Organon & Co. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2021; filed November 12, 2021. Organon became a standalone public company on June 2, 2021, following its separation from Merck. The pre-separation results were derived from Merck’s records and include allocated costs, so comparisons do not represent results of Organon operating independently throughout both periods.
Business context and financial results
Organon sells prescription therapies in women’s health, biosimilars and established brands. It reports one operating segment and operates six manufacturing facilities.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $1.600 billion | $1.613 billion | $4.701 billion | $4.919 billion |
| Net income | $323 million | $547 million | $1.149 billion | $1.792 billion |
| Diluted EPS | $1.27 | $2.16 | $4.52 | $7.07 |
| Gross margin | 62% | 67% | 62% | 69% |
| Operating cash flow from continuing operations | Not separately stated | Not separately stated | $2.113 billion | $1.800 billion |
Q3 sales declined 1% reported (3% excluding foreign exchange); nine-month sales declined 4% reported (8% excluding foreign exchange). Q3 pretax income was $389 million, compared with $681 million; nine-month pretax income was $1.293 billion, compared with $2.227 billion. Interest expense was $98 million in Q3 and $160 million for the nine months, largely reflecting debt issued in connection with the separation.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $1.008 billion. Working capital from continuing operations was $1.2 billion, versus $348 million at December 31, 2020.
- Long-term debt, net of current portion, was $9.259 billion; total principal debt was $9.298 billion. No amounts were drawn under the $1 billion revolving credit facility.
- Nine-month investing cash outflow was $348 million, including the Alydia acquisition and the ObsEva license payment. Financing cash outflow was $790 million, reflecting separation-related transactions, debt costs and dividends.
- Organon distributed $9.0 billion of debt proceeds to Merck in connection with the separation. The company reported compliance with its financial covenants and no default as of September 30.
Material changes and management commentary
- Profitability and margins fell year over year as sales declined and costs rose. Standalone-company establishment costs, higher employee and promotional costs, Merck tolling arrangements and a $24 million charge for estimated unavoidable losses under a long-term supply contract contributed to expense increases.
- Sales were affected by generic competition and loss of exclusivity (about $70 million of Q3 and $280 million of nine-month sales impact), China’s volume-based procurement program (about $60 million and $150 million, respectively), and COVID-19. Management estimated COVID-19 reduced Q3 sales by approximately $100 million.
- Biosimilar growth, including Renflexis and Ontruzant, and demand recovery in some women’s health products partly offset declines. Q3 sales were also supported by foreign exchange.
- Management said COVID-related effects were expected to persist through the remainder of 2021, principally affecting established brands and Nexplanon/Implanon NXT. The filing provides no quantified full-year revenue or earnings guidance.
- Organon completed its $219 million upfront acquisition of Alydia Health in June; the Jada System intangible was recorded at $247 million and is amortized over 11 years. The company also paid ObsEva $25 million upfront for ebopiprant rights, recorded as R&D expense in Q3. A November agreement to acquire Forendo contemplated $75 million upfront, assumption of about $9 million debt and up to $870 million of contingent milestone payments; closing was expected in Q4 2021, subject to customary conditions.
Risks, contingencies and unusual items
- Risks include operating independently after separation, ongoing transition-service reliance, generic and biosimilar competition, pricing pressure, supplier performance and minimum-purchase commitments, COVID-19, regulatory and product-safety matters, and foreign-exchange and interest-rate exposure.
- The company recorded $24 million for estimated unavoidable losses under a vendor supply contract and cautioned that other similar arrangements could create additional costs.
- Organon disclosed product-liability and patent litigation, as well as a Washington State Attorney General investigation request concerning adalimumab and biosimilars. The company stated that material loss estimates for certain proceedings could not be reasonably determined; it has no insurance for most product liabilities.
- Q3 included correction of previously identified separation-related out-of-period adjustments. The company said the adjustments were not material to current or prior periods and did not affect nine-month operating results. A separate approximately $145 million prepaid-tax-asset adjustment was also described as not material.
- The nine-month effective tax rate was 11.2%, including a $70 million tax benefit from a non-U.S. tax-basis step-up and a $29 million net benefit related to the conclusion of Merck tax examinations.
Important facts for investors to verify
- How post-separation standalone expenses, manufacturing arrangements and transition-service costs will affect future margins and cash generation.
- Whether sales recovery can offset continued generic erosion, China procurement effects and the remaining COVID-19 impact.
- Debt service, leverage covenant headroom and the company’s capacity to fund dividends, acquisitions and other commitments.
- Potential cash or earnings exposure from minimum-purchase obligations, litigation, the Washington investigation and contingent acquisition payments.
- Forendo transaction completion, contingent consideration and the commercial and development prospects of acquired or licensed pipeline assets.