The operator welcomes everyone to the Organon Third Quarter 2023 Earnings Conference Call and introduces the speakers. The call will be recorded and there will be a Q&A session. A presentation will be referenced and available on the company's website. The speakers will be discussing forward-looking statements and non-GAAP financial measures, and remind listeners to refer to the company's filings for more information.

The company's CEO, Kevin Ali, discusses the company's third quarter 2023 results and the challenges they faced, including the impact of the strong U.S. dollar and a slow biosimilars market. Despite these challenges, the company saw growth in product sales and adjusted EBITDA. However, they are lowering their revenue guidance due to various factors, including FX rates and changes in their go-to-market model. The CEO also provides an overview of the company's revenue breakdown by segment.

The Women's Health franchise experienced a 7% decline in the third quarter due to the loss of patent protection for NuvaRing and increased competition from generics. However, the fertility business is expected to have a strong fourth quarter due to market growth in China and new customer wins in the U.S. The company is also focusing on the rapidly growing reimburse market segment and has secured a significant new customer. This is expected to contribute to a strong fourth quarter for fertility in the U.S. overall.

Organon's fertility products are expected to see significant growth in the U.S. in 2024, while Nexplanon has experienced a decline in the current quarter but is expected to see a strong fourth quarter and reach a $1 billion run rate in 2025. Changes have been made to the U.S. go-to-market model for Nexplanon, including postponing a price increase and removing voluntary discounts in federal programs. The company has also limited its participation in the annual Mexico tender, which will have a negative impact on Nexplanon revenue in 2023 but will be a tailwind for future results. Demand for Nexplanon outside of the U.S. has been strong in Asia and Africa.

The company has strong demand for Nexplanon, leading to an investment in expanding supply capacity. This, along with the growth of Other Women's Health products such as Jada and XACIATO, is expected to drive significant revenue growth in the coming year. Jada has already generated $31 million in revenue and has potential for even greater success globally. The company's go-to market strategy for XACIATO involves leveraging the Nexplanon commercial team's expertise and working to obtain competitive managed care formulary status.

The company's Biosimilars business has seen growth in the third quarter and year to date, with a focus on the recent launch of Hadlima in the U.S. The product has been priced at an 85% discount to provide expanded access and economic benefits to patients. The company is seeing success in the market, outpacing competitors and gaining traction with payers. The product's attributes, such as high-concentration and a user-friendly pen, make it well-positioned for uptake. The slower market formation for biosimilars is seen as a missed opportunity to pass on savings to patients, as many currently pay high costs for similar medications.

The company's focus on the low cost segment of the market and their product profile is expected to help the market convert faster. The Established Brands franchise has grown 1% ex-FX and has been performing ahead of expectations since spin. The company's strategy of manufacturing optimization and adapting their commercial model has led to stable results. The diversity of the portfolio and solid execution has contributed to this success. The Chinese market is currently experiencing a slower recovery post-COVID, which has impacted the retail business. The company has a long operating history in China and is implementing initiatives to reach consumers directly, such as through e-commerce.

In the past few weeks, the traditional retail business in China has started to improve, despite the country's health care budget being in a deficit. The company has experienced minimal impact from stricter enforcement of volume-based procurement rules and investigations into prescribing patterns. With a diverse portfolio and experienced team, the company expects a return to normal levels of engagement in the hospital and retail channels by the beginning of next year. They are also focused on reducing leverage and bringing in assets to enhance growth. Despite temporary challenges in 2023, the company is confident in achieving mid-single-digit revenue growth in the medium-term. The financial results for the third quarter showed a 1% decline in revenue at constant-currency.

In the third quarter, the impact of loss of exclusivity was about $10 million, primarily due to generic competition for NuvaRing in the U.S. The volume impact from VBP in China was around $30 million, consistent with previous quarters. Price erosion of $25 million was seen in other franchises, particularly in biosimilars due to competitive pricing. There was $70 million of volume growth, mainly from Established Brands in the LAMERA region and non-VBP products in China. Biosimilars volume was up in the U.S., Canada, and Brazil, driven by new customers and increased purchasing from existing customers. Sales to Merck accounted for $15 million in the quarter.

The company's revenue from contract manufacturing has been declining since the spinoff and will continue to decline. The company also faced a financial reporting headwind due to foreign exchange translation. The company has a sensitivity to foreign exchange due to a majority of its revenue being generated outside the United States. The Women's Health franchise is experiencing headwinds in 2023, but is expected to return to strong growth in the high single-digits next year. Demand for fertility remains solid, but the company may have to give up some price to gain market share.

The company's new product, the Jada device for postpartum hemorrhage, is seeing a significant increase in revenue after its launch, and the recent launch of Xaciato is expected to contribute to revenue growth in 2024. The Biosimilars division saw a 10% growth in the quarter and is on track for its sixth consecutive year of growth in the U.S. despite competitive pricing dynamics. Established Brands also saw a 3% growth in the third quarter, despite facing challenges such as VBP in China and market actions for injectable steroid products. The company expects at least level performance from Established Brands for the full year.

In this paragraph, the speaker discusses the non-GAAP P&L line items and metrics for the third quarter and year-to-date performance. They mention that the GAAP financials and reconciliations are included in the press release and appendix slides. They also explain the decline in gross margin due to foreign exchange impact, inflationary costs, product mix, and pricing erosion. The speaker then discusses the $80 million legal reserve for a settlement with Microspherix and the increase in SG&A and R&D expenses.

In the third quarter of 2023, the company had $10 million in IPR&D expenses, resulting in an adjusted EBITDA margin of 29.4%. Non-GAAP adjusted net income was $223 million, a decrease from the previous year due to lower adjusted EBITDA and higher interest expenses. The net leverage ratio is expected to decrease in the fourth quarter due to a decline in adjusted EBITDA. The company expects to generate between $700 million to $800 million in free cash flow before one-time charges in 2023, with a decrease of $250 million from previous expectations due to lower EBITDA and working capital use. The company is currently implementing a new ERP system, which has tied up cash temporarily. One-time cash costs related to the spinoff transaction are expected to be around $350 million for the year, with the biggest component being the implementation of the ERP system, set to be completed in the second quarter of 2024.

The company expects to see a decline in one-time costs related to the spin, with a focus on transition services agreements versus manufacturing services agreements. They also anticipate a 3% to 4% range for CapEx and PP&E. The company has revised their revenue guidance for the year, with minimal impact from LOE and a lower estimate of potential price erosion. They have also lowered their outlook for volume growth.

The company has lowered its revenue forecast for the year due to changes in their go-to-market model, slower uptake of a product, and macroeconomic factors in China. The weakening US dollar has also affected their forecast, resulting in a 1.6% to 3.3% growth on a constant-currency basis. The company is revising their gross margin guidance to the low 60% range and expects similar factors to impact their gross margin in 2024. Inflationary pressures and a strong US dollar are expected to continue to be headwinds for the company.

In the third quarter, the company reported steady performance in its Established Brands segment and strong performance in Women's Health, specifically with Jada and the launch of Xaciato. However, due to macroeconomic issues and slow market formation for Humira biosimilars, the company revised its 2023 guidance. The call was then opened up for Q&A, with the first question addressing the change in the go-to-market model for Nexplanon and its potential impact on quarterly revenues. The second question was about biosimilar competition in the fertility market, and the third question asked about discounts provided to accounts in Q3 and the long-term growth expectations for the Women's Health portfolio.

The company is changing their go-to-market model for Nexplanon in order to align with industry standards and make the reimbursement process smoother. They hope this will reduce unpredictability and volatility in the market. As for biosimilar penetration, there hasn't been any significant increase, but there has been a shift towards company-sponsored benefits in the fertility sector. The company is currently unable to give a definitive answer on the impact of this trade-off between price and volume.

The company has secured a large win in the reimbursement sector and will see growth in their Women's Health portfolio. They expect high single digit growth in fertility and a good year for Nexplanon. They have opened up supply to meet demand in ex-U.S. markets and are launching a new product, Xaciato. A question was asked about the company's China business, which was previously estimated to have 70-80% of business going through the VBP by the end of the year.

Kevin Ali, CEO of Organon, discusses the company's China business going into 2024. He mentions that China is their second largest market and they have a long history there. He also talks about the impact of the volume-based procurement process and how they are shifting their focus to the retail sector. In regards to the government review campaign in the healthcare sector, Ali believes that companies with too much business in the public sector may face more problems, but Organon has a diverse portfolio and has shifted most of their business to the retail sector. He acknowledges that the policy has been disruptive, but they are coming out of it and feel they are in a good position.

The company is experiencing growth in the fourth quarter and expects a healthy year in China next year. They are considering initiatives to boost EBITDA margins and are managing costs tightly. The role of Biosimilars in the organization is seen as an opportunity in the short to medium term.

The speaker discusses the potential impact of the end of a patent on their I/O product and the slower than expected launch of their Humira biosimilar. They believe that the market will eventually open up and their biosimilar franchise will be a good investment. The speaker also addresses a question about free cash flow and explains that the lower target is due to net working capital use and a lower EBITDA outlook. They are uncertain about the impact of net working capital on next year's free cash flow.

The speaker discusses the company's free cash flow and its plans for debt paydown and capital allocation. They mention that the company had initially anticipated $1 billion in free cash flow for the year, but due to lower EBITDA and investments in working capital, this has been revised. However, they expect a higher level of free cash flow next year and are optimistic about it. They also mention that the current low interest rates have made debt reduction more attractive, and this will impact their approach to business development and M&A transactions.

The speaker explains that there has been lower activity in BD in 2023 compared to 2022. However, they believe that their business's cash flow supports their current dividend and there are no plans to change it. The next question is about how the FDA's updated recommendation for biosimilar labeling will affect the uptake of Hadlima. The speaker believes that the draft statement will eventually take hold and that their investment in interchangeability will give them an advantage in the market. They expect to launch their interchangeability indication in the second or third quarter of next year. This designation will make it easier for patients to switch from Humira to the biosimilar.

The speaker discusses the potential impact of interchangeability designation on market share and the expected ramp-up of Hadlima in 2024, with potential challenges due to bundling power and discounts from AbbVie. They also mention the potential for improved business in 2025 when the market is expected to open up.

Organon's CEO, Kevin Ali, sees the company's growth as a long-term process and expects double-digit year-over-year growth in the future. He acknowledges some issues in the Women's Health business this quarter, but remains confident in its overall trajectory. The current quarter's performance is affected by strong growth in the previous year and changes in the go-to-market model for Nexplanon. However, Ali believes these are temporary and expects growth to resume in the first quarter of next year. The company is only 2.5 years old, but has a dedicated team and is focused on continuing its growth. Ali also mentions that China's growth is starting to pick up again and sees opportunities for Hadlima.

The speaker is confident that their company will experience growth in the future and is looking forward to discussing it on the next earnings call. The operator thanks the speakers and ends the call.

This summary was generated with AI and may contain some inaccuracies.