help us in terms of being a tailwind what we're seeing play out in the market today.
<unk> is the fact that interchange ability, especially at the at the pharmacy level, we'll be able to have an easier switch for patients when they get to the pharmacy they'll understand that do they want to for example pay $1000 a month for as a copay or do they want to pay $100 or whatever it is it's going to be in that particular plan.
And so having that ability to have the interchangeability designation will I think will help to guide pharmacists to be able to more actively switch from humira through the Biosimilar specific NFA switch, obviously, we have a commanding market share right now in terms of total prescriptions.
We'll be able to get a lot a lot of share of that so it is a tailwind I believe for us for whoever has the interchangeability designation I think theres only about maybe a handful three or four actually that we will have the interchange ability designation as opposed to others that have and initiated the studies.
So thats I think thats, where it is because it is in draft form right now and I think people are going to want to see it and see that you actually have it and we will have at the end of Q2 beginning of Q3 next year.
Great. Thank you.
Our next question comes from the line of <unk> Prasad with Barclays. Please go ahead.
Hi, everyone as Michela Anthropologic, thanks for taking our question.
Just two from US I guess can you talk a bit more about the Hudson ramp into 2024, and I guess elaborate on just some of the key factors impacting it and on women's health will you be able to reverse the weakness seen and I guess any further comment on what will be needed here. Thank you.
Yes per head Lima, the ramp up of 2024 will be I mean, what we see right. Now is the fact that what Abbvie has been able to do is essentially use their bundling power to essentially exclude especially in the PGM world, but remember about 40% of the lives covered right now or what we would call wax sensitive.
Or what we call low net cost sensitive.
It's just going to be some time until we were able to get those plants to start opening up there is a time lag between kind of the discounts you lose on the Abbvie business as well as kind of compared to the benefit you gained from the discounts that you get going with the Biosimilar, we will definitely see better business next year, but at the same time at the same token we.
We do see that this is another market formation year in 2024, and then the breakthrough I believe will come in 2025, when the kind of the floodgates will start to open up slowly and give us an opportunity. That's why I see had lima more of as a kind of a longer tail business and continued growth double digit year over year, which will help us in the outage.
There's no doubt about it in regards to women's the women's health question, Yes.
Yes, we found some issues. This this particular quarter, but it doesn't change the overall trajectory of our women's health business, let's remember that in in Q3 of 2022. It was 18% growth in the U S for Nexplanon that was because the previous the previous share there with some COVID-19 issues. So 2020.
Three in this quarter is really a function of a few things.
Lapping a very very strong quarter of last year and second the fact that the goal to go to market model has changed in terms of taking price right now people would start to kind of build their inventories in order to take advantage of the upcoming price change now that's not happening so thats, what youre lapping and then ultimately you will see that kind of come to fruition in the <unk>.
First quarter of next year, where people will start to take take inventory at that point of client.
Thank you.
Certainly.
There are no further questions at this time I would now like to turn the call over to Kevin <unk> for closing remarks.
Thank you it's been an opportunity for us to kind of show what we've been able to accomplish a lot in a very short period of time as a Standalone company. We're just.
A little bit over two and a half years old.
We've got a very talented team dedicated to continuing the growth of organon business.
We look forward to the future theres been some headwinds in this quarter, but we see them as more transient China is starting to grow again in Q4, so that that overhang is starting to lift and we see China's growth opportunities are solid for next year. We've taken some changes in regards to our go to market model on <unk> in that.
We'll continue to show progress for next year, as well and we see opportunities for had Lima and it is not a question of if it's a question of when it starts to open up and ultimately drive more incremental growth for us as a company. So we feel we're in a good position to continue our work and continue our focus.
We take the opportunity to look forward to speaking to you on the next earnings call. Thank you very much.
I would like to thank your speakers for today's presentation and thank you all for joining US. This now concludes today's call you may now disconnect.
Yeah.
Okay.
Okay.