Organon & Co. Q1 2025 Earnings Report

Organon & Co. EPS Results

• Actual EPS: $1.02
• Consensus EPS: $0.89
• Beat/Miss: Beat by +$0.13
• One Year Ago EPS: $1.22

Organon & Co. Revenue Results

• Actual Revenue: $1.51 billion
• Expected Revenue: $1.53 billion
• Beat/Miss: Missed by -$20.18 million
• YoY Revenue Growth: -6.70%

Organon & Co. Announcement Details

• Quarter: Q1 2025
• Date: 5/1/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, May 1, 2025
• Conference Call Time: 8:30AM ET

Organon & Co. (NYSE:OGN) is a science based global pharmaceutical company, which develops and delivers innovative health solutions through a portfolio of prescription therapies within women’s health, biosimilars and established brands. The company was founded on March 11, 2020, and is headquartered in Jersey City, NJ.

Organon & Co. Q1 2025 Earnings Call Transcript

Presentation

[Operator]

Hello, and welcome to the Organon First Quarter twenty twenty five Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to Jennifer Halczek, Vice President, Investor Relations. You may begin.

[Jennifer Halchak, VP, IR at Organon]

Thank you, operator, and good morning, everyone. Thank you for joining Organon's first quarter earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer and Matt Walsh, our Chief Financial Officer Juan Camilo Arjona Ferreira, Organon's Head of R and D, will also be joining for the Q and A portion of this call. Today, we will be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call on the Events and Presentations section of our Investor Relations website, www.organano.com.

[Jennifer Halchak, VP, IR at Organon]

Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward looking statements. Actual results could differ materially from those stated or implied by forward looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our 10 ks and subsequent periodic filings. In addition, we will discuss certain non GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared and recorded with GAAP. A reconciliation of these non GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation. I'd now like to turn the call over to our CEO, Kevin O'Lee.

[Kevin Ali, CEO at Organon]

Good morning, everyone, and thank you, Jen. Our first quarter results represented a solid start to 2025, and we're very much in line with our expectations for the year. Key growth drivers are on track, and Explanon grew double digit and is set to achieve more than $1,000,000,000 in revenue in 2025. The launch of DITAMA in the atopic dermatitis indication has been successful, ramping just as expected, and the product is marching towards $150,000,000 of revenue for the year. Additionally, we continue to estimate that our restructuring initiatives will yield approximately $200,000,000 of annual savings.

[Kevin Ali, CEO at Organon]

Given the tariff policies in effect as of today, we are affirming our revenue and adjusted EBITDA margin guidance as well as our target of generating over $900,000,000 of free cash flow before onetime costs in 2025. Today, we also announced that we have reset our dividend payout and will redirect those funds to debt reduction. With a reduced dividend payout, the company can redeploy almost $200,000,000 in prospective dividend payments over the remainder of 2025 that will enable a path to achieve a net leverage ratio below four by year end. Over the last year, we have established a leaner, more fit for purpose cost structure while increasing revenue contribution from our core growth drivers. By deleveraging more rapidly, we will continue to strengthen the future prospects of the company.

[Kevin Ali, CEO at Organon]

Over time, this will position us to execute more of the compelling business development opportunities we've done to date, bringing in additional growth drivers to our portfolio while maintaining lower leverage. Further, the recent macroeconomic uncertainty has created a pronounced dislocation in our equity valuation relative to our earnings. To us, this is an affirming signal from the market that now is the right time to proactively take action to support our balance sheet. A lot of the uncertainty in the broader market obviously centers around current and future tariff policy. Based on tariffs in place as of today, we have very limited exposure in 2025.

[Kevin Ali, CEO at Organon]

Our revenue composition is about 75% ex U. S. EuropeCanada represents about 25% of our total revenue. China represents about 13% of our revenue. And for that revenue generated in China, a majority of the supply comes from Europe.

[Kevin Ali, CEO at Organon]

As you think about the roughly 25% of our revenue generated in The U. S, again, most of that supply comes from Europe. Our women's health products sold in The U. S. Are primarily made in The Netherlands.

[Kevin Ali, CEO at Organon]

Nexplanon is the bulk of that, and we have already taken steps to mitigate exposure through inventory management. For U. S. Biosimilars, Ontrazon, Ranflexis and HEDLEMA are mainly supplied from Korea and The EU. For recently acquired Tovidense, that product is manufactured in China, but we have inventory coverage offering us protection through 2025.

[Kevin Ali, CEO at Organon]

The denosumab asset from Shanghai Hanlius is not planned to launch until much further in the year. So again, based on the tariffs in place as of today, we have very limited exposure in 2025. With those important topics addressed, let's move now to a discussion of the financial results. As I mentioned, the first quarter was very much in line with our expectations. We had guided that first quarter would be the lightest of the year as we worked through the loss of exclusivity of AdderZed and as VITAMA ramped up.

[Kevin Ali, CEO at Organon]

The women's health franchise grew 12% ex exchange, led by performance of Nexplanon, which was up 14% in the quarter. Nexplanon grew double digit in both The U. S. And Ex U. S.

[Kevin Ali, CEO at Organon]

Markets. This year, we expect Nexplanon to deliver more than $1,000,000,000 in sales, driven by both price increase and demand growth. For the five year indication, we have made our submission to the FDA, putting us in a position to be ready for a late twenty twenty five launch, pending FDA approval. Fertility had a very strong quarter, growing nearly 26% globally. The U.

[Kevin Ali, CEO at Organon]

S. Grew $23,000,000 or 70%, with about half of the growth coming from lapping a buyout in Q1 of last year. The other half was volume growth and rate favorability. Ex U. S.

[Kevin Ali, CEO at Organon]

Fertility grew 4%, with new launches in Turkey and Japan offsetting sluggish performance in China. We expect growth in The U. S. As well as footprint expansion outside The U. S.

[Kevin Ali, CEO at Organon]

To drive high single digit growth in our global fertility business in 2025. Jada grew 20% in the quarter, driven by growth in shipments, especially in The U. S. Among existing customers that are expanding Jada adoption. More than 94% of the nation's largest birthing hospitals now stock Jada.

[Kevin Ali, CEO at Organon]

During the first quarter, Jada launched in South Korea and achieved the CE mark of approval in Europe. We plan to launch in select EU markets this year, and we continue to assess future market expansion opportunities. Turning to biosimilars. Biosimilars continues to be an important part of our growth story. In 2025, though Ontrazont and REMFLEXIS will continue to decline, HEDLEMA grew 57% in the first quarter with continued strong uptake in The U.

[Kevin Ali, CEO at Organon]

S. We also recently acquired the regulatory and commercial rights for Topodense in The U. S. For intravenous infusion. Topodense

[Kevin Ali, CEO at Organon]

is

[Kevin Ali, CEO at Organon]

the first biosimilar approved for Actemra. Topodense was launched in May 2024, but the overall Actemra biosimilar market was slow to form in The U. S, yielding an opportunity, a very good opportunity for future sales uptake and growth. Immunology is a market we certainly know well in The U. S, notably the physician administered business.

[Kevin Ali, CEO at Organon]

And as a result, we are uniquely positioned to drive Topodin sales. And finally, we anticipate launching the portfolio of Hanlius products beginning in late twenty twenty five with adanosumab biosimilar in The U. S, followed by patuzumab in Europe. Wrapping up the revenue discussion with established brands. In the respiratory portfolio, mandatory pricing revisions in Japan and mild seasonal respiratory complications in China weighed on our results in the first quarter.

[Kevin Ali, CEO at Organon]

Performance in the cardiovascular portfolio during the first quarter was driven by the headwinds from the loss of exclusivity of AdoZe, which will abate in the fourth quarter of this year. As we have said since spin, though many of the brands in this portfolio have been around for decades, we have taken an entrepreneurial approach in managing the business for profitable growth. The established brands franchise is starting to look different than it did at spin, Now home to innovative medicines that are growth engines for the company, it looks more like a general medicines portfolio. Over the last year and a half, we have added products with patent protection to this franchise, including Emgality and VITAMMA. Combined, we expect those products to generate over $300,000,000 in revenue in 2025.

[Kevin Ali, CEO at Organon]

The VITAMMA launch performance has been encouraging as it continues to outpace branded competition in NRx and TRx growth. For the week ending April 18, Butama NRx grew 71% versus direct competitors who were up 4% compared to a pre AD approval thirteen week average baseline. TRx grew 30% compared with competitors who were up 5%. ZYTAMA is uniquely positioned within the atopic dermatitis market. It is applied once a day and is the only nonsteroidal topical approved for mild, moderate and severe atopic dermatitis, providing access to all segments of the addressable market.

[Kevin Ali, CEO at Organon]

It is the only product approved for patients two years of age and older, offering a significant advantage over competitors. We have developed a core capability in finding opportunities like Emgality and VITAMMA. These are accretive transactions with deal structures heavily weighted towards success based milestones. These are the types of assets that over time, we will have greater opportunity to pursue with the capital freed up from the dividend. I'll now turn the call over to Matt, who will review the financials in more detail.

[Matthew Walsh, CFO at Organon]

Thank you, Kevin. Beginning on Slide nine. Here, we bridge the 4% constant currency revenue decline in the first quarter year over year. Starting on the left, LOE was about 60,000,000 for the quarter, which primarily reflects the impact of the loss of exclusivity of Atozed in Europe, which occurred in September 2024. VBP in China was de minimis in the first quarter, and we expect only a nominal impact on a full year basis for 2025.

[Matthew Walsh, CFO at Organon]

Our potential exposure this year will be more back half weighted as we expect Fozamax will be included in round 11. Once this occurs, approximately 80% of our established brands portfolio will have been subjected to the VBP process. There was an approximate $40,000,000 impact from price for the first quarter or about 2.5%. Pricing pressure was mainly from biosimilars, certain mature products in The U. S.

[Matthew Walsh, CFO at Organon]

Like NuvaRing and Julera and the LOE of Adazet. From a regional perspective, we continue to face expected mandatory pricing revisions in Japan and ongoing competitive price pressures related to our respiratory products in China. Volumes increased $45,000,000 in the quarter, representing growth of a little over 2.5%. HEDLEMA, Emgality, VITAMMA and Nexplanon were the largest contributors to volume growth and will likely continue to be the main drivers for the full year. In SupplyOther, here we capture the lower margin contract manufacturing arrangements that we have with Merck, which have been declining since the spin off as expected.

[Matthew Walsh, CFO at Organon]

And lastly, foreign exchange translation had an approximate $45,000,000 impact in the first quarter or about two eighty basis points of headwind to revenue, which reflects a strengthening U. S. Dollar versus most foreign currencies in the current period relative to the first quarter of twenty twenty four. The recent weakening of the U. S.

[Matthew Walsh, CFO at Organon]

Dollar potentially creates a tailwind for us over the remainder of 2025, and I'll revisit this point later in the presentation when we discuss

[Matthew Walsh, CFO at Organon]

guidance. Now let's turn

[Matthew Walsh, CFO at Organon]

to Slide 10, where we show key non GAAP P and L line items and metrics for the quarter. For reference, GAAP financials and reconciliations to the non GAAP financial measures are included in our press release and the slides in the appendix of this presentation. For gross profit, we are excluding from cost of goods sold, purchase accounting amortization and onetime items, which can be seen in our appendix slides. Adjusted gross margin was 61.7% for the first quarter compared with 62.1% in the first quarter of twenty twenty four. The year over year decrease in adjusted gross margin primarily reflects the impact of unfavorable price, as I discussed.

[Matthew Walsh, CFO at Organon]

Non GAAP SG and A expense was up 6% in the first quarter, driven by commercial and launch expenses for which was acquired in the fourth quarter of twenty twenty four. Excluding expenses related to VITAMMA, SG and A was down versus prior year, reflective of our efforts to contain and reduce operating expenses. Non GAAP R and D expense before $6,000,000 of IPR and D was down 17%, primarily due to the timing of clinical study spend. As we think about the restructuring actions to reduce operating expense that we communicated as part of our 2025 earnings guidance in February, we began executing those plans during the first quarter and we fully expect to achieve approximately $200,000,000 in expense savings over quarters two through four, which is already incorporated into our earnings guidance. Our first quarter adjusted EBITDA margin of 32% was about 150 basis points better than we expected, in part because of the timing of clinical study spend that I just spoke of.

[Matthew Walsh, CFO at Organon]

We also did a bit better on gross margin, driven by favorable product mix. Also in the first quarter, we benefited from a $4,000,000 realized transaction gain from foreign exchange, mainly driven by currencies that we can't hedge. Turning to Slide 11, we delivered $146,000,000 of free cash flow before onetime costs in the first quarter, about onethree better than the prior year period. This is a function of active cash cycle working capital management, lower interest rates and timing of cash interest and tax payments. As we said back in February, onetime costs related to the spin off were completed in 2024 following the rollout of our global ERP system.

[Matthew Walsh, CFO at Organon]

We expected onetime spin off costs to be zero in 2025, and you can see that reflected in our first quarter results, again, 62,000,000 in the prior year period. In the $75,000,000 of other onetime costs, about $15,000,000 relates to cash payments associated with restructuring initiatives aimed at leaning out our operating expenses I mentioned earlier, dollars 20,000,000 relates to the final payment on the microspherics settlement, and the remaining $40,000,000 relates to the planned exits from supply arrangements with Merck that as we've discussed in past quarters would be ramping up. These are activities that will enable Organon to redefine our appropriate sourcing strategy and move to fit for purpose supply chains, while focusing on delivering efficiencies in terms of gross margin expansion, which we expect to begin realizing in 2027. Restructuring and manufacturing separation activities could together represent $325,000,000 to $375,000,000 in 2025. Our current view is that we could finish 2025 at the lower end of this range.

[Matthew Walsh, CFO at Organon]

Once again, these onetime costs drive value that investors will be able to see in 2025 in the form of improved operating expense efficiency and in later years related to more cost efficient manufacturing that is expected to drive meaningful margin expansion. In 2025, we expect to pay about $200,000,000 in commercial milestones, primarily tied to VITAMMA and GALITY and the biosimilar programs with Shanghai Hanlius. During the first quarter, we have paid about $130,000,000 towards that expected amount. The achievement of these milestones means that we are realizing value for business development deals already signed and validates the path to low to mid single digit revenue growth post 2025 that we've been saying Organon should be able to deliver. Now turning to Slide 12.

[Matthew Walsh, CFO at Organon]

Our net leverage ratio was 4.3 times at March 31. That performance is consistent with prior commentary that leverage could float up to the mid four times area during 2025 as we digest the Dermavant transaction. As we capture more EBITDA benefit from the VITAMMA launch later in the year and realize the benefit of operating expense restructuring actions, we would naturally delever closer to 4.2 times where we ended 2024. With our revised capital allocation plan announced today that increases our retention ratio, we now have the ability to accelerate progress on deleveraging. In the near term, as Kevin stated, our priority is to reduce net leverage given the uncertain macroeconomic environment that investors are reacting to.

[Matthew Walsh, CFO at Organon]

We see a clear path to achieving net leverage below four times by year end. And over time, the capital preserved with a higher retention ratio creates a compounding improvement in financial flexibility. It offers us the opportunity to achieve meaningful deleveraging over the next few years, whether it's through outright debt repayment, accretive M and A or some combination of the two. Now turning to 2025 guidance on Slide 13. For the operational bars on this page, everything remains the same for the full year.

[Matthew Walsh, CFO at Organon]

Our constant currency guidance remains the same, which is about flat versus prior year at the midpoint. We expect the uptake of VITAMMA, continued solid performance in ENGALITY and organic growth in NEXLINON and other products in our portfolio will help to offset the LOE of ADAZED in Europe along with pricing headwinds in other parts of the portfolio. That's a pretty strong statement given that Adazet's LOE represents a headwind of approximately $200,000,000 alone between volume and price. So with no changes to the ranges on the operational drivers, let's focus for a moment on foreign exchange. The guidance we provided in February was for an expected $200,000,000 negative impact from FX in 2025 or about a 300 basis point headwind.

[Matthew Walsh, CFO at Organon]

As I mentioned, the Q1 impact was about two eighty basis points, in line with that full year estimate. Since February, however, the dollar has weakened And if current rates persist, we would see some upside to the full year estimate that would move us to the high end of the guidance range. Given the volatility in the currency markets, that upside could be temporary. The responsible thing to do at this point as regards guidance is to avoid chasing a very volatile currency market and for now leave that component of our guidance unchanged and simply note the possibility for favorability over the remainder of the year. We'll be reevaluating our view on FX as the year progresses.

[Matthew Walsh, CFO at Organon]

From a quarterly phasing perspective, we should deliver modest sequential revenue growth from the first quarter to the second quarter, and we continue to expect the fourth quarter to be the strongest of the year. Turning to Slide 14, where we show all components of our earnings guidance. Again, no changes to what we provided back in February. We expect adjusted gross margin to be in the range of 60% to 61, about a point lower at the midpoint compared with last year, and that's a continuation of the pressure on gross margin that we saw in 2024, especially in the back half due to price and higher manufacturing and distribution costs. On SG and A expense, we ended 2024 at 25% of revenue and R and D was about 7% of revenue ex IPR and D.

[Matthew Walsh, CFO at Organon]

Those general percentages also hold for 2025. And that guidance implies essentially flat OpEx dollars year over year, which is consistent with ongoing actions to improve our operating cost efficiency that would serve as offsets to investments to grow VITAMMA. Those pieces culminate in an adjusted EBITDA margin range of 31% to 32%. The favorability we saw in Q1 adjusted EBITDA margin was mostly timing. Second quarter adjusted EBITDA margin should look very similar to what Q1 would have looked like without the upside that came through.

[Matthew Walsh, CFO at Organon]

So that means we're expecting a Q2 adjusted EBITDA margin in the 30.5% area. We continue to believe Q4 will have the highest margin for the full year as VITAMA ramps, and we capture more of the benefit of our restructuring initiatives. For below the line items, our estimate for full year 2025 interest expense remains at $510,000,000 which includes about $25,000,000 related to the debt like instruments assumed in the Dermavant acquisition. Payments on a portion of those instruments are tied to VITAMMA sales. Exclusive of the Dermavant transaction, our interest expense estimate for 2025 is approximately $30,000,000 lower compared with last year as a result of the two refinancing events completed in 2024 and lower borrowing rates on our variable rate debt instruments.

[Matthew Walsh, CFO at Organon]

For 2025, we continue to estimate our non GAAP tax rate to be in the range of 22.5% to 24.5%. The uptick from 2024 is largely due to the impact of the 15% global minimum tax rate required under the OECD's Pillar two. Depreciation is a touch higher than last year at $135,000,000 driven by the completion of our new ERP system in 2024. In summary, first quarter performance was solid and puts us squarely on track to meet our financial guidance for the year. Nexplanon, our largest product posted another quarter of double digit revenue growth.

[Matthew Walsh, CFO at Organon]

Our largest acquisition, VITAMMA is launching nicely and is on track to deliver the $150,000,000 in 2025 revenue that we forecasted. And we continue to make steady progress on the $200,000,000 of identified operating expense savings in 2025, which would deliver our best operating expense efficiency metric since the spin off. We expect these OpEx savings to benefit not only twenty twenty five, but annualized to roughly $275,000,000 which we would realize in 2026 and thereafter. And finally, the change we are making to our capital allocation priorities to increase our retention ratio will enable us to accelerate meaningful strengthening of our balance sheet, including lowering our 2025 net leverage ratio target to sub four times by the end of the year. With that, now let's turn the call over to Q and A.

[Operator]

Thank Your first question comes from David Amsellem with Piper Sandler. Your line is open.

[David Amsellem, Sr. Research Analyst at Piper Sandler Companies]

Hey, thanks. So a couple for me. First, on the Tama, can you just talk through your level of confidence that you can get to that sales target that you reiterated? And I guess part of my question here is just given the nature of the category and that it is tightly controlled, how are you feeling about access? How are you feeling about the gross to net here?

[David Amsellem, Sr. Research Analyst at Piper Sandler Companies]

Just help us understand and just overall how you think you can get to the target? That's number one. And then number two, just with your priorities regarding deleveraging, where does additional biz dev M and A fit? Is that on the backburner? Is that something where you're just going to continue to be opportunistic?

[David Amsellem, Sr. Research Analyst at Piper Sandler Companies]

How should we think about that? Thank you.

[Kevin Ali, CEO at Organon]

Thanks for the question, David. It's Kevin. And in regards to Vutama, we are confident that we'll achieve that January that I I kept mentioning. And the reason for that is that the new label, the atopic dermatitis label, really is a game changer. The kind of advantages that we have versus competition are significant, whether it's essentially the once a day down to two years of age, the incredible efficacy in terms of attacking itch, which is the number one essentially symptom that you see with AD.

[Kevin Ali, CEO at Organon]

Initial reports have been fantastic. Not only that, but you see the NRx and TRx numbers. But you put your finger on probably the most important aspect of getting to that number, which is access. And we've got a fantastic managed care group working on access as we speak right now. And I think they're all the things that I'm seeing in terms of signals are coming from the market is essentially getting really good uptake in regards to moving the needle on getting more covered lives, moving prior auth to essentially preferred and non preferred and just moving that whole continuum over.

[Kevin Ali, CEO at Organon]

And that is the key point underpinning my confidence in being able to reach that 150. I was in the field actually doing double visits last week in three different cities in States. And what I can tell you is there's been a lot of momentum and a lot of good positive feedback right now because now patients are coming back after they've been prescribed the drug and kind of seeing follow-up. And what they're saying, signaling to me has been outstanding efficacy and really, really easy to apply. So we feel good about And ultimately, we reach that number, we'll have a different discussion of what the future outlooks looks like because we're going to be launching in Canada later actually in a few months coming, and we'll be launching ex U.

[Kevin Ali, CEO at Organon]

S. In terms of international and globalizing this product. We feel very good about this acquisition. And in regards to the second question about deleveraging, yes, that's what we're focused on right now. We think it's the right thing to do, as Matt said, sub-four by the end of the year and then accelerating that going forward.

[Kevin Ali, CEO at Organon]

And then ultimately, over time, what we think this is going to do is essentially it's going to strengthen the company's future prospects. As we start to delever, we'll be able to kind of look for opportunities down the road in terms of being able to bring in more assets like VITAMA into the organization. Look, we need products like that. We've got a fantastic business development organization that really has developed a real skill set at being able to identify assets that we can bring into our hands and ultimately plug into our commercial organization and do a really good job with. So for right now, it's really focused on delevering.

[Kevin Ali, CEO at Organon]

And then over time, it's really focused on being able to bring in other assets like Avitama or Tovidence that we just brought in that have fantastic opportunities and are accretive almost immediately.

[David Amsellem, Sr. Research Analyst at Piper Sandler Companies]

Thank you.

[Operator]

The

[Operator]

next question comes from Michael Niedelkovich with TD Cowen. Your line is open.

[Michael Nedelcovych, Director - Equity Research at TD Cowen]

Thank you for the question. I have one question and a follow-up. So clearly, BD will be more of a focus moving forward. Should we think of any uptick in that area as an increase in the frequency of future deals? Or could there also be an increase in the size of future deals?

[Michael Nedelcovych, Director - Equity Research at TD Cowen]

And as a follow-up, when we survey the assets that Organon has in licensed recently, think it's fair to say the company has adopted a pretty flexible definition of women's health. So what should we consider to be your option space moving forward? Is there any asset or therapeutic category that you view as outside the bounds of your strategic focus? Or is pretty much everything fair game so long as it makes financial sense? Thanks

[Kevin Ali, CEO at Organon]

for the question, Michael. I would say this, that we have a very broad definition of women's health, first and foremost. It encompasses, I would say, axises. One is those conditions unique to women, like, for example, our Forendo acquisition, of which we'll be talking about more down the road in terms of what we're doing in that space, for endometriosis or polycystic ovary syndrome. Our partnership with Lilly on Emgality, twothree of the patients who suffer and struggle with migraine are women, which are those conditions I would call it disproportionately impacting women.

[Kevin Ali, CEO at Organon]

And then the third category would be, I would say, fall into the category of where Vitamla falls in, which is dermatology, specifically AD, where it affects women differently, whether it's the fact that women happen to be the caregivers, by and large. And so in the pediatric space, there's nothing there that ultimately approaches, from a nonsteroidal perspective, patients that are two years of age and older. And by the way, we are getting started this year on studying this product for down to three months of age and older. So that's a game changer. And for that point of view, I mean, you look at adults, adults typically suffer more from AD that are women than men.

[Kevin Ali, CEO at Organon]

And so that is kind of the more squishy, I would say, of the three definitions. But typically, we are looking at a broader perspective, but also we have a very business oriented mindset in regards to getting assets that we feel that we're a better owner of, that we can do better with globally, whether it's plugging it into our international commercial footprint or whether it's essentially using our medical affairs teams, our commercial assets teams. So I think overall, we're making the right use of capital and our BD organization is doing a really good job of setting up these deals so that it's not just a one hit where it's essentially success based, everybody's got skin in the game, and we're paying milestones along the way. We're happy to pay those milestones because it just basically means that we're hitting on some of those achievements in terms of commercial achievements. In regards to whether it's more frequent smaller deals or larger deals, again, like I said, the key thing is delevering.

[Kevin Ali, CEO at Organon]

And when we find the deal, the right deal, like a VITAMMA, for example, or that we just brought in, we'll do that. But it just gives us more room to breathe when we have a much lower leverage rate, and we'll continue to accelerate that.

[Operator]

The next question comes from Chris with JPMorgan.

[Ethan Brown, Equity Research Analyst at JP Morgan]

This

[Ethan Brown, Equity Research Analyst at JP Morgan]

is Ethan on for Chris Schott. On the first question, just wanted to ask about capital allocation more broadly in your framework going forward and maybe more specifically, how share repo might fit into that equation relative to debt paydown and business development? And then my second question is just on the potential impact of tariffs. I know you provided some commentary on 2025, but any general color on your ability to navigate this dynamic looking past 2025? Although details are lacking, maybe just frame out how you're thinking about that impact.

[Ethan Brown, Equity Research Analyst at JP Morgan]

Yes.

[Kevin Ali, CEO at Organon]

Ethan, I think Matt and I will ping pong on addressing these topics. So I'll keep the tariff issue aside for Matt to deal with. But on capital allocation, really briefly, right? Look, we're doing this I want to be clear. We're doing this from a position in terms of what we've done with the dividend today, what we announced, from a position of strength.

[Kevin Ali, CEO at Organon]

Over the last few years, we have, for example, reestablished Nexplanon, our key product, where we're going to surpass $1,000,000,000 this year. We have stabilized the Established Brands business. We have essentially grown we've regrown our fertility business. We have also successfully launched Jada and HEDLEMA and Emgality and now VITAMA and Tophanins. And so we're very comfortable with the fact that going forward, some of the headwinds we faced this year with a loss of exclusivity of our second largest product, ADVOZTE, will be behind us.

[Kevin Ali, CEO at Organon]

And essentially, going forward, we have opportunities really to accelerate our top line and bottom line growth. And so for that and we've done three restructurings in the last one point years. So we're a much more leaner fit for purpose organization. This is really done in order to be able to set us up so that in the future, we can do more business development deals like the VITAM and the TOPIDENCE deal that we just did recently in order to be able to continue to grow, continue to grow for the long term. And so I believe this is a position of strength.

[Kevin Ali, CEO at Organon]

And when it comes now to your second question around tariffs, I'll hand that over to Matt in terms of in regards to the fact that what we see today is not something that we feel very concerned about.

[Matthew Walsh, CFO at Organon]

Yes. Yes. Thank you, Kevin. So as we spoke of in the prepared comments, where the policy is more clear around countries like Canada, Mexico, China, we have very nominal exposure. Less than $5,000,000 in 2025 has been it's one of the factors that has enabled us to affirm guidance for the year.

[Matthew Walsh, CFO at Organon]

When you look forward, Organon has six manufacturing plants, all of them outside The United States. Most of the production that ends up coming into The United States is from our plants in Europe. And since the policy around that route into The United States is still very fluid, it's really too soon to be talking about what potential impacts might be.

[Kevin Ali, CEO at Organon]

Do you want to address the share buybacks that he

[Kevin Ali, CEO at Organon]

had mentioned earlier, Ethan?

[Matthew Walsh, CFO at Organon]

Sure. So share buybacks have been a lower priority for us in our roster of capital allocation priorities. The biggest issues we face that can improve Organon's valuation in the near term relate to managing our leverage and relate to growth. And we need capital to solve both of those issues.

[Matthew Walsh, CFO at Organon]

And so returning capital to shareholders is right now less of a priority. It's one of the reasons why we made the move that we did with the dividend announcement today. So and especially as long as our leverage is above four times, I believe we'll create more value and better positioning and overall strength for the future by rightsizing our leverage versus buying back shares.

[Operator]

The next question comes from Umer Raffat with Evercore ISI. Your line is open.

[Umer Raffat, Senior Managing Director at Evercore ISI]

Hi, guys. Thanks for taking my question. I mean, look, I feel like the Dermavan deal was a surprise, but today is a bigger surprise. And there's a lot of market sentiment that they can't have confidence in consistency and decision making process at Oregon on right now. So specifically, last call, you guys said you're committed to regular dividend as the number one capital allocation priority.

[Umer Raffat, Senior Managing Director at Evercore ISI]

I think you just now said returning capital is a lower priority. And I guess the question is really for all the investors on the line. What is the priority? And how can we be sure that this will be the priority going forward? Because there appears to be a lot of things just moving around constantly.

[Kevin Ali, CEO at Organon]

Umer, thanks for the question. And if you notice, things are going on in the outside. Macro environment is changing. It's quite volatile out there. Clearly, investment community is not clearly focused on the dividend for us as much as it is on leverage.

[Kevin Ali, CEO at Organon]

I hear it in almost every discussion that I have with investors that they're very concerned about where we are in terms of leverage in these very volatile times. It's really a risk off type of analysis. So for us, we were very committed to that. But when we saw the type of volatility happening, we saw the timing, we're on the verge of really having, I think, a really great year in 2026 and the second half of this year. I think we're in a much better position to say, look, we know that we can delever very quickly.

[Kevin Ali, CEO at Organon]

And as we delever and as we have a situation where we give ourselves more of an opportunity to bring in assets like I will tell you that right now, if you just look at the NRx and TRxs of VITAMMA, it's clearly positive signaling to the fact that we made the right decision. And hopefully, we'll be able to have a discussion at the end of the year where you see that we delivered what we said we were going to deliver with the product. And ultimately, then you see that the run rate of where we're going with this product and the type of label we're developing was a good use of capital. And I think there's a better use of capital in bringing in more assets in that space. And so the combination of what's happening externally, coupled with where investors essentially are kind of telling us that they're very focused on delevering, much more so than anything else, kind of brought us to the fact.

[Kevin Ali, CEO at Organon]

And the initial encouraging results we're really having with ZYPAMA and the continued strength of our core products like Nexplanon tells us that there's a better use of that capital in terms of being able to go forward and use it to be able to not only delever but bring in growth aspects for the company.

[Umer Raffat, Senior Managing Director at Evercore ISI]

Thank you for that, Kevin. And maybe just to clarify then, is part of your thought process in anticipation for tariffs given your manufacturing network? Or was it exclusively from a delevering perspective?

[Kevin Ali, CEO at Organon]

Well, right now, we don't know where we're pretty well set for where the tariffs are today. Let's see where they land in The U. S. It's very early to be able to determine exactly what that's going to look like. But I think we're pretty good for 2025.

[Kevin Ali, CEO at Organon]

We brought in a lot of the inventory that, as I said, we manage the inventory of our biggest product, Nexplanon. But the focus really is on deleveraging right now. And I think that, as I said, volatile times, investors being very clear with us, we need to delever, accelerate that process, kind of took us to where we took that decision not lightly, but I think very clear minded.

[Matthew Walsh, CFO at Organon]

Thank you.

[Operator]

The next question comes from Jason Gerberry with Bank of America. Your line is open.

[Bhavin Patel, Analyst at Bank of America]

Hey, guys. This is Bhavan Patel on for Jason. Two questions from us. First, what are your views on the Nexplanon paragraph four? Do you see the filer as a credible threat to launch a generic in ex US markets?

[Bhavin Patel, Analyst at Bank of America]

And where does the FDA stand on the issue of applicator similarity, which I believe was the core issue in your Citizens Petition? And then my second question is regarding the expected $900,000,000 plus of free cash flow before onetime costs. Can you break down the anticipated onetime costs for 2025? And how should we think about free cash flow both before and after onetime costs in 2026? Thank you.

[Kevin Ali, CEO at Organon]

Why don't we address those questions in reverse order? Matt, why don't you deal with cash flow issues, onetime costs? And then maybe Juan Camilo, you can address the Paragraph IV issue, which is U. S, by

[Kevin Ali, CEO at Organon]

the way, specific.

[Matthew Walsh, CFO at Organon]

Yes. So with regards to this fiscal year, included in our estimates for onetime costs, it's about $150,000,000 in round numbers related to the manufacturing separation from Merck. Recall that the one time cost of separation on the administrative side for things like TSA activities, that number is zero. From a restructuring perspective, we were looking at something in the vicinity of 200,000,000 to achieve the operating expense savings of $200,000,000 this year, annualizing to $275,000,000 And then there's about $75,000,000 of other costs, which I elucidated in the prepared comments.

[Matthew Walsh, CFO at Organon]

As we look forward to 2026 and really beyond, we will continue to have manufacturing separation costs for the next few years. This year is probably the largest. It will be gradually declining. And then what we will start to see is the back end milestone payments for BD deals already signed, that will probably be in the two million to maybe $250,000,000 range going forward. But thankfully, the further we get from the spin off, the less of an impact these various onetime costs are making.

[Kevin Ali, CEO at Organon]

And then I'll ping pong with Juan Camilo in regards to the question on the Paragraph IV. It's not a surprise to us. And the legal process that, that's going to go through will take us anyway through probably mid-twenty twenty seven. But we still have a patent that needs to be determined in regards to legal process in regards to our applicator. We feel very confident that that's a fairly strong patent that takes us through 02/1930.

[Kevin Ali, CEO at Organon]

And the issues in terms of regulatory process of being able to get the FDA approval in regards to actually having a three year remember, we're launching five year indication later this year. So they'll be if they overcome all the significant large obstacles, which nobody has been able to do yet with the FDA on the LARC, then they'll be coming into the market that's already moved to five year indication. But I'll move it over to Juan Camilo to discuss in regards to some of the regulatory difficulties around trying to get an approval for a product like this.

[Juan Camilo Ferreira, Executive VP, Head of Research & Development and Chief Medical Officer at Organon]

Yes. Thank you, Kevin. And thank you, Jason. The complexity of getting a generic lark, it's been highlighted multiple times. It is multiple fold.

[Juan Camilo Ferreira, Executive VP, Head of Research & Development and Chief Medical Officer at Organon]

The first is the demonstration of equivalent. There is a need for bioequivalence. The current draft guidance from FDA asked for six months, but it's been shown in the past that six months of bioequivalence does not translate into three years of efficacy. Therefore, that's one of the challenges that FDA is going to have to decide how much they're how confident they are on the efficacy side. Then you mentioned the applicator that gets to the safety.

[Juan Camilo Ferreira, Executive VP, Head of Research & Development and Chief Medical Officer at Organon]

FDA is really focused on the safety of the insertion and removal of implants like this. Any changes to the applicator open the door for really questioning safety of a new device and the requirements for training for restricted distribution for certification of physicians before they can use their products. So there is complexity all throughout. So FDA will have to now go through this review. And we've highlighted this very clearly, multiple aspects of this in detail in our citizens petition, because we know how complex it is, because we've been doing it for many, many, many years to ensure the safety of Nexplanon.

[Juan Camilo Ferreira, Executive VP, Head of Research & Development and Chief Medical Officer at Organon]

So we see that there is a very, very high bar, not only from a legal perspective on the IP of the rod and the applicator, but also the regulatory bar for FDA to be confident on the efficacy and safety of a new product. So as Kevin pointed out, we continue to be very, very confident in our ability to grow NEXLANET all the way to the end of the decade, and we're excited about the potential for a five year indication coming our way before the end of the year.

[Kevin Ali, CEO at Organon]

Thank you.

[Operator]

This concludes the question and answer session and will conclude today's conference call and webcast. We thank you for joining. You may now disconnect.

Participants

Analysts

• Jennifer Halchak, VP, IR at Organon
• Kevin Ali, CEO at Organon
• Matthew Walsh, CFO at Organon
• David Amsellem, Sr. Research Analyst at Piper Sandler Companies
• Michael Nedelcovych, Director - Equity Research at TD Cowen
• Ethan Brown, Equity Research Analyst at JP Morgan
• Umer Raffat, Senior Managing Director at Evercore ISI
• Bhavin Patel, Analyst at Bank of America
• Juan Camilo Ferreira, Executive VP, Head of Research & Development and Chief Medical Officer at Organon