Ladies and gentlemen, thank you for joining us. I would like to welcome everyone to the Organon Third Quarter 2023 Earnings Conference Call. All lines have been muted to avoid background noise. After the speakers finish their remarks, we will have a question-and-answer session. This call is being recorded. Thank you. I will now hand it over to Jennifer Halchak, Vice President of Investor Relations. Please begin your conference.

Thank you, operator. Good morning, everyone. Thank you for joining Organon's third quarter 2023 earnings call. With me today are Kevin Ali, Organon's Chief Executive Officer, who will cover strategy and operational highlights; and Matt Walsh, our Chief Financial Officer, who will review performance and guidance. Dr. Sandra Milligan, Organon's Head of R&D, will also be joining us for the Q&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. The presentation will also be available following this call on the Events & Presentations section of our Organon Investor Relations website at www.organon.com. Before we begin, I would like to remind 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-K 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 in accordance 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 would now turn the call over to our CEO, Kevin Ali.

Good morning, everyone, and thank you, Jen. Welcome to today's call, where we will talk about our third quarter 2023 results. In the third quarter, we navigated some external factors impacting the business. The strength of the U.S. dollar persists. We are navigating a challenging economic and policy environment in China. And as we said from the very beginning that we expected the biosimilars market for Humira to be a slow formation, it has been slower than we thought. Still, in the third, we delivered product sales that grew 1% at constant-currency. That represents our eighth consecutive quarter of product growth. Total revenue, which includes lower margin product sales to Merck, was down 1% at constant-currency, compared with the prior year. In the third quarter, ex-FX, our Women's Health was down 7%, our Biosimilars franchise grew 10%, and the Established Brands franchise, which represents nearly 2/3 of our business, grew 3%, again, demonstrating its continued stability. Adjusted EBITDA was $447 million, representing a 29.4% margin and adjusted diluted EPS was $0.87. With these results in mind, we are lowering our revenue guidance by $150 million at the midpoint to a range of $6.15 billion to $6.25 billion; about $100 million of this is from FX rates that have worsened since we last guided in August. The remaining impact primarily reflects the operational factors I just described, plus changes we are making to our go-to-market model for Nexplanon. We are also revising our range on our adjusted EBITDA margin to 30.5% to 31.5% to reflect the lower gross margin stemming from the impacts of foreign exchange on revenue, unfavorable product mix, and the timing of manufacturing costs. Now let's start by reviewing revenue beginning with Women's Health. The Women's Health franchise was down 7% on a constant-currency basis in the third quarter, primarily driven by NuvaRing, which went LOE in 2018 and now has five generics in the market. The fertility business is flat year-to-date, but we anticipate a very strong fourth quarter, driven by identifiable market tailwinds in China as well as the onboarding of a large new customer win in the U.S. Strong finish in the fourth quarter underpins our expectation that the fertility business will deliver high single-digit revenue growth for the full year on a constant-currency basis. In China, we are seeing IVF cycles pick up after a slower third quarter stemming from the Chinese government's ongoing review of healthcare practices, which commanded significant physician attention. This is a transient issue impacting the entire industry. The fourth quarter of 2023 will also benefit from an easier year-over-year comparison as the fourth quarter of 2022 was impacted by COVID. Year-to-date, the fertility business in China has been a growth engine, up 15% FX. We are doing very well in that important market and we have been gaining market share in China. In the U.S., the fertility market is growing and demand is very strong. Strategically, we are working on an evolution of our go-to-market strategy into the reimburse market segment, which is rapidly growing. Over the past three years, the percentage of employers providing fertility benefits has increased from 30% to 40%. To compete in the reimbursed market, we have traded price for volume. We are having success, and we are excited about some of the significant accounts we have recently secured that will start to benefit the business in the near-term. In fact, a recent win in the reimbursed book of business represents our largest customer win since becoming an independent company. Inventory build from this customer will help to drive what we expect to be a strong fourth quarter for fertility in the U.S. Particularly encouraging is that as we head into 2024, we expect Organon's fertility products will be the preferred brand and a significant percentage of covered lives in the U.S. Let's now turn to Nexplanon, which declined 3% ex-FX in the quarter and is up 2% year-to-date on a constant-currency basis. We expect a robust fourth quarter of Nexplanon, resulting in full year performance in line with that low single-digit growth year-to-date. We have made some key strategic decisions to better position Nexplanon in the U.S., and to accelerate growth globally. The initiatives undertaken will position Nexplanon for strong growth in 2024, and we expect to reach a $1 billion run rate in 2025. First, we have made some changes to our U.S. go-to-market model. We will not take effective price in Nexplanon in the U.S. in 2023. Our future U.S. pricing increases will now be aligned with when health plans update their pricing and reimbursement schedules. This timing update will make a meaningful difference to the value physicians see from carrying and implanting Nexplanon. Additionally, we see a healthy uptick in customer purchases, ahead of when a new price increase goes into effect. So by postponing our price increase until next year, we anticipate about $20 million of customer buying will shift into 2024. Also, as we have signaled in the last couple of quarters, our Nexplanon mix in the U.S. has been skewing more heavily towards higher discounted channels. We are adapting to this industry-wide dynamic by removing voluntary discounts in these federal programs, which we believe will benefit the fourth quarter and going forward. Secondly, we limited our participation in the annual Mexico tender on the basis of price. That represents about $20 million of negative impact to Nexplanon revenue in 2023. Lapping this impact will be a tailwind to Nexplanon's results next year. And thirdly, overall demand outside the U.S. has been strong, especially in Asia and Africa. In fact, it has been so strong that we have invested in expanding our Nexplanon supply capacity to satisfy these fast-growing international markets. We have visibility to approximately $20 million of throughput related to that demand that we expect to be realized in 2024. So I have talked about three factors that will drive Nexplanon growth next year, which together represents $60 million or about 7 points of growth that we have high visibility into for next year. Turning to Other Women's Health products, let's talk about Jada, our device for postpartum hemorrhage. This is the first time we are publicly breaking out revenue for Jada. And so you will see that year-to-date, Jada has generated $31 million, more than double the revenue for the same period last year. Jada is now available in over 85% of the largest birthing hospitals in the U.S. and more than 36,000 mothers have been treated with Jada since launch. Given our progress in making Jada available in the majority of the hospitals in the U.S., our focus will now shift to supporting hospitals and users in the incorporation of Jada into their standard PPH readiness and response protocols. We believe Jada can achieve a peak of up to $150 million in the U.S. and more than $250 million peak when layering in the potential sales outside the U.S. Globally, there are over 100 million births annually and less than 4 million of those are in the U.S. Jada is a great fit for our global footprint. And finally, in October, we made our first U.S. shipment of XACIATO, an FDA approved medication for the treatment of bacterial vaginosis in patients 12 years of age and older, developed by our collaborator Daré Bioscience. Our go-to market strategy leverages the knowledge and experience of the Nexplanon commercial team. Our skilled market access team continues to meet with customers to review XACIATO and obtain competitive managed care formulary status in the bacterial vaginosis marketplace. Let's move now to our Biosimilars business, which grew 10% ex-FX in the third quarter and 15% year to date. Understandably, we get the most investor questions on the recent launch of Hadlima in the U.S., so let's focus the discussion there. At an 85% discount, we priced Hadlima to enable expanded access and to bring the economic benefits of biosimilars directly to the patient. We've emphasized that's where we believe we can offer the highest value to patients. We have focused our commercial efforts on payers who want to bring lower net costs to patients. We estimate that together those plans represent about 40% of the covered lives in the U.S. While not as rapidly as we may have hoped for, we're having success. Among the July cohorts of entrants, we're out-prescribing our next closest competitor by a factor of over 3x. We're winning in both the commercial and managed Medicaid space across the competitive set, and we're rapidly closing in on the gap on Amgen's AMJEVITA, despite their six month lead in the market. Consistent with comments we've made around Hadlima's launch, there is a market need for a simple single price strategy and we believe that product attributes will be a key to uptake. We're well positioned with a product that has a high-concentration, citrate-free formulation, as well as the low concentration formulation, a user-friendly pen backed by the Arthritis Foundation, a wealth of real-world evidence from over 20 studies and interchangeability expected by mid-2024. We view the slower market formation for biosimilars as a clear missed opportunity to pass on savings to patients. Right now, about 1/3 of patients on Humira pay at least $1,000 a month. That is more than they would pay for Hadlima, out of pocket without insurance coverage. We believe it is not a matter of if, but when this market starts to meaningfully form. Our very intentional focus on the low-cost segment of the market together with our product profile could very well help the market convert much faster. Rounding out the top line discussion, let's move to Established Brands. Year to date, the Established Brands franchise has grown 1% ex-FX. Over the past quarters, we've highlighted some fundamentals of our Established Brands strategy, which explains why the franchise has been performing ahead of external expectations since our spin. In the first quarter, we talked about manufacturing optimization for Nasonex and Atozet to meet increasing demand, resulting from heightened promotional activity. Last quarter, we talked about adapting our commercial model to compensate for payer pressure and to mitigate pricing declines in select markets through our policy work. What bears repeating this quarter is the product and geographic diversity of the portfolio and the way we have been managing these assets has led to very stable results. During any given quarter, we are navigating and capitalizing on geographic and competitive complexities that can vary widely across our five geographic regions and 49 products. The stable results in Established Brands we have delivered since our spin have been a testament to the diversity of the portfolio, as well as the solid execution by the team. Now let's turn to Slide 9, where we can take a look at revenue by geography. Let's focus on China because that is the region that's currently moving most dynamically this quarter. As you probably understand, the Chinese economy has had a slower-than-expected recovery post-COVID. The general economic slowdown is impacting Chinese consumers, which for our business had read through to the retail business. We have had a long operating history in China, and our experience in navigating this dynamic market. We have implemented initiatives that help us to reach the consumer more directly, for example, through e-commerce. In addition, in recent weeks, our traditional retail business that is through pharmacies has also started to improve. The other macro issue at play in China is that for the first time in recent history, the healthcare budget in China is in a deficit. The authorities are seeking options to offset this decline, which includes stricter enforcement of the volume-based procurement rules and investigations into prescribing patterns at the hospital level. Our portfolio has seen a very muted impact from these particular initiatives. We have strong diversity in our China business. No product represents more than 16% of revenue in China. Also, most of our portfolio has already been through VBP and has weathered those impacts. And because we have a long operating history in China, our team has experience and has reallocated resources to other areas less impacted by this campaign. Overall, we believe that we will see a return to a more normal level of engagement in the hospital and retail channels by the beginning of next year. In fact, we are already seeing growth in China in the fourth quarter. Since spin, we have given new life to Established Brands and have expanded our pipeline in both Biosimilars and Women's Health. As we move into 2024, we will be working to reduce leverage and maximize the power of our existing portfolio. We are currently creating our own opportunities. We are overturning every stone to unlock value. The transient headwinds we saw in 2023 will serve as tailwinds for us next year. We believe we are well-positioned to build from here and deliver mid-single-digit revenue growth over the medium-term. Now let's turn the call over to Matt, who will go into our financial results in more detail.

Thanks, Kevin. Beginning on Slide 10, let's walk through the drivers of our 1% decline in revenue at constant-currency for the third quarter. Starting with the impact of loss of exclusivity, LOE was about $10 million in the third quarter, and the small amount that we have realized year-to-date has been related to generic competition for NuvaRing in the U.S. In the third quarter, we had about a $30 million volume impact from VBP in China, consistent with the first two quarters of the year, as the impact continues to be related to last year's implementation of Round 7 that included our cardiovascular product Ezetrol, which is sold as Zetia in some markets outside of China, as well as the July implementation of Round 8 that included REMERON and HYZAAR. We experienced a $25 million price erosion in the quarter. In prior quarters, Established Brands was the franchise contributing most significantly to this area. But as Kevin just referenced, we've been able to stem price erosion in Established Brands to the low end of our expectations. What we saw in Q3 was price pressure being driven within other franchises. Given the nature of biosimilar competition, we're seeing pricing pressure broadly across that franchise. Additionally, two issues within Women's Health in the U.S. First, customer mix in Nexplanon has been skewing towards the 340B channel. And second, within fertility, we're seeing price pressure as we competitively position ourselves to grow volume in the attractive market for reimbursed fertility services. We had about $70 million of volume growth in the third quarter, primarily from Established Brands, particularly in our LAMERA region and non-VBP products in China. Setting aside the slow market formation for Humira biosimilars in the U.S., which Kevin covered in detail, our Biosimilars volume was up nicely in the U.S., Canada, and Brazil due to volumes from new customers as well as greater depth of purchasing from existing customers. The bar for supply/other primarily represents sales to Merck of $15 million for the quarter compared to the prior year. As we've discussed in the past, this revenue stream is essentially a series of lower margin contract manufacturing arrangements that have been declining since the spinoff and will continue to decline going forward. And finally, you can see the financial reporting headwind we had in foreign exchange translation of about 65 basis points for the third quarter. In August, when we last updated guidance, we raised our revenue guidance based on where spot rates were at that time. With the benefit of hindsight, late July, early August happened to be the most favorable point in the year in terms of FX spot rates versus the U.S. dollar. Since then, the dollar has strengthened as much as 6% across some of our most significant currencies, which has caused us to give up the second half favorability we were anticipating based on August spot rates and then some. I'll remind everyone, our sensitivity to foreign exchange in financial reporting is a function of more than 75% of our revenue being generated outside the United States. Now let's turn to performance by franchise. As has been our convention, I will target my comments over the next three slides to those areas most relevant to your modeling as we think about where we will end the year. Let's start with Women's Health on Slide 11. As Kevin covered in some detail at the outset, Nexplanon is experiencing headwinds in 2023 that we don't expect will recur next year. The math on those headwinds, especially those in the second half, indicate that it's hard to envision a scenario where Nexplanon doesn't return to strong growth in the high single-digits next year. Demand for fertility is solid and that therapy area continues to have strong structural tailwinds even if we have to continue to give up some price as we did in the third quarter in order to gain greater market share. In the area of new products, the Jada device for postpartum hemorrhage is now hitting a steeper part of its revenue curve post-launch, and Xaciato is now in the channel as of last month, and we're looking forward to what that launch will yield in 2024. Turning to Biosimilars on Slide 12. Biosimilars grew 10% ex-FX in the quarter and has grown 15% ex-FX year-to-date. Renflexis grew 15% in the quarter and is on track for its sixth consecutive year of annual revenue growth in the U.S. Ontruzant continues to operate in a competitive environment in both the U.S. and Europe. However, volume remains strong in the LAMERA region, mainly in Brazil, and this was offset in competitive pricing dynamics. With regard to Hadlima, our original expectation for global Hadlima sales in 2023 was that it would represent just under 1.5% of full year 2023 revenue. Given the slower market formation in the U.S. for Humira biosimilars that Kevin discussed in detail, global Humira revenue mix will be significantly less than that in 2023. And in fact, this is one of the key factors driving our 2023 revenue guidance revision. Turning to Slide 13. Established Brands grew 3% ex-FX in the third quarter, and it is still in positive territory for the year at 1% growth year-to-date. We have talked about the durability of Established Brands. This year is a case in point, that 3% growth ex-FX was delivered despite three pretty significant headwinds. First, VBP in China, which is currently capturing our largest product Ezetrol in Round 7, and now we have Round 8 underway. Second, the economic slowdown and challenging policy environment in China. And third, we grew despite the market action that occurred at the very beginning of the year for injectable steroid products. Given year-to-date performance and the outlook for the fourth quarter, we expect Established Brands to deliver at least level performance year-on-year at constant currency. Now let's turn to Slide 14 where we show key non-GAAP P&L line items, metrics for the third quarter and year-to-date performance. For reference, GAAP financials and reconciliations to the non-GAAP financial measures are included in our press release and in the appendix slides of this presentation. For gross profit, we are excluding from cost of goods sold, purchase accounting amortization, and one-time items related to the spin-off which can be seen in our appendix slides. Non-GAAP adjusted gross margin was 62.6% compared with 67.1% in the prior year period. The year-over-year decline in gross margin is primarily due to foreign exchange translation, and inflationary manufacturing and distribution costs. Product mix and pricing erosion were also factors, but to a lesser extent in this quarter. With respect to the foreign exchange impact on cost of sales, third quarter adjusted gross profit margin reflects the timing of FX recognition related to inventory purchases, which has impacted us unfavorably versus the prior year and this will continue into the fourth quarter. Moving down the P&L. In October, we were able to reach agreement in principle on the key terms of a settlement with Microspherix to resolve patent infringement claims for Nexplanon that predated the spin-off. We reserved an amount of $80 million to cover the settlement. The settlement will be paid out over three fiscal years, $35 million in 2023, $25 million in 2024, and $20 million in 2025. That total of $80 million in legal reserves was the main driver in GAAP SG&A increase year-over-year. On a non-GAAP basis, as you can see, SG&A increased 4% mainly due to higher employee-related costs. Total non-GAAP R&D, excluding IPR&D expense increased 7% in the quarter. The increase is primarily due to continued investments into our pipeline and higher costs associated with the development of these assets. Including IPR&D, R&D expense was actually down 2% year on year. We had $10 million of IPR&D expense in the third quarter of 2022 against no such expenses in this quarter. These factors culminate in an adjusted EBITDA margin of 29.4% in the third quarter of 2023 compared to 35.5% in the third quarter of last year. Non-GAAP adjusted net income was $223 million or $0.87 per diluted share compared with $337 million or $1.32 per diluted share in 2022. The year-over-year decrease in net income was a result of lower adjusted EBITDA as well as higher interest expense. Turning to our net leverage ratio on Slide 15. As we've previously discussed, we expected upward pressure on our net leverage ratio this year with the peak expected to be in the third quarter, and this has played out. Next quarter, we will be lapping a low adjusted EBITDA quarter last year due to last year's market action on injectable steroids, and that should drive a decline in the net leverage ratio in Q4, all else equal. Turning to Slide 16, we provide a closer look at our cash flow. For full year 2023, we expect to generate between $700 million to $800 million in free cash flow before one-time charges. At the midpoint of the range, this is about $250 million below what we expected earlier in the year, and the difference is attributable to lower expected EBITDA as well as working capital use. On the latter, we're now deep in the implementation of our new global ERP system, and that has temporarily tied up cash and current accounts to mitigate potential disruptions to normal operations. As a reminder, in 2022, we generated just over 75% of our annual cash flow in the second half, and we expect this year to follow a similar pattern. One-time cash costs related to the spinoff transaction are trending in line with our expectation of about $350 million for the full year 2023. The single biggest component of separation costs relates to the implementation of the global ERP system that I just referenced, and we're on track to complete that in the second quarter of 2024. As a result, these one-time costs associated with the spin, especially those that are related to transition services agreements as opposed to the longer-tailed manufacturing services agreements, should decline meaningfully next year. For CapEx, PP&E of 3% to 4% of revenue remains a good range for forecasting purposes as we continue to deploy that capital into our internal manufacturing and packaging capabilities as well as our technology infrastructure to help drive cost efficiency and productivity. Turning to revenue guidance on Slide 17. We bridge our expected revenue change year on year. We have revised the number of these ranges based on how we expect to finish the year. LOE impact has been minimal so far in 2023; we expect the year to finish similarly. The small amount realized was related to the impact of generics maneuvering. We lowered our range to $10 million to $20 million, down from $50 million to $75 million as we do not anticipate a generic entrant for Dulera in the U.S. this year. And in addition, the impact of generic competition for Atozet in Japan on that LOE event has been lower-than-anticipated this year. Turning to VBP, we now expect the annual impact to be slightly lower than what we guided to in the second quarter as we're tracking better with both Atozet, which was in the implementation of Round 7 in November of last year, as well as the recent Round 8 implementation in July of this year, which included our REMERON and HYZAAR products. We are lowering our estimate of potential price erosion to $90 million to $100 million, down from $100 million to $150 million, an improvement from the bridge that we showed you last quarter. Here, we are seeing the momentum of our Established Brands portfolio being able to manage price erosion better than expected across several markets. We have lowered our outlook for volume growth for the year and that underpins our revision to the revenue guidance. We have lowered our range to $370 million to $400 million or about 6% year-on-year growth at the midpoint, down from the 9% we were forecasting last quarter, as a result of changes we have made to our go-to-market model for Nexplanon, a slower-than-expected uptake of Hadlima and macroeconomic and policy headwinds in China. When we reported our second-quarter results in August, the U.S. dollar had been steadily weakening over the first seven months of 2023 and we saw favorability in our forecast if rates simply held at where spot rates were in early August. Since then, FX has retraced, we gave back all of those gains and then some. We are now raising our FX exposure to $120 million to $130 million representing about a 200 basis point headwind for the full year 2023 compared with the zero to 80 basis points of headwind we expected for the full year back in August. Together, these factors result in revising top-line guidance to $6.15 billion to $6.25 billion, which represents growth of 1.6% to 3.3% growth on a constant-currency basis. Moving to the other components of guidance on Slide 18. We are revising our range on expected gross margin to the low 60% range, which reflects impacts from foreign exchange on revenue, unfavorable product mix, and timing of manufacturing costs. We are in the midst of our budget planning process for 2024. So while we aren't providing 2024 gross margin guidance today, we can say, directionally, that the factors that have impacted gross margin in 2023, especially in the back half, will be factors for us in 2024 as well. For example, inflationary pressures will likely persist at the COGS line. Also, the Fed dialogue around higher-for-longer as regards its influence over short-term interest rates in the U.S. suggests that the strong dollar is likely to continue to be a headwind given our significant ex-U.S. revenue exposure. For operating expenses, our ranges for SG&A and R&D as a percentage of sales are consistent with what we laid last quarter for our expectations for the year, and reflect the investments we are making in the business to position it for future growth. In closing, bright spots in the third quarter performance included the continued steady performance of Established Brands, our largest revenue segment; and within Women's Health, the strong performance of Jada and the launch of Xaciato. The 2023 guidance revision was necessary in light of the macro issues around economic and policy conditions in China and FX translation, as well as the slow market formation for Humira biosimilars. Even with this, we believe Organon will post constant-currency revenue growth in the low single-digits. And on a reported basis, we are likely to post revenue growth for 2023 that exceeds the revenue growth rate of last year. With that, we can now turn the call over to Q&A.

Our first question comes from Navann Ty with BNP Paribas.

I have three questions please. Can you hear me okay?

Yes, we can.

Could you clarify Nexplanon's change in the go-to-market model and what drove the change and will it smooth the quarterly cadence of Nexplanon revenues? And then on fertility, have you seen biosimilar competition pressure intensifying? And also curious about what level of discount did Organon provide when onboarding accounts in Q3? And then just one overall, if you do still expect a long-term, high single-digit, low double-digit growth with the current Women's Health portfolio?

I’ll address your three questions. Regarding Nexplanon, historically, the price increase typically occurs in the fourth quarter, leading to substantial buying activity in the third and fourth quarters as customers prepare for this price change. This results in fluctuations in the first quarter each year. Additionally, healthcare providers usually update their reimbursement schedules in the first quarter of the new year, which can create challenges for physicians due to discrepancies between price and these schedules. By allowing price adjustments in the first quarter, we align with the broader LARC industry and the timing of updated reimbursement schedules at the state level. This change helps reduce the unpredictability and volatility associated with previous buying patterns, enabling smoother and more predictable forecasting for our operations and stakeholders. As for your second question on biosimilar penetration in the U.S., we haven’t observed any significant increase in this area. In fact, we're seeing more patients transition to the reimbursed segment due to company-sponsored benefits in the fertility sector. This situation results in a trade-off between price and volume that we cannot definitively assess right now, but we have secured a significant win in the reimbursement sector, which we will elaborate on in our next earnings call. You may notice some inventory buying in the fourth quarter as a result. Lastly, our long-term goal is to continue growing our Women's Health portfolio. We expect fertility to see high single-digit growth this year and likely the same next year. We believe Nexplanon will perform well next year, particularly with our enhanced go-to-market strategy beginning early in the year. Regarding our international business, we are increasing supply to meet growing demand, particularly in Latin America, Asia Pacific, and Africa, which enhances our confidence in future growth opportunities in Women's Health. Furthermore, we are seeing strong performance from Jada, and we are in the process of launching Xaciato, which will also contribute moving forward.

Thank you. Our next question comes from the line of Umer Raffat with Evercore. Please go ahead.

This is Jiachen asking for Umer. I would like to inquire about your business in China. It was previously projected that 70% to 80% of business would transition through the VBP by the end of this year. Considering the new dynamics you just outlined, how should we approach the China business as we head into 2024, particularly in the first half? Additionally, what impact have you observed from the government's review campaign in the healthcare sector this year in China?

Thank you for the question. China is our second-largest market at Organon and is very important to us. We have a long history in China, and it remains a key focus. By the end of this year, about 75% of our Established Brands business will have undergone the volume-based procurement process. This means we are now concentrating on transitioning our business to the retail sector in various forms, including e-commerce and pharmacies. We are actively working with the leading pharmacy chains in China and have successful ongoing programs with them. Regarding your second question about the policy framework, companies with excessive concentration risk in the public sector and volume-based procurement may face challenges. However, no single product of ours accounts for more than 16% of our overall business, and we have shifted much of that business to the retail sector, reducing exposure. While the last summer was disruptive, we are currently recovering and feel optimistic about fourth-quarter growth and increased retail access. We anticipate that next year will be strong for us in China as we navigate and overcome the challenges faced this year.

Our next question comes from the line of David Amsellem with Piper Sandler.

Just two for me. Broadly speaking, just given the headwinds you cited, are there any initiatives that you're considering to try to boost EBITDA margins as you think about '24 and longer term? That's number one. Number two is thinking broadly about Biosimilars, what's the role of that segment in the organization? And is that something you might look to monetize in some way, either as a way to pivot to acquisition of brand assets or to address the debt balance? How do you think about that?

Thanks for the question, David. On the first part, I'll take that one. So we are and have been managing the business pretty tightly. From a cost perspective, most of the increases that you've seen in our reported results, whether it's in the SG&A line or the R&D line, have been for revenue-producing activities in the future so that we can sustain our long-term revenue growth rate. That said, as regards what you might refer to as infrastructure costs, administrative costs, et cetera. We're going after those, hard to manage those as tightly as we can. And so just we're rest assured that we're really examining the cost structure hard to make sure that we're differentiating from revenue-producing costs that represent investments in the future, and any costs related to running the business from an administrative perspective, we are clamping down on those.

David, regarding your second question about biosimilars, I see them as a significant opportunity for us in the short to medium term. Looking ahead to the end of the decade, when certain patents expire, there will still be a strong market. Our biosimilar Hadlima for Humira has been growing more slowly than we expected. However, when considering our share of total prescriptions, we are three times larger than our closest competitor that launched in July. Thus, I believe it's just a matter of when the market will open up, not if. Currently, about a third of patients are paying around $1,000 in out-of-pocket costs for Humira every month, even after its loss of exclusivity. Additionally, an estimated two-thirds of Americans are living paycheck to paycheck, which suggests that, over time, the market will gradually expand. We anticipate a more gradual growth in our Hadlima business instead of a sudden spike followed by a sharp decline. We are optimistic about our biosimilar franchise and will continue to approach it with that mindset. Importantly, the return on invested capital is strong, and we do not allocate significant resources towards our biosimilar franchise, leading to a healthy return. Therefore, we feel positive about this area for now.

Our next question comes from the line of Jason Gerberry with Bank of America.

This is Bhavin Patel on for Jason Gerberry. Two questions from us. The first is on free cash flow. It seems like the lower $700 million to $800 million free cash flow target from $1 billion previously is mainly due to net working capital use as well as lower EBITDA outlook. So how likely is this net working capital use impact to carry over into next year? Do you think that we should start thinking about $700 million to $800 million of free cash flow as an annual benchmark? Or do you see it possibly getting back to $1 billion annually next year? And then the second is on capital allocation. Notice these plans for further debt paydown in 2024. So can you frame any sort of leverage ratio target or at least how you may balance the debt paydown with business development and paying dividend?

Okay. So we'll take the free cash flow question first. We started the year with an anticipation of in round numbers, about $1 billion of free cash flow. We have had to take that back given developments this year, as we noted, related to lower EBITDA as well as the investment in net working capital. Now the latter is temporary, okay? That will come back out of the business. We will be fully through the implementation of our global ERP system in the second quarter of next year. So working capital should work its way back into our bank accounts as cash, sort of more or less ratably over that timeframe. And so we do see that the business should return to a higher level of free cash flow generation next year. And when you combine that with the fact that we expect to see lower one-time costs from the separation next year, we're actually quite optimistic about what next year's free cash flow number will look like and when we guide to that in February. Since the spin-off, we have been focused on balancing capital allocation between investments for future growth and short-term benefits from reducing leverage. With the rise in interest rates, the advantages of debt reduction seem more appealing. As we've mentioned before, this raises our standards for business development and M&A activities, which is why there has been a comparatively lower level of business development activity in 2023 compared to 2022. We remain confident that the cash flow profile of the business supports our current dividend, and we have no plans to change that in the near term.

Our next question comes from the line of Chris Shibutani with Goldman Sachs.

This is Roger on for Chris. Just one quick question from our end. So just given the updated statements from the FDA recommending that all labeling for biosimilars include one statement, the biosimilarity statement, can you comment on how you view this change and whether this acts as a tailwind or headwind for the uptake of Hadlima?

Yes. Currently, this is just a draft statement and not an immediate action item for anyone. However, I believe it will eventually become significant. We have already invested in interchangeability, and the data from our partners at Samsung Bioepis has been very promising. We anticipate launching our interchangeability indication around the end of the second quarter or the beginning of the third quarter next year. This will likely provide us with momentum in the market. What we observe is that interchangeability, particularly at the pharmacy level, will facilitate an easier transition for patients. They will be able to choose between, for example, a $1,000 co-pay or a significantly lower amount, such as $100, depending on their plan. Having the interchangeability designation should assist pharmacists in making the transition from Humira to the biosimilar more active. If that switch occurs, we currently hold a strong market share in total prescriptions and will capture a substantial portion of the market. Therefore, I see this as a positive factor for any product that obtains the interchangeability designation, and only a few, about three or four, will hold this designation compared to others that have not begun the necessary studies.

Our next question comes from the line of Balaji Prasad with Barclays.

This is Mikaela on for Balaji. Just two from us. I guess, can you talk a bit more about the Hadlima ramp into 2024? And I guess, elaborate on just some of the key factors impacting it. And on Women's Health, will you be able to reverse the weakness seen? And I guess, any further comments on what will be needed here?

For Hadlima, the ramp-up in 2024 will be influenced by AbbVie's ability to leverage its bundling power, especially in the pharmacy benefit manager space. Currently, around 40% of lives covered are sensitive to WAC or have low net cost sensitivity, so it will take time for those plans to start becoming more accessible. There is a delay in the discounts lost from the AbbVie business compared to the benefits from the biosimilar discounts. We expect to see improved business next year, but 2024 will also be another year of market formation. I believe significant progress will occur in 2025, which will gradually open up opportunities for us. Therefore, we view Hadlima as a longer-term business with continued double-digit year-over-year growth that will support us in the coming years. Regarding Women's Health, we did encounter some challenges this quarter, but it does not affect the overall growth trend of our Women's Health business. In the third quarter of 2022, there was an 18% growth in the U.S. for Nexplanon, largely due to strong performance impacted by previous COVID-related issues. The results in 2023 reflect a few factors, including comparisons to a very strong prior quarter and changes in our go-to-market model affecting pricing. Currently, the inventory buildup in preparation for an upcoming price change isn't occurring as it typically would. You can expect to see improvements starting in the first quarter of next year as inventory levels begin to stabilize.

There are no further questions at this time. I would now like to turn the call over to Kevin Ali for closing remarks.

Thank you. It's been an opportunity for us to kind of show what we've been able to accomplish a lot in a very short period of time as a stand-alone company. We're just a little bit over 2.5 years old. And we've got a very talented team dedicated to continuing the growth of Organon's business. We look forward to the future. There's been some headwinds in this quarter, but we see them as more transient. China is starting to grow again in Q4, so that overhang is starting to lift, and we see China's growth opportunities as solid for next year. We've taken some changes in regards to our go-to-market model on Nexplanon, and that will continue to show progress for next year as well. And we see opportunities for Hadlima. And it's not a question of if, it's a question of when it starts to open up and ultimately drive more incremental growth for us as a company. So we feel we're in a good position to continue our work and continue our focus, and we take the opportunity to look forward to speaking to you on the next earnings call. Thank you very much.

I would like to thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's call. You may now disconnect.