Organon & Co. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Organon was then operating as part of Merck. Merck completed the spin-off on June 2, 2021, and Organon began trading on the NYSE on June 3. Historical statements are carve-out combined financials, not results of an already standalone company.
Financial results
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Sales | $1.506 billion | $1.780 billion | Down 15% reported; down 19% excluding foreign exchange |
| Gross margin | 61% | 70% | Lower, reflecting standalone setup and tolling costs |
| Income from continuing operations before tax | $467 million | $844 million | Down 45% |
| Net income from continuing operations | $395 million | $734 million | Down 46% |
| Net income, including discontinued operations | $399 million | $703 million | Down 43% |
| Diluted EPS | $1.58 | $2.78 | Continuing-operations EPS: $1.56 vs. $2.90 |
| Operating cash flow from continuing operations | $1.300 billion | $747 million | Increase benefited from related-party payables and other working-capital movements |
| Capital expenditures | $38 million | $40 million | Cash used in investing activities was $38 million |
Cost of sales was $591 million, up 10%; SG&A was $382 million, up 21%; and R&D was $67 million, up 49%. Operating expenses reflect costs of establishing Organon as a standalone company, while lower promotional, travel and meeting costs partly offset SG&A increases. The effective tax rate was 15.5%, versus 13.0%; Q1 2021 included a $29 million net tax benefit tied to the conclusion of Merck’s IRS examination.
Balance sheet, liquidity and debt
- At March 31, 2021, cash and cash equivalents were $141 million; current assets were $2.977 billion and current liabilities were $2.875 billion. Continuing-operations working capital was $26 million, down from $348 million at year-end 2020.
- Current liabilities included $1.520 billion due to related parties. Merck’s third-party debt was not attributed to Organon in the historical statements.
- After the spin-off, Organon assumed approximately $9.48 billion of principal debt: term loans of $3.0 billion and €750 million due 2028, secured notes of $2.1 billion due 2028 and €1.25 billion due 2028, and $2.0 billion of unsecured notes due 2031. The company also has a $1 billion revolving facility, with no borrowings outstanding as of the filing date.
- Organon distributed $9.0 billion of debt proceeds to Merck and reported beginning standalone operations with approximately $900 million of cash; about $400 million was intended for inventory purchases from Merck before year-end 2021. Management said financing arrangements, operating cash flow and capital-market access were expected to provide adequate resources.
Material changes and operating drivers
- Management estimated COVID-19 reduced Q1 2021 sales by approximately $100 million. Lower healthcare access and visits affected physician-prescribed and physician-administered products; the company expected residual negative effects to persist through 2021.
- Management attributed approximately $80 million of the year-over-year sales decline to loss of exclusivity and approximately $50 million to China’s volume-based procurement program. Generic competition weighed on established brands, including Singulair, Dulera, Nasonex, Zetia and Vytorin, and on NuvaRing.
- Women’s Health sales were mixed: Nexplanon/Implanon NXT declined 6% and NuvaRing declined 28%; Follistim AQ rose 25% and Orgalutran rose 85%. Biosimilar Renflexis sales increased 36%, while Brenzys declined 42%; Aybintio generated $8 million of launch-period sales.
- Established Brands faced broad declines. Worldwide respiratory sales included Singulair down 31%, Nasonex down 39% and Dulera down 54%. Higher fertility-product and biosimilar sales, and revenue from the generic vaginal-ring arrangement, partly offset the pressure.
- Discontinued operations, principally Merck-retained products transferred back to Merck, recorded $89 million of sales and $4 million of after-tax income, versus $465 million of sales and a $31 million after-tax loss in Q1 2020.
Outlook, transactions and risks
- The filing provides no numerical full-year revenue or earnings guidance. Management expected continuing residual COVID-19 effects, further NuvaRing declines, and 2021 declines in certain established brands, including Dulera and Rosuzet.
- Organon acquired Alydia Health on June 16, 2021, for $215 million upfront, including $50 million paid in April and $165 million at closing; a further $25 million sales-based payment is contingent on achievement. The acquisition was accounted for as an asset acquisition.
- Merck transition services generally run for up to 25 months after separation. The company also entered interim operating, manufacturing and supply arrangements with Merck; these relationships and the shift to standalone operations may affect costs and execution.
- Contingencies include product-liability, intellectual-property and commercial matters. Organon disclosed approximately 3,485 Fosamax cases pending against Merck and stated it must indemnify Merck for certain litigation-related liabilities under the separation agreement. The company said it could not reasonably estimate possible losses for certain matters. Legal defense reserves were approximately $30 million at March 31, 2021. The filing states Organon will not be liable for the Vioxx and Zetia antitrust litigation outcomes.
- Other risks include foreign-exchange exposure, generic competition, debt service and credit-agreement leverage covenants, and separation-related tax restrictions. Management reported disclosure controls were effective; no material change in risk factors was reported.
Important facts for investors to verify
- Standalone results and cash generation after separation, including actual transition-service, manufacturing and other separation costs; the historical statements include Merck allocations that may not represent standalone costs.
- Post-spin-off debt, cash balances, interest expense, leverage-covenant headroom and the use of the revolving facility.
- Whether COVID-19 effects, China procurement measures and generic competition develop as management expected, and whether biosimilar and fertility growth offsets established-brand declines.
- Actual tax effects of the separation-related non-U.S. tax-basis step-up and the terms and milestones of the Alydia Health acquisition.
- Developments in indemnified litigation and other legal contingencies, including whether reserves remain adequate.