Organon Stock Jumps On Profit Beat In First Post-Spinoff Report

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On August 12, 2021, Organon (NYSE: OGN, $33.50, Market Capitalization: $8.5 billion) announced 2Q21 results. Total revenue of $1.6 billion grew by a modest 4.5% YOY (-1% excluding foreign currency impact or excl. fx) reflecting the impact of loss of exclusivity on some products, but beat consensus by 5.2%. Revenue growth at Biosimilars (+43%, +35% excl. fx) and Women’s Health (+19%, +16% excl. fx) was partially offset by Established Brands

LB
(-4%, -10% excl. fx). Non-GAAP Adjusted gross margin contracted 578 bps to 65.5% (consensus: 64.9%) on higher standalone costs and unfavorable mix of manufacturing agreements. Adjusted EBITDA from continuing operations fell by 19% to $627 million (consensus: $572 million), while the corresponding margin contracted 1,154 bps to 39.3%. Non-GAAP Adjusted net income from continuing operations decreased 32% YOY to $437 million (+18.3% vs. consensus), leading to corresponding margin erosion (2Q21: 27.4%, 2Q20: 41.9%). Non-GAAP Adjusted Diluted EPS of $1.72 (2Q20: $2.52) also comfortably beat consensus by 21.8%.

For FY21E, OGN expects revenue to be in the range of $6.1-$6.4 billion. Gross margin is expected to be in low to mid-60% range. Further, the company expects adjusted EBITDA margin to be in the range of 36%-38%. The company initiated a quarterly dividend of $0.28 per share, implying an annualized yield of 3.3% at current price.

On February 5, 2020, Merck

MRK
& Co., Inc. had announced plans to spin-off Women’s Health, Legacy Brands and Biosimilars businesses into a new, independent, publicly traded company, ‘Organon & Co.’ On April 29, 2021, Organon filed an amended Form 10 with the SEC. Earlier, on March 17, 2021, Organon filed initial Form-10 with the SEC. The company announced the details and timeline for the spin-off of Organon. On May 7, 2021, MRK’s Board of Directors approved the spin-off of Organon. The record date for the spin-off was May 17, 2021. The spin-off ratio was 1:10, implying each MRK shareholder received one share of Organon common stock for every ten shares of MRK‘s common stock. On May 14, 2021, Organon’s common stock started when issued trading under the ticker “OGN.WI”, while Merck (“MRK.WI”) started when-issued trading on May 27, 2021. The distribution date for the spin-off was June 2, 2021. Both the stocks commenced regular way trading from June 3, 2021. Merck continued to trade on the NYSE under the ticker MRK, while Organon was listed on the NYSE under the ticker OGN. Moreover, Merck continues to be part of the S&P 500 index and Organon has joined the S&P 500 Index. The spin-off was tax-free to the shareholders.

We are upbeat on Organon (OGN), given the strong 2Q21 results, dividend initiation at peer-leading yield and potential top-line growth and margin momentum over the medium-term. The ability to sustainably lower debt, while continuing to return cash to shareholders may attract potential investors to the stock. Given management’s reticence to raise the full-year 2021E outlook, despite an across-the-board beat, our target price of $45.00 per share remains unchanged. We reiterate our Buy rating on Organon.

Key highlights of the conference call (2Q21)

Organon & Co. (OGN) reported overall revenues of $1.6 billion, representing 4.5% YOY growth, primarily driven by 43% YOY jump in revenues from Biosimilars business and 19% YOY growth in revenues from Women’s Health business. The negative impact of COVID-19 was ~$120 million ($100 million better than previous year period). Given ~80% revenues derived outside the US, foreign exchange translation had a 550 basis points favourable impact on revenues. For 2021E, management expects foreign currency translation to be a modest tailwind, considering year-to-date currency performance and the current level of spot rates.

• Women’s Health grew 19% YOY (16% ex-FX) during the quarter, driven by growth in Nexplanon (etonogestrel implant), which grew 39% YOY ex-FX. Nexplanon is approved for three-years of efficacy; however, in November 2020, OGN began studies to increase this to five years. Also, in-person patient visits to healthcare professionals demonstrated recovery during the quarter as COVID-19 restrictions were eased. However, patient visits have still not reached pre-pandemic levels and the company expects the ongoing negative impact to persist through 2021.

• Growth in fertility also contributed to the performance in Women’s Health; Follistim, AQ Cartridge (follitropin beta injection), which grew 40% YOY ex-FX, positively benefited from a combination of COVID-19 recovery and increased demand.

• However, NuvaRing (etonogestrel/ethinyl estradiol vaginal ring) witnessed 19% YOY ex-FX decline due to generic competition.

• Biosimilars revenue grew 43% YOY (35% ex-FX), driven by continued demand growth for Reneflexis (infliximab-abda) and continued uptake of Ontruzant (trastuzumab-dttb) in the US, which was partially offset by a decrease in the EU, due to rising competition in the region.

• Revenues from Established Brands fell 4% YOY (-10% ex-FX), primarily due to loss of exclusivity of ZETIA (ezetimibe) in Japan. Excluding the impact of LOEs (loss of exclusivity), revenue for Established Brands fell 2% ex-FX as volumes grew incrementally, mainly driven by the COVID-19 rebound and decline in prices by 2%. OGN expects price erosion in Established Brands to be in the low single digits ex-LOE, over the intermediate term.

• Retail expansion in China grew in double digits, representing ~45% of established brands revenue in China, up from ~35% a year ago, partially offset impacts from decreases in the hospital channel due to volume-based procurement.

• Management remains positive about revenue growth in low-to-mid single digits on an organic basis. Women’s health and biosimilar businesses are expected to deliver low-double digit growth CAGR in the intermediate term.

• Non-GAAP adjusted gross margin fell to 65.5% (2Q21: 71.2%) due to the increase in standalone costs, including those related to manufacturing agreements between OGN and Merck, which had lower gross margins compared to third-party product sales.

• OGN is enhancing the existing portfolio, the market-leading positions in contraception and fertility. As a result, on June 2021, the company completed the acquisition of Alydia Health (a commercial stage medical device) that received a 510K clearance from the FDA in 2020 for the Jada system, a product intended to control abnormal postpartum bleeding or haemorrhage.

• OGN recently announced a licensing agreement with ObsEva for global development, manufacturing, and marketing rights.

• The US biosimilars product is expected to continue to grow; immunology and oncology are witnessing increasing biosimilar usage. The company expects ~70% of Trastuzumab market converted to biosimilars and according to management, remains well-positioned as a commercial collaborator with Samsung Bioepis. OGN also launched Hadlima Australia and Canada, which are performing well and the company sees a major pipeline opportunity with Hadlima expected to launch in the US in 2023. The company will continue to evaluate other potential opportunities with Samsung and other partners.

• Asia-Pacific region witnessed slow down during the quarter. However, Europe and Canada saw double-digit growth, supported by COVID-19 recovery, coupled with volume growth in biosimilars and infertility.

• The LOE impact in 2Q21 was ~$130 million ($210 million year-to-date), related to ZETIA in Japan and NuvaRing in the US. Post 2021E, the cumulative LOE exposure would be ~$300 million for 2022E to 2025E, taking into account the absence of a generic for Dulera, which lost exclusivity in 2020.

• As of June 30, 2021, the total debt stood at $9.5…

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