Organon & Co. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Organon is a global healthcare company focused on women’s health, biosimilars and established brands, with more than 60 products. Its results are consolidated; the comparable 2021 period predates the June 2021 separation from Merck and includes Merck allocations and discontinued operations, limiting direct comparability.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $1,567 million | $1,506 million |
| Gross margin | 64% | 61% |
| Income from continuing operations before tax | $442 million | $467 million |
| Net income from continuing operations | $348 million | $395 million |
| Diluted EPS from continuing operations | $1.36 | $1.56 |
| Operating cash flow from continuing operations | $123 million | $1,300 million |
| Cash and cash equivalents at period end | $694 million | $737 million at Dec. 31, 2021 |
| Long-term debt, including current portion | $9,094 million principal | $9,134 million principal at Dec. 31, 2021 |
Revenue increased 4% year over year, or 8% excluding foreign exchange; international revenue rose 7% while U.S. revenue fell 6%. Cost of sales declined 5%, and SG&A declined 3%; R&D increased 43% to $96 million, primarily reflecting clinical-stage assets and employee costs. Other expense was $97 million, mainly interest expense, versus $2 million of other income in Q1 2021. The effective tax rate was 21.3%, compared with 15.5%; the prior-year rate benefited from a $29 million net tax benefit related to the conclusion of Merck IRS examinations.
Operating cash flow fell to $123 million, principally due to a decrease in trade payables, including balances with Merck. Q1 2021 cash flow included a $769 million related-party cash-flow benefit, making the year-over-year comparison particularly uneven. Investing cash use was $63 million, including the Marvelon/Mercilon acquisition and capital expenditures; financing cash use was $91 million, including $71 million of dividends. Working capital was $1.4 billion, up from $1.2 billion at year-end. The company reported no outstanding revolving-credit borrowings and said it was in compliance with debt covenants. Weighted-average borrowing cost was 3.9%; the debt portfolio includes variable-rate loans.
Material changes and business developments
- Growth was led by established-brand respiratory products, including Singulair and Nasonex, and by biosimilars and fertility treatment Follistim. Nasonex revenue included a $10 million regulatory milestone.
- Women’s health headwinds included lower Nexplanon sales, mainly due to U.S. distributor buying patterns, and generic competition for NuvaRing. Loss of exclusivity reduced sales by about $30 million year over year; revenue from the U.S. authorized-generic arrangement fell to $11 million from $32 million and is expected to decline significantly for the rest of 2022.
- Organon paid $30 million and accrued another $35 million for Marvelon and Mercilon rights and inventory in China; the Vietnam rights transaction remained subject to closing conditions. A separate agreement to license global rights to Xaciato was announced after quarter-end, with a $10 million upfront payment, potential milestones of up to $182.5 million and tiered double-digit royalties; closing was expected in Q2 2022.
- The board declared a quarterly dividend of $0.28 per share, paid in March; a further $0.28 dividend was declared in May.
Outlook, risks and contingencies
The filing gives no quantified revenue or earnings guidance. Management expects positive operating cash flow and plans to fund operations and investment primarily from operating cash, cash on hand, its $1 billion revolving facility and capital-market access. It cautions that COVID-19 developments may continue to cause near-term volatility, including through healthcare access and physician-visit disruptions. Management also flagged potential effects of the Russia-Ukraine conflict on shipping, supply, regulatory activity, currencies and counterparties; Russia and Ukraine together represented about 2% of revenue, and assets there were not material at March 31.
Risks discussed include competition and generic entry, pricing and reimbursement pressure, supplier and third-party dependence, acquisition execution, and patent challenges. Organon is involved in product-liability, intellectual-property, commercial and governmental matters; management said it was unlikely that resolution of the described matters would materially affect financial condition, results or cash flows, but some losses cannot yet be estimated. Organon has no insurance for most product liabilities. It may also have indemnification obligations to Merck for specified litigation. The filing describes a Washington State investigation demand concerning adalimumab and biosimilars and ongoing Nexplanon patent litigation. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether revenue growth and the strong respiratory-product performance persist, given generic competition, distributor purchasing patterns and potential competitor supply normalization.
- Whether cash generation improves after the sharp decline in operating cash flow, and how working-capital movements and Merck-related balances affect cash conversion.
- Debt repayment capacity, variable-rate interest exposure, covenant headroom and the sustainability of dividends alongside acquisition spending.
- Progress and commercial economics of the China and Vietnam product-rights transactions and the Xaciato license, including closing conditions and milestone or royalty obligations.
- Developments in product-liability, patent and governmental matters, including potential indemnification exposure to Merck and the absence of insurance for most product liabilities.