Organon & Co (OGN) 22Q4 Update

22Q4 revenues were $1.485 billion, down 7.4% year-over-year, but up 1% at constant currency.  GAAP diluted EPS was $0.43, below 21Q4’s $0.80 and below my estimate of $0.54.  Non-GAAP EPS of $0.82 was below last year’s $1.18 and a penny below my estimate of $0.83.

Revenues were slightly below my forecast and operating expenses were higher.  Materials and production costs, R&D expense, restructuring cost, interest expense, exchange losses and other expense were all higher than forecast, more than offsetting lower SG&A expense and acquired IPRD.  Pre-tax income was 35% below projections, due mostly to exceptional items that are excluded in the calculation of non-GAAP EPS.  Free cash flow (CFOA plus CFIA plus FX) for the quarter was $289 million, 18% above my forecast of $244 million, due to higher collections and positive FX.

One concern among OGN investors has been free cash flow generation, which has been running below the company’s target of $1.2 billion.  In 2022, free cash flow, according to my definition, was $413 million.  Excluding acquisition costs and a $300 million non-recurring working capital outflow related to the spin-off, adjusted free cash flow was $944 million. That was below the target, but still provides an adequate cushion to support the dividend.  According to the company’s definition, 2022 free cash flow, excluding the $300 million working capital build and $358 million of other one-time costs, was $1.18 billion.  Free cash flow generation is important for Organon because it provides capital to invest in new business opportunities, offsetting the impact of flat-to-declining cash flow from the Established Brands portfolio.

For 2023, Organon’s guidance implies, according to my model, revenues of $6.24 billion, up 1.1% from 2022.  GAAP EPS of $3.38 and non-GAAP EPS of $4.44.  For 2024, I currently anticipate revenues of $6.43 billion, up 3.0%, EPS of $3.82 and non-GAAP EPS of $4.88.  The revised forecast is below my previous projections, due mostly to management’s guidance of lower adjusted gross margin and higher R&D expense.

Based upon my lower EPS forecast, I am reducing my price target from $33 to $31.  The revised price target equates to 8.1 times projected 2024 GAAP EPS and 6.4 times 2024 non-GAAP EPS of $4.88.  Those multiples are unchanged from my previous report and below the mid-cap pharma group’s one-year average forward multiple of 8.0 times non-GAAP EPS.  From the current price of $23.95, the revised price target offers a potential total return of 34%, including the 4.7% dividend yield.  Thus, I am maintaining my performance rating of “1” (Strong BUY).  Since my last report, OGN’s stock has again been volatile, having roundtripped back to $24 after rising to a high of $32 in mid-January.  Most of the drop from $32 came after 22Q4 earnings and 2023 guidance.  A sustained advance requires a stable (or improving) earnings outlook.

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.

April 10, 2023

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

© 2015-2024 by Stephen P. Percoco, Lark Research.   All rights reserved.

This blog post (as with all posts on this website) represents the opinion of Lark Research based upon its own independent research and supporting information obtained from various sources. Although Lark Research believes these sources to be reliable, it has not independently confirmed their accuracy. Consequently, this blog post may contain errors and omissions. Furthermore, this blog post is a summary of a recent report published on this subject and that report provides a more complete discussion and assessment of the risks and opportunities of any investment securities discussed herein. No representation or warranty is expressed or implied by the publication of this blog post. This blog post is for informational purposes only and shall not be construed as investment advice that meets the specific needs of any investor. Investors should, in consultation with their financial advisers, determine the suitability of the post’s recommendations, if any, to their own specific circumstances. Lark Research is not registered as an investment adviser with the Securities and Exchange Commission, pursuant to exemptions provided in the Investment Company Act of 1940. This blog post remains the property of Lark Research and may not be reproduced, copied or similarly disseminated, in whole or in part, without its prior written consent.

This entry was posted in Health Care, OGN and tagged , . Bookmark the permalink.