22Q2 revenues of $1.585 billion were flat year-over-year, but up 5% at constant currency. GAAP EPS of $0.92, was below 21Q2’s $1.68 and also below my $1.11 estimate. Non-GAAP EPS of $1.25 was below last year’s $1.72 and also below my $1.34 estimate. In 21Q2, Organon was still part of Merck, so the year-over-year performance figures are not directly comparable.
Operating costs were higher than expected, in SG&A, due to the higher cost of operating as an independent, publicly-traded company and higher business development expenses, and also in R&D. OGN incurred IPRD costs from its new collaboration with Shanghai Henlius Biotech, a Chinese biosimilars firm. Free cash flow for both 22Q2 and YTD was well below expectations.
Organon continues to pursue acquisitions and licensing agreements. Besides Henlius, it has announced three others so far this year. Some, like Xaciato, are assets that have begun generating revenues, but their contribution to consolidated results is small. Organon seeks a balance in business development between assets that can make an immediate contribution to sales and profits and pipeline opportunities that may be years away from commercialization. It may therefore take time before these efforts make a meaningful contribution to its bottom line.
With the lower-than-expected 22Q2 earnings, I have reduced my 2022 earnings estimate to be in line with the company’s adjusted EBITDA guidance. (Previously, my estimates were above guidance.) I now anticipate GAAP diluted earnings of $3.86 for 2022 and $4.45 in 2023. Non-GAAP EPS projections are $5.01 and $5.49, respectively. Despite falling sharply since late May, Organon’s stock has outperformed this year, but it still trades at a significant discount to the market and peers. With progress in its stabilization and growth efforts, this discount should narrow over time. Lower-than-expected free cash flow is a concern, so I am reducing my price target to $40 (from $45). But at the current price, the potential total return to the PT is 30%, including the 3.6% dividend yield. Accordingly, I am raising my performance rating to “1”, significantly outperform. A decline in the dollar in 22H2, if the Fed slows its interest rate increases, would boost OGN’s sales and profits.
On August 17, Organon and its partner Samsung Bioepis announced that the FDA has approved Samsung’s formulation of a Citrate-Free High-Concentration form of HADLIMA, its biosimilar of HUMIRA. This is noteworthy because most prescriptions of HUMIRA, the world’s second best-selling drug in 2021, after the COVID vaccine Comirnaty, are now based on the high concentration version. Organon will launch HADLIMA on or after July 1, 2023.
This is a summary of my recent report on Organon & Co., Inc. (OGN). To obtain the full report, please reach out to me using the contact information listed below.
August 8, 2022 (addendum dated August 17, 2023).
Stephen P. Percoco
Lark Research
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