OGN - Organon & Co (OGN) Piper Sandler 35th Annual Healthcare Conference (Transcript)
2023-11-29 12:45:25 ET
Organon & Co (OGN)
Piper Sandler 35th Annual Healthcare Conference
November 29, 2023 11:00 AM ET
Company Participants
Kevin Ali - Chief Executive Officer
Matthew Walsh - Chief Financial Officer
Conference Call Participants
David Amsellem - Piper Sandler
Presentation
David Amsellem
Okay. Good morning, everyone, and let's get started. Welcome again to the 35th Annual Piper Sandler Healthcare Conference. I'm David Amsellem from the pharma team. And with us is Organon. We have Kevin Ali, CEO; and Matt Walsh, CFO. Thanks, gentlemen, for joining us.
And certainly, lots to talk about, so I'm going to dive right in with questions here. So I'll start at a high level and ask how you're thinking about balancing debt paydown and capital deployment to bolster the pipeline and/or commercial portfolio. So maybe I'll start with you, Kevin.
Kevin Ali
You jumping right in the deep end first?
David Amsellem
Right in the deep end, right in the hot topic, yes.
Kevin Ali
Yes. So look, I mean, as we go forward, a couple of things are happening. One is that we're getting to understand now and going into year 3 in terms of what our real cost structure is required in terms of what we need to do to be more efficient. We're winding down from some of the onetime costs to stand the company up. We've gotten past that horizon of what kind of structure -- the consultants told us we should spin out with what we need more of and less of. And so I think you'll see more of a kind of a scrutiny on OpEx going forward. So I think we'll be able to look at more of a leveraged P&L as we move forward as we've kind of passed this period of time of investing in terms of just standing up the company. That's good news.
And so when we start to think about capital allocation for the years to come. Look, we're always -- we're focused on becoming a leader in women's health, but I want to be declarative on this. What that means is not only conditions unique to women, but that disproportionately impact women. So that basically includes almost everything. So that's why we have a very active business development group that reports to Matt, and we're constantly looking. And right now, it's not a bad time to be looking for assets where we're more focused on either soon to be commercialized or recently commercialized assets in the market. And there are some really interesting things out there we're looking at. But nevertheless, as we start to be able to generate more free cash flow, absent anything that's interesting in BD will definitely put it to debt pay down.
Question-and-Answer Session
Q - David Amsellem
Yes. I think you've talked about trying to get under 4x net debt to EBITDA. And so I guess the question here is, what can you realistically do on the BD M&A front that would bolster the business, but at the same time, not set you back too far in terms of getting under 4…?
Kevin Ali
I think that is the question. Absent anything, you can rest assured we'll be definitely migrating below 4 next year. And that's our ambition. That's what we're focused on doing. If something comes along that's very interesting, that's commercialized out there that's generating revenue that just in our hands, we're more a better owner. We're more -- because we have an international footprint. We've got the same footprint as most big pharma does. So as a result of that, we can internationalize a product, let's say, for example, is only in the U.S. That may be one reason that we might do something that we ultimately can do more with it, maybe some synergies out of it. We would come and essentially might have -- we wouldn't necessarily need to have a very strong narrative, very strong story as to why we're doing this and why it is that we need another year to get to where we need to go. But absent that, that's where we're going to be going.
David Amsellem
So to be clear, yield, absent any M&A, you'll get under 4x at some point year. As you think longer term -- and I don't want to pin you down here on targets. But do you have a steady state net debt to EBITDA that you want to get to? I mean I can name one of your peers that said we want to be at 3x. Where do you want to be?
Matthew Walsh
Back around the time of spin, my answer to that question would have been 3.5x given how the business should cash flow, excluding any separation-related items. And -- but really sort of the binding constraint on that answer has really been how the stock trades. Operationally, the company can function quite easily at higher leverage levels than we think investors are comfortable with right now.
Now around the time of the spin, we would have said 3.5x is a good place to land. And at that time, investors were nodding like, okay, we can defend that answer. I think our impression is now just given the current macroeconomic climate, investors are roughly half a turn more sensitive to leverage than they were. So if they were sensitive -- if they were fine 3.5x, the dialogue we have back and forth is now 3x. And so we -- running the company as one vector into what the leverage ratio is, but really what the interaction that we have with shareholders is another vector and it's generally more conservative.
David Amsellem
Okay. I want to talk about margins, EBITDA margins. So this year, lower than last year. And with that in mind, what are you doing to manage margins prevent further margin degradation? Or maybe I'll ask it differently, what is within your control?
Matthew Walsh
Yes. So it's a great question, Dave. So the answer to that question starts with discipline. Our operating expense at the time of the spin had very little reflection of any reinvestment in pipeline. And so our costs have gone up to accommodate that. But as we -- as capital has gotten more expensive, that reads through both on the BD side, right, the M&A side as well as our own internal pipeline. So we have generally been seeking to balance debt reduction and external growth. And we've almost done that to the dollar since the spin. But that same discipline that we're now applying where the hurdle is higher for M&A. And not only is it higher, it slanted more towards income-producing assets. We have to apply that same discipline to our own internal pipeline. And I think you'll see that reflected in how we're thinking about next year.
So OpEx is where we have hands down the most ability to impact it. You've seen some of it in our last quarter Q. We announced a restructuring charge. We're incorporating more of that kind of discipline and planning into 2024. Gross margins, just reflecting some of the latency effect of foreign exchange, and it's hard to have a conversation about Organon's financial performance and not talk about FX, just given that roughly 75% of our sales are outside the United States. So we will see a read through next year on some of the margin pressures that we've been seeing in the second half of this year.
On the upside, though, right, as we think about rightsizing the leverage ratio, which is important to us. We have a lot of conversations with investors that just are anxious about Organon's leverage over 4x. So OpEx is one piece of it, but debt reduction is the other piece. And we are going to see improved performance next year, will have lower cost of separation next year. It should be at least 40% lower. Most of the working capital build that we've had to do is done. We've put even a little more working capital in, in support of an ERP rollout that should moderate next year.
So the ability for the business to delever just naturally, given all those things, David, it's at least 1/3 of a turn and can be half a turn just within one calendar year, absent any BD because as hard as we can tighten down the P&L. If we do that, and that looks great. The next question you're going to ask is, how are you guys going to grow? And so we do -- we always have that in the back of our minds. It's just if we're going to do a growth deal anytime in the next 12 or 14 months, it's going to be very easy to defend. People can draw straight lines to why that makes sense for a company with our balance sheet to be doing it. And if we don't see them, we'll probably do like we did this year, we only announced one deal this year.
David Amsellem
Yes. All right. That's fair. So I want to make sure we hit on specifics within the business. And I'll start with women's health. And there were some dynamics for Nexplanon that drove some of the weakness in 3Q. And I wanted to have a little bit of a refresher on that and talk through the extent to which you think that's going to be short-lived.
Kevin Ali
Yes. So Nexplanon is, look, nothing has happened to Nexplanon at all. Over the last 5 years, excluding that you're seeing ex U.S. business grow more because there was no investment in Nexplanon outside the U.S. And now that something like around 35% of our -- or 30% of our business is ex-U.S. and growing in contribution and 70% of our business is in the U.S. In the U.S., what's happened is because we've taken it over, you start to see a tick up of volume increases. Now every year, Merck was getting essentially where we came from was getting their growth because of price, right? So now we decided not to take price in this year.
There's a very good reason for that. It's based on 2 important factors and one that's important to both of us, but not important to all of you, which is number one is when physicians are able to prescribe a product at the state level, they have to wait -- basically that the states update their list -- their pricing list every kind of beginning of the year in the quarter. If you take price in the fourth quarter, there's a very high likelihood the physician that's prescribing Nexplanon is underwater because the price is higher than what the reimbursement price is.
So what we did is we equalized that, so that when a physician -- so when we take price, it's along the same lines as in that -- within that quarter that the price will be updated in the state list. So that ultimately, they're not underwater. And coincidentally, that's where all the other take their prices in the first quarter and not fourth quarter. So we aligned to where the competition is and we align to where states update their reimbursement list and reimbursement pricing, that's number one.
Number two, we got really a lot of questions in the 2.5 years we've been here. What's going on with the fourth quarter? Why is it so high? And what's going on with the first quarter? Why is it so low? Well, obviously, people bought in to take advantage of the lower price, knowing that the price is going to go up. Now we take all of that noise out of the forecast by moving into the first quarter. So that in the calendar year, you actually see everything happening in that given period of time. And so as a result of that, that will smooth in the overall volatility of that forecast line. So that you can say, "Oh, okay, I can see what's happening now. There's not all these violent swings in Q4 and Q1 that I need to try to make sense out of." So those are the -- I think, the 2 most important reasons why we decided to not take price.
So going forward, in 2024, to put a [magnitude], it's going to be a very strong year for Nexplanon for 2 reasons in the U.S. One, our 340B business, which is a lower-priced federally-mandated business, has grown to about 1/3 of our overall business globally. And so that Merck -- the previous company used to actually give even additional discount on top of the 340B price, we've taken all that away. So we took that away, started -- we removed that discount in September. So for next year, you'll see basically 3/4 of overlap a benefit of that, plus we get the added price increase that we're taking next year, plus you get the incremental volume growth that we have. So we expect low double-digit growth of Nexplanon next year. So it's still our strongest product going forward. Nothing has changed dramatically.
David Amsellem
So when you say low double digits, how much of that is price and pricing dynamics and how much of that is volume?
Kevin Ali
Low to mid-single digits in the U.S. for volume and the rest is all price.
David Amsellem
I guess -- and this is -- I don't mean to ask this as a loaded question, but could it be volumes, at least, could it be better just given the penetration of the LARC category, number one. And then number two, just the dynamics I'm just wondering why wouldn't volume trajectory be higher?
Kevin Ali
It's not a simple answer, but it's answerable. So I would say this to you is that, first of all, the product has been in the U.S. for nearly 10 years. So you get a certain route kind of prescription behavior from physicians that are essentially with this product. So it takes more time and effort to start to change that momentum so that you have instead of low single digit, low to mid -- you get mid to high single digit. That takes time to do, number one.
Number two is the fact that when you think about this product, it takes -- so when you think about the LARC segment, it's declining, the others in the LARC. We're the only ones actually increasing in the LARC segment. So LARC, in general, IUDs are starting to essentially flatten to go down, where we continue to grow. We're the growth driver of the LARC segment. And so as a result of that, you've got forces at play. It's not as if the LARC segment is just exploding, and we're on that wave. We're actually carrying everybody else in terms of driving growth.
Finally, what I will tell you is the following. This takes a lot of effort around social media, a lot of effort in terms of being able to get people to understand that in the U.S., 40% of all pregnancies even a little north of that, 45% are unintended. And along with those comes the unintended consequences. And I don't want to get into that, but quite a number of things. And 40% of those were on some form of contraception, most likely, pills. So when people ask me, so what happens if the over-the-counter pills start to come in line, is that going to hurt you? Now actually, the more -- we get all our business from the patients who are on pills, women who are on pills.
So the more pills that are actually being distributed, the more we actually get patient influx. So that is the standard. And then ultimately, we go over to Nexplanon. So I believe it will break through. And we have plenty of runway ahead of us before LOE to be able to create the kind of, as you say, volume uptick that we think this deserves.
David Amsellem
Yes. So you touched on R&D and spend overall in the beginning of our discussion. One of the things that I think comes up a lot in my discussion is pipeline visibility. And so with that in mind, can you walk us through some of the key deliverables on the pipeline, not just women's health, but just broadly speaking, that we could expect over, say, the next 12 to 18 months?
Kevin Ali
12 to 18 months. So remember, we're 2.5 years old. We spent about $500 million in BD activities. We didn't spin out with a pipeline to speak of, obviously, from our previous company. And we spent about the other $500 million in terms of capital allocation and debt paydown over that 2.5 years. So what we've been able to do is bring in about 8 assets in various stages. So for example, Jada which we launched a couple of years ago, it's starting to really do well, starting to really contribute. We broke it out in the Q3 earnings. We'll break it out more in Q4. We have high expectations for that device going forward. And then when you talk about XACIATO, we just launched that, off launch right now. It will be full launch in 2024. That is a nice little business to get into. It's a unique product for bacterial vaginosis, one application and basically very good efficacy. So there's a tremendous need in that space.
Then the more earlier-stage assets, like, for example, 6219, which is our endometriosis product, is exciting. It will -- in that 12- to 18-month period, you'll see a report out of Phase 2. And hopefully, if knock on wood, if that's positive, we'll actually be able to talk about something in terms of Phase 3 migration from a product that has a complete new mechanism of action and an exciting type of delivery in terms of safety that you don't see with the GnRH class as well as the efficacy that we're hopeful that we were able to see with the 6219. And in another 12 months, you'll see a migration of 7191. This is the Forendo acquisition. That asset is for polycystic ovary syndrome.
Now that is an area -- when you're talking about unmet need, it is absolutely creaming off the page for innovation, for investment innovation. That one will be going into Phase 1 in 2024. And probably in the end of that 18-month period that you're talking about, if we're all things being equal, if things go well, we can potentially start the Phase 2 process at the end of that.
David Amsellem
Let's move on the biosimilars. And I think for a long time, it seems like that's all we talked about, even the small parts.
Kevin Ali
Part of me actually is happy. I'm not getting 6 million questions about biosimilars…
David Amsellem
Got a few here. So I guess I'll start with Hadlima biosimilar. And just talk about market dynamics in the U.S. And I guess, maybe again, another somewhat loaded question is, is the business is that market evolving differently than how you thought?
Kevin Ali
Yes. But having said that, when I first started to signal what the peak revenues of Hadlima would be, a couple of hundreds of millions in the U.S. and globally, I think we'll still get there. It's just going to be a time continuum. This product is going to have a long tail than originally anticipated, where I anticipated a faster uptake and a faster downgrade because of price, I think it's going to slowly migrate up. And if you start to think about how our performance Hadlima is doing versus the competition, we've already passed AMJEVITA, which had a 6-month headstart on us in terms of share and our WAC share.
So I think, clearly, the team has been able to differentiate itself in terms of not only the product but also the way that we execute and the strategy that we took. Many of the other biosimilars took a dual pricing strategy. We took a low pricing strategy because I always have the feeling that why are we in this, if not to save money for the system and for patients. And if you're in a high WAC strategy, you're not saving money for the system or the patients. You're essentially potentially making more money for PBMs in the process. So there's 60% of the lives right now are PBM driven and 40% of the lives are what I would call more WAC-sensitive type of payers, Medicare, Medicaid, Blue Cross Blue Shield, PRISMs, VAs, Kaisers and so on and so forth. And so I think we're much more of a very, very compelling value proposition for that.
And you can see it in the uptake. Now hats off to AbbVie. I think they've been able to do a number of, let's say, negotiation tactics if I can call it that, that has been able to hold on to the majority of their share that they've had. But they went from $20 billion in their peak now last -- this year to $14 billion; next year, they're saying to $7 billion, and then it will just keep going down. Because $7 billion is still far too much value that's trapped there that needs to come back to patients and providers.
David Amsellem
Yes. So I mean, if I'm thinking about it as the -- as AbbVie backs off, there's -- I don't -- maybe this is a little harsh, but some of the crumbs, if you will, will sort of come to...
Kevin Ali
Sure. Listen, one man's garbage is another man's treasure is that the way they say it. Now the way I look at it is the following: if that market ends up being not $7 billion, but more like $2.5 billion, and we're 10%, 15% of that, we easily achieve the numbers I talked about in terms of the several hundreds of millions.
David Amsellem
Okay. All right. That makes sense. So we've got a couple of minutes left. I want to make sure we're talking about China. So that was an interesting 3Q in terms of some unique moving parts. And maybe talk to those moving parts briefly. And then how you're thinking about the outlook in '24 for China?
Kevin Ali
Sure. So across the board, we faced -- Organon faced a number of macroeconomic challenges during the year and a number of challenges period. We had a recall at the beginning of the year. We've finally gotten through that. In China specifically, at the beginning of the year, the first quarter, we had overhang on COVID, which affected our ability to drive our -- one of our fast-growing stars of our business over there, which is fertility. That has gone away. Then in the late second quarter, beginning of the third quarter, we had this anticorruption campaign now that's fading away. Then we -- throughout the entire year, we had this essentially, the economy is driving deflation as opposed to inflationary pressures over there. People weren't spending money, especially for moving consumer goods, patients going to the pharmacy, which is a big part of our business, the retail section, that was a bit challenged. Now that's starting to soft enough.
So all the signals are pointing as we go forward and as we move through the volume-based procurement, we still have some volume-based procurement processes to go through next year. But as we move through that, we'll be in a much healthier state. Even with all of these headwinds, we're only like minus 1, minus 2 this year versus last year in terms of performance. So the team is really good at executing and finding other opportunities. Next year, you'll see on a positive sign, we'll be growing. And then the following years, we're doing more BD, China for China BD. So we have opportunities to grow.
David Amsellem
How much exposure do you have next year...?
Kevin Ali
Not a huge amount. I think like I said, we got 25% of the business left, is probably about 10% of the -- or less that is exposed to any volume-based procurement rounds next year. That's why, essentially, instead of it being very high single digit, low double digit, potential opportunity, it's more moderated because of the volume-based procurement
David Amsellem
And how much of your business overall in China is retail versus non-retail?
Kevin Ali
It's about 2/3 of our business now in the Established Brands business is retail. 1/3 is non-retail.
David Amsellem
Okay. And then in the minute or so 45 seconds we have left, Established Brands. Just maybe tie a ribbon around the discussion as we think about the stability of the business, how are you thinking about pricing dynamics for Established Brands globally and just the extent to which you expect to continued stability?
Kevin Ali
Not much pricing opportunities around the world. There's a few countries that gives us opportunity to price to take price, but there's always volume opportunities everywhere. And we've got more than 40 products in the Established Brands franchise, 60%, 65% of our overall business. Everybody expected that product -- those products to be declining high single digit, low double digits. It's actually grown it's grown since we've taken it over. We still expect growth over the next coming years, a very small growth, but a heck of a lot better than what people give us credit for
David Amsellem
Limited pricing erosion, I would imagine.
Kevin Ali
Limited. Well, yes, you're going to get more price. You're definitely going to get price. We average I would say, what, mid-single digit on price erosion here?
Matthew Walsh
Around the time of the spin, the CAGR on that would have been about a 3% to 5% decline. This year, it's going to be around 1% because the inflationary environment has enabled us to go back in and either limit price or in certain markets. So now you have volume growth showing through.
David Amsellem
Okay. Well, we're out of time. Thanks, Kevin. Thanks, Matt.
For further details see:
Organon & Co (OGN) Piper Sandler 35th Annual Healthcare Conference (Transcript)