Organon & Co. — Q2 2023 Form 10-Q
Business context and reporting period. Organon is a global healthcare company focused on women’s health, biosimilars and established brands. This unaudited report covers the quarter and six months ended June 30, 2023; dollar amounts are in millions unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,608 | $1,585 | $3,146 | $3,152 |
| Income before taxes | $254 | $287 | $489 | $729 |
| Net income | $242 | $234 | $419 | $582 |
| Diluted EPS | $0.95 | $0.92 | $1.64 | $2.28 |
| Operating cash flow | — | $141 | $274 |
- Q2 revenue rose 1% reported and 4% excluding foreign exchange; unfavorable FX reduced sales by about $39 million. Six-month revenue was essentially flat reported, but increased 3% excluding FX; unfavorable FX reduced sales by about $110 million.
- Q2 cost of sales rose 9% to $640 million, SG&A rose 7% to $451 million, and R&D rose 21% to $128 million. For the first half, these expenses rose 6%, 12% and 27%, respectively.
- Calculated gross margin was approximately 60.2% in Q2 versus 62.9% a year earlier, and 61.2% for the first half versus 63.6%. Calculated net margin was approximately 15.0% in Q2 versus 14.8%, and 13.3% for the first half versus 18.5%.
- Interest expense increased 35% in both the quarter and first half, to $132 million and $264 million, respectively. Management cited higher rates and, for the first half, costs associated with the term-loan prepayment.
- Effective tax rates were 5.0% for Q2 and 14.4% for the first half, versus 18.5% and 20.2% in 2022. The lower 2023 rates primarily reflected a reduced-rate arrangement in Switzerland.
Liquidity, debt and cash flow
- Cash and cash equivalents were $326 million at June 30, down from $706 million at year-end. Working capital was $1.6 billion, compared with $1.4 billion at year-end; management attributed the increase mainly to inventory and receivables timing.
- First-half operating cash flow was $141 million, down from $274 million. Investing used $124 million, including $117 million of capital expenditures; financing used $414 million, including $334 million of debt repayments and $147 million of dividends. Cash decreased by $380 million over the period.
- Long-term debt principal was $8.730 billion; the balance-sheet carrying amount was $8.722 billion, excluding the $8 million current portion. The company made a discretionary $250 million U.S. term-loan prepayment in March. Weighted-average borrowing cost was 5.6%, and average debt maturity was about 5.5 years.
- Organon was in compliance with its financial covenants at June 30, 2023. It amended its credit agreement on June 30 to replace LIBOR-based rates with Adjusted Term SOFR rates; the reported financial impact was not material.
- Stockholders’ deficit was $555 million. The company declared a $0.28-per-share quarterly dividend in August, payable September 14, 2023.
Material changes and operating drivers
- Women’s health: Q2 Nexplanon/Implanon NXT sales increased 10% to $214 million and Follistim AQ rose 21% to $70 million. Management cited demand and U.S. price increases for Nexplanon and recovery in China for Follistim. NuvaRing fell 5% to $40 million amid generic competition.
- Biosimilars: Q2 Renflexis sales grew 19% to $70 million. Ontruzant declined 7% to $33 million. Hadlima U.S. sales began in July 2023, after the quarter.
- Established brands had mixed results: Atozet rose 17% to $143 million, while Cozaar/Hyzaar fell 23% to $71 million and Zetia/Vytorin fell 5% to $129 million. China volume-based procurement reduced sales by $25 million in Q2 and $52 million in the first half; management expects effects on established brands for several more quarters.
- Diprospan sales fell 61% in Q2 to $12 million and 57% in the first half, following a manufacturing-site regulatory inspection finding and related market action. The company said the findings were resolved in Q1 and expects sales recovery over the next 12 months.
- First-half R&D included an $8 million Claria Medical investment, expensed as acquired in-process R&D. Organon may acquire Claria for an additional $47 million if it exercises its option.
Outlook, risks and contingencies
- The filing provides no quantified revenue, earnings or cash-flow guidance. Management expects positive operating cash flow and believes financing arrangements, operating cash and access to capital markets will provide adequate resources for future needs.
- Management expects continued NuvaRing sales declines from generic competition, ongoing VBP pressure on established brands, and possible near-term volatility in China from COVID-19 impacts. It also cited pricing and generic competition, product access and regulatory pressures, supply and manufacturing costs, and execution of development and commercialization plans as risks.
- Organon has customary product-liability, intellectual-property, commercial and governmental matters. It states that possible losses for certain litigation cannot currently be reasonably estimated. Its $23 million legal-defense reserve is an estimate of defense costs, not a quantified estimate of potential damages; Organon has no insurance for most product liabilities.
- Notable proceedings include approximately 3,235 Fosamax femur-fracture cases pending against Merck, with Organon potentially responsible for certain liabilities under its separation agreement; the filing does not provide a clear estimate of any potential Organon loss. A separate Nexplanon patent case was scheduled for jury trial beginning October 16, 2023. A €39 million Spanish competition fine imposed on Merck concerning NuvaRing was under appeal; Organon could be required to indemnify Merck for a portion if upheld.
- Other commitments include a $25 million milestone due upon acceptance of an IND filing for ebopiprant and up to $25 million of potential future regulatory milestones under the Samsung Bioepis agreement. Management also noted tax-law uncertainty and continuing assessment of possible effects of the U.S. Inflation Reduction Act.
Investor verification priorities
- Track whether sales growth excluding FX converts into sustained profit and cash-flow growth, given first-half operating cash flow fell to $141 million.
- Monitor debt, interest expense, working-capital needs and the company’s ability to maintain dividends while funding capital expenditures and development.
- Assess China VBP, distributor ordering patterns, generic competition and the pace of Diprospan recovery against management’s stated expectations.
- Review subsequent filings for developments in product-liability and patent matters, indemnification exposure, and any resulting accruals or cash payments.
- Verify the impact of Hadlima’s U.S. launch, Claria’s option decision and milestone obligations, and the evolving tax and regulatory environment.