The operator introduces the Organon Q4 Full Year 2023 Earnings Call and Webcast and welcomes Jennifer Halchak, Vice President of Investor Relations. She is joined by CEO Kevin Ali and CFO Matt Walsh to discuss strategy, operations, and financial performance. The presentation will be available on the company's website. Forward-looking statements and non-GAAP financial measures will be discussed. CEO Kevin Ali begins by thanking everyone for joining the call.

In the fourth quarter of 2023, the company had a strong performance with 8% revenue growth and growth in all geographies and franchisees. For the full year, they exceeded their revenue guidance and saw growth in their women's health, biosimilars, and established brands businesses. Adjusted EBITDA was $1.9 billion and adjusted diluted EPS was $4.14. The company also had strong free cash flow and plans to continue business development and focus on women's health, including through licensing deals like their partnership with Eli Lilly for migraine medicines.

In 2023, the company's international commercial infrastructure allowed them to efficiently commercialize products through success-based milestones, resulting in potential peak revenue of almost three quarters of a billion dollars. The company expects to achieve low single-digit revenue growth and maintain or improve their adjusted EBITDA margins in 2024. The women's health franchise saw 8% growth in the fourth quarter and 3% for the full year, with strong contributions from Fertility, Jada, and Marvelon. The fertility business had a 9% growth for the full year, driven by a significant contract win with a major PBM in the US.

Organon has proven their ability to unlock additional value in their product portfolio, with a recent win in the fertility space marking their return to U.S. market leadership after almost two decades. China also performed strongly in this area, with the company gaining share from domestic competitors. The Lamera region also saw strong growth, aided by new launches. Jada, a key contributor to the women's health franchise, is available in multiple markets and is expected to see further growth in 2024. Marvelon and Mercilon also saw strong double-digit growth in 2023.

In 2023, the company made several transactions to acquire rights to products in Asia, including China and Vietnam. They also made their first shipment of Xaciato, a medication for bacterial vaginosis, in the US and are working to obtain competitive formulary status. The company also saw success with their contraceptive product, Nexplanon, becoming the top-selling long-acting reversible contraceptive in the US. There was a 1% growth in Nexplanon sales in 2023, but this was impacted by lower volumes in Mexico. The company is optimistic about the long-term prospects of Nexplanon and expects strong growth in 2024, with Phase III data from a five-year study expected by the end of the year.

Nexplanon, a contraceptive product, is expected to receive three years of exclusivity in the U.S. market, which will give it a significant advantage over competitors. Organon's biosimilars business, which includes products for immunology, had a 24% growth in 2023. Renflexis, Brenzys, and Hadlima, all biosimilar products, saw strong growth and market share gains. Hadlima, a biosimilar for Humira, has been successful in gaining formulary access and has been leading in total prescriptions for the past eight weeks. Organon's strategy of offering lower net cost to patients has been paying off, and they have recently won a national solicitation with the U.S. Department of Veterans Affairs.

The VA's support for biosimilars to Humira is promising and we are eager to work with them to improve affordability of biologics. Established brands saw 2% growth in the past year and we believe this part of Organon's story is often overlooked. This growth can be attributed to various strategies such as optimizing manufacturing, adapting to payer pressure, and expanding product indications. We have also taken advantage of over 30 opportunities for lifecycle management in different markets. Our five geographic regions all performed well in the quarter and for the year. We will continue to look for business development opportunities, such as the recent transaction with Lilly, to leverage our commercial expertise.

In the fourth quarter, the company's performance in China was impressive despite the economic slowdown and VBP. The company has a diverse business in China, with no product representing more than 16% of revenue. The recovery in China was seen through a return of patients to clinics and growth in established brands. In the United States, strong performance was driven by fertility demand, Jada, Biosimilars, and Dulera, partially offset by the LOE of NuvaRing. The company's priorities for 2024 are to deliver constant currency revenue growth and stable to improving adjusted EBITDA margins. The company sees a significant opportunity in women's health and is well positioned to address unmet needs. The revenue increase in the fourth quarter was mainly driven by volume growth in Fertility, Biosimilars, and established brands.

In the fourth quarter, the company experienced solid volume growth, but also faced a loss of exclusivity for NuvaRing in the US and Atozet in Japan. They also saw a $20 million impact from volume-based procurement in China, and a negligible impact from pricing. For the full year, revenue was up 3% at constant currency, with LOE impact of $20 million and price erosion of $90 million, driven by established brands, biosimilars, and fertility.

The fertility market is expanding globally, with increased reimbursement from health systems and commercial insurers. This has led to volume growth and price competition. In the U.S., women's health and biosimilar products saw strong demand, while foreign exchange translation created a financial reporting headwind. In the women's health franchise, the decision to delay a price increase for Nexplanon affected its performance in the fourth quarter, but it is expected to return to strong growth in 2024.

The first quarter of 2024 is expected to have strong growth due to a reset in the timing of list price increases for Nexplanon. Fertility had a strong fourth quarter due to increased demand in the U.S. and a one-time buy-in from exiting a commercial arrangement with Merck. Biosimilars also had a strong fourth quarter, with the main drivers being Ontruzant deliveries in Brazil. In 2024, the biosimilars portfolio is expected to continue growing, particularly with Renflexis, Hadlima, and established grants.

Performance was able to overcome challenges in the market and supply interruptions to achieve a 2% growth in constant currency for the full year. Non-GAAP P&L line items and metrics for the fourth quarter and full year were also discussed, with adjusted gross margin decreasing due to foreign exchange translation and product mix. Operating expenses were down, with SG&A expense and total R&D expense decreasing by 3% and 6% respectively. Foreign exchange losses were also lower compared to the previous year. One key improvement was increasing the portion of Euro-denominated debt designated as a net investment hedge.

In summary, the company's improved ability to report unrealized FX gains and losses has reduced volatility and improved the quality of reported earnings. This led to a higher adjusted EBITDA margin and non-GAAP adjusted net income in the fourth quarter of 2023. However, the adjusted gross margin and EBITDA margin decreased for the full year due to higher costs of sales and lower R&D spend. The company also had a significant GAAP tax item in the fourth quarter that resulted in a net benefit to GAAP net income. Overall, adjusted net income for the full year 2023 was lower compared to the prior year.

The decline in net income for the company is mainly due to increased interest expenses and accelerated amortization of financing costs. The company ended the year with higher than expected free cash flow, driven by improvements in net working capital. Cash taxes are expected to increase in 2024, while interest expenses are expected to decrease. Working capital use is expected to be about $100 million, with a reduction in one-time spin-related costs. Overall, the company is expected to generate $1 billion in net free cash flow before one-time spin-related costs in 2024, with a significant reduction in one-time costs in 2024 and 2025.

Organon expects one-time spin-related costs to be minimal after 2025, with an additional reporting line for other one-time costs. These costs may include settlement payments and restructuring costs, but are expected to be gross margin accretive over time. The net leverage ratio improved to 4.1 times at the end of 2023, but may tick higher in the first half of 2024 before coming down. Organon's 2024 revenue guidance range is $6.2 billion to $6.5 billion, with an estimated $70 million to $90 million impact from LOE.

The paragraph discusses the expected impact of LOE and VBP on the company's revenue in 2024. It also mentions the projected growth in volume and the potential impact of FX rates. The company's full year revenue guidance for 2024 is $6.2 billion to $6.5 billion, representing constant currency revenue growth of over 2.5%. The company's objective for 2024 is to deliver a P&L with constant currency revenue growth and potential operating leverage.

The company has adjusted their EBITDA margin range and aims to improve this metric through network optimization efforts. They expect to see margin improvement in the second half of the year due to cost savings. R&D expenses are expected to improve by $50 million, but this does not include any potential milestone payments. Interest expense is expected to be lower, and the company's effective tax rate may go up due to the implementation of Pillar 2.

In 2023 and 2022, the company had a low effective non-GAAP tax rate due to a tax holiday, but this will increase in the coming years due to the termination of the holiday and the implementation of Pillar 2. The company had a strong end to 2023 and is optimistic about delivering constant currency revenue growth and improved margins in the next year. They are committed to maintaining their current dividend and have enough free cash flow to do so and pursue potential acquisitions. There was also a question about the working capital unwind in Q4, which was driven by various factors.

The speaker discusses the company's focus on tuck-in acquisitions and maintaining dividends, as well as their efforts to improve networking capital and achieve a billion dollars in free cash flow. The next question is about the potential for generic competition for Nexplanon and the barriers to entry for generics prior to 2027, referencing the FDA's guidance on generic equivalence and in vitro release testing. The speaker is asked for their perspective on this matter.

The speaker discusses the feasibility of doing accelerated in vitro release testing for Nexplanon and the potential for generic competition before 2027. They mention that the FDA has not provided guidance on breaking the patent for Nexplanon, and that historically, it takes 2.5 to 4 years for the FDA to approve a complex generic drug. They also mention the example of NuvaRing, which took 8 years for Teva to get to market, and that a generic version of Nexplanon would also need its own proprietary device design.

In order to successfully market and sell Nexplanon, the company will need to invest in a sales force and medical affairs team to train physicians. The product is expected to have a smooth launch and remain exclusive until the end of the decade. The company is also focused on managing operating expenses and gaining more acceptance from PBMs and payers. They have recently been named the sole manufacturer for biosimilars for Humira for the VA.

The speaker discusses the expected market formation in 2024, with a stronger year for Hadlima. They also mention ongoing cost management and efficiency efforts and address concerns about declines in the Mexico tender for Nexplanon, stating that they expect solid growth in 2024. The net leverage ratio is expected to improve without any additional debt prepayments.

The company is expected to generate sufficient cash flow to decide between investing in growth assets or paying off debt. The net leverage ratio guide does not anticipate any debt repayments. The operating margin guidance for 2024 is expected to improve by 200 basis points due to operating expense improvements and cost containment. The company has curtailed some pipeline projects in the R&D space that were not meeting economic return requirements. The company will also be containing costs across the SG&A space while still investing in product launches. Hadlima is expected to continue its impressive growth and the potential launch of an interchangeable high concentration version may affect it.

In 2023, the company experienced over $40 million in foreign exchange losses, which are not expected to recur in 2024. This will contribute to an improvement in year-on-year performance. The company is currently the leading market share for TRx and NRx among all the six or more products launched last January. They expect to achieve interchangeability within four months and are in a strong position to compete. The company anticipates delivering peak revenues as promised, but the timeline may be extended. In terms of EBITDA margins, the company expects a range of 31% to 33% beyond 2024.

The company expects to see margin expansion beyond 2024 from three potential sources: faster revenue growth, peeling away manufacturing from Merck, and higher contribution from newer products. The business development funnel looks promising with the launch of Emgality in the European Union projected to reach $170 million in peak revenue.

The company is confident in the growth potential of its women's health branch, with a potential $750 million in revenue from commercial stage assets. They have multiple deals in the works for regional business development, particularly in China and Europe. The company expects strong performance from its Nexplanon product due to a new pricing approach and the removal of certain discounts. The product has also become the top choice in the large segment in the US. The company is also optimistic about the growth potential of its fertility products.

Fertility grew 9% last year, driven by China and the U.S., which make up 60% of the overall business. Opportunities in other regions such as Lamera could drive growth beyond high single digits. Jada has potential to reach global peak sales of $200 million with launches in the EU and Brazil. Oral contraceptives, including the recently relaunched Marvelon, are seeing strong double-digit growth in the Asia Pacific region. The women's health business is becoming more diversified and stronger, with the recent launch of Xaciato and discussions with payers for formulary acceptance.

The speaker discusses the potential for revenue growth in the Women's Health franchise through upcoming product launches and a strong pipeline. They specifically mention a new treatment for endometriosis, with Phase II data expected in the first half of next year. They also express confidence in the company's financial performance and ability to generate free cash flow. The call concludes with the speaker looking forward to future updates.

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