Organon & Co. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Organon is a global healthcare company focused on women’s health, biosimilars and established brands, with more than 60 medicines and products. Results are unaudited; the prior-year comparison includes pre-separation Merck results through June 2, 2021.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1.585 billion | $1.595 billion | $3.152 billion | $3.101 billion |
| Gross margin | 63% | 63% | 64% | 62% |
| Net income | $234 million | $427 million | $582 million | $826 million |
| Diluted EPS | $0.92 | $1.68 | $2.28 | $3.25 |
| Operating cash flow | Not stated separately for the quarter | $274 million | $1.745 billion |
Q2 revenue fell 1% reported but increased 5% excluding foreign exchange; first-half revenue rose 2% reported and 6% excluding foreign exchange. Q2 U.S. revenue increased 4%, while international revenue declined 2% reported (up 5% excluding foreign exchange). Q2 net income declined primarily amid higher interest expense, taxes and a $97 million acquired in-process R&D and milestones charge. First-half comparisons also reflect $99 million of favorable tax benefits recorded in 2021, including a $70 million separation-related benefit and a $29 million net benefit tied to the IRS examination.
Revenue and operating trends
- Q2 growth in Nexplanon and biosimilars, notably Renflexis and Ontruzant, was offset by foreign-exchange headwinds, U.S. discount effects and generic competition.
- NuvaRing revenue declined 21% in Q2 and 16% in the first half, primarily due to generic competition. Revenue from the related U.S. generic supply/profit-sharing arrangement also fell and is expected to decline significantly for the remainder of 2022.
- First-half established-brand growth included Nasonex and Singulair; Nasonex sales included a $10 million U.S. regulatory-approval milestone. COVID-related lockdowns in selected Chinese cities affected fertility and established-brand sales in Q2.
- R&D expense increased 39% in Q2 and 41% in the first half, reflecting clinical-stage assets from recent acquisitions and higher employee-related costs. Q2 interest expense was $98 million, versus $62 million a year earlier, following the 2021 debt issuance.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $545 million, down from $737 million at year-end 2021. Working capital was $1.4 billion, compared with $1.2 billion at year-end.
- First-half operating cash flow was $274 million, down from $1.745 billion, primarily due to lower trade payables, including balances with Merck. Investing cash outflow was $146 million; financing cash outflow was $274 million.
- Long-term debt was $8.884 billion, with $8.893 billion in principal debt; the company made a $100 million discretionary term-loan prepayment in June. Weighted-average borrowing cost was 4.0%, and average maturity was approximately 6.5 years. No revolving-credit borrowings were outstanding; the facility provides up to $1 billion of capacity. The company reported compliance with financial covenants.
- Organon paid quarterly dividends of $0.28 per share in Q1 and Q2 and declared another $0.28 dividend payable September 15, 2022.
Outlook, developments and risks
The filing provides no quantified revenue or earnings guidance. Management expects to fund operations and anticipated needs primarily from operating cash flow, cash on hand, available revolving-credit capacity and capital-market access, and believes these sources are adequate. This expectation is subject to business and market conditions.
- Business-development activity included Henlius biosimilar licenses, with up to $468 million of potential milestones; Daré’s Xaciato license, with up to $182.5 million of potential milestones plus royalties; and acquisition of Marvelon and Mercilon rights in China. The Xaciato U.S. launch was expected in Q4 2022. A July 2022 Cirqle collaboration followed quarter-end and includes up to $360 million of potential milestones.
- Principal risks discussed include generic and brand competition, patent expiry, pricing and reimbursement pressure, reliance on suppliers and commercial partners, acquisition execution, foreign exchange and interest rates, and ongoing COVID-19 uncertainty. Russia and Ukraine accounted for approximately 2% of revenue; related assets were not material, but sanctions and conflict-related disruptions may affect operations and supply chains.
- Organon reported ordinary-course litigation and governmental matters, including a Washington State investigation concerning adalimumab-related activities. It said resolution of disclosed matters was unlikely to be material, but noted it cannot estimate possible losses for certain proceedings. Organon has no insurance for most product-liability risks and has indemnification obligations to Merck for specified matters.
- The company recorded a $9 million impairment related to a biosimilar product right. Turkey was deemed hyperinflationary in Q2; the resulting earnings impact was reported as immaterial. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether sales growth excluding foreign exchange can offset currency pressure and continued generic erosion, especially in NuvaRing.
- How operating cash flow develops after the sharp first-half decline and whether working-capital movements normalize.
- Debt-service capacity, variable-rate exposure and covenant headroom; the filing does not give a specific covenant ratio or quantified headroom.
- Development, approval and launch progress—and eventual milestone and royalty costs—under the Henlius, Daré and other licensing agreements.
- Updates on product-liability, patent and governmental matters, including any material change to estimated exposure or defense costs.