Organon (OGN) reported 25Q1 GAAP diluted EPS of $0.33, down from $0.78 a year ago. Non-GAAP EPS was $1.02, down from $1.22. I had anticipated GAAP EPS of $0.61 and non-GAAP EPS of $0.92. Revenues of $1.51 billion declined 6.7% from $1.62 billion a year ago. More than half of the revenue decline was due to the loss of exclusivity on Atozet in France and Rosuzet in Japan. Sales of biosimilars fell 17.1% to $141 million, due to higher discounts of Renflexis and choppy sales in Brazil.
Management said that the quarter’s performance represented a solid start to 2025 and was in line with its expectations for full year results. It left its full year guidance for sales, cost ratios and key cost line items unchanged. It was surprising, therefore, that Organon announced a 71.4% cut in its quarterly dividend from $0.28 to $0.08. On the previous quarter’s conference call, management asserted that the company was committed to its regular dividend as its “#1 capital allocation priority.” In defense of this apparent reversal, management said that Organon was taking this action from a position of strength and in response to a changing market environment. With the $200 million of annual savings, Organon now aims to focus on reducing net debt. It is seeking to reduce its net leverage ratio (presumably net debt-to-adjusted EBITDA) to four times by the end of 2025. According to my estimates, the company will end 2025 with a net leverage ratio of 4.3 and will not get to 4.0 until 2026.
In my previous update report (April 1), I lowered my price target from $21 to $16 based upon the stock’s earlier drop in price and I reduced my performance rating from buy to outperform. In my view, the outperform rating was justified in part by technical factors: The stock had traded sideways since mid-November, slightly outperforming its benchmark, the S&P SmallCap 600, which is often a good set-up for a rebound. If I had looked more closely at the chart on April 1, however, I might have had second thoughts, as the stock fell 5.1% that day, posting what technical analysts call a bearish engulfing candle pattern.
The next day, April 2, was “Liberation Day,” the day that President Trump announced his administration’s reciprocal tariff strategy that sent the stock market into a tailspin. Organon’s stock performed reasonably well that day, but it then proceeded to drop sharply, along with the rest of the market. It joined the recovery party on April 22 and marched steadily higher until it made the dividend rate cut announcement on April 30. On May 1, the stock fell nearly 27%, closing at $9.45. It has since continued to decline, closing today at $9.02; but it is up off of its lows.
In my April 1 update report, I acknowledged the key factors that have caused the stock to lose 73% of its value since the spin-off from Merck: The company never achieved its original target of $1.2 billion of free cash flow. Its earnings have also declined steadily over the past five years. At the end of 2024, in announcing its target of $900 million of free cash flow, management said that Organon would no longer be facing one-time costs against free cash flow. With the 25Q1 results, the target is once again $900 million before one-time costs, as the company now anticipates restructuring costs of about $300 million.
The stock has always traded poorly and at a huge discount to the peer group average. My performance recommendations have mainly ranged between outperform and buy for most of that time, hoping (in vain, it turns out) that the stock was not a value trap.
Despite CEO Kevin Ali’s assertion that Organon cut the dividend from a position of strength, the market is telling us otherwise. Since it has fallen so sharply even as management has reaffirmed its full year guidance, the stock still looks surprisingly cheap. According to my estimates, it is trading at only 6.6 times projected 2025 GAAP EPS of $1.37 and 2.4 times projected non-GAAP EPS of $3.72. Thus, the market does not believe that my 2025 earnings estimates, which are consistent with management’s guidance, are sustainable.
With this latest drop in price, the stock now has an RSI (relative strength index) of 31, just above the oversold threshold of 30. Despite the market’s skepticism, it is entirely possible that the stock could rally from here, perhaps significantly. (Supporting this view, three insiders recently made modest purchases of the company’s stock.) Yet, the low valuation tells us that any rally would probably not be sustainable, and that the long-term trend is still likely to be down.
As noted in my previous report, I believe that from a business perspective, management has played the tough hand that it has been dealt reasonably well. Organon has shown greater sales stability in its Established Brands off patent portfolio than many might have imagined. It also has made what look like several smart bolt-on acquisitions. The dividend cut will save $200 million annually, which should improve its financial flexibility in what may very well be challenging times ahead. Nevertheless, having played my hand mostly on the long side during the stock’s four-year decline, I believe that I need some time to reset my approach. As a result, I will no longer be publishing quarterly updates on Organon and its stock. I will, however, continue to include the company on my coverage list and may issue follow-up reports from time to time.
This is a summary of Lark Research’s recent report on Organon & Co., Inc. (OGN). To obtain a copy of the report, please reach out to Steve Percoco using the contact information provided below.
June 20, 2025 (Report published on May 8, 2025.)
Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250
admin@larkresearch.com
© 2015-2025 by Stephen P. Percoco, Lark Research. All rights reserved.
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