Organon & Co. — Third-Quarter 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Organon is a global healthcare company focused on women’s health, biosimilars and established brands. Unless noted otherwise, dollar amounts are in millions.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,519 | $1,537 | $4,665 | $4,689 |
| Gross profit (revenue less cost of sales) | $907 | $986 | $2,833 | $2,989 |
| Net income | $58 | $227 | $477 | $809 |
| Diluted EPS | $0.23 | $0.89 | $1.86 | $3.17 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $402 | $591 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $172 | $133 |
Q3 revenue declined 1% year over year; net income fell about 74%. Nine-month revenue was down about 1% as reported, but up 2% excluding foreign exchange, while net income declined about 41%. Gross margin, calculated as gross profit divided by revenue, was approximately 59.7% in Q3 2023 versus 64.2% in Q3 2022, and 60.7% for the first nine months versus 63.7% in the prior-year period.
Higher costs weighed on earnings: Q3 cost of sales rose 11%, SG&A 22%, R&D 8%, and interest expense 24% year over year. SG&A included an $80 million charge/reserve related to the Microspherix litigation. Nine-month interest expense was $398 versus $303; the company cited higher rates, debt-prepayment-related fees and discounts, and foreign exchange.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $414 at September 30, 2023, down from $706 at year-end 2022. Working capital was $1.6 billion, compared with $1.4 billion at year-end.
- Net cash provided by operations was $402 for the first nine months, down from $591. Capital expenditures were $172; operating cash flow less capital expenditures was $230, compared with $458 in the prior-year period.
- Net cash used in investing was $179; net cash used in financing was $492. Financing outflows included $221 of dividends and a $250 voluntary term-loan prepayment. Cash declined by $292 over the period.
- Long-term debt, net of current portion, was $8.646 billion, versus $8.905 billion at December 31, 2022. Total principal debt was $8.654 billion. The weighted-average borrowing rate was 5.7%, with an average maturity of approximately 5.3 years. The company reported compliance with financial covenants and no default.
- The quarterly dividend was $0.28 per share. A further $0.28 dividend was declared November 2, payable December 14, 2023.
Material business changes and management commentary
- Revenue performance was mixed across products. Nine-month growth included Renflexis (+22%), Atozet (+14%) and Jada (+150%); declines included Zetia/Vytorin (-13%), Cozaar/Hyzaar (-12%) and Diprospan (-37%).
- China volume-based procurement reduced sales by $31 million in Q3 and $83 million year to date; Organon expects continued effects on established brands for several quarters. Generic competition continued to pressure NuvaRing, and the company expects further declines in its sales.
- Diprospan sales were affected by a regulatory inspection-related market action. Organon said the findings were resolved in Q1 and expected supply and sales recovery to continue over the next 12 months.
- Hadlima launched in the United States in July 2023. Xaciato launched in the United States in October 2023, after the reporting date. Organon made an $8 million strategic investment in Claria Medical and holds an option to acquire it for an additional $47 million.
- Organon expects to restructure approximately 3% of its workforce in Q4 2023, with estimated charges of $60 million to $70 million, primarily severance, paid over the following 12 months. The company recorded $4 million of restructuring charges in the first nine months.
- Management said it expects continued positive operating cash flow and believes financing arrangements, operating cash generation and capital-market access will provide adequate resources for future needs. The filing provides no specific full-year revenue or earnings guidance.
Risks, contingencies and other notable items
- On October 13, 2023, the parties in the Nexplanon patent case reported an agreement in principle on key settlement terms; proceedings were stayed for 60 days to allow execution of an agreement. Organon had reserved $80 million. This development occurred after quarter-end.
- Organon faces product-liability, intellectual-property, commercial and governmental matters, including cases for products originally associated with Merck for which Organon may have indemnification obligations. It said it could not reasonably estimate possible losses for certain litigation. It has no insurance for most product-liability matters.
- A Spanish competition authority imposed a €39 million fine on Merck relating to NuvaRing; an appeal is pending, and Organon could be required to indemnify Merck for a portion if the fine stands. Organon is also cooperating with a Washington State investigation concerning adalimumab and biosimilars.
- Other principal risks cited include pricing and reimbursement pressure, generic competition and patent loss, product-development and commercialization execution, supply-chain and manufacturing costs, foreign exchange and interest rates, and geopolitical or regulatory developments. Management reported no material change in disclosed risk factors.
- Disclosure controls were deemed effective. ERP implementation continues, with the consolidated financial reporting module expected to be completed in Q4 2023 and general-ledger modules expected to be completed in the first half of 2024.
Most important facts for investors to verify
- Whether revenue and margins stabilize as China volume-based procurement, foreign exchange and product-level competition continue to affect sales.
- Whether biosimilar launches and growth products can offset declines in established brands and NuvaRing.
- The cash-flow effect of lower operating cash generation, working-capital needs, debt service, dividends and planned restructuring charges.
- The final terms and accounting or cash consequences of the Microspherix settlement, and developments in other litigation and indemnification matters.
- Progress against the stated Diprospan recovery outlook and the company’s restructuring and ERP implementation plans.