Organon & Co. (OGN) 22Q3 Update

22Q3 revenues were $1.537 billion, down 3.9% year-over-year, but up 3% at constant currency.  GAAP diluted EPS was $0.92, below 21Q3’s $1.27, but above my estimate of $0.82.  Non-GAAP EPS of $1.36 was below last year’s $1.61, but also above my estimate of $1.08.

Revenues were in line with my forecast, but operating expenses were lower.  As a result, OGN’s pre-tax income was 10% higher than projected in dollars and 150 bp higher as a percent of sales, despite higher interest expense and business development costs.  Free cash flow (CFOA plus CFIA) was $31 million, below my estimate of $85 million, but acquisition costs of $124 million were not included in my forecast.

Although no new transactions were announced this quarter, Organon continues to pursue acquisitions and licensing agreements.  Recently acquired commercialized assets are beginning to contribute to its financial results.  OGN’s JADA system, which treats abnormal post-partum bleeding and hemorrhaging, is now installed in 800 U.S. hospitals and completed its first shipment outside the U.S.  The company is now recording revenues from the recently purchased marketing rights for the fertility drugs Marvelon and Mercilon in China and Vietnam.  It will also launch XACIATO, an FDA-approved medicine for bacterial vaginosis, in 23H1.  In its pipeline, OGN is enrolling patients for a Phase 2 study of OG-6219 for the treatment of endometriosis.

Organon lowered the top end of its revenue guidance by $100 million to $6.1-$6.2 billion and raised and narrowed its adjusted EBITDA margin outlook from 32%-34% to 33.5%-34.5%. It expects interest expense of $420 million, up from $400 million, and depreciation expense of $100 million, at the low end of its $100-$150 million range.  Based upon 22Q3 results and the updated guidance, I have reduced EPS estimates for 22Q4, but raised full year non-GAAP EPS by $0.04 to $5.05.  The implied 22Q4 guidance is disappointing and reflects lower revenue from volume-based procurement (VBP) protocols in China and higher operating costs.  Consequently, I have also reduced projected 2023 non-GAAP EPS by $0.30 to $5.19.

With the latest sell-off, the stock has underperformed the market and peers YTD, though it has stabilized in recent weeks.  It is now valued at 5.7 times 2023 GAAP diluted EPS of $4.16 and 4.6 times non-GAAP EPS of $5.19, both well below market averages.  For now, I have reduced my forward non-GAAP valuation multiple from 7.3 to 6.4, which reduces my price target from $40 to $33, the second consecutive quarterly decline.  At the revised PT, the potential total return is 42.5%, including the dividend yield of 4.7%.  I am therefore keeping my performance rating at “1” (Strong BUY), but I have lowered OGN’s safety rating a notch to C- (from C).  The market took the stock down sharply in anticipation of OGN’s implicit cut in 22Q4 guidance, but my analysis suggests that it has overreacted.  Even so, it may take time for the stock to recover.

This is a summary of my recent update report on Organon & Co. (OGN). For a copy of the full report, please reach out to me using the contact information provided below.

November 9, 2022

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

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