Organon & Co. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Organon completed its spin-off from Merck on June 2, 2021 and began NYSE trading June 3. Pre-separation financials were derived from Merck’s records and include allocated costs; therefore, comparisons may not reflect Organon’s standalone cost structure.
Business and financial performance
Organon develops and sells prescription therapies across women’s health, biosimilars and established brands. All figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales | $1,595 | $1,526 | $3,101 | $3,306 |
| Gross margin | 63% | 70% | 62% | 70% |
| Income from continuing operations | $431 | $586 | $826 | $1,320 |
| Net income | $427 | $542 | $826 | $1,245 |
| Diluted EPS | $1.68 | $2.14 | $3.25 | $4.91 |
| Cash from continuing operations | Not separately stated | Not separately stated | $1,745 | $1,480 |
Q2 sales increased 5% as reported but declined 1% excluding foreign exchange; first-half sales fell 6% as reported and 11% excluding foreign exchange. Q2 sales growth reflected recovery and demand in women’s health and biosimilars, partly offset by generic competition, China’s volume-based procurement program and continuing pandemic effects. First-half declines reflected established-brand generic competition, lower respiratory-product sales, NuvaRing competition and China VBP.
Cost of sales rose 27% in Q2 and 18% in the first half. Management cited standalone setup and manufacturing costs and lower-margin tolling arrangements with Merck. SG&A increased 46% in Q2 and 33% year to date; R&D increased 49% in both periods, mainly reflecting standalone-company costs and employee-related expenses. Q2 other expense included $62 million of interest expense on newly issued debt.
Cash, debt and liquidity
- Cash and cash equivalents were $730 million at June 30, 2021, versus $12 million at December 31, 2020. Working capital was $936 million, versus $348 million.
- First-half cash from continuing operating activities was $1.745 billion; investing activities used $287 million, including the Alydia Health acquisition; financing activities used $772 million. Operating cash flow benefited from higher accounts payable, including amounts due to Merck, despite lower net income.
- At June 30, principal long-term debt was $9.348 billion; balance-sheet debt, net of issuance costs and current portion, was $9.309 billion. Debt includes dollar and euro term loans and notes, with maturities principally in 2028 and 2031. Weighted-average borrowing cost for Q2 was 3.0%.
- The $1 billion revolving credit facility was undrawn. Debt covenants include a quarterly total leverage ratio test beginning September 30, 2021; no default had occurred by quarter end.
- Organon issued about $9.5 billion of debt in connection with the separation and distributed $9.0 billion to Merck. Management said operating cash flow, cash on hand, revolver capacity and capital-market access should fund future needs.
Outlook, risks and unusual items
- Management estimated COVID-19 reduced Q2 sales by approximately $120 million and expected negative effects to persist through 2021, principally in established brands and women’s health. No quantified full-year revenue or earnings guidance is provided in the filing.
- Management reported approximately $130 million of Q2 and $210 million of first-half year-over-year sales impact from loss of exclusivity, and approximately $40 million and $90 million, respectively, from China’s VBP program.
- The Alydia Health acquisition closed June 16 for $219 million upfront consideration; a further $25 million sales-based payment was contingent and not probable at quarter end. Organon recorded a $247 million Jada System intangible and $23 million of compensation expense.
- In July, Organon agreed to license worldwide rights to investigational ebopiprant. Terms include 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.
- Tax items included a $70 million benefit related to a non-U.S. tax-basis step-up and a $29 million net benefit associated with the conclusion of Merck’s 2015–2016 IRS examination. A $145 million out-of-period prepaid-tax-asset adjustment, offset through Merck investment, had no income-statement or cash-flow impact; the company deemed it immaterial to current and prior periods.
- Risks include standalone-transition costs and reliance on Merck transition services, generic and biosimilar competition, pricing and reimbursement pressure, supply disruptions, COVID-19, debt and covenant constraints, and product, patent and regulatory litigation. The company reported a Washington State Attorney General CID concerning activities related to adalimumab and biosimilars and said it was cooperating. It also disclosed product-liability and patent matters and noted it has no insurance for most product liabilities.
Investor verification priorities
- Compare post-spin standalone expenses and cash generation with historical Merck-allocated results; assess whether setup costs and tolling arrangements continue to pressure margins.
- Track organic sales trends, separating currency, COVID-19 recovery, generic loss of exclusivity and China VBP effects, particularly across established brands.
- Verify debt service capacity, leverage covenant headroom, variable-rate exposure and the ability to sustain dividends; the filing reports a $0.28-per-share quarterly dividend declared in August.
- Monitor the commercial uptake, regulatory requirements and contingent payments associated with Jada and ebopiprant, and the outcome of the Washington CID and other significant litigation.