Organon & Co. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Organon became an independent, publicly traded company on June 2, 2021. Results before separation were derived from Merck’s records and include allocated costs; historical results may not represent Organon’s standalone performance. The filing reports full-year results, not a separate fourth-quarter summary.
Business context
Organon is a global healthcare company with one operating segment and more than 60 medicines and products across women’s health, biosimilars and established brands. It generated about 80% of 2021 sales outside the United States and distributes products in more than 140 countries and territories.
Financial results and liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $6.304 billion | $6.532 billion | Down 3% reported; down 6% excluding foreign exchange |
| Gross margin | 62.2% | 67.6% | Down 5.4 percentage points |
| Income from continuing operations | $1.351 billion | $2.256 billion | Down 40% |
| Net income | $1.351 billion | $2.160 billion | Down 37% |
| Diluted EPS | $5.31 | $8.52 | Continuing-operations EPS was $5.31 versus $8.90 |
| Cash from operating activities | $2.160 billion | $2.284 billion | Down $124 million |
| Capital expenditures | $192 million | $255 million | Down $63 million |
Operating costs and other expenses totaled $4.775 billion, up 26%; research and development expense more than doubled to $443 million, and SG&A rose 23% to $1.668 billion. Interest expense was $258 million, primarily reflecting debt issued in connection with the separation. The effective tax rate was 11.7%, versus 18.0% in 2020, reflecting foreign earnings and tax benefits associated with the separation and IRS examination conclusion.
At year-end, cash and cash equivalents were $737 million, working capital was $1.2 billion, and long-term debt was $9.125 billion, with $9 million current. No revolving-credit-facility borrowings were outstanding; $1 billion of capacity was available. Organon reported compliance with its financial covenants and no default. It paid $0.56 per share in dividends during 2021; the board declared a $0.28 quarterly dividend in February 2022.
Portfolio performance and changes
- Women’s health: Sales were $1.612 billion, versus $1.555 billion in 2020. Nexplanon/Implanon NXT sales rose 13% to $769 million; NuvaRing sales fell 19% to $191 million amid generic competition. Follistim AQ and ganirelix sales increased 23% and 37%, respectively.
- Biosimilars: Sales increased 28% to $424 million. Renflexis sales rose 37% to $186 million and Ontruzant sales rose 10% to $126 million; Brenzys sales declined 15% to $63 million. Aybintio contributed $36 million and Hadlima $13 million.
- Established brands: Sales declined 10% to $4.068 billion, with generic competition and China’s volume-based procurement affecting several products. Zetia/Vytorin sales fell 18% to $542 million; Singulair fell 11% to $413 million.
Management attributed the overall sales decline to established-brand generic competition, lower sales of certain respiratory and cardiovascular products, the loss of a Rosuzet distribution agreement in Korea, NuvaRing competition, China’s volume-based procurement and continuing COVID-19 effects. These pressures were partly offset by growth in Nexplanon, fertility products and biosimilars, as well as foreign exchange. Management estimated that loss of exclusivity reduced 2021 sales by about $300 million and China volume-based procurement reduced them by about $170 million versus 2020.
Gross-margin contraction reflected standalone and tolling costs, higher amortization, a $24 million charge for unavoidable losses under a long-term supply contract and a $7 million biosimilar product-right impairment. Higher SG&A also reflected standalone-company costs and increased selling and promotional spending. The company reported $2.2 billion of operating cash flow, but working-capital movements included higher receivables and inventory.
Strategy, outlook and material items
- Management described continued generic and pricing pressure, ongoing COVID-19 disruption, and growth opportunities in long-acting contraception, fertility and biosimilars. It expects generic competition to continue reducing NuvaRing sales and said revenue from its U.S. generic vaginal-ring arrangement is expected to decline significantly in 2022. The filing does not provide clear quantified full-year 2022 financial guidance.
- COVID-19’s estimated negative sales impact was approximately $400 million in both 2021 and 2020, mainly due to reduced medical visits, clinic access and elective procedures. Management said recovery occurred during 2021 but impacts persisted.
- Organon acquired Alydia Health for an upfront $219 million; the Jada postpartum-hemorrhage device received U.S. clearance for technological updates in September 2021 and launched in February 2022. International authorization was being pursued for the 2023/2024 timeframe.
- The Forendo acquisition involved a $75 million upfront payment, assumption of about $10 million in debt and potential development, regulatory and commercial milestones; the maximum stated consideration was $955 million. The company recorded $79 million as R&D expense in 2021. The ObsEva ebopiprant license involved a $25 million upfront payment, up to $90 million in development and regulatory milestones, up to $385 million in sales-based milestones and tiered double-digit royalties.
- The separation was financed with notes and term loans; Organon distributed $9.0 billion to Merck from debt proceeds and other available funds. It made a discretionary $100 million term-loan prepayment in December. Future material obligations include $1.5 billion of purchase obligations through 2030 and $251 million of lease payments; $349 million and $53 million, respectively, were due within 12 months.
- Key risks include substantial debt and covenant restrictions, generic competition and patent expirations, pricing and reimbursement pressure, reliance on Samsung Bioepis and other suppliers, sole-source supply exposures, COVID-19, foreign exchange, cybersecurity and the costs and operational risks of completing the separation from Merck. Nexplanon rod-technology patents expire in 2027 in the U.S. and 2025 in other countries.
- Contingencies include product-liability and patent litigation, including litigation relating to Fosamax, Nexplanon/Implanon and Propecia/Proscar, and a Washington State investigation concerning adalimumab and biosimilars. The company said it could not estimate possible losses for certain matters; it reported $9 million of legal-defense reserves. Environmental liabilities accrued were $24 million, with estimated remediation expenditures of $19 million for 2022–2026.
- Russia and Ukraine represented approximately 2% of 2021 revenue combined. The company warned that the armed conflict and related sanctions could affect shipping, supplies, regulatory activity and currency exchange.
Important facts for investors to verify
- How much of the 2021 decline in revenue and gross margin reflects recurring competition and pricing pressure versus temporary COVID-19 and standalone costs.
- The sustainability of operating cash flow and liquidity after separation, including debt service, covenant headroom, dividends and purchase commitments.
- The pace of China volume-based procurement effects, generic erosion in established brands, and the expected decline in NuvaRing-related revenue.
- Commercial and regulatory progress for Jada, Hadlima’s planned U.S. launch in June 2023, and the Forendo and ebopiprant development programs.
- Potential financial effects of litigation, supply interruptions, Merck transition arrangements and the company’s reliance on external manufacturers and partners.