Q4 2024 Organon & Co Earnings Call

Thank you for standing by. My name is Celine, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Argonauts' fourth quarter and full year 2020 Fair Earnings Call. All lines have been placed on mute to prevent any background noise.

After the speaker remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.

If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Jen. Please go ahead.

Jen: Thank you, operator. Good morning, everyone. Thank you for joining Organon's fourth quarter and full year 2024 earnings call. With me today are Kevin Ali, Organon's chief executive officer, Matt Walsh, our chief financial officer, and Juan Camilo Arjona-Ferreira, Organon's head of R&D.

Jen: Today, we'll be referencing a presentation that will be visible during this call for those of you on our webcast. The presentation will also be available following this call on the events and presentation section of our Organon Investor Relations website.

Jen: Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements.

Jen: 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.

Jen: 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.

Jen: I would now like to turn the call over to our CEO, Kevin Ali.

Kevin Ali: Good morning, everyone, and thank you, Jen. Welcome to today's call, where we'll talk about our fourth quarter and full year 2024 results.

Kevin Ali: For the full year 2024, revenue was $6.4 billion, representing a 3% growth rate at constant currency. This is the third consecutive year that Organon has delivered constant currency revenue growth.

Kevin Ali: In fact, all three of our franchises have delivered three years of constant currency revenue growth.

Kevin Ali: Adjusted EBITDA was 1.96 billion dollars inclusive of 81 million dollars of IPR&D representing a 30.6% adjusted EBITDA margin.

Kevin Ali: Ex-IPR&D, our adjusted EBITDA margin was 31.8%, about a half a point of margin expansion over last year on that same basis.

Kevin Ali: Today we are also providing guidance for the full year 2025.

Kevin Ali: For this year, we expect revenue to be in the range of $6.125 billion to $6.325 billion, inclusive of an approximate $200 million headwind from foreign currency.

Kevin Ali: which we will look to offset with growth in products like Vitama, Emgality, Fertility, and of course Nexplanon.

Our adjusted EBITDA range for 2025 is 31% to 32%.

Kevin Ali: consistent with prior commentary that we intend to manage to hold a 31% adjusted EBITDA margin floor X IPR&D. This applies even in 2025, as we manage through the LOE of our second largest product.

Kevin Ali: Let's move now to discuss the growth drivers within the franchises in 2024.

Kevin Ali: The Women's Health Franchise grew 5% ex-exchange led by performance of Nexplanon, which was up 17% ex-FX for the full year of 2024. This was Nexplanon's best annual performance ever and positions the product to achieve at least $1 billion of revenue in 2025.

Kevin Ali: In 2024, Nexplanon grew double-digit both in the U.S. and in international markets.

Kevin Ali: Outside the U.S., growth in the La Mera region was particularly strong, driven by increased demand, tender expansions, as well as strong performance in Brazil.

Kevin Ali: We also had a strong growth in the UK, where Nexplanon is a market leader.

Kevin Ali: In the U.S., we benefited from Nexplanon's market leadership coupled with our pricing strategy, which includes management of the 340B discount program, as well as continued growth in physician demand.

Kevin Ali: We remain very optimistic about the future of Nexplanon, especially with the potential of a five-year indication to sustain long-term Nexplanon growth. In 2024, we submitted our five-year study package to the FDA.

Kevin Ali: which had strong results including zero pregnancies and no new safety signals.

Kevin Ali: We also have collected data from this same study on women with a high BMI where there is a significant unmet need for a new, highly effective option with an adequate safety profile.

Kevin Ali: Late in 2024, we made our submission to the FDA, putting us in a position to be ready for a late 2025 launch pending FDA approval.

Kevin Ali: Also in women's health, Jada grew to $61 million in 2024 and celebrated 100,000 unit ships since launch. Over 90% of the largest birthing hospitals in the U.S. now stock Jada.

Kevin Ali: We expect continued growth of Jada in 2025 as we drive depth in our existing base and advocate for Jada's continued incorporation into hospital protocols.

Kevin Ali: Rounding out women's health, our fertility franchise was down 2% exchange in 2024. In the U.S., we worked through a late 2023 buy-in for Follistim due to the exit of a spin-related interim operating model. This offset growth we saw from new launches in Latin America, Japan, and Turkey, and strong performance in the Asia-Pacific region.

Kevin Ali: Our fertility products in China are performing better than the market, and we are well positioned to capture growth when that market accelerates.

Kevin Ali: In 2024, our biosimilars franchise grew 12% at a constant currency, in part because of our ability to capture more than our contractual share of the Brazil tender for Entrezant.

Kevin Ali: With renflexes and ontosont, at the mature point in their longer-than-projected life cycle, we'll likely see a decline in biosimilars in the mid-single-digit range in 2025.

Kevin Ali: We expect continued strong growth in HAD-LIMA following our U.S. launch in July of 2023. And late in 2025, pending FDA approval, we expect to launch a denosumab biosimilar in collaboration with Shanghai Henleus.

Kevin Ali: We also plan to launch a biosimilar for Progetta in the EU and in Latin America in 2026 with the U.S. following those launches. Lastly, we continue to see further business development opportunities to build out our pipeline for biosimilars.

Wrapping up the revenue discussion with established brands.

Kevin Ali: Established brands grew 2% ex-exchange for the full year of 2024. Contributions from Imgality and Vitama, along with recovery and injectable steroids, more than offset the impacts from the LOE of Adozed and an unfavorable pricing dynamic in Japan.

Kevin Ali: Before turning to our R&D pipeline, let's spend a few minutes discussing our strategy and where we are at at this point in time.

Kevin Ali: Even before SPIN, we knew that we had substantial work to do in order to stand up this new company and build out the capabilities required for success.

Kevin Ali: During this period, we established Organon as a leader in women's health, completed 11 business development transactions, achieved a double-digit revenue caper with Nexplanon, and drove growth in our base business.

Kevin Ali: We also began to streamline our operating expenses with the goal of expanding profitability. You see the results of those actions in our full year 2024 results with non-GAAP operating expenses x IPR&D down 2%.

Kevin Ali: Over the last two years, we've also tailored our business development approach to focus on transactions like Mgality and Dermavent that drive earnings accretion and enhance our revenue growth profile.

Kevin Ali: We're driving a lean culture focused on profitable growth where we see our CAGR on both revenue and adjusted EBITDA accelerating through the end of the decade. That will be powered by the portfolio we have in hand as well as future business development activities.

Kevin Ali: Let's talk about our specific plans in 2025 and focus on four specific strategic pillars.

Kevin Ali: One, continued demonstration of resiliency in our base business. Our base business represents a material driver of value for our company. We've aggressively managed this portfolio since then, driving cash flow for reinvestment and growth. Two, capturing efficiencies.

Kevin Ali: When we look at our operations, we are already in the process of implementing multiple initiatives that will drive significant operating savings during the calendar year of 2025. Those savings will more than offset the $180 million of expenses of DERMAVENT post-synergies.

Kevin Ali: We are reframing the way the company operates to be more nimble, eliminating reporting layers, and increasing spans of control, all to position the company for profitable growth.

Kevin Ali: 3. Consistent deployment of capital. We're committed to our regular dividend as our number one capital allocation priority. And 4. Delivering on the promise of our growth products and pipelines.

Kevin Ali: This includes eclipsing the $1 billion mark for Nexplanon for the calendar year of 2025. We also have a line of sight to deliver more than $300 million of revenue from our recent business development transactions.

Kevin Ali: specifically MGALADY and the DERMAVAN acquisition with a hundred and fifty million of that coming from VITAMA.

Kevin Ali: We're off to a strong start with VITAMA. Taking recent data ending January 31st, VITAMA saw strong NRX growth of 51% over the pre-AD approval 13 week average.

For comparison, our direct competitors were up only 5%.

Kevin Ali: The Tama TRX also outperformed competitors by 10 points on that same basis.

We remain comfortable.

Kevin Ali: with our revenue estimate for VITAMA in 2025, especially following the broad, favorable, and differentiating label we received in December in atopic dermatitis.

Kevin Ali: The TAM is the only non-steroidal topical approved for mild, moderate, and severe atopic dermatitis, providing access to all segments of the market in patients as young as two years of age.

Kevin Ali: The TAMA delivers systemic-like efficacy, has no black box warning, no contraindications, and no duration or body surface area limitations, allowing for treatment across varying levels of disease severity.

Kevin Ali: Early receptions of VTAMA have been very positive. From the field, healthcare professionals are telling us they have been waiting for this approval.

Kevin Ali: that they have felt an obligation to expand the use of non-steroidals, especially for children, and that there has yet to be a product that could treat the entire family. Overall, feedback has confirmed that there is a significant unmet need in atopic dermatitis.

Kevin Ali: And finally, in 2025, we also will be approaching stage gates in our R&D pipeline.

Kevin Ali: Some of them, like OG6219, that have the potential to be game-changing programs.

Speaker Change: With that, I'll turn it over to Juan Camilo to speak more about our R&D priorities.

Juan Camilo: Thank you, Kevin. Our research and development organization plays a pivotal role in shaping Organon's long-term growth and fulfilling our mission.

Juan Camilo: We strive to address long-standing unmet needs and realize our vision of a better and healthier everyday for every woman.

Juan Camilo: To accomplish this, we work to maximize the potential of our existing assets through life-cycle management, advance novel therapeutics through the clinical development process, and explore innovative modalities to improve health.

Juan Camilo: Starting with exciting regulatory milestones, in December we received approval for VITAMA for the treatment of atopic dermatitis in adults and children down to two years of age.

Juan Camilo: Despite an extended review period through a collaborative engagement with the FDA, we achieved approval on our original timeline, reflecting our proactive approach.

Juan Camilo: The approved label outlines the compelling benefit and risk profile differentiated from the labels of the other available treatment options for atopic dermatitis.

Juan Camilo: With DermAvant, we also acquired DMV506, a preclinical aerial hydrocarbon receptor agonist with potential applications in immunological inflammatory diseases and multiple routes of administration.

Juan Camilo: Our collaboration with Shanghai Henleus has advanced two biosimilars HLX-14, a biosimilar candidate for the Nosomath Prole-X Giva for the treatment of osteoporosis and cancer related skeletal events

Juan Camilo: and HLX11, a candidate for pertuzumab, perjeta, for the treatment of breast cancer.

Juan Camilo: Both biosimilar labeling applications have been accepted by FDA, with HLX-14 being potentially available in the U.S. later in 2025, pending FDA review and approval.

Juan Camilo: As Kevin mentioned, we submitted robust data from our five-year Next1On study to the FDA, and if approved, we expect to be able to launch this five-year indication by the end of this year.

Juan Camilo: Additionally, the study included data in women with body mass index above 30, with the potential to address significant need for contraceptive options in this population.

Juan Camilo: Our long-acting recombinant human follicle-stimulating hormone, SJO2, is under review by the Chinese Regulatory Agency. If approved, it will be the first of its kind in China for control of island stimulation.

Speaker Change: Organon acquired the exclusive commercialization rights for SAO-2 in mainland China from Zuzhou CentraGene Pharmaceuticals.

Speaker Change: On the clinical development side, early in 2023, Organon made a strategic investment in Clario Medical, Inc., a privately held company developing an investigational medical device for use during minimally invasive laparoscopic hysterectomy.

Speaker Change: Clary is responsible for clinical development and the clinical trials to support registration are underway.

Speaker Change: Perhaps the biggest potential opportunity we have is OG6219, acquired as part of the forender transaction.

Speaker Change: OG 6219 is a potential novel therapy for endometriosis and is currently in phase 2.

Speaker Change: Endometriosis is a chronic disease affecting up to 1 in 10 women of reproductive age. It's associated with abdominal pain, among many other debilitating symptoms, and it's a common cause of infertility.

Speaker Change: Currently available treatments only address pain, have limited efficacy, a limited duration of use, or have significant side effects including decreases in bone mineral density and menopausal symptoms.

Speaker Change: Results from the Phase 2 study are expected in mid-2025, with potential to initiate Phase 3 studies in 2026.

Speaker Change: If successful, OG6219 has the potential to be a new non-hormonal treatment option for endometriosis by the end of the decade.

Speaker Change: We also have a backup program which supports our goal to deliver a product based on this novel mechanism.

Speaker Change: And finally, OG-8276A is being developed for the potential treatment of dysmenorrhea in Japan.

Speaker Change: We have positive top-line results from the Phase 3 study and expect to complete the study extension and regulatory submission in Japan later this year.

Speaker Change: We are excited by the potential of our development assets to address significant medical needs. If successful, these innovations could contribute substantial revenue over the next 5 to 10 years.

Speaker Change: With that, I will pass it to Matt for additional details about our performance. Matt?

Matt Walsh: Thank you, Juan Camilo. Beginning on slide 11, here we bridge the 3% constant currency full-year revenue growth year over year.

Matt Walsh: Starting on the left, LOE was about $55 million for the year, which reflects the full-year impact of the loss of exclusivity of Adazet in Japan and the impact of the LOE in Europe, which occurred in September.

Matt Walsh: There was an approximate $15 million impact from VBP that was really contained to the first half of the year and related to round eight that began in the third quarter of 2023 and included Remeron and Kosar Hyzar.

Matt Walsh: There was an approximate $115 million impact from price for the full year, or about 1.8%.

Matt Walsh: Pricing headwinds came primarily from the September LOE of Adizet in Spain and France, as well as from certain mature products in the U.S. like Nuvaring, Dulaire, and Renflexis, as well as from expected mandatory pricing revisions in Japan.

Matt Walsh: Volume growth for the year was $415 million, representing almost 7% growth across multiple drivers.

Matt Walsh: Hedlema and Ngaldy were the largest contributors to volume growth, followed by Nexplanon, and the recovery of injectable steroids following a market action in 2023.

Matt Walsh: In Supply Other, here we capture the lower margin contract manufacturing arrangements that we have with Merck, which have been declining since the spinoff as expected.

Matt Walsh: Lastly, foreign exchange translation had an approximate $80 million impact in the year, or about 130 basis points of headwind to revenue, which reflects a strengthening U.S. dollar versus most foreign currencies during the year.

Matt Walsh: Now let's turn to slide 12, where we show key non-GAAP P&L line items and metrics for the full year. For reference, GAAP financials and reconciliations to the non-GAAP financial measures are included in our press release and the slides in the appendix of this presentation.

Matt Walsh: For gross profit, we are excluding from cost of goods sold, purchase accounting amortization, and one-time items, which can be seen in our appendix slides.

Matt Walsh: Adjusted gross margin was 61.6% for the full year 2024, compared with 62.7% in the full year 2023.

Matt Walsh: The year-over-year decrease in adjusted gross margin reflects the impacts of unfavorable price, as I discussed, as well as higher inflation impacts to material and distribution costs.

Matt Walsh: Excluding $81 million of IPR&D expense incurred during the year, non-GAAP operating expenses were down 2% year over year, reflective of our cost containment efforts.

Matt Walsh: Of the $81 million of IPR&D expense in the year, $70 million of it related to our collaboration with Shanghai Henleus for further advancement of the Denosumab and Fortusumab biosimilar candidates.

Matt Walsh: and ten million dollars related to a preclinical milestone for CERCLA, a non-hormonal investigational contraceptive candidate.

Matt Walsh: For the full year, embedded in the adjusted EBITDA figure, is a $26 million transaction loss from foreign exchange.

Matt Walsh: More than half of that, or $15 million, was in the latter part of the fourth quarter, after our last update to earnings guidance, and related to significant devaluation in unhedgable currencies, about half of that impact coming from the ruble.

Matt Walsh: This compares favorably to full year 2023, where we realize $43 million of losses on foreign exchange.

Matt Walsh: These factors culminated in an adjusted even margin of 30.6% for full year 2024, or 31.8% ex-IPR&D.

Matt Walsh: As Kevin mentioned, that's a little more than half a point of margin expansion over a full year of 2023 adjusted to even a margin of 31.2%. Once again, ex-IPR&D.

Matt Walsh: Non-GAAP adjusted net income was $1,065,000,000 for full year 2024, consistent with $1,061,000,000 in full year 2023, which is logical given that both gross profit and operating expense were essentially flat.

Matt Walsh: Reported net income for full year 2024 was $864 million, or $3.33 per diluted share, compared with $1,023,000,000, or $3.99 per diluted share in 2023.

Matt Walsh: And that difference is due to a prior year one-time benefit from the termination of a Swiss tax arrangement.

Matt Walsh: Turning to slide 13, we delivered $967 million of free cash flow before one-time costs in 2024, which met our expectation from the start of the year.

Matt Walsh: In the top half of the table, the number that stands out in free cash flow before one-time items is cash taxes.

Matt Walsh: which were higher in 2024 as we expected due to the payment of certain non-U.S. taxes, as well as settlements in various jurisdictions that triggered higher cash taxes relative to 2023, which happened to be an unusually low year for cash taxes.

Matt Walsh: Looking ahead to 2025, we would expect cash taxes to be similar to those of 2024.

Matt Walsh: Working down this table, we had expected about $100 million of working capital use in 2024. We ended the year a bit better, attributable to active cash cycle working capital management.

Matt Walsh: For the full year, one-time spin-related costs were $160 million, which is better than the $200 million we were originally forecasting for 2024, and in 2025, we expect these spin-related costs to be essentially zero.

Matt Walsh: In the $190 million of other one-time costs, about $90 million relates to the ongoing restructuring initiatives that Kevin discussed aimed at leaning out our operating expense.

Matt Walsh: Another $60 million relates to the planned exits from supply arrangements with Merck that we have discussed in past quarters would be ramping up.

Matt Walsh: These are activities that will enable Organon to redefine our appropriate sourcing strategy and move to fit-for-purpose supply chains while focusing on delivering efficiencies in terms of gross margin expansion, which we expect to begin realizing starting in 2027.

Matt Walsh: So, while the spin-related TSA costs are going to be effectively zero in 2025, we will continue to see other one-time costs in both restructuring and manufacturing separation for Merck that together could be $325 to $375 million in 2025.

Matt Walsh: Once again, these one-time costs drive value that investors will be able to see in 2025 in the form of improved operating expense efficiency and in later years related to more cost-efficient manufacturing that is expected to drive meaningful margin expansion.

Kevin Ali: As we think about capital allocation, the priority, as Kevin mentioned, is our dividend. And in the past two years, the highest and best use of the remaining cash flow has been opportunistic business development.

Kevin Ali: In 2024, we made upfront and milestone payments totaling about $350 million.

Kevin Ali: An additional $30 to $70 billion would be due if milestones for Henleus and SJ02 are met.

Kevin Ali: The achievement of these milestones means that we're realizing value for business development already signed and validates the path to low to mid-single-digit revenue growth post-2025 that we've been saying Organon should be able to deliver.

Kevin Ali: Moving to slide 14, we ended the year at 4.2 times net leverage ratio, up from 4 times at the end of September, primarily due to the DERMAVAN transaction.

Kevin Ali: We assumed about $280 million of DERMAVENT debt-like instruments, which are recorded on our balance sheet at fair value.

Kevin Ali: As we digest this acquisition, leverage could float up to the mid-four-times area at the halfway point this year before coming down closer to four times by year-end when we'll be capturing more benefit from the VITAMA launch.

Kevin Ali: That's a strong statement about the business, given that Dermavent was the biggest deployment of capital that we've done as a company. We're in the middle of a launch year with Vitama, and we're also working our way through the Adozet LOE.

Kevin Ali: Now turning to 2024 guidance on slide 15. Here we highlight the items driving our 2025 revenue guidance range.

Kevin Ali: Our revenue range for full year 2025 is $6.125 billion to $6.325 billion.

Kevin Ali: While we believe revenue could ultimately land anywhere in this range, if we look for a moment at the midpoint of the range, the midpoint is down just under 3% compared to 2024, which is essentially our estimate of the year-over-year impact of foreign exchange translation.

Kevin Ali: Overall, we expect the uptake of V-TAMA, continued solid performance in Gality, and organic growth in Nexplanon and other products in our portfolio will help to offset the loss of Adazet in Europe.

Kevin Ali: Even in this LOE year, there is a credible path to another year of constant currency revenue growth, and that is reflected at the high end of our full-year revenue guidance.

Kevin Ali: For LOE, we expect an impact of $160 to $180 million, which is primarily driven by the LOE of Adizet in the EU.

Kevin Ali: In this column, we're showing volume associated with LOE. There's also a price down component for Adizette for volume that we retain for a total of about $200 million of total revenue headwind related to the LOE of Adizette in 2025.

Kevin Ali: Moving to the right, we expect the impact from VBP to be approximately $20 million to $40 million, and that relates to Round 11 for FOSAMAX, which we expect to be implemented late in 2025.

Kevin Ali: Our range on pricing impact for 2025 is $155 to $185 million.

Kevin Ali: were approximately 2.7 percentage point headwind versus prior year, which is in line with our longer-term expectations from price impact across our entire business, but higher than last year.

Kevin Ali: That is driven by price declines associated with the Adazet LOE, as well as continuing competitive pressures in the U.S. within mature products such as Doolera, Renflexis, and Nuveri.

Kevin Ali: For the year, we expect volume growth in the range of $380 million to $500 million, reflecting growth in the range of 6 to almost 8 percent over last year.

Kevin Ali: Volume growth will be driven pretty equally by our strategic growth pillars, Nexplanon, Fertility, Hedlima, and new products such as M-Gality and V-Tama.

Kevin Ali: And finally, based on our current view of FX, we expect about a $200 million impact from FX in 2025, or a 300 basis point headwind, as I said earlier. And this is a function of about 75% of our revenue coming from outside the U.S.

Kevin Ali: As you think about quarterly revenue cadence in 2025, we believe this will be a story of bookends. We expect the first quarter of 2025 will be our lowest revenue quarter, and we expect the fourth quarter of 2025 will be the highest, as VITAMA ramps through the year, and the Adozet LOE will have its greatest impacts in the first three quarters of the year.

Kevin Ali: By order of magnitude, we could see more than a $100 million swing between the first and fourth quarter of 2025.

Kevin Ali: Turn to slide 16 where we show all components of our earnings guidance.

Kevin Ali: For full year 2025, we expect adjusted gross margin to be in the range of 60 to 61 percent.

Kevin Ali: about a point lower at the midpoint compared with last year, and that's a continuation of the pressure on gross margin that we saw in 2024, especially in the back half due to price and higher manufacturing and distribution costs.

Kevin Ali: On SG&A expense, we ended 2024 at 25% of revenue. That's a good barometer for 2025.

Kevin Ali: On R&D, we ended 2024 at about 7% of revenue, XIP R&D. For R&D expense in 2025, upper single digit as a percentage of revenue is probably a good place to get your model for 2025.

Speaker Change: Given where our revenue guide is landing, that would imply essentially flat OPEX dollars year over year, which is consistent with Kevin's commentary that we are continuing to improve our operating cost efficiency.

Speaker Change: Those pieces culminate in an adjusted EBITDA guidance range of 31 to 32 percent. This aligns with prior commentary and remarks made today that we intend to hold a floor on adjusted EBITDA margin of 31 percent XIPR&D.

Speaker Change: So, timing of the implementation of those savings along with the uptake of VTAMA could drive 200 basis point delta and adjusted EBITDA margins between the first and fourth quarters of the year.

Speaker Change: For below-the-line items, our estimate for full-year 2025 interest expense is about $510 million, which includes about $25 million related to the debt-like instruments assumed in the Dermavan acquisition.

Speaker Change: Payments on a portion of those instruments are tied to VTAMA sales.

Speaker Change: Exclusive of the Dermaband transaction, interest expenses down approximately $30 million in 2025 as a result of the two refinancing events completed in 2024 and lower borrowing rates on our variable rate debt instruments.

Speaker Change: For 2025, we estimate our non-GAAP tax rate to be in the range of 22.5% to 24.5%. The uptick from 2024 is largely due to the impact of the 15% global minimum tax rate required under the OECD's Pillar 2.

Speaker Change: Depreciation is a touch higher than last year at $135 million, driven by the completion of our new ERP system in 2024.

Speaker Change: To wrap up, 2024 was a solid year for three reasons. First, we delivered revenue and EBITDA growth, both as reported and at constant currency.

Speaker Change: Second, excluding IPR&D, we improved EBITDA margins year over year. And third, we improved the leverage ratio of the base business below four times going into the fourth quarter, and that gave us the balance sheet capacity to acquire DERMAVAN.

Speaker Change: And we now have immediate U.S. revenue and commercial capability in dermatology with the prospect for solid growth in 2025 on the heels of the launch of V-TAMA and atopic dermatitis as we have discussed.

Speaker Change: We're going into 2025 with financial guidance that reflects the potential for a fourth year of constant currency revenue growth and stable EBITDA margins, despite VTAN at launch expenses and an LOE of our second largest product.

Speaker Change: To temper the impact of this LOE, we've identified at least $200 million of OPEX savings in 2025 that have a very high probability of being achieved, and if we're successful here, we're likely to record our best operating expense efficiency metric since the spinoff.

Speaker Change: We expect these OPEC savings to benefit not only 2025, but annualized to roughly $275 million, which we will realize in 2026 and thereafter.

Speaker Change: As the quarters roll out in 2025, we expect our sequential P&L performance to improve throughout the year, which should provide a window into the strength of the underlying business beyond the LOE impact, which we expect to see in the near term here in 2025.

Speaker Change: With that, now let's turn the call over to questions and answers.

Speaker Change: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.

Speaker Change: If you would like to withdraw your question, simply press star 1 again.

Speaker Change: If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.

Speaker Change: We do request for today's session that you please limit to one question and one follow-up.

Speaker Change: Your first question comes from the line of Terrence Flynn with Morgan Stanley. Please go ahead.

Speaker Change: and kind of different indications in the installed base. And it sounds like they feel more confident in protecting Prolia. Just as you guys think about, the commercial dynamics there for that franchise, any color on how to think about that end of this year into 26. Thank you.

Speaker Change: But our starting point on adjusted EBIT is going to be about $100 million lower, and so that rolls right through. So our expectation is right around $900 million of free cash flow before one-time items.

Speaker Change: And then as we think about the, as I said, the drivers as you go down the free cash line will be somewhat similar to 2024.

Speaker Change: Yeah, Terrence, I can address the question on the Denosumab biosimilar launch.

Speaker Change: Right now, you know, we're going to be launching probably later on in the Q4 timeframe, so it'll be probably de minimis in terms of what we can expect for 2025 from the DeNosumab biosimilator, but going forward.

Speaker Change: Look, we've got a lot of comfort in the buy and build process and I can tell you right now that we've had years of experience when you start to think about the last six or seven years of Renflexus, Remicade, Biosimilar, Nexplanon and so on and so forth, so we feel very comfortable.

Speaker Change: with regards to having a product, a solid biosimilar for denosumab in both Prolea and Xgeva and being able to get some penetration out of that product in the coming years.

Thank you very much. Thank you.

Next question.

Speaker Change: Your next question comes from the line of Michael Nedelkovich with TD Corwin. Please go ahead.

Michael Nedelkovich: Thank you for the questions. I have two as well. The first is on Nexplanon.

Speaker Change: At least as of November 25, it looks like there's still not been a paragraph 4 filing for Nexplanon.

Speaker Change: And then my second question relates to your ambition to accelerate top line and EBITDA growth rates beyond 2026. Do you feel you already have the portfolio necessary to do that, or is that goal predicated on the idea that you would do additional accretive deals in the future? Thank you.

Thank you.

Kevin Ali: Michael, it's Kevin. So thanks for the questions. I'll start with the last one first and then and then go backwards. So we do feel very comfortable that

Kevin Ali: when we get past the LOE of Adozet in this year, which is our second largest product.

Kevin Ali: And we feel very good about the fact that we have a line of sight to be able to still deliver some constant currency growth this year, even in spite of

Kevin Ali: The loss of exclusivity of our second largest product, but going forward in 2026 to 2030

Kevin Ali: There's every intention and confidence that we can accelerate growth both on the top line and bottom line, leverage growth that is.

Kevin Ali: And, of course, we'll continue to do business development, but right now, we feel comfortable with the portfolio that we have in hand with Vitama, with...and I'll get to your first question in a second.

Kevin Ali: and other assets that we can continue to accelerate growth top-line and bottom-line in the second half of the decade without any doubt, but of course we will continue to do continued business development.

Kevin Ali: And then, in terms of your first question around epsilon, no Paragraph 4 right now.

Kevin Ali: that we've received, and right now, I've been saying for, I don't know, for the last two years...

Kevin Ali: I don't see really any risk to a large degree of a next one on three or five year for that matter introduction in terms of a generic.

Kevin Ali: or biosimilar between now and the end of the decade. After the end of the decade, I mean, then we'll determine what happens then.

Kevin Ali: When I start to see that our five-year indication, which we will hopefully launch by the end of this year, will have exclusivity through 2029, if I start to look at all the various issues around an implant that has a product in it, there's no precedent there.

Kevin Ali: When I start to think about the benchmarks of either Mirena, a medicated IUD, no generics so far, so I don't feel we'll see any generics.

Kevin Ali: to challenge Nexplanon through 2030 and so as a result of that when you start to see that we've got a billion dollars expectation in this year and you put down essentially the growth expected to the end of the decade you see how big product can be and it's our most profitable product.

Thank you.

Speaker Change: Your next question comes from the line of Chris Schutt with J.P. Morgan. Please go ahead.

Speaker Change: Hi, this is Ethan on for Chris Schott. Thanks for taking our questions.

Speaker Change: Just two for me. First off, on Vitama, you've had the asset for several months now. Any surprises as you think about the competitive or commercial landscape and just would be interested?

Speaker Change: in your latest thinking on the competitive positioning of Vitama and atopic derm versus the initial psoriasis indication.

Speaker Change: and then second off on margins and the manufacturing separation from Merck that you're doing.

Speaker Change: You talked about beginning to see that in 2027, but just any color on the magnitude of benefit we might see and how that might flow in over 2027 and looking past that year. Thank you.

Speaker Change: Thanks for the questions, Ethan. I'll take the first and then hand it over to Matt to take your second question. Look, every week that goes by I'm more and more confident, I was already confident on the acquisition of Vitama and that what we could do with that product globally and the U.S. of course.

Speaker Change: But, you know, when you look at NRX in terms of week ending January 31st, we've got a 51% growth versus the pre-AD approval 13-week average baseline. So really solid NRX growth, solid growth in terms of new prescribers to the product.

Speaker Change: topic will improve from mild, moderate, and severe. You're talking about from two years of age and onward. So when you think about the competitive landscape,

Speaker Change: There's no other non-steroidal topical that actually has down to two years of age. The closest is actually Zareve that starts from six and older.

Speaker Change: Easy 75 rates up to 59% and and that really beats everything in the market and of course

Speaker Change: You've got no black box warnings, no safety precautions, or drug-drug interactions, no minimal, essentially systemic absorption. So we're talking about really a phenomenal product, all-in-one solution, once a day, and no duration or body surface area limitations. So when I think about the potential

Speaker Change: of Vitama for what we can do with that product both in the U.S. and we'll be launching in Canada later this year.

Speaker Change: It is going to be a very big contributor of growth for us for not only 2025, but also going through the end of the decade and beyond. It's a fantastic product.

Matt Walsh: I'll hand it over to Matt now to talk about the other questions.

Matt Walsh: Yeah, so I'm the subject of gross margin improvement. So at the time of the spin...

Matt Walsh: Essentially, all of our API and a good deal of our manufacturing services were provided by Merck. They're regulated products, so it takes time to move these things. We're in the process of doing it now.

Matt Walsh: The margin expansion that we expect to see would be on the order of 250 to 300 basis points starting in 2027. It would roll in over a few years starting at that point.

Matt Walsh: but that's a significant improvement in our supply chain and manufacturing efficiency that we look forward to realizing.

Speaker Change: Your next question comes from the line of David Amsalim with Piper Sandler. Please go ahead.

David Amsalim: Thanks, two quick ones for me. One is, regarding your dermatology business that you now have, what are you hoping to accomplish beyond the TAMA in terms of leveraging...

your infrastructure and adding other assets down the road.

David Amsalim: That's number one. And then number two, can you talk about your net leverage targets over the long term? The 4X or around that has been stubbornly high. Can you talk about the extent to which you want to get it down a turn or potentially more over the long term?

David Amsalim: Good to hear, David. I can address the first question on V-TAM, but look...

David Amsalim: You know, we're concentrated in this year, in 25, our launch year, most important year.

David Amsalim: to really get out of the gates and not only achieve, but hopefully even surpass the numbers that we gave out in terms of what we expected to drive this year.

David Amsalim: from that product. I talked a little bit earlier about the, I think, the best-in-class label that we received from the FDA. I think that was the one single risk that we were taking when we did the acquisition, is what would the AD label look like, given the fact that the AD market is significantly bigger in terms of number of patients versus psoriasis.

David Amsalim: and the opportunities really existed there. And what came through from the FDA.

David Amsalim: is the label, it's just best-in-class label. And so, you know, let's see how we do this year. I'm very confident that we'll do very well and we'll be on a right trajectory going forward to be able to achieve.

David Amsalim: Peake Revenues that I think will surprise a lot of folks in the market, but nevertheless, we've got a great vertical that we're building here. The team that came over from Dermaband.

David Amsalim: is our fantastic sales force, really fantastic. And we've got medical affairs groups and DTC groups that are really outstanding. And so as a result of that, I have every intention, we have every intention of being able to continue to build out our portfolio in dermatology. And first and foremost, to do well with Vitama, globalize the product, because we're gonna be launching in Canada. And thereafter, we'll start to think about

Matt Walsh: all the regions like the EU and others to really kind of penetrate into those into those segments but after that we've got a tremendous opportunity across a variety of different therapeutic areas within the dermatology area that we can add to the bag in our group in the in the US and all for that I'll pass it over to Matt now

Matt Walsh: Yeah, so on leverage ratio, David, we had said at the start of 2024 that we thought that business would de-lever below four times by the end of the year. Pro forma for the DermaVani transaction, that number would have been about 3.8 times.

Matt Walsh: sort of a manifestation of the idea that we'll de-lever faster through EBITDA growth than through straight debt reduction.

Matt Walsh: And, okay, 2025 is a launch year for BTAMA, but when you think about what the business can do in 2026, we should be cleanly below four times by the end of 2026.

Matt Walsh: And then that, so we're getting closer by the end of 2026 to the point where we're in that mid three range where we had been saying since the spin is a sensible soft target for a business like this with the kind of cashflow that it generates.

Matt Walsh: I think we've set up the business to get there once we work our way through 2025 and the near-term issues.

Matt Walsh: that we're facing, which are really restricted to 2025. When you think about the things that are growing in 2025, the TAMA, MGALADY, HEDLIMA, NEXPLANOT, all of those things will keep growing in 2026.

Matt Walsh: And the issues, the headwinds that we're facing are very near-term in nature, and so we expect the ability to make significant progress on leverage in just a few quarters' time once we get on the other side of 2025.

Thank you. Bye.

Speaker Change: Your next question comes from the line of Alagi Prasad with Barclays. Please go ahead.

Laji?

Speaker Change: I think you're next, Ian. Your next question comes from David.

Speaker Change: There he is. There he is. You can hear him. Go ahead, Balaji. Sorry about that, guys.

Speaker Change: Two questions from me, comparing on a component-wise basis the variations between my estimates and the delivery, the biosimilar pricing decline seems to be higher than what I factored. I understand that the products are in the mature phase of the product life cycles and I would have expected the pricing impact to have been felt already.

Speaker Change: So, if you can throw some color on what the pricing impact was and what led to this and which of the competitor, what competitive dynamics led to this, that will be very helpful.

Speaker Change: Secondly, could you help us understand the quarterly cadence on the back of the multiple moving pieces that you have this year, pricing, ADLIMA, VITAMA, EDUSET? So how should we factor the quarterly cadence for the year? Thank you.

Speaker Change: Thanks, Balaji, for the question. I'll address the first. In regards to pricing with biosimilars, I think the

Speaker Change: The issue really is probably centered around the 340B pricing with Renflexus, which is our largest biosimilar, Remicade biosimilar in the U.S.

Speaker Change: for Red Flexus, which is indicative, I think, of our ability.

Speaker Change: to commercialize biosimilars. And we're really looking forward for our Denosumab launch later on in this year.

Speaker Change: And then thereafter, our Progetta launch in Europe and in Latin America in 2026, and then followed thereafter by the U.S. And of course, as I mentioned in my opening comments, we're also doing a lot of due diligence on a variety of different things we can do in biosellers with regards to accretive business development deals that we could do in 2025 to offset some of the issues that we're looking at price in regards to Renflexus and Entrezon. Thanks for the question.

Speaker Change: So I'll take the second part. So your question is very important because as you correctly point out we've got

Speaker Change: trending during the year that has some pretty significant movements, and let's just review what that is. We've got the LOE of Adizet, which the impacts of that are more front-loaded in 2025. By the time we get to the fourth quarter, we lap it.

Speaker Change: We've got the ramp up of Vitama sales. Approximately two-thirds of our annual projection there is realized in the back half of the year. And then we've got the cost savings as a result of the restructuring, which is also back half weighted.

So when you blend all that together...

Speaker Change: I'll revisit the points that we made in the prepared comments. From a revenue perspective, it could be between Q1 and Q4 in the story of the book ends of the year, as I said.

Speaker Change: There's about a hundred million dollar revenue difference, we think, between where Q1 will land and where Q4 will land, so there's that delta. You can figure out the pieces in between.

Speaker Change: And then from an EBITDA margin perspective, it could be as much as 200 basis points difference between our first quarter, which will probably be our lowest quarter of the year, and our fourth quarter, which should be our best quarter of the year as we're laying out our planning for the year.

And I'll leave it at that.

Thanks for having me.

Speaker Change: Your next question comes from the line of Jason Gerberi with Bufa Securities. Please go ahead.

Thank you.

Hey, guys. Good morning. Thank you for taking my questions.

Speaker Change: Just firstly, for me, the $200 million of OPEC savings, that seems like that's primarily in SG&A from the guide. That's about...

Speaker Change: Reduction of 10% to 15% of your legacy cost base. Just wondering, the team's...

Speaker Change: like a pretty significant number, wondering where those cuts are actually coming from and any commentary you can provide on opportunities beyond 2025 for further restructuring opportunities.

Kevin Ali: And then just on the next one, Kevin, you've been more vocal about this potentially reaching a billion and a half in revenues in the out years and having a very long tail.

Kevin Ali: I would think that that implies more of like an out-here growth kegger of at least double-digit And Street obviously has it more flatlining

Kevin Ali: probably on differing LOE assumptions. But just kind of curious, your guidance for 25, it's just greater than a billion, but that's pretty much where you are this year. So just wondering if we should be thinking about growth and next one on as more in the double digit plus territory in 25.

Jason Gerberi: So, I'll start out with the restructuring piece. So, we've been a public company now since 2001. We undertook some restructuring in 2023, 2024. I would call that belt tightening. This round of restructuring, as you point out, Jason, more significant. We did look at our organization more holistically,

Jason Gerberi: and really did some pretty significant streamlining of our spans and layers and the way that our various functions work together. We've really tightened things up.

Jason Gerberi: So, the 2025 impact, 200 million, run rate of that, about 275, as I said in the prepared comments.

Jason Gerberi: The rough split in terms of how we financially report in 2025, you'd see about 75% of that 200 in our OPEX, and so that's spread over the SG&A and R&D line, and about 25% would be in COGS.

Jason Gerberi: In regards to your question on Nexplanon, you've heard me say many times the reasons to believe, and I feel very confident that we won't see, at least until the end of the decade, a competitor for Nexplanon.

Jason Gerberi: And, you know, in 2024, as you rightfully stated, it was the best year that we've actually ever had with 17% growth both outside the U.S. and inside the U.S.

Jason Gerberi: I think the historical growth rate of this product has been in the high single-digit range.

Jason Gerberi: I don't expect that to change, but there are certain years where we do certain things like, for example, you start to see the benefit of the five-year indication, hopefully with some BMI language attached to it, which will really open up.

Jason Gerberi: A variety of new, very attractive segments for us for the next one on growth opportunities.

Jason Gerberi: So, it could be double-digit, low double-digit in some years, high single-digit in other years, but I think it's a prudent way to say, look, just factor in high single-digit growth.

Jason Gerberi: through the end of the decade, it'll get you to somewhere in the neighborhood of the 1.1.5 billion dollars, which, again, is very different than you see in some of the models out there, but I think as time goes on, it is a show-me story. As time goes on, you'll start to see the opportunities that do start to materialize.

Jason Gerberi: for an exponent for us, at least for the end of the decade. I see it. And thereafter, it could easily be longer. If you take the Morena precedent, it could be significantly longer than that. But I'm going to be more responsible and say through the end of the decade.

Speaker Change: Your next question comes from the line of Umar Rafat with Evercore ISI. Please go ahead.

Umar Rafat: Hi guys, thanks for squeezing me in. I wanted to focus on Vitama on a two-part question. First, I saw you reported $10 million for U.S. in Q4 for Vitama.

Umar Rafat: Previously, I know the run rate was around $20 million or so on the prior quarters that DermaVent was reporting, but I do acknowledge you have a partial quarter. There's only two months, but still, I wouldn't have thought it would be $10 million. It would be closer to perhaps $15 million or so. So I wanted to understand better the $10 million number, knowing that it was two out of three months.

Umar Rafat: Secondly, I was very intrigued by a comment made today. So, specifically, I know you previously said you expect $150 million in sales for Vitama in 2025.

Umar Rafat: Today, you said two-thirds will be back half-weighted, so $100 million will be in the second half of the year, presumably, which would imply a $50-$60 million quarter in Q4. So is it reasonable to think that your expectation is that Vatama's Q4 run rate will be $200-$250 million?

Good to hear from you, Umar.

Umar Rafat: Sales forward in terms of revenue forward in the end of the quarter

Umar Rafat: We, for obvious reasons, decided not to do that and to get a good start in 2025, and so as a result of that, kind of just let it, you know, just clean in terms of the overall kind of performance in Q4 so that we could start off, I think, in a very solid fashion with Q1 for the remainder of the year, and you're right.

Umar Rafat: When I start to think about, you know, where the opportunities lay for this product.

Umar Rafat: We're going to be working on growth to net, we're going to be working on a number of areas, especially around with our managed care group, which is, I think, best in breed in the market today. And they're getting successes as we speak to get better treatment in terms of the overall formulary status.

Umar Rafat: So, yeah, by the end of the year, as you start to see successively quarter after quarter, you'll start to see more strength in the product based on some of our managed care work and some of the formulary work that we're doing, as well as continuing growth in NRX, ERX.

Umar Rafat: growth that we see going on for the product now. We've got a really solid first month of the year in terms of TRX growth so we think that that will continue on to go forward for us.

Thank you.

Okay, I think that was our last question.

Operator.

Speaker Change: That concludes our Q&A session. I will now turn the conference back over to Kevin Ali, Chief Executive Officer, for closing remarks.

Speaker Change: Thank you, Operator, and thanks, everybody, for your questions. Once again, we're really very proud of our 2024 performance.

Speaker Change: In 2024, we achieved our third year of constant currency revenue growth and delivered adjusted EBITDA margin expansion, XIP R&D.

Speaker Change: Our 2025 financial guidance reflects the potential for a fourth year of constant currency revenue growth despite the loss of exclusivity of our second largest product, Atozet.

As we think about 2026 and beyond,

Speaker Change: We will have that LOE behind us, and we will be leveraging the cost savings we're taking out this year. Longer term, we will continue to source accretive business development deals that will drive an acceleration in our revenue growth profile, all while aggressively managing our cost structure.

Speaker Change: So, thank you for your questions, and we look forward to reporting on our continued progress as a company. Thanks everyone.

Speaker Change: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Please wait. The conference will begin shortly.