Organon (OGN) 23Q3 Update

23Q3 revenues were $1.52 billion, down 1.2% YOY and also down 1% at constant currency.  GAAP diluted EPS was $0.23, compared with 22Q3’s $0.90 and my estimate of $0.74.  Non-GAAP EPS of $0.87 was below last year’s $1.32 and my estimate of $1.09.  (The consensus estimate of $1.06.)

Women’s Health revenues decreased 8%, as reported and 7%, ex FX, due to a 23% decline in NuvaRing, which is losing sales to generics, and a 3% decline in Nexplanon’s sales.  Biosimilars sales increased 10%, but sales of Hadlima, a biosimilar of Humira, came in much lower than expected.  Established Brands sales rose 2%, as reported, and 3%, ex-FX.

While revenues decreased slightly, operating expenses increased 14.7% to $1.44 billion.  Adjusted gross margin fell 450 bp to 62.6%, due to FX and cost inflation.  The SG&A expense ratio jumped 680 bp to 35.4%, due mostly to a legal settlement.  Interest expense rose 24% due to higher rates.  Thus, income before taxes fell 71.6% to $80 million and adjusted EBITDA declined 14.9% to $447 million.  Free cash flow (my definition) increased from $31 million to $158 million, but was below my estimate of $310 million.

Management lowered its 2023 full year guidance for revenues from $6.25-$6.45 billion to $6.15-$6.25 billion and its adjusted EBITDA margin from 31.5%-33.0% to 30.5%-31.5%.  My projections, which are slightly above the high-end of those ranges, now anticipated 2023 GAAP EPS of $2.52 (down from $3.00 previously) and non-GAAP EPS of $4.28 (down from $4.45 previously).  I also now project free cash flow of $446 million, up from $402 million in 2022, but below my previous 2023 estimate of $654 million.  For 2024, I now anticipate revenues of $6.38 billion, down only slightly from my previous projection, GAAP EPS of $3.28 (down from $3.37), non-GAAP EPS of $4.44 (vs. $4.52) and free cash flow of $779 million (vs. $851 million).

Since my last report, OGN’s stock has fallen nearly 11.4%, underperforming the S&P Small Cap 600 (where it now resides) and the PHLX Pharmaceuticals Index.  That price plunge is probably a near-term overreaction.  However, investors are right to be concerned because if free cash flow does not improve significantly within the next year or two, the company probably will have to cut the dividend.

Based upon my revised projections, I am lowering my price target to $15 (from $24), but also lowering the stock’s safety rating from C- to D+.  Together with the now 8.2% dividend yield, the revised price target represents a potential total return of 21.2%.  I am therefore raising my performance rating from “2” (Outperform) to “1” (Buy).  This is, of course, a speculative buy rating that anticipates a technical rebound from the now clearly oversold level.

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.

November 8, 2023 (Originally published on November 4, 2023)

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

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