Organon 21Q3 Update

Organon reported 21Q3 GAAP EPS of $1.38 which exceeded my estimate of $1.31.  Revenues were in line with my estimates and operating costs were lower, except for a $25 million increase associated with the acquisition of in-process research & development.

Management reaffirmed and narrowed its pro forma full year 2021 guidance on key metrics.  My projections, which are consistent with management’s guidance but above consensus, anticipate GAAP EPS of $5.85 and non-GAAP EPS of $6.63.  Management’s guidance leaves open the possibility of one-time charges or a higher tax rate, which probably explains most of the difference between my projections and consensus.

Management remains confident in Organon’s ability to achieve organic revenue growth in the low- to mid-single digits.  By year-end, the risks associated with loss of exclusivity in Established Brands, which accounts for two-thirds of sales, should be minimal.  The remaining one-third of sales, from Women’s Health and Biosimilars, is poised to grow at double-digit rates.  Organon will also generate significant free cash flow which can be used to expand through acquisitions, licensing, joint ventures and internal development.  For 2022, though, my projections anticipate modestly lower earnings, as the company continues to adjust to operating as an independent company and cope with the lingering effects of the pandemic.  Even so, management’s long-term targets should translate into growth in earnings in 2023 and beyond.

The stock’s current valuation of five times forward earnings seems unjustifiably low.  It appears to reflect a “show-me” attitude by the market on management’s performance targets.  The stock had advanced nicely from August to early November, but it has given back all of those gains since reporting 21Q3 results.  Nevertheless, I am maintaining my rating at “1”, strong outperformance, and my $45 price target, which represents a multiple of 8 times projected 2022 GAAP earnings of $5.68 and 7 times projected 2022 non-GAAP earnings of $6.42.

This is a summary of my update report on Organon & Co. (OGN). To obtain a copy of the full report, please reach out to me.

December 10, 2021

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

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