Organon & Co. (OGN) 23Q2 Update

23Q2 revenues were $1.61 billion, up 1.5% YOY and up 4% at constant currency.  GAAP diluted EPS was $0.95, better than 22Q2’s $0.92 and above my estimate of $0.87.  Non-GAAP EPS of $1.31 was higher than last year’s $1.25 and also above my estimate of $1.11 and the consensus estimate of $0.99.

The company realized volume growth across all three of its businesses.  Revenues were higher in Women’s Health and Biosimilars, but down 2.1% in Established Brands, due to currency and the impact of volume-based procurement in China.  Operating expenses increased 4.3%, more than revenues, as increases in COGS, SG&A and R&D more than offset the non-repeat of acquired IPRD charges.  Thus, income before taxes declined 11.5%; but since this was more than offset by a lower tax rate; net income increased vs. 22Q2.  Adjusted EBITDA rose 3.5% to $530 million, as adjusted EBITDA margin rose 70 bp to 33.0%.

Despite the improvement in revenues and profitability, free cash flow was only breakeven for the second consecutive quarter.  Management still expects full year free cash flow before one-time costs of $1 billion; however, its definition does not match up with the reported GAAP line items and it does not provide a reconciliation to support its calculations, including those one-time costs.  Yet, my definition of free cash flow after one-time costs (CFOA plus CFIA plus currency) does approximate the company’s definition.

Management updated its 2023 guidance, raising the low ends of its revenues and adjusted EBITDA margin ranges and lowering its effective non-GAAP tax rate.  Accordingly, I have reduced my 2023 GAAP EPS estimate by $0.14 to $3.00, but raised my non-GAAP EPS estimate by $0.17 to $4.45.  For 2024, I now anticipate GAAP EPS of $3.47. up $0.03 (from my previous estimate), and non-GAAP EPS of $4.52, up $0.04.

Since my last report, OGN’s stock has rebounded 11.4%, outperforming the S&P Mid-Cap 400’s 4.0% gain and the PHLX Pharmaceuticals Index’s 6.2% gain.  However, it has been trending lower (in line with the broader market) since surging to an intraday high of $23.79 on the day of the earnings announcement.  The stock appears to be building a base of support, but it has not decisively broken its 12-month downtrend.

Based upon guidance and my revised projections, I am raising my price target to $24 (from $21).  Together with the 5.0% dividend yield, that represents a potential total return of 11.7%.  I am also therefore raising my performance rating from “3” (Neutral) to “2” (Outperform).  My projections anticipate that the company will generate $0.65 billion of free cash flow in 23H2 and for the full year.  Organon must generate free cash flow at least at that level consistently going forward to cover its dividend, reduce debt and provide capital to grow its business to offset the likely moderate decline in its Established Brands’ profitability over time.

This is a summary of my latest report on Organon & Co., Inc. (OGN), which was originally published on August 20, 2023. To obtain a copy of the full report, please reach out to me using the contact information provided below.

August 21, 2023

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

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