23Q1 revenues were $1.538 billion, down 1.9% year-over-year, but up 3% at constant currency. GAAP diluted EPS was $0.69, below 22Q1’s $1.36 and below my estimate of $0.88. Non-GAAP EPS of $1.08 was below last year’s $1.65 and also below my estimate of $1.15, which was in line with consensus.
Revenues were 1.4% above my forecast but operating expenses were 5.5% higher, due to a 19.5% increase in SG&A expense. Management attributes the increase in costs to higher staffing and other expenses associated with being an independent company and also the higher costs required to realize the potential from recently acquired assets. Thus, net income was 21.7% below projections. 23Q1 free cash flow (CFOA plus CFIA plus FX) was $79 million, above last year’s $48 million but below my forecast of $240 million, due to a $188 million increase in working capital, mostly from higher inventory.
Management’s guidance implies 2023 free cash flow of $650 million, after $350 million of one-time cash costs. That is below my previous forecast of $797 million. For 2024, it expects one-time costs to fall to $125 million, which implies free cash flow of $775 million or better. I have therefore reduced projected free cash flow to $756 million for 2023, which is above the implied guidance, and $870 million for 2024.
Management reaffirmed its 2023 guidance on key metrics. Based mostly upon the 23Q1 earnings shortfall, I have reduced my 2023 GAAP EPS estimate by $0.24 to $3.14 and my non-GAAP EPS estimate by $0.16 to $4.28. For 2024, I now anticipate GAAP EPS of $3.44 and non-GAAP EPS of $4.48.
Since my last report, OGN’s stock has underperformed both the broader market and peers, falling 15.8% vs. the 1.3% gain in the S&P Mid-Cap 400 and 1.6% decline in the PHLX Pharmaceuticals Index (DRG). Most of that underperformance occurred during the month of May, following the 23Q1 earnings announcement.
Although punctuated by a sharp rally in 22Q4, the stock has been in a downtrend since its May 2022 peak of $39. While it looks like it may have bottomed over the past few trading sessions, that conclusion cannot be confirmed technically in my mind until the stock recovers to above $25 (from its current level of $20.19 on 6/5). With the drop in price and assuming no recovery in the one-year forward multiple from the current level, my price target falls to $21 (from $31 previously). Together with its 5.5% dividend yield, that represents a potential total return of 10.5%, which under the circumstances merits a “3” or Neutral performance rating. The stock price may continue to be volatile in reaction to quarterly results. There is also significant upside if Organon is able to deliver on its goals of growth in Women’s Health and Biosimilars and stability in Established Brands, but the company will probably need to show tangible progress as a prerequisite.
This is a summary of my recent update report on Organon & Co., Inc. (OGN). To obtain a copy of the full report, please reach out to me using the contact information provided below.
June 16, 2023
Stephen P. Percoco
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Linden, New Jersey 07036
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