Good afternoon, everybody. I'm Chris Schott at JP Morgan, and it is my pleasure to be hosting this fireside chat with the Organon management today. From the company, we have CEO, Kevin Ali, as well as CFO, Matt Walsh. Kevin and Matt, Happy New Year!
Thank you.
Thanks for joining us again today.
Yes.
Thank you.
I thought, Kevin, maybe just to kick off, would be interested in just maybe some bigger picture thoughts-
Sure
on the business heading into 2024, and then we'll dive into the specifics of the business from there.
Sure. Well, I think, Chris, and thanks for that introduction and for hosting this. I think you saw on... Actually, just yesterday, we had an announcement that we made at JPM, a press release where we essentially did a few things. One is, we reaffirmed our guidance for 2023. And also, we said that our cash position is probably gonna be a little bit better on the high side in terms of our range for 2023.
Yeah.
And then we kind of gave a soft, nuanced guide-
Yes,
For 2024, where we talked about low single-digit growth on the revenue line, as well as, you know, we're working towards stabilizing our EBITDA margin and maybe potentially even increasing. Basically, you see an increase in our EBITDA going forward. So I think that's moving well, and we actually made a business development announcement recently, just a couple of weeks ago, with our deal with Lilly for Europe for their migraine assets, and which is we're very excited about. And so, as you go forward, we'll start to see more of a focus on de-levering, a focus on doing these more, more of these type of Lilly deals, where we have been very successful at bringing those kind of deals in.
Ultimately, we see really good growth with our biosimilars business, continued stability and growth with our women's health business, and a stabilization and even a little bit of a growth on our established brand. So we're in a good position.
Excellent, excellent. A lot, a lot going on, a lot to dig into here.
Yeah.
Maybe, starting off on women's health, I'd just like to talk about positioning of the women's health franchise and your confidence in the growth outlook there. I guess maybe as part of that, just any learnings from the past few years as you've kind of built up the company, that you can think about applying to the portfolio going forward?
Yeah, I think overall, what we. We're still very focused on trying to define women's health in, in a very different meaning, that the fact that women's health is, is really the health of women, in the sense that it doesn't necessarily mean that we have to do business development activities around just those conditions unique to women.
Mm-hmm.
But like the Lilly deal, we can expand to those conditions disproportionately impacting women, like, for example, migraine, where three-quarters of the patients or so are women versus men. So migraine, osteoporosis, number of different other areas that are tangential to women's health. So as we start to expand the definition of women's health, we ultimately have plenty of opportunities for inorganic opportunities to continue to drive the business forward. But what we see is fertility, in spite of where you see, for example, no patent protection in the fertility sector, continues to grow high single digit, has tremendous opportunity in the Asia Pacific region, especially China, now that they're starting to reimburse for more fertility treatments. So that's an opportunity for continued growth.
U.S., that business is moving now to a more reimbursed business, so PBMs are getting more involved. So price is at stake, but at the same time, you get a lot more volume. So fertility is very robust. We obviously have our Nexplanon business that continues to grow. We didn't take price in 2023, but we'll be taking price in 2024, so you'll start to see really a nice, solid growth for Nexplanon in 2024 versus 2023. Jada now, our device that we had done with the acquisition of Alydia, is now kind of over $40 million for 2023, and so it's on the right track. And definitely, you'll see peak revenues for Jada of about $150 million in the U.S., and probably $250 million all total for global sales.
Hmm
For Jada, ultimately, as peak. Xaciato, our collaboration with Daré, is a unique product for the treatment of bacterial vaginosis, of which 20 million women in the U.S. suffer from that condition, and a lot of dissatisfaction in there. We launched that in November. You'll start to see more of that business start to trickle in into 2024. And this time next year, we'll hopefully be turning the card over on our 6219 asset, which is a completely new mechanism of action and unique new product for the treatment of endometriosis. We'll see where that goes, but, we're actually looking forward to that. So overall, I think it's a nice business to be in.
Mm-hmm.
There's tremendous opportunities for growth as you expand the definition of women's health. And we continue, I think, to do the right things to really stabilize and grow that business.
Great. Touched on a lot of things there. Maybe first on Nexplanon.
Sure.
Can you just elaborate a little bit more on your growth outlook for that one, both U.S. and ex-U.S.?
Yeah. For 2023, it was a year where we didn't take price in the U.S.-
Yeah
A nd the U.S. represents about 70% of our business, so it's clearly very important for us.
Mm-hmm.
And by doing that, we did that for a very specific reason. Most of the competition, actually, the long-acting, reversible contraception business, takes price in the first quarter of every year. It was historical precedent from Merck doing that, and ultimately, we decided to move where the competition is, because that's when the state reimbursement list gets updated.
Okay.
We wanted to make sure the customers are not really out of pocket or underwater for that short period of time. We decided not to take price, so you'll see price be more of a factor in 2024, and the-
Mm
Un derlying volume continues to be low double-digit growth. So the direction of travel for Nexplanon is that it will reach kind of a steady state of a billion-dollar product-
Mm
B y the end of 2025, if you annualize it at that point. And we've got at least to the end of the decade to really make some good business, continuing business.
Great.
That's our blockbuster product.
Yeah. And can you just update us on the timing? I know you've been working on the five-year study, and-
Yeah
Y ou know, when, when should we expect some updates there?
2025 is the year we'll be able to, I think, be able to submit.
Okay.
We'll probably launch that five-year indication in 2026, which will take the exclusivity period in terms of for the five-year indication until 2029.
Okay.
That's ultimately the plan.
Yeah. Do we have to think about pricing dynamics shifting around at all as you kind of go from a 3-year to a 5-year, and I just know it's a few years out, but how do we think about that?
Yeah, we haven't taken a decision formally on what we do with price, but we'll likely take price with the new indication coming.
Mm-hmm.
and that gives us an opportunity there, because a lot of work has gone into the five-year indication.
Okay. I think you mentioned the Jada System-
Mm-hmm
A nd some of the peak sales opportunities. Just elaborate a little bit more on what you're seeing with that and how you kinda get to, you know, the peak sales opportunity for that asset.
Well, that was a real learning opportunity for us because realizing that this is a hospital product, you need to get formulary acceptance, you need to start to train physicians ultimately to get it into the labor and delivery suite so that it's there as a default kind of for patients or for physicians. Now, 45,000 women have been treated with the Jada System since launch. That's a great thing because of the fact that that means that less women would have to have other transfusions or potentially more morbidity and mortality associated with postpartum hemorrhage. And so as we start to kind of get now almost to the point where 80% of those centers that we wanted to have access in, we have now access in Tier One, Tier Two, and Tier Three hospitals.
Now, we're talking about in 2024 and beyond, getting depth of prescription in each one of those centers.
Mm-hmm.
So right now it's more about driving share, driving penetration, as opposed to getting new accounts lined up.
Okay. And then on the pipeline, you mentioned one of the assets, but just holistically, I guess one of the questions I have is, you did this Lilly deal. How much of the incremental portfolio here should we think about things more like partnerships, so with Lilly, versus... And you've got some internal assets, but continue to build out the internal pipeline of the business?
Look, I think the way that I would look at the business going forward holistically is the fact that 2024 is a year where we don't see really any. You never know when it can potentially be, you know, made available, any transformative M&A activity.
Okay
G oing forward in 2024. We've really kind of looked at everything right now, and right now, the year in 2024 is really about- and we, we, you know, reaffirmed our commitment to pay the dividend for, you know, going forward, and, that's what we're gonna be doing. And that's- we've got plenty of cash at our disposal in order to be able to pay the dividend comfortably. But really, it's a focus on execution, delivering, incorporating some of these new business development deals, continuing to move our Nexplanon business, fertility business, drive our Hadlima, biosimilar business, and really have a stable kind of year ahead of us in terms of being able to deliver the growth on the top line and hopefully on the bottom line-
Okay
O bviously better in terms of leverage. So as we go forward, though, we'll be looking at business development in two ways. One is, we'll do those deals like the Lilly type of deal-
Yeah
A nd the Marvelon-Mercilon deal and other deals we've done. We'll do those all the time.
Okay.
They are very nice, very high probability of success, low entry cost. They deliver accretive sales relatively fast.
Mm-hmm.
We have the scale across the world as a global footprint in order to pull those products in and really kind of do well without essentially adding more cost to the base. So we'll do those deals. Those are always things that we're looking at. Sometimes they'll be regional, sometimes they'll be, like China for China deals we're looking at as well. Sometimes they may be global in nature. And then we'll always be looking for that transformative deal, and then ultimately, if we do something like that, everything's on the table, but it'll be the kind of deal where the people will say, "I get it. Makes sense.
Okay.
Okay.
That seems like that's maybe-
Yeah, that's further out-
M ore in the future. Yeah.
T hat's further out as we-
Yeah
Start to stabilize and de-lever the company.
Okay. That's, that's helpful. Maybe pivoting over to biosimilars.
Sure.
Obviously a lot of discussion around biosimilar Humira as we went through 2023. Just the latest in terms of how you're thinking about market dynamics for that, that opportunity.
You know, I was sitting here a year ago, and I was actually the person who was kind of signaling that it's gonna be a slower uptake-
You were
P eople should be ready for that.
Definitely calling that, yeah.
I think a lot of people were very bullish, and I was more kind of being conservative, that I said, "The market will take some time to form-
Mm-hmm
B ecause it is a hospital, or rather a pharmacy-driven, dispensed, product." And so the PBM world works a little differently. The way I look at it going forward is the following: Is that, currently, there were about 6 or 7 biosimilars that were launched in July of 2023. And then there was, previous January, Amgen launched their biosimilar of Humira. We are now number one biosimilar of Humira, albeit it's a smaller scale business that is growing.
We beat everybody else, and clearly, the value proposition that we've come to the market with has been picked up, but it's gonna take time in order for those PBMs, as well as what I would call the low WAC type of businesses, Medicaid, Medicare, Blue Cross Blue Shield, VA, you know, prisons, all those things that kind of look for the lowest net price, we fit into that world very well.
Okay. Okay.
We also fit into the PBM world. You saw what's happened recently with the CVS announcement, with Cordavis.
Mm-hmm.
So there's a lot of activity, a lot of churn in that system. All of that means that 2024 is still a year of market formation. 2025, you'll start to see more of the pickup. So what I'm signaling is, if the net revenue of Humira at its height was, say, $20 billion of net revenue, if that ultimately comes down, and I said last year, to $2 billion-
Yep
Right? And we're one of three. It's still a very good business for us, and it'll get us to the place where we wanted to be in terms of what we've said about our peak revenue for Hadlima in the U.S.
When I look at that 2024 dynamic, still seems like a year of market build. Should we expect that there is steady progress on volumes, or with some of the efforts we've seen on the AbbVie side, is it still going to be a pretty, pretty low penetration year?
I think that you'll see sequentially more penetration quarter by quarter, definitely.
Okay.
There's no doubt about that. Because that low WAC, low net cost business will continue to churn, to want to be able to get to a place where they take on biosimilars as opposed to the originator.
Mm-hmm.
It's just going to be a slower build. We'll reach that peak revenue I've always signaled in $200 million for the U.S., but it's a kind of time continuum that gets pushed out a bit.
Okay. And then just on the competitive landscape there, you've obviously pulled away from the competition, I think, in terms of the share that's available. Do you see, you know, that we're going to end up with still seven or eight relevant players, or do you think we're going to start to see, one by one, some folks deciding not to compete here?
I've always said that there will be two or three that emerge-
Okay
U ltimately at the end of the game.
Yep.
I still feel that way. I think that even PBMs, in any payer system, if you're not getting the uptake, if you're not getting the pull-through, they'll pull you off formulary, because essentially you're just wasting space.
Mm-hmm
W hich could go somewhere else. So ultimately, I do think, in the case of, CVS, they've went for a system where there'll be, one biosimilar and then one originator, obviously. In the other case of other PBMs, they may go to two or three, but I think three is the max, and I think that's what you'll see is kind of emerging for the market in the long run, is that there'll be three winners that come through. That's fine for the kind of market that I'm saying it's going to end up-
Yeah, yeah
B eing, along with AbbVie.
Is having, I guess, initial share, even if it's small, important in terms of making sure you're staked out as one of those three players, or, or-
I do think so.
Okay.
I think you've got to get on formularies.
Mm-hmm.
You've got to get some usage. You've got to get people feeling comfortable with your form, with your presentation. I think that's what's happening to us.
Okay, great. Maybe just update us on the status of interchangeability here, and-
Yeah
H ow important, I guess, is that for the market, do you think?
That's the one area I might have missed a year ago. I didn't think it was going to be as important as it's emerging to be more important. Study's finished.
Mm-hmm.
We submitted for the FDA. We expect to have that indication wrapped up and launched in the summer of this year.
Okay.
and so that what that'll mean is that, you know, in specialty pharmacies, when patients coming in, they get the sticker shock in terms of the out-of-pocket costs, they'll be able to move that patient over if you have the interchangeability status-
Okay
W ithout any issues.
Okay. So you think that that actually will be a determinant?
I think it will help a little bit.
Yeah.
Yeah.
Okay. And then just bigger picture view on the biosimilar business. I guess, is there any takeaways from the biosimilar Humira experience that kind of inform your approach, either what molecules you look at or what markets you want to compete in?
Well, I mean, the big group of competition was really focused on now the Humira-
Mm-hmm
LOE event, and then the next tidal wave will come in 2028 with Opdivo and Keytruda.
Okay. Yep.
But that's a different go-to-market model.
Yep.
This is unique because this is the first and largest pharmacy-dispensed LOE in the biosimilars or the biologic space that has ever taken place. And we see there's a very big different set of kind of perverse incentives that take place at the PBM level and the low WAC business. So that will be different when you get to more of a hospital-dispensed buy-and-bill type of process-
Mm-hmm
W here it flows into something that we know. So I do believe that, 2028 will be another very serious milestone in terms of a lot of activity around the IOs. In between, there is a number of, immunology products, as well as, some cancer products coming off patent. We have an agreement with Henlius, we'll be launching in 2025 and 2026, the biosimilar of pertuzumab, as well as the biosimilar of denosumab.
Mm-hmm.
One for breast cancer, again, women's health space, and one's for osteoporosis, which again, is tangential to women's health.
I guess when I think about biosimilars, it seems like there's a couple different strategies emerging. We've got some companies that are starting to vertically integrate a little bit. We've got other companies that are happy using partnerships. We've got other people who are looking to maybe just exit the business. Kind of where do you- in terms of where you sit today, is there, is there any desire to kind of, I guess, want to go to one of those directions, either, like, get out of this business altogether or, or vertically integrated, or do you think you're in a, a good place with the, the approach you're taking?
I think we're in a good place because we're not end-to-end.
Mm-hmm.
So we don't have to invest capital in terms of manufacturing, research and development-
Mm-hmm
R egulatory pathways. We are just focused on the commercial partnership. There are a number of developers out there, including Samsung and Henlius and others that we've done business with, where we feel the return on invested capital is really good because you don't have a lot of investment on the upfront expense in terms of commercialization.
Yeah
O f these products. You just have to have really good key account processes and other things that you need to do to get the business moving. So it's a very nice opportunistic play. Let's see where it plays out to the end of the decade when the IOs come off-
Mm-hmm
A nd then we'll start to see what's, what's there in the future for, in the cards for that.
In the meantime, is there a desire to further build out the portfolio in terms of-
Yeah
N umber of assets? Okay.
Absolutely. We're always looking for potential partnerships, like the one with Henlius, with those two assets, and we're looking at more assets in the space.
Is there a capacity issue or is this like, you know, you don't want to do a lot of these at once, or is this really just finding the right asset the challenge?
It's. The key is, what is when are you coming to market?
Mm-hmm.
Are you among the first, say, two or three?
Yep.
That, to me, is number one. If you're actually going to be in the second group of, say, 3-6, it's probably not worth your while-
Okay
T o get in.
That's key-
Yeah
K ey to you, is getting there.
First to market is key.
Yeah. Established brands.
Yeah.
It's been... There's a lot of skepticism when you guys spun out in terms of ability to stabilize this. Just talk about what's allowed the better-than-expected performance since the spin, and how, just how you're kind of thinking about that, that business over time.
Well, it's analogous to what we've done, I think, in biosimilars. I mean, we're the number one, as I said, you know, Humira biosimilar, and that's against a lot of folks that have been investing, the end-to-end-
Yeah
F olks that you're talking about. So I think that we've proven that we can execute commercially, I think, very well. The biggest test was around established brands. It's 60% of our business. These are originals. These aren't commoditized generics, of course. They play very well in the emerging markets, in China, in Southern Europe, and, you know, it's done very well. And ultimately, the direction of travel before we took this business over was high single-digit decline year-over-year.
Mm-hmm.
We've actually increased that business year-over-year. Every year that we've had that business, we're 2.5 years into the spin, we have grown the established brands business.
Yeah.
We foresee, and that's, again, where I was wrong in a good way, in the sense that I basically said there was gonna be low decline, single-digit decline. Actually, I reversed that. It's flat to increasing year-over-year, and we continue to see opportunities to grow that business, depending on which country that we have an opportunity in any given year. But it's really about the knowledge of these products, it's the knowledge of these markets, it's the entrepreneurial kind of nature of the sales force that we have, the commercial excellence. These products do have a future if you put the right type of investments in them.
I guess on that point, is that an opportunity where you get, let's say, a couple-year bump, where this asset that hasn't been focused on, you focus on it, you gain some share, and then it goes back to a state where it's maybe not growing that much? Or do you think there can be some legs to that?
Well, from a macro perspective, a lot of countries have had, outside of the U.S., have had issues around generic quality-
Okay
A round stock-outs-
Mm-hmm
O f a certain generic, whether it's sterile manufacturing or just small molecules. So as a result of that, there's been less of a push on price.
Okay. Yeah.
So the price-volume interplay that we had at the beginning was you'd lose more price than you were able to generate volume. We continue to generate volume better than we thought, and we're losing less price than we thought. Globally, of course, I'm taking a very global perspective on this. As a result of that, we've been able to eke out growth year in and year out.
Does that... I guess, that price dynamic, is that pretty broad-based, or are there specific markets you'd call out that have been maybe better than others?
Well, you know, U.S. is the most efficient at taking price in the-
Yeah
I n the small molecule space.
Yeah.
Then you'd follow that by Western Europe, and then ultimately Southern Europe and the rest of what we call emerging, the old emerging market, plus Japan to some extent. It's not as aggressive.
Okay.
Because people, like, for example, in China, will pay out of pocket for what they consider to be high-quality products.
Yeah.
You know, that's our largest established brands business is in China.
Yeah.
It continues to potentially have growth aspirations for us for the future.
I guess, given this dynamic you're seeing, is there a desire to continue to build up this business? It seemed like, if I was interpreting when you, when you came public, it seemed like it was, "We use the cash flow for this to really build-
Reinvest in itself.
B iosimilars and reinvest.
Yeah.
Is this in itself a business that... I guess I kind of envision that there's a lot of assets around the industry that maybe haven't had the investment or haven't had the focus, and that you could add some value by bringing that focus to them. Is that-
Well-
An opportunity?
T he Lilly deal is a perfect example of products that could potentially, you know, address tangentially the women's health space, but ultimately is, is in the established brands business.
Okay
D efinition. Those are ways that we can continue to add on these assets, that from an inorganic perspective, can keep us to low single-digit potential growth.
Mm-hmm.
From an organic perspective, we feel good that we've been able to stabilize that business, and there's an opportunity to continue to have it stable over time. But if you're asking me, would I do an M&A, a large transformative M&A, focused on established brands? Likely not.
Okay.
I'm focusing more on growth for the future, as most of us are.
These are probably more one-off kind of-
Yeah
P roduct and geography.
Here and there, opportunistic. Exactly.
Yeah, yeah.
Exactly.
And then just kind of maybe summarizing all this, just longer-term view of this business, is this something that you think is a sustainable kind of low single-digit grower, or is it... How are you thinking about it?
Well, I can say that to the end of the decade, I can give you assurance that it will be, I love this term, flat-ish.
Okay.
So, you know, some years-
Yeah
W e might eke out some 1 or 2% or so growth. Other years, we might see -1% at best. But if you just put a line through it, there'll be a little bit of growth we can generate till the end of the decade.
Okay. So pretty stable.
Yeah, pretty stable.
Nice business for you.
Yeah.
Within there, I mean, you've mentioned China a few times. Just talk about dynamics that we should be thinking about for China, for Organon in 2020. I guess, what we see in 2023, what should we look forward to in 2024?
Yeah, so 2023, for the variety of reasons, China was a headwind because of the anti-corruption campaign that started in July, and-
Mm-hmm
B ut that petered out very quickly.
Okay.
Now we're kind of looking at the position where we no longer see the effects of that.
Okay, good.
In terms of COVID in the first quarter, that was overhang in terms of kind of holding us back from kind of seeing the fruition of that fertility explosion that was happening in terms of the business. That's now over, so we're able to get back and do what we need to do for fertility. That headwind in 2023 will turn into somewhat of a tailwind in 2024, where we'll start to see growth for China. And we're looking at inorganic opportunities, 'cause we've got over a thousand people in China, that ultimately are really good at what they do in terms of commercializing assets. And so, as a result of that, we do see an opportunity to do some inorganic activity-
Okay.
I n China.
That's one of the markets that you'd be looking to—
That's one of the markets.
Yeah.
I would do China-for-China deals.
Okay. I know, VBP has been a discussion point over time. How much left of the portfolio is left to go through that? How much exposure do you have in the next few years?
Yeah. So 75% of the portfolio has gone through.
Okay.
25% is remaining. That'll kind of peter out over the 2, 2, 3 years in front of us-
Mm-hmm
D epending on whether they get delayed in certain volume-based procurement rounds. But right now, we're looking good-
Okay.
I n terms of where we need to do for 2024 and 2025. I would tell you that, fertility is not part of-... the VBP business-
Okay, yep.
It goes through the retail channels, and so we're looking at fertility being a really, a very nice growth driver. And we brought back in Marvelon and Mercilon-
Mm-hmm
W hich is our oral contraceptive products from Bayer back into our portfolio in China. It's growing exceptionally well.
Oh, great.
So China is an important movement for us going forward. And then, you know, the thing that we were most concerned about in China was the general economy. Because if you have an economy where people are perceiving there to be a recession potentially at hand, unemployment is rearing its head potentially, and people tend to be very kind of restrictive in terms of that out-of-pocket spend. But then, the alternative they have is to go back into the public hospitals, and they see the difficulty of getting kind of long-term, you know, chronic medications as they go—they spring back to the-
Yeah
R etail channels.
Yeah.
That is working its way through as well.
Okay. Just on the retail piece of the business, can you just remind us how much of your business in China is in retail markets? I guess one of the questions I get is just longer term sustainability of that retail channel.
Yeah.
Is there something, you know, items you worry about there that, you know, that could be a less attractive market for you over time?
Well, 55% of our business is through the retail channel.
Okay.
And it's growing, and the retail channel is growing in itself as well. It's not only retail in the sense that, you know, the shops, the stores-
Mm-hmm
B ut also kind of Ali Health, a number of online retailers are starting to emerge to become really an important contributor to the business as well. I do see that as a channel that will continue on because the... I believe the Chinese government wants that to continue as optionality for their, you know, for their patients in or-- in terms of, or for their population, in terms of whether they want to go to the public system and deal with the bureaucracy of it, or whether they want to get the convenience of doing the retail channel. And I still see that being an important channel going forward. And we took the decision back in the previous days when I was running MSD International, to essentially build up our portfolio in 2017 in the retail channel.
Okay.
We've got a lot of good experience there.
Yeah. Excellent. Maybe pivoting over to 2024.
Sure.
I know you had some comments yesterday.
Yeah.
Maybe just... And you talked a little bit in the opening remarks, but just talk about, you know, just general outlook for 2024, what, you know, kind of... I know you'll give probably more formal guidance at some point, but just how are you thinking about the year shaping up?
I do. I feel very strongly that we'll have low single-digit growth on the top line.
Mm-hmm.
We'll have stabilized and start to grow our margin, our EBITDA. We are starting to essentially understand 2.5 years in, what kind of expense base we're looking at. So we're being more efficient with our OpEx. I don't want to send a signal that we're declining year-over-year our expenses, but definitely we're stabilizing them. And where we can actually take expense out, we're doing so. So as a result of that, you'll start to see more margin expansion. We feel good about that. We feel good that we can over this year start to de-lever a bit more than where we're gonna end up in 2023, which will be just north of 4.
And so, I think that it's a year of growth, stability, potentially focused on delevering, paying the dividend, and ultimately, gaining more, I think, shareholder investor confidence.
Excellent. Can you elaborate a little bit more? I know you talked about the cost opportunities being part of the, what's enabling, you know, the EBITDA margins to stabilize and start to improve from here. Just a little bit more flavor of where that cost is coming from, and should we think of this as kind of a one-year event or something that could be kind of a continual process over time?
Well, I mean, it's everywhere, really.
Okay.
It's whether it's global business services, whether it's manpower, personnel, in terms of what we need to be more efficient, whether it's taking down our R&D expense of areas that we weren't investing in, in terms of say, life cycle management projects that we weren't continuing to further you know, to pursue, whether it's things that we're doing on a number of different fronts to really kind of look at ways of being able to squeeze down and be more efficient, because now we know exactly what we need to run this business.
Mm-hmm.
Where we spun out two and a half years ago was a function of what we didn't know, what we didn't know, and ultimately, I think we're able to kind of now operate in a way where it's not a one-year event-
Okay
A nd then next year it'd have popped back up.
Yeah.
It's rather kind of a running ability to continue to drive the right expense structure.
So is it reasonable to think about from here that we could see kind of steady progress on the EBITDA margins, or is a bigger EBITDA margin expansion gonna be predicated on whether it's pipeline or, you know, a further acceleration of top-line growth, I guess?
Well, I think that we're now stabilizing our OpEx. We haven't given really clear guidance yet. We'll do that in February with our-
Mm-hmm
Q4 earnings call.
Yep.
So at that point, I think we'll be able to get a bit more granular in terms of what we expect to go forward with it. But clearly, I mean, in the absence of any type of, you know, transformative deals, which I don't see anything in front of me right now, we'll continue to just work on the, you know, the basic fundamentals of the business.
Okay, great. Cash flow, I think you talked about coming in above the high end of the range for 2023. Just talk a little bit about the drivers of that performance, and...
Yeah
J ust in a bigger picture, how representative is 2023 in terms of, like, a normal cash flow generation year for Organon?
Yeah. So, our business is one of the core investment theses of our business. It's a strong cash flow-generating business.
Mm-hmm.
In 2023, there were a few things that impeded that, and they're more or less all related to the separation process that we're still undergoing from Merck.
Okay. Mm-hmm.
So, for example, we had about $350 million of one-time costs related to separation. Most of that is in the IT space and a global ERP system. That's the high water mark... you know, we see that number improving significantly in 2024, probably on the order of 40% lower. The other piece was, and through nine months of the year, we had about $500 million working capital build. Once again, a lot of that related to the global ERP system. And I had said in the third quarter earnings call, that with our largest plants now on the system up and running, we would start to claw back some of that working capital, would start in Q4, and then it would progress into Q1 and Q2 of 2024.
We were more successful at clawing back that working capital earlier than we thought, and that's what drove the overperformance on cash flow in Q4.
Great. That's, that's helpful. On, I guess, capital allocation, you've said in the past, and you reiterated on, in terms of the, the, I guess, kinda debt repayment, business development, dividend, kind of, you know, the biggest uses of that. Just, first one for me is on the, the yield. The stock's got a very healthy yield right now. Just commitment to the current dividend, is that- so we think of that as kind of a rock-solid commitment to that, that dividend?
Yes.
Okay, perfect. And then more broadly, how do you think about capital market allocation priorities, just given, I guess, the environment we're in, where your stock's trading? Like, how you think about balancing the different uses of your cash going forward?
Yeah, I mean, I think, look, as we start to get a better cash picture going forward in the years to come, as we continue to grow our top line, as we continue to do these kind of very nice bolt-on deals that you see with Lilly, and we've done other deals like that. And they're not de minimis, they actually deliver really nice, nice growth opportunities for us. We're always looking for that transformative potential M&A opportunity, but, you know, I think that I believe that the stock was trading artificially too low, and I think now that people are seeing, you know, what we're capable of doing-
Yeah
A nd delivering, it's starting to kind of bounce back up to kinda more, you know, levels that we think are hopefully, in the near future, will be reflective of where we need to be. But I do believe that, going forward, we're committed to the dividend, we're committed to doing some of the BD that we think is very attractive, these kind of bolt-ons that we talked about. And we'll always be looking for that transformative M&A opportunity when and if that presents itself, and then everything's on the table ultimately.
Okay. On leverage, just what's a reasonable way to think about leverage targets for 2024? And then, what do you think is an appropriate leverage level for the company as we think longer term?
Yeah. So. Go ahead. Kevin, I can start? Go ahead, yeah. So, we'll finish the year leverage ratio in the 4.4-4.25 range. And I think we can de-lever the business-
Mm-hmm
I n 2024, you know, probably by a quarter point or so.
Okay.
When we spun, and we were looking at the cash flow generating ability of the business and the diversification, we were thinking that a sensible place to land leverage from a total shareholder return perspective would be right around 3.5x.
Okay.
I think the market has grown more sensitive to leverage. I mean, from an operating perspective, it's no problem for us to run this business at 3.5 x. The market has grown a little bit more sensitive to leverage, so whereas we might have seen investors nodding their heads at 3.5 x.
Yeah, yeah
A round the time of the spin, they're nodding their heads at maybe at about 0.5 point lower than that now.
Sure. Yeah.
And so the gating issue for us on leverage is really what's the market perception of it versus any operating considerations we would have. So, you know, there are benefits to the equity, to getting that leverage number down, and it does have, I think, its appropriate place in the way that we think about capital allocation priorities. So we've always said our number one priority is the dividend, now that we have it. But really sort of tied for second is business development and debt reduction. The near term and certain benefits of debt reduction have their place in the way that we think about overall value creation.
Great. In the last minute or two here, maybe. The Lilly migraine deal-
Yeah
I s there more opportunities that you see that are near-term actionable like that, or are these kind of harder to find in terms of the right deal?
No, I think doing the deal with Lilly, I think has kind of created a halo effect to some extent because, you know, other companies are in the same situation, where they're saying strategically: Is this the right-
Yeah
Thing to be doing? And can we partner with a company that we trust and feel that are gonna do good in terms of what we need them to? And, I think that was a good deal. There are more to be done.
Mm-hmm.
We're just kicking the tires on a number of things now. I guess, like I said, some are gonna be regional focused, some might be country focused, depending on... I think China's the key country we're looking at for China deals. But, we've done four of those deals so far.
Yeah.
They're all doing exceptionally well.
Excellent.
We'll continue to look at that.
And maybe the last question here, just thoughts on the stock. I know it's, you know... Just talk a little bit about just the primary, I guess, disconnects you're seeing between how you're thinking about the business, what seems to be reflected in valuation. Just any, any perspective there?
I think 2023 was a very challenging year. There was a lot of noise about the dividend.
Yeah.
That's why we had to clear that up-
Yep, absolutely
W ith a clear and unambiguous -
Yes.
L anguage around the dividend. I think that's one thing. The second thing is, investors wanted to see, EBITDA start to stabilize and grow.
Mm-hmm.
I think we've started to signal that's the direction of travel. I think that was the second thing that kind of took a moment for people to kind of digest and say: "Oh, okay, well then, if that's the case, you're generating a lot of cash, you should be able to do more things.
Yeah.
and then the final thing is really about the future growth prospects. And what we're signaling is, and what we signaled and we continue to deliver, this is a business on its own, organically, that can drive low to mid-single digit growth over the long range operating planning period.
Mm-hmm.
I still believe very strongly that that's the case. We've been able to do it. You'll see that in 2023, we fell into that range. In 2024, we're signaling the same. And, you know, Nexplanon is our key product. It will get to a run rate of about $1 billion by the end of 2025. It will continue to be a very key contributor to growth through the end of the decade. We'll get the five-year indication and launch that in 2026 likely, which will take us to 2029. And so there's a lot of reasons to believe in the strong fundamentals of the business, and we're finally...
I mean, when you look at the ERP implementation, the average tenured, or the average length of time it takes to get a global ERP system set up is anywhere between seven and 10 years. This June, we'll have finished it. That's three and a half years in. That's a record! So getting those things behind us, giving us the opportunity to kind of focus on running the business in the best possible way, doing these kind of accretive deals, until something more transformative comes along, is, I think, the right way of being able to approach the future.
Excellent. Well, appreciate all the comments today.
Thank you, Chris.
Thanks for joining us. Yeah.
Thanks so much.
Thank you.
Thank you.