Organon & Co. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Organon is a global healthcare company focused on women’s health, biosimilars and established brands.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $1.538 billion | $1.567 billion |
| Net income | $177 million | $348 million |
| Diluted EPS | $0.69 | $1.36 |
| Operating cash flow | $114 million | $123 million |
| Investing cash flow | $(54) million | $(63) million |
| Financing cash flow | $(326) million | $(91) million |
- Revenue declined 2% as reported; excluding foreign exchange, it increased 3%. Unfavorable FX reduced sales by about $71 million.
- Gross margin, calculated from reported revenue and cost of sales, was approximately 62.3%, versus 64.2% a year earlier. Net margin was approximately 11.5%, versus 22.2%.
- Income before taxes fell to $235 million from $442 million. Income tax expense was $58 million; the effective tax rate rose to 24.6% from 21.3%.
- SG&A increased 17% to $435 million and R&D rose 34% to $129 million. Interest expense increased 36% to $132 million, reflecting higher rates, debt-prepayment costs and foreign exchange effects.
- Cash and cash equivalents were $459 million at March 31, down from $706 million at December 31, 2022. Working capital was reported as $1.4 billion and remained consistent with year-end.
- Total principal long-term debt was $8.711 billion; the balance sheet reported $8.703 billion of long-term debt, net of current portion, plus $8 million current debt. The weighted-average borrowing rate was 5.4%, with average maturity of approximately 5.7 years.
Material changes and business drivers
- Women's Health sales were mixed: Marvelon/Mercilon rose 58% to $37 million following Organon’s acquisition of rights in selected territories; Follistim AQ fell 10% to $55 million, partly due to COVID-related effects in China; Nexplanon/Implanon NXT declined 3% to $165 million.
- Biosimilar sales included Renflexis up 34% to $62 million, while Ontruzant declined 7% to $21 million and Hadlima declined to $5 million.
- Established Brands faced pressure in parts of the portfolio. Zetia/Vytorin declined 18% to $112 million, including a $27 million year-over-year impact from China’s volume-based procurement program. Diprospan fell 54% to $14 million following manufacturing disruption tied to a regulatory inspection; Organon said the inspection findings were resolved by March 31.
- Cost of sales rose 3%, attributed to product mix, employee costs and inflation-related distribution costs. SG&A growth reflected promotion, employee and Merck-separation/ERP implementation costs; R&D growth reflected clinical activity, acquired clinical-stage assets and employee costs.
- Operating cash flow was lower mainly due to reduced net income, partly offset by working-capital changes. Financing outflows included a discretionary $250 million prepayment on the U.S. dollar term loan; the company paid $73 million in dividends.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management expects continued positive operating cash flow and believes financing arrangements, operating cash and capital-market access will support future needs.
- Management expects China’s volume-based procurement program to affect established-brand sales for several more quarters. COVID-19 uncertainty and lockdown-related effects in China may continue to cause short-term volatility.
- Organon expects continued NuvaRing sales declines from generic competition. Other key risks include pricing and reimbursement pressures, product competition and patent expirations, supply/manufacturing constraints, foreign-exchange and variable-rate interest exposure, and reliance on third parties.
- In January 2023, Organon invested $8 million in Claria Medical, expensed as acquired in-process R&D, and received an option to acquire the company for an additional $47 million. A separate $25 million milestone for ebopiprant may be triggered as early as Q2 2023 upon acceptance of an IND filing.
- Legal matters include product-liability and patent litigation and potential indemnification obligations to Merck. The company said it cannot reasonably estimate possible losses for certain matters; its legal-defense reserve was $22 million. Organon has no insurance for most product-liability claims.
- The board declared a $0.28-per-share quarterly dividend payable June 15, 2023. The ERP system rollout is ongoing; management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether revenue growth excluding FX can be sustained and how China procurement, generic competition and product-specific demand affect sales.
- Whether lower earnings and cash balances, debt costs and the company’s dividend and debt-repayment plans remain supportable by future cash generation.
- Progress and commercial impact of the July 2023 planned U.S. Hadlima launch, and any Claria option exercise or ebopiprant milestone payment.
- Developments in significant litigation, the potential Merck indemnification exposure, and any changes to legal reserves or contingencies.
- Whether manufacturing, supply, COVID-related and ERP implementation risks affect operations or financial reporting.