The operator introduces the Organon Q2 2024 Earnings Call and Webcast, and all lines are placed on mute. The Head of Investor Relations, Jennifer Halchak, introduces the CEO, Kevin Ali, and the CFO, Matt Walsh. A presentation will be referenced during the call and will be available on the Organon Investor Relations website. Listeners are cautioned about forward-looking statements and non-GAAP financial measures. The CEO, Kevin Ali, will now begin the call.

Kevin Ali discusses the company's second quarter results, including a 2% growth rate in revenue and a 31.9% adjusted EBITDA margin. The company is on track to deliver its third consecutive year of constant currency revenue growth and has narrowed its full year revenue guidance. The year-to-date adjusted EBITDA margin is 32.5%, and the company expects to maintain its 31% to 33% range for the full year. The company is also on track to deliver $1 billion of free-cash flow before one-time spin-related costs in 2024.

In this paragraph, the company discusses their strong cash-flow, which allows for financial flexibility to service dividends and make debt repayments. They then move on to discuss their franchise performance, highlighting the growth of their women's health product Nexplanon. They attribute this growth to their pricing strategy and expansion in supply capabilities. The company expects Nexplanon to achieve low-teens revenue growth for the full year and potentially reach $1 billion in revenue next year. They also mention the successful results of a five-year study for Nexplanon and their plans for regulatory submission and potential launch in 2026. This launch would provide data exclusivity for three years.

In the next few years, there will be no competition for Nexplanon in the US market due to patents and device requirements. The company's global fertility business was down in the second quarter, but they have secured access to a large PBM in the US and are optimistic about expanding reimbursement for ART procedures in China. Overall, the company expects flat growth in global fertility for the full year, but anticipates growth in the second half due to expansion in China and other international markets.

In the year 2025, there is expected to be strong growth in fertility due to increased reimbursement for ART in China and expansion in the US. The biosimilars franchise also saw significant growth in the second quarter, driven by the uptake of Hadlima in the US and an international tender for Ontruzant. The franchise is expected to continue delivering strong growth for the full year. Hadlima is performing well due to its focus on lowering net cost and improving patient affordability. The interchangeability status of Hadlima has been approved for some formulations and is expected to be approved for others in the middle of next year. A biosimilar candidate for denosumab has been filed in the EU and is expected to be filed in the US later this year, with plans for another biosimilar candidate in 2025.

Organon has exclusive global commercialization rights to certain assets outside of Mainland China, Hong-Kong, Macau, and Taiwan. The established brands portfolio declined 1% in the second quarter but has grown by 1% year-to-date. The recent commercialization agreement with Eli Lilly for two migraine drugs has contributed $40 million in the first half of the year. The recovery of certain injectable steroid products and business development opportunities have helped offset impacts from VBP, LOE, and mandatory price revisions. Revenue by geography shows that EUCAN was down 1% due to unfavorable phasing of sales related to the ERP implementation, while the US was up 5% driven by solid performance of Nexplanon and uptake of other products.

In the second quarter, the APJ region saw a 5% increase in revenue, driven by the recovery of injectable steroids and favorable timing in Singulair. The LAMERA region also had strong growth, particularly in Brazil and Mexico. China saw a 4% decline, but is expected to improve in the second half of the year. The company is confident in its ability to deliver constant-currency revenue growth and higher EBITDA in 2024. The focus on cost optimization and efficiency will drive shareholder value. Matt Walsh then discusses the financial results in more detail, highlighting volume growth as the biggest driver. Year-to-date revenue growth is solid at 4.5% organic growth and 6% including the addition of Emgality.

In the second quarter, there were minimal headwinds to revenue growth, including the loss of exclusivity of Atozet in Japan, the lingering effects of Round 8 in China, and a slight impact from pricing. The Nexplanon pricing strategy in the US helped offset pricing pressure in other areas of the business. The decline in lower-margin contract manufacturing arrangements with Merck also had an impact. Foreign exchange translation had a significant impact on revenue, with a strengthening dollar relative to the prior year. In terms of franchise performance, the focus is on women's health, particularly Nexplanon, which is expected to have a lower but still strong growth rate in the second half of the year. This is due to lapping a significant buyout in the prior year period.

The company is expecting a tough comparison in the fourth quarter of 2024 due to previous business developments. In the meantime, NuvaRing is facing competition from generic competitors, but Marvelon/Mercilon has seen strong performance. The company is also expecting growth in their biosimilars franchise, driven by Hadlima and potentially offsetting pressure in Ontruzant and Renflexis.

Slide 10 and 11 show key financial metrics for the second quarter. Year-to-date, established brands have seen minimal impact from revenue drivers like VBP, LOE, and price. However, in the second half of the year, we expect more prominent impact from these drivers, particularly from VBP in China, LOE in the EU, and mandatory pricing revisions in Japan. We anticipate strength in volume growth from the continued onboarding of migraine products. The phasing of shipments related to the implementation of our ERP system has also impacted our first half performance, but we expect to achieve flat performance for the full year. Slide 11 shows non-GAAP P&L line items and metrics for the second quarter, with adjusted gross margin at 62%.

In the second quarter of 2024, the company's lower adjusted gross margin was due to unfavorable product mix, foreign-exchange translation, and higher inflation impacts. Operating expenses were down 2% year-over-year, thanks to cost containment efforts and favorable timing of spend. $15 million of IPR&D expenses were incurred, $10 million for a collaboration with Circle and $5 million for a collaboration with Shanghai Henlius. Adjusted EBITDA margin was 31.9%, down from 33% in 2023. Non-GAAP adjusted net income was $289 million, compared to $336 million in 2023. The company's cash flow for the first half of the year was more balanced compared to previous years, with an expected free cash flow of $1 billion for the full year.

The company has successfully implemented a global ERP system and is now focusing on optimizing business processes to stabilize free cash flow generation. One-time spin-related costs are expected to decline significantly in the second half of the year and be minimal next year. The net leverage ratio has remained steady and the company expects it to be below 4 times by the end of the year. The company has also tightened its revenue guidance range for 2024, with a focus on accelerating driver activity in the second half of the year. Overall, the company's operational performance is consistent with previous guidance.

The company's revenue guide remains unchanged, with expected growth of 1.4% on a nominal basis and 3.4% on a constant-currency basis. The impact of LOE, VBP, and price will increase in the second half, but volume growth is expected to offset these effects. LOE for Atozet in Japan and the EU, as well as Rosuzet in Japan, will occur later in the year. VBP impact will be back-half weighted due to Fosamax's expected inclusion in Round 10. The impact from pricing has been minimal so far, but will be felt more in the back-half due to mandatory pricing revisions in Japan and associated with Atozet LOE in the EU.

The competitive environment in fertility and biosimilars is putting pressure on prices, leading to a narrowed range for volume growth in the coming year. The company expects volume growth to be strong, driven by new assets and geographic expansion. They have also adjusted their guidance for the impact of FX and expect adjusted gross margin to be in the range of 61% to 63%. SG&A expenses are expected to increase in the second half of the year due to planned investments, while R&D expenses have been raised by $30 million. Overall, the company is tracking close to their initial guidance for the year.

The company has been able to absorb the year-to-date IPR&D expense within their adjusted EBITDA margin range. The $30 million expense accounted for 1% of the adjusted EBITDA margin year-to-date. The company expects Q3 and Q4 to be similar in terms of revenue and EBITDA margin. There is no change to ranges for interest, taxes, or depreciation. The non-GAAP effective tax rate for the second quarter was 17.3% and is 16% year-to-date, which was favorably impacted by the conclusion of two non-US tax audits. The company expects an 18.5% to 20.5% non-GAAP ETR for the full year. Despite a debt refinancing in May, the company's point estimate for annual interest expense remains at approximately $520 million. The second quarter was another strong quarter for the company, with positive results in volume growth, margins, operating expense discipline, and free-cash flow. The company is on track for another year of constant-currency revenue growth. The call was then opened for questions, with the first one coming from Umer Raffat from Evercore ISI.

The speaker, Kevin Ali, addresses a question about the difference in commercial strategy for selling Gardasil and Organon products in China. He also discusses the impact of a healthcare budget deficit and stricter procurement rules on demand in China, stating that while there were some challenges in Q2, they expect mid-single-digit growth for the second half of the year. He also mentions that 80% of their established brands business will have gone through the VBP by the end of the year.

The speaker expects China to experience solid growth momentum in the upcoming year, with no issues related to local partnerships or inventory dynamics. They also mention that operating margins will remain stable for the rest of the year.

The company is confident about their full year guidance and expects growth in the second half. They are also positive about volume growth in the future and will discuss more about 2025 later in the year. The caller asks about the company's contracting strategy for their product Hadlima and their approach to driving more volumes in the market. The company's CEO responds by stating their focus on providing a high-quality and affordable experience for patients. The second question is about the company's R&D spend and their pipeline visibility. The CEO mentions a change in guidance and emphasizes their prioritization of balancing pipeline spend with margin stability or expansion.

The speaker discusses the current market for biosimilars and their company's growth in the PBM sector. They mention their top biosimilar for Humira and their excitement for their endometriosis asset. They also mention their prudent use of capital for deals and tuck-ins, and their interest in the women's health field. They will continue to be careful with R&D expenditures.

In this paragraph, the operator introduces a question from Jason Gerberry of Bank of America. Gerberry asks about the company's thoughts on EBITDA beyond 2024 and their ability to do Emgality type deals, as well as their plans for Hadlima and interchangeability. Kevin Ali responds that they are confident in Hadlima's performance and do not see interchangeability as a roadblock, as they are the sole winner of the VA business. He also mentions that they will have interchangeability when the exclusivity period wears off. Matt will discuss the EBITDA question.

The speaker is handing over the discussion to Matt regarding the question about EBITDA. Matt explains that it is too soon for guidance on years beyond 2024, but they see the potential to hold margins and improve them in 2025 and beyond. This is due to the separation of the manufacturing network and the potential for growth in product mix. The cost structure is also right-sized for generating operating leverage. A question is asked about the pricing and ramp of conversion for the Nexplanon five-year product, to which the speaker responds that it is essentially the same product and they are still considering pricing.

The speaker discusses the optionality of expanding their product line and the exclusivity of their inserter device until 2030. They also mention challenges in international pricing dynamics, particularly in Japan, and how their China business navigates anti-bribery and anti-corruption measures. They also mention the success of the Lilly transaction and the potential for similar deals in the future.

The speaker discusses the impact of the anti-corruption campaign in China on their business and states that they do not see any lasting effects. They expect mid-single-digit growth in China in the second half of the year and more robust growth in the future. They also mention that international reference pricing has not affected their negotiations with the Chinese government and they plan to continue making tuck-in deals like the one with Lilly. These deals are characterized by modest upfront payments and success-based milestones.

The operator concludes the Q&A session and hands the call back to Kevin Ali for closing remarks. Kevin thanks everyone for joining and expresses confidence in the company's progress and ability to meet their performance goals. The call is now concluded and participants may disconnect.

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