Q1 2025 Organon & Co Earnings Call
Hello, and welcome to the you're working on first quarter 2025 earnings call and webcast. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session and if you would like to ask a question. During this time. Please press star one on your telephone keypad.
Jennifer: I would now like to turn the conference over to Jennifer <unk>, Vice President Investor Relations you may begin.
Speaker Change: Thank you operator, and good morning, everyone. Thank you for joining Oregon on first quarter earnings call with me today are Kevin Ali organized Chief Executive Officer, and Matt Walsh, Our Chief Financial Officer, Juan Camilo excellent I forget are organized head of R&D will also be joining for the Q&A.
Jennifer: <unk> of this call.
Jennifer: Today, we will be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available. Following this call on the events and presentations section of our Investor Relations website, www organize and dotcom.
Jennifer: Before we begin I would like to caution listeners that certain information discussed by management. During this conference call will include forward looking statements actual results could differ materially from those stated or implied by forward looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the securities and exchange.
Jennifer: Commission, including our 10-K and subsequent periodic filings. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the <unk>.
Press release and conference call presentation, I'd now like to turn the call over to our CEO Kevin Ali.
Kevin Ali: Good morning, everyone and thank you Jan.
Jennifer: First quarter results represented a solid start to 2025.
Kevin Ali: We're very much in line with our expectations for the year.
Kevin Ali: He goes drivers on track Nexplanon grew double digit and is set to achieve more than $1 billion in revenue in 2025.
Kevin Ali: The launch of the Tamil and the atopic dermatitis indication has been successful.
Ramping just as expected and the product is marching towards a $150 million of revenue for the year.
Kevin Ali: Additionally, we continue to estimate that our restructuring initiatives will yield approximately $200 million of annual savings.
Kevin Ali: Given the tariff policies in effect as of today.
Kevin Ali: We are affirming our revenue and adjusted EBITDA margin guidance as well as our target of generating over $900 million, our free cash flow before one time costs in 2025.
Kevin Ali: Today, we also announced that we have reset our dividend payout and we will redirect those funds to debt reduction.
Kevin Ali: With a reduced dividend payout the company can redeploy almost $200 million in prospective dividend payments over the remainder of 2025.
Kevin Ali: Will enable a path to achieve a net leverage ratio below four by year end.
Kevin Ali: Over the last year, we've established a leaner more fit for purpose cost structure, while increasing revenue contribution from our core growth drivers by deleveraging more rapidly we will continue to strengthen the future prospects of the company.
Kevin Ali: Overtime, this will position us to execute more of the compelling business development opportunities, we've done to date, bringing in additional growth drivers to our portfolio, while maintaining lower leverage.
Kevin Ali: Further the recent macroeconomic uncertainty has created a pronounced dislocation in our equity valuation relative to our earnings to us.
Kevin Ali: This is an affirming signal from the market that now is the right time to proactively take action to support our balance sheet.
Kevin Ali: A lot of the uncertainty in the broader market, obviously centers around current and future tariff policy.
Kevin Ali: Based on tariffs in place as of today, we have very limited exposure in 2025.
Kevin Ali: Our revenue composition is about 75% ex U S.
Kevin Ali: Europe, Canada represents about 25% of our total revenue China represents about 13% of our revenue for that revenue generated in China, a majority of the supply comes from Europe.
Kevin Ali: As you think about the roughly 25% of our revenue generated in the U S. Again, most of that supply comes from Europe are.
Kevin Ali: Our women's health products sold in the U S were primarily made in the Netherlands.
Kevin Ali: Next one on is the bulk of that and we've already taken steps to mitigate exposure to inventory management.
Kevin Ali: For U S. Biosimilars Entresol rents Lexus and had Lima are mainly supplied from Korea and the EU.
Kevin Ali: For our recently acquired <unk>.
Kevin Ali: That product is manufactured in China, but we have inventory coverage offering us protection through 2025.
Kevin Ali: The Dino so nab asset from Shanghai, Handless is not planned to launch until much further in the year.
Speaker Change: So again <unk>.
Speaker Change: Just on the tariffs in place as of today, we have very limited exposure in 2025.
Speaker Change: With those important topics addressed let's move now to a discussion of the financial results as I mentioned, the first quarter was very much in line with our expectations.
Speaker Change: We had guided that first quarter would be the lightest of the year as we work through the loss of exclusivity of out of that and as the Tam on ramped up.
Speaker Change: The women's health franchise grew 12% ex exchange led by performance of Nexplanon, which was up 14% in the quarter Nexplanon grew double digit in both the U S and ex U S markets. This year, we expect nexplanon to deliver more than $1 billion in sales driven by both price increase.
Speaker Change: And demand growth.
Speaker Change: For the five year indication, we have made our submission to the FDA, putting us in a position to be ready for a late 2025 launch pending FDA approval.
Speaker Change: Fertility had a very strong quarter growing nearly 26% globally.
Speaker Change: The U S grew $23 million of 70% with about half of the growth coming from lapping a buyout in Q1 of last year. The other half was volume growth and rate favorability.
Speaker Change: Ex U S fertility grew 4% with new launches in Turkey, and Japan offsetting sluggish performance in China, We expect growth in the U S as well as footprint expansion outside the U S to drive high single digit growth in our global fertility business in 2025 J.
Speaker Change: <unk> grew 20% in the quarter driven by growth in shipments, especially in the U S. Among existing customers that are expanding jada adoption.
Speaker Change: More than 94% of the nation's largest birthing hospitals now stocked jada.
Speaker Change: During the first quarter Jada launched in South Korea, and achieved the CE Mark approval in Europe, We plan to launch in select EU markets. This year, and we continue to assess future market expansion opportunities.
Speaker Change: Turning to Biosimilars Biosimilars continues to be an important part of our growth story.
Speaker Change: In 2025, though Entresol and <unk> will continue to decline had Lima grew 57% in the first quarter with continued strong uptake in the U S. We also recently acquired the regulatory and commercial rights for <unk> in the U S for intravenous infusion.
Speaker Change: <unk> is the first biosimilar approved for Actemra.
Speaker Change: Torrance was launched in May 2024, but the overall actemra biosimilar market was slow to form in the U S.
Speaker Change: Yielding an opportunity a very good opportunity for future sales uptake and growth immunology is a market, we certainly know well in the U S. Notably the physician administered business and as a result, we are uniquely positioned to drive <unk> sales.
Speaker Change: And finally, we anticipate launching the portfolio of handlers products beginning in late 2025 with the Denosumab Biosimilar in the U S followed by <unk> in Europe.
Speaker Change: Wrapping up the revenue discussion with established brands.
Speaker Change: In the respiratory portfolio mandatory pricing revisions in Japan, and mild seasonal respiratory complications in China weighed on our results in the first quarter performance and the cardiovascular portfolio. During the first quarter was driven by the headwinds from the loss of exclusivity of Arizona, which will abate in the fourth quarter of this year.
Speaker Change: As we have said since spin.
Speaker Change: So many of the brands in this portfolio had been around for decades, we have taken an entrepreneurial approach in managing the business for profitable growth. The established brands franchise is starting to look different than it did at spin now home to innovative medicines that are growth engines for the company. It looks more like a general medicines portfolio over the last year and a half.
Speaker Change: We've added products with patent protection to this franchise, including them Gallery and V. Tamara combined we expect those products to generate over $300 million in revenue in 2025.
Speaker Change: So the town of loss performance has been encouraging as it continues to outpace branded competition and Rx and T Rx growth.
Speaker Change: For the week ending April 18th.
Speaker Change: <unk> grew 71% versus direct competitors, who were up 4% compared to a pre 80 approval 13 week average baseline.
Speaker Change: T Rx grew 30% compared with competitors, who were up 5%.
Speaker Change: Tamara is uniquely positioned within the atopic dermatitis market. It is applied once a day and it is the only non steroidal topical approved for mild moderate and severe atopic dermatitis, providing access to all segments of the addressable market. It is the only product approved for patients two years of age and older offering.
Speaker Change: Significant advantage over competitors.
Speaker Change: We have developed a core capability and finding opportunities like him Gallery, Andy Tamara. These are accretive transactions with deal structures heavily weighted towards success based milestones. These are the types of assets that over time, we will have greater opportunity to pursue with the capital freed up from the dividend.
Speaker Change: I'll now turn the call over to Matt who will review the financials in more detail.
Matt Walsh: Thank you Kevin beginning on slide nine here, we bridge the 4% constant currency revenue decline in the first quarter year over year.
Matt Walsh: Starting on the left <unk> was about $60 million for the quarter, which primarily reflects the impact of the loss of exclusivity of <unk> in Europe, which occurred in September 2024.
Matt Walsh: <unk> and China was de Minimis in the first quarter, and we expect only a nominal impact on a full year basis for 2025.
Matt Walsh: Our potential exposure this year will be more back half weighted as we expect frozen Max will be included in round 11.
Matt Walsh: Once this occurs approximately 80% of our established brands portfolio will have been subjected to the BBB process.
Matt Walsh: There was an approximate $40 million impact from price for the first quarter were about two 5%.
Matt Walsh: Pricing pressure was mainly from biosimilars certain mature products in the U S like Nuvaring and Dulera.
Matt Walsh: Hello, you've added debt.
Matt Walsh: From a regional perspective, we continue to face expected mandatory pricing revisions in Japan, and ongoing competitive price pressures related to our respiratory products in China.
Matt Walsh: Volume increased $45 million in the quarter representing growth of a little over two 5%.
Matt Walsh: Had lima, and <unk> be Tamara and next benign were the largest contributor to volume growth and will likely continue to be the main drivers for the full year.
And supply other here recapture the lower margin contract manufacturing arrangements that we have with Merck, which have been declining since the spin off as expected.
Matt Walsh: Lastly, foreign exchange translation had an approximate $45 million impact in the first quarter or about 280 basis points of headwind to revenue, which reflects a strengthening U S dollar versus most foreign currencies in the current period relative to the first quarter of 2024.
Matt Walsh: The recent weakening of the U S dollar potentially creates a tailwind for us over the remainder of 2025 and I will revisit this point later in the presentation when we discuss guidance.
Matt Walsh: Now, let's turn to slide 10, where we show key non-GAAP P&L line items and metrics for the quarter 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, 7% for the first quarter compared with 62, 1% in the first quarter of 2024.
Matt Walsh: The year over year decrease in adjusted gross margin primarily reflects the impact of unfavorable price as I discussed.
Matt Walsh: non-GAAP SG&A expense was up 6% in the first quarter driven by commercial and launch expenses for <unk>, which was acquired in the fourth quarter of 2024.
Matt Walsh: Excluding expenses related to be Tamara SG&A was down versus prior year reflective of our efforts to contain and reduce operating expenses.
Matt Walsh: non-GAAP R&D expense before $6 million of IP R&D was down 17%, primarily due to the timing of clinical studies spend.
Matt Walsh: As we think about the restructuring actions to reduce operating expense that we communicated as part of our 2025 earnings guidance in February.
Matt Walsh: We began executing those plans during the first quarter and we fully expect to achieve approximately $200 million in expense savings over quarters, two through four which is already incorporated into our earnings guidance.
Matt Walsh: Our first quarter adjusted EBITDA margin of 32% was about 150 basis points better than we expected in part because of the timing of clinical studies spend that I just spoke of.
Matt Walsh: We also did a bit better on gross margin driven by favorable product mix.
Matt Walsh: So in the first quarter, we benefited from a $4 million realized transaction gain from foreign exchange, mainly driven by currencies that we can't hedge.
Matt Walsh: Turning to slide 11, we delivered $146 million of free cash flow before one time costs in the first quarter about a third better than the prior year period.
Matt Walsh: This is a function of active cash cycle, working capital management, lower interest rates and timing of cash interest and tax payments.
Matt Walsh: As we said back in February one time costs related to the spin off were completed in 2024 following the rollout of our global ERP system, we expected onetime spinoff cost to be zero in 2025, and you can see that reflected in our first quarter results against $62 million in the prior year period.
Matt Walsh: In the $75 million of other onetime costs about $15 million relates to cash payments associated with restructuring initiatives aimed at leaning out our operating expenses I mentioned earlier.
Matt Walsh: $20 million relates to the final payment on the microspheres settlement.
Matt Walsh: And the remaining $40 million relates to the planned exits from supply arrangements with Merck that as we've discussed in past quarters would be ramping up.
Matt Walsh: These are activities that will enable oregon on 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 in 2027.
Matt Walsh: Restructuring and manufacturing separation activities could together represent $325 million to $375 million in 2025. Our current view is that we could finish 2025 at the lower end of this range. Once again these onetime costs drive value that investors will be able to.
Matt Walsh: 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.
Matt Walsh: In 2025, we expect to pay about $200 million in commercial milestones, primarily tied to the camera and gallery in the Biosimilar programs with Shanghai Handless.
Matt Walsh: During the first quarter, we have paid about $130 million towards that expected amount.
Matt Walsh: The achievement of these milestones means that we are realizing value for business development deals 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.
Matt Walsh: Now turning to slide 12.
Matt Walsh: Our net leverage ratio was four three times at March 31.
Matt Walsh: That performance is consistent with prior commentary that leverage could flowed up to the mid four times area. During 2025, as we digest the dermis and transaction.
Matt Walsh: As we capture more EBIT benefit from the <unk> launch later in the year and realize the benefit of operating expense restructuring actions, we would naturally delever closer to four two times, where we ended 2024.
Matt Walsh: With our revised capital allocation plan announced today that increases our retention ratio, we now have the ability to accelerate progress on deleveraging.
Matt Walsh: In the near term as Kevin stated our priority is to reduce net leverage given the uncertain macroeconomic environment that investors are reacting to.
Matt Walsh: We see a clear path to achieving net leverage below four times by year end.
Matt Walsh: And over time, the capital preserved with the higher retention ratio creates a compounding improvement and financial flexibility.
Matt Walsh: It offers us the opportunity to achieve meaningful deleveraging over the next few years, whether it's through outright debt repayment accretive M&A or some combination of the two.
Matt Walsh: Now turning to 2025 guidance on slide 13.
Matt Walsh: For the operational bars on this page everything remains the same for the full year.
Matt Walsh: Our constant currency guidance remains the same which is about flat versus prior year at the midpoint.
Matt Walsh: We expect the uptake of the Tami continued solid performance at <unk> and organic growth in <unk> and other products in our portfolio will help to offset the low that is that in Europe, along with pricing headwinds in other parts of the portfolio.
Matt Walsh: A pretty strong statement given that <unk> represents a headwind of approximately $200 million alone between volume and price.
Matt Walsh: So with no changes to the ranges on the operational drivers, let's focus for a moment on foreign exchange.
Matt Walsh: The guidance we provided in February was for an expected $200 million negative impact from FX in 2025 or about a 300 basis point headwind.
Matt Walsh: As I mentioned, the Q1 impact was about 280 basis points in line with that full year estimate.
Matt Walsh: Since February however, the dollar has weakened and if current rates persist we would see some upside to the full year estimate that would move us to the high end of the guidance range.
Matt Walsh: Given the volatility in the currency markets that upside could be temporary.
The responsible thing to do at this point as regards guidance is to avoid chasing a very volatile currency market and for now leave that component of our guidance unchanged and simply note the possibility for favor ability over the remainder of the year.
Matt Walsh: We will be reevaluating, our view on FX as the year progresses.
Matt Walsh: From a quarterly phasing perspective, we should deliver modest sequential revenue growth from the first quarter to the second quarter.
Matt Walsh: We continue to expect the fourth quarter to be the strongest of the year.
Matt Walsh: Turning to slide 14, where we show all components of our earnings guidance again, no changes to what we provided back in February.
Matt Walsh: We expect adjusted gross margin to be in the range of 60% to 61% about a point lower at the midpoint compared with last year.
Matt Walsh: And that's a continuation of the pressure on gross margin that we saw in 2020 for especially in the back half due to price and higher manufacturing and distribution costs.
Matt Walsh: On SG&A expense, we ended 2024 at 25% of revenue and R&D was about 7% of revenue ex IP R&D.
Matt Walsh: Those general percentages also hold for 2025.
Matt Walsh: And that guidance implies essentially flat opex dollars year over year, which is consistent with ongoing actions to improve our operating cost efficiency that would serve as offsets to investments to grow V. Tamera.
Matt Walsh: Those pieces culminate in an adjusted EBITDA margin range of 31% to 32%.
Matt Walsh: The favorability we saw in Q1 adjusted EBIT margin was mostly timing.
Matt Walsh: Second quarter adjusted EBITDA margins should look very similar to what Q1 would have looked like without the upside that came through so that means we're expecting a Q2 adjusted EBITDA margin in the 35% area.
Matt Walsh: We continue to believe Q4 will have the highest margin for the full year as <unk> ramps and we capture more of the benefit of our restructuring initiatives.
Matt Walsh: For below the line items, our estimate for full year 2025 interest expense remains at $510 million, which includes about $25 million related to the debt like instruments assumed in the <unk> acquisition.
Matt Walsh: Payments on a portion of those instruments are tied to <unk> sales.
Matt Walsh: Exclusive of the Derm event transaction, our interest expense estimate for 2025 is approximately $30 million lower compared with last year. As a result of the two refinancing events completed in 2024 and lower borrowing rates on our variable rate debt instruments.
Matt Walsh: For 2025, we continue to estimate our non-GAAP tax rate to be in the range of 22, 5% to 24, 5%.
Matt Walsh: The uptick from 2024 is largely due to the impact of the 15% global minimum tax rate required under the Oecd's pillar two.
Matt Walsh: Depreciation is a touch higher than last year at $135 million driven by the.
Matt Walsh: The completion of our new ERP system in 2024.
Matt Walsh: In summary, first quarter performance was solid and puts us squarely on track to meet our financial guidance for the year.
Matt Walsh: <unk>, our largest product posted another quarter of double digit revenue growth our largest acquisition <unk> is launching nicely and is on track to deliver the $150 million in 2025 revenue that we forecasted.
Matt Walsh: And we continue to make steady progress on the $200 million of identified operating expense savings in 2025, which would deliver our best operating expense efficiency metrics since the spinoff.
Matt Walsh: We expect these opex savings to benefit not only 2025, but annualized to roughly $275 million, which we would realize in 2026 and thereafter.
Matt Walsh: And finally, the change we are making to our capital allocation priorities to increase our retention ratio will enable us to accelerate meaningful strengthening of our balance sheet, including lowering our 2025 net leverage ratio target to sub four times by the end of the year.
Matt Walsh: With that now, let's turn the call over to Q&A.
Matt Walsh: Thank you.
Speaker Change: Like to ask a question. Please press star one on your telephone keypad.
Speaker Change: I would like to withdraw your question simply press Star. One again. Please ensure you are not on speaker phone and that your phone is not on mute when called upon.
Speaker Change: Thank you please limit yourself to one question and one follow up thank you.
Speaker Change: Your first question comes from David <unk>.
Speaker Change: And Selim with Piper Sandler Your line is open.
Speaker Change: Hey, Thanks, So a couple for me.
Speaker Change: First on the Tam can you just talk through your level of confidence that you can get to that.
Speaker Change: That sales target that you reiterated and I guess.
Speaker Change: My question here is just given the nature of the category.
Speaker Change: And that is tightly controlled how are you feeling about access how are you feeling about the gross to net here just help us understand.
Speaker Change: Overall, how do you think you can get to the target.
Speaker Change: That's number one and then number two just with your priorities regarding deleveraging.
Speaker Change: Where does additional biz Dev M&A fit is that on the backburner or is that something where youre just going to continue to be opportunistic how should we think about that thank you.
Speaker Change: Thanks for the question David.
Speaker Change: Kevin.
Kevin Ali: And in regards to <unk>, we are confident that we'll achieve that 150 that kept kept mentioning.
Kevin Ali: And the reason for that is that the new label. The atopic dermatitis label really is a game changer.
Kevin Ali: Kind of advantages that we have versus competition or significant whether it's essentially the once a day down to two years of age the incredible efficacy in terms of.
Kevin Ali: Attacking edge, which is the number one essentially symptom that you see with <unk>.
Kevin Ali: As bad as the initial reports have been fantastic not only that but you see the <unk> and Trs numbers, but you put your finger on probably the most important aspect of getting to that number which is access.
Kevin Ali: We've got a fantastic.
Kevin Ali: Managed care group.
Kevin Ali: Working on access as we speak right now and I think they're all the things that I'm seeing in terms of signals are coming from the market.
Kevin Ali: Is is essentially getting really good uptake in regards to moving the needle on getting more covered lives moving prior off to essentially preferred and non preferred and just moving that whole continuum over and that is the key the key point underpinning my confidence in being able to reach that 150 I was in the field actually doing double.
Kevin Ali: As its last weekend.
Kevin Ali: In three different cities in the in the <unk>.
Kevin Ali: And.
Speaker Change: What I can tell you is there's been a lot of momentum and a lot of good positive feedback right now because now patients are coming back.
Speaker Change: After they've been prescribed the drug and kind of seeing follow up and what they are saying signaling to me has been.
Speaker Change: Outstanding efficacy and really really easy.
Speaker Change: So we feel good about that.
Speaker Change: And ultimately when we reached that number will have a different discussion in terms of what the future outlooks looks like because we are going to be launching in Canada later actually in the few months coming and we'll be launching ex U S. In terms of international and Globalizing. This product we feel very good about this about this acquisition in regards to the second question about deleveraging.
Matt Walsh: That's what we're focused on right now we think it's the right thing to do as Matt said sub four by the end of the year and then accelerating that.
Matt Walsh: Going forward and then ultimately over time, but we think this is going to do is essentially.
Matt Walsh: It's going to strengthen the company's future prospects.
Matt Walsh: As we start to Delever, we will be able to kind of look for opportunities down the road in terms of being able to bring in more assets like <unk> and to the organization look we we need products like that we've got a fantastic business development organization that really has developed a real skill set of being able to identify us assets that we can bring into.
Matt Walsh: Our hands and ultimately plug into our commercial organization and do a really good job with so for right now it's really focused on Delevering and then over time, it's really focused on being able to bring in other assets like <unk> that we just brought in that have fantastic opportunities and are accretive almost immediately.
Matt Walsh: Okay. Thank you.
Speaker Change: Hey, Dave.
Speaker Change: The next question comes from Michael Madelle, Kovich with TD Cowen Your line is open.
Speaker Change: Okay.
Speaker Change: Thank you for the question I have one question and a follow up so.
Speaker Change: So clearly BD will be more of a focus moving forward should we think of any uptick in that area as an increase in the frequency of future deals or could there also be an increase in the size of future deals.
Speaker Change: And.
Speaker Change: As a follow up when we share may be assets that Oregon has in licensed recently I think it's fair to say the company has adopted a pretty flexible definition of women's health.
Speaker Change: So what should we consider to be your option space moving forward is there any asset or therapeutic category that you view as outside the balance of your strategic focus or it's pretty much everything share gains so long as it makes financial sense.
Speaker Change: <unk>.
Speaker Change: Thanks for the question Michael I would say this that we have a very broad definition of women's health first and foremost.
Speaker Change: It encompasses I would say three.
Speaker Change: <unk> is one as those conditions unique to women like for example, <unk> acquisition of which we'll be talking about that.
Speaker Change: More down the road in terms of what we're doing in that space for endometriosis polycystic ovary syndrome.
Speaker Change: Our partnership with Lilly on <unk> two.
Speaker Change: Two thirds of the patients who suffer and struggle with migraine are women, which are those conditions I would call it disproportionately impacting women.
Speaker Change: And then the third category would be I would say fall into the category of where every time a falls in which is dermatology specifically.
Speaker Change: Where it affects women differently, whether it's the fact that women happen to be the caregivers.
Speaker Change: By and large.
Speaker Change: And so when the pediatric space Theres nothing there, but ultimately approaches from a nonsteroidal perspective.
Speaker Change: Patients that are two years of age and older and by the way. We are getting started this year on studying this product for down to three months of age and older. So that's a game changer for that point of view I mean, when you look at adults adults typically suffer more from AED that are women than men.
Speaker Change: And so that is kind of the more squishy I would say of the three definitions, but typically we are looking at a broader perspective, but also we have a very business oriented mindset in regards to getting assets that we feel that we're a better owner of that we can do better with globally, whether it's plugging it.
Speaker Change: Onto our international commercial footprint or whether it's essentially using our medical affairs teams are commercial assets team. So I think I think overall, we're making the right use of capital in our in our BD organization is doing a really good job of setting up these deals so that it's not just the one hit where essentially success based.
Speaker Change: Everybody has got skin in the game and we're paying milestones along the way we're happy to pay those milestones because it just basically means that we're hitting on some of those achievements in terms of commercial achievements in regards to whether it's more frequent smaller deals or larger deals again like I said the key thing is delevering.
Speaker Change: When we find the deal or the right deal like <unk> for example, or <unk>. So we just brought in well, we'll do that but it just gives us more room to breathe when we have a much lower leverage rate and we will continue to accelerate that.
Chris Schott: Thank you. Our next question. Thank you. The next question comes from Chris Chris Schott with Jpmorgan. Your line is open.
Speaker Change: Hi, This is Ethan on for Chris Schott, Thanks for taking our questions.
Speaker Change: On the first question just wanted to ask about capital allocation more broadly in your framework going forward.
Speaker Change: And maybe more specifically how share repo might fit into that equation relative to debt Paydown and business development.
Speaker Change: And then my second question is just on the potential impact of tariffs I know you provided some commentary on 2025.
Speaker Change: Any general color on your ability to navigate this dynamic looking past 2025.
Speaker Change: Although details are lacking maybe just frame out how you're thinking about that impact.
Speaker Change: <unk>.
Speaker Change: Yes, Ethan I think Matt and I will Ping pong on addressing these topics so I'll keep the tariff.
Speaker Change: Issue aside for Matt to deal with but on capital allocation.
Speaker Change: Really really briefly.
Speaker Change: Look we're doing this I want to be clear we're doing this from a position in terms of what we've done with the dividend today, we announced from a position of strength over the last few years. We have for example, reestablished <unk>.
Speaker Change: <unk> product, where we're going to surpass $1 billion. This year, we have stabilized the established brands business.
Speaker Change: Essentially.
Speaker Change: Grown.
Speaker Change: Our fertility business. We have also successfully launched Jada and had Lima, and <unk> and now the tomo and <unk> and.
Speaker Change: <unk> and so.
Speaker Change: Comfortable with the fact that going forward some of the headwinds we faced this year with the loss of exclusivity of our second largest product out of that will be behind us and essentially going forward we have opportunities.
Really to accelerate our topline and bottom line growth and so for that and we've done three restructurings in the last year and a half. So we're a much more leaner fit for purpose organization. This is really done in order to be able to set us up so that in the future. We can do more business development deals like the like the <unk>.
Speaker Change: And the.
The <unk> deal that we just did recently in order to be able to continue to grow continue to grow for the long term and so I believe this is a position of strength. When it comes now to your second question around tariffs I'll hand that over to Matt in terms of in regards to the fact of what we see today is not something that we feel very.
Speaker Change: Concerned about but.
Matt Walsh: Yes, yes. Thank you Kevin so as we spoke of in the prepared comments, where the policy is more clear around countries like Canada, Mexico, China, we have very nominal exposure less than $5 million in 2025.
Matt Walsh: One of the factors that has enabled us to affirm guidance for the year when you look forward.
Matt Walsh: Oregon has six manufacturing plants all of them outside the United States.
Matt Walsh: Most of the.
Speaker Change: Production that ends up coming into the United States is from our plants in Europe and since the policy around there around that route in the United States is still very fluid, it's really too soon to be talking about what what potential impacts might be do you want to address the share buybacks that he had mentioned earlier in <unk>.
Matt Walsh: Sure so share buybacks have been.
A lower priority for us in our roster of capital allocation priorities. The biggest issues, we face that can improve Oregon on valuation in the near term relate to managing our leverage and relate to growth and we need capital to solve both of those issues.
Matt Walsh: And so returning capital to.
Matt Walsh: To shareholders is right now less of a less of a priority. It's one of the reasons why we made the move that we did with the.
Matt Walsh: With the with that.
Matt Walsh: The dividend.
Matt Walsh: Announcement today, so and especially as long as our Leverages above four times.
Matt Walsh: I believe we will create more value and.
Matt Walsh: Better positioning and overall strength for the future by right sizing our leverage versus buying back shares.
Matt Walsh: The next question comes from Omar Saad with Evercore ISI. Your line is open.
Omar Saad: Hi, guys. Thanks for taking my question.
Speaker Change: I mean look I feel like.
Speaker Change: Birmingham deal was a surprise, but today, the bigger surprise and Theres a lot of market sentiment that they can have confidence and consistency and decision making processes that Oregon on right. Now. So specifically last call you guys said youre committed to regular dividend as the number one capital allocation priority.
Speaker Change: I think you just now said.
Speaker Change: The return on capital is a lower priority and I guess.
Speaker Change: The question is really for all the investors on the line.
Speaker Change: Is the priority and how can we be sure that this will be the priority going forward because there appears to be a lot of things just moving around constantly.
Speaker Change: Omar.
Omar Saad: Thanks for the question.
Speaker Change: If you notice things are going on in the outside macro environment is changing its quite volatile out there clearly investment community.
Speaker Change: Clearly focused on the dividend for us as much as it is on leverage I hear it and almost every discussion that I have with investors that they're very concerned about where we are in terms of leverage in these very volatile times, it's really a risk off type of.
Speaker Change: Analysis, so for US, we're very very committed to that but when we saw the type of volatility happening. We saw the timing. We're on the verge of really having I think a really great year in 2026 in the second half of this year I think we're in a much better position to say look we know that we can delever very quickly.
Speaker Change: And as we Delever and as we as we have a situation, where we give ourselves more of an opportunity to bring in assets likely Tamara and I will tell you that right now if you just look at the <unk> of the tomo, It's clearly positive signaling to the fact that we made the right decision and hopefully we'll be able to have a discussion at the end of.
Speaker Change: The year, where you see that.
Speaker Change: We delivered what we said we were going to deliver the product.
Speaker Change: And ultimately that you see the run rate of where we're going with this product and the type of label. We're developing was a good use of capital and I think there's a better use of capital and bringing in more assets in that space and so the combination of what's happening externally.
Speaker Change: Coupled with where investors essentially are kind of telling us that they're very focused on delevering much more so than anything else kind of brought us to the fact and the initial encouraging results, we're really having with the panel and.
Speaker Change: And the continued strength of our core products like Nexplanon tells us that there's a better use of that capital in terms of being able to go forward and use it to be able to not only de lever, but bring in growth aspects for the for the company.
Speaker Change: Okay.
Speaker Change: Thank you for that Kevin and maybe just to clarify then as part of your thought process in anticipation for tariffs given your manufacturing network or was it exclusively from deleveraging perspective.
Speaker Change: Well right now, we don't know, where we're pretty well set for where the tariffs are today, let's see where they land in the U S.
Speaker Change: It's very early to be able to turn to determine exactly what that's going to look like but I think were pretty good for 2025, we brought in a lot of the inventory as I said, we manage the inventory of our biggest product next month.
Speaker Change: But the focus really is on deleveraging right now and I think that as I've said volatile times.
Speaker Change: Vessels being very clear with us we need to delever accelerate that process kind of took us to where we took that decision.
Speaker Change: Not lightly, but I think very clear minded.
Speaker Change: Thank you.
Jason: The next question comes from Jason <unk> with Bank of America. Your line is open.
Patel: Hey, guys. This is <unk> Patel on for Jason.
Patel: Two questions from US first what are your views on the next slide in paragraph four can you see the siler as a credible threat to launching generic in ex U S markets and where does the FDA stand on the issue of <unk>.
Speaker Change: Applicators similarity, which I believe was the core issue in your citizens petition and then my second question is regarding the expected 900 million plus of free cash flow before one time costs can you breakdown. The anticipated one time cost for 2025, and how should we think about free cash flow both before and after one time.
Patel: Costs in 2026.
Patel: Thank you.
Speaker Change: Why don't we why don't we address those questions in reverse order, Matt why don't you deal with the cash flow issues. The onetime cost of them maybe want Camilo you can address the paragraph four issue, which is the U S by the way specific yes.
So with regards to this this fiscal year.
Speaker Change: In the.
Speaker Change: Yes included in our estimates for onetime cost is about $150 million in round numbers related to the manufacturing separation from Merck.
Speaker Change: Recall that the onetime cost of separation on the administrative side for for things like TSA activities that number is zero.
Speaker Change: From from a restructuring perspective.
Speaker Change: We were looking at something in the vicinity of $200 million to achieve.
Speaker Change: The operating expense savings of 200 million this year annualized to $2 75, and then there is about $75 million of other costs, which I elucidated in the prepared call.
Speaker Change: Comments as we look forward to 2026 and really beyond.
Speaker Change: We will continue to have manufacturing separation costs for the next few years. This year is probably the largest.
Speaker Change: There will be gradually.
Speaker Change: Declining.
Speaker Change: And then what we will start to see as the back end.
Speaker Change: Myles stone payments for be fair for BD deals already signed that will probably be in the two to maybe $250 million range going forward, but you'll thankfully. The further we get from the spin off.
Speaker Change: Less of an impact these various one time costs are making.
Speaker Change: And then ill.
Speaker Change: Ping Pong with.
Speaker Change: With Juan Camilo in regards to the question on the paradigm for it's not a surprise to us.
Speaker Change: And the legal process that that's going to go through will take us any way through probably mid 2027, but we still have a patent that is needs to be determined rigor in regards to legal process in regards to our applicator, we feel very confident that that is.
Speaker Change: Fairly strong patent that takes us through 2030.
Speaker Change: And.
Speaker Change: The issues in terms of regulatory process of being able to get the FDA approval in regards to actually having a three year number as we're launching five year indication later this year so there'll be.
Speaker Change: Overcome all the significant large obstacles, which nobody has been able to do yet with the FDA on a large.
Speaker Change: Then they will be coming into the market. That's already moved to five year indication, but I'll move I'll move it over to walk me alluded to discuss in regards to some of the difficult regulatory difficulties around trying to get an approval for <unk>.
Speaker Change: For a product like this yes, thank you Kevin.
Jason: Thank you Jason.
Speaker Change: The.
Speaker Change: <unk> of getting in the generic large.
Speaker Change: Highlighted multiple times that is it.
Speaker Change: It is multiple fold firstly is the demonstration.
Speaker Change: Equivalents.
Speaker Change: There is the need for bioequivalence.
Speaker Change: The current draft guidance from FDA asked for six months, but it's been shown in the past that six months of of bio equivalent as it does not translate into three years of efficacy. Therefore, that's one of the challenges that it would be it's going to have to decide how much content. They are on the efficacy side. Then you mentioned the applicator.
Speaker Change: That gets to the the safety FDA is really focus on the safety of the.
Speaker Change: Insertion and removal of infants.
Speaker Change: The changes to the applicator opened the door for for really questioning.
Speaker Change: The safety of a new device and their requirements for training for restricted distribution for certification of decisions before they can use the product so.
Speaker Change: There is complexity all throughout so FDA will have to now go through this review.
Speaker Change: Highlighted very clearly multiple aspects of this in detail in our citizen petition because we.
Speaker Change: We know how complex it is because we've been doing it for many many many years.
Speaker Change: To ensure the safety of <unk>. So we see that there is a very very high bar not only from a from a.
Kevin Ali: A legal perspective on the IP of the Rod and the applicator, but also the regulatory bar for FDA to be confident on the efficacy and safety of our venue product. So as Kevin pointed out we continue to be very very confident in our ability to to.
Kevin Ali: Grow next one on all the way through the end of the decade, and we're excited about the potential for a five year indication coming our way before the end of the year.
Kevin Ali: Thank you.
Kevin Ali: This concludes the question and answer session and we will conclude today's conference call and webcast. We thank you for joining you may now disconnect.
Kevin Ali: Please wait the conference will begin shortly.
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