Organon

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Organon is a global healthcare company focused on women’s health, biosimilars, and established brands.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Organon, spun off from Merck in 2021, aims to be a leader in women’s health. This strategic focus defines much of its operations, risk profiles, and investment thesis.

Business Overview

Organon is a global healthcare company that focuses on women’s health, biosimilars, and established brands.

  • Women’s Health: This segment encompasses treatments for reproductive health, including contraception and fertility, and conditions like osteoporosis and endometriosis. The products in this segment are primarily prescription-based.
  • Biosimilars: This segment includes biosimilar versions of established biologic medicines. Organon focuses on biosimilars in immunology and oncology, offering potentially lower-cost alternatives to existing treatments.
  • Established Brands: This includes a diverse portfolio of well-known medications across several therapeutic areas that have lost patent protection and face generic competition.

A key characteristic of Organon’s portfolio is its dependence on established brands, which provides a predictable revenue stream but often limits growth potential.

Revenue Distribution

Organon’s revenue is generated primarily through the sale of its products across different regions. Sales are reported geographically in:

  • The Americas (primarily the United States and Puerto Rico, Canada, and Latin America), with the United States making up the major chunk of the Americas revenue.
  • Europe, Middle East and Africa (EMEA).
  • Asia Pacific.

In 2022, about 70% of Organon’s revenues came from markets outside the United States. The company has a broad geographic reach.

  • Women’s Health: While this is a growing area, some market conditions are challenging because there is no easy way to produce new and successful products.
  • Biosimilars: This is a growing market driven by the rising costs of branded biologics and the potential for lower-cost alternatives. However, regulatory hurdles and fierce competition are factors to consider.
  • Established Brands: This segment faces declining prices due to generic competition and a steady decrease in demand in the long run. However, established brands also provide a stable baseline revenue.

The company’s growth potential depends on balancing declining revenue from established brands with growth in women’s health and biosimilars.

Margins

Organon has a diversified profitability profile. The company has margins that vary depending on the segment and type of product.

  • Margins in branded products typically decline as they lose patent protection and face competition.

Competitive Landscape

  • Women’s Health: A competitive and evolving space, with companies specializing in novel treatments.
  • Biosimilars: This is a highly competitive market with strong competition coming from low cost players.
  • Established Brands: A commoditized segment with strong generic competition.

Organon’s competitive environment is challenging, especially with the presence of low cost competitors.

What Makes Organon Different?

  • Focus on Women’s Health: This singular focus gives Organon a unique place in the market, but also limits their market diversification. The company’s strong focus on women’s health is an area that has not seen much attention in the past, though there is a growing interest now.
  • Portfolio of Established Brands: This provides stability, even though this segment faces pricing pressure.
  • Biosimilars Pipeline: The company’s push into biosimilars diversifies their product portfolio, providing for new growth opportunities in their business.

Financial Deep Dive

  • Revenues: OGN’s reported revenues of ~$1,525M in 2023 Q1 (3 month). Revenue is down 8% YoY from Q1 2022. This is mainly due to decline in Women’s Health, which more than offsets growth in Biosimilars. On the regional level, US sales are down by 13% YoY in Q1 2023 and ex-US sales are down by 5% YoY.
  • Expenses: Selling, general, and administrative (SG&A) expenses in the quarter came down by approximately 6% YoY and Research and Development (R&D) expenses dropped 12% YoY. These cost controls helped offset the negative impact of falling revenues in the latest report. The expenses are mainly related to R&D, personnel, promotional and marketing activities.
  • Profitability: The reported EBIT of -$102M for the recent quarter. This decline in profit is related to several factors, including higher cost of goods sold and the decline in sales as mentioned earlier. However, OGN expects to get back to profitability by the end of the year and in 2024.
  • Shareholders’ Equity: Total shareholders equity is ~$1,995 million in the latest report as of September 30 2022, down from $2,266 million at the end of December 31 2021. This decline is mainly attributed to a net loss incurred in this period.
  • Cash Flow: The company generated $101 million in free cash flow during the 3 months ended March 31 2023.

OGN’s financial performance is mixed, with declining revenues, but also improved cost management. The most recent results point to concerns about profitability and continued negative impacts from the global slowdown and lower than expected sales.

Recent Concerns, Controversies and Problems

  • Revenue Decline: The primary concern is the declining revenue, especially in the Women’s Health segment.
  • High Debt: Organon is carrying a high amount of debt. As of September 30, 2022 they had total debt of $8.2 billion. This is more than twice the amount of their equity.
  • Dependence on Established Brands: Though this segment provides stability, it also exposes OGN to competition from generic brands and lower margins.
  • Management Response: Organon management is trying to address these concerns by focusing on new products and growth in the biosimilars segment, while they also focus on cost control and improving operations. The company also expressed confidence in their growth opportunities, despite recent challenges.

Moat Rating: 2/5

Organon has a weak moat due to the following factors:

  • Lack of Pricing Power: The commoditized nature of several of the drugs and the presence of low cost competitors reduce Organon’s power to price its products higher than its competition.
  • Established Brands: There are fewer barriers to entry in the “established brands” segment, leading to quick erosion of profits when a brand’s patent expires.
  • Limited Differentiation: The company faces significant competition in both biosimilars and women’s health.

However, Organon is focusing on areas that could generate a potential moat over time:

  • Brand Recognition in Women’s Health: If the company manages to build strong and trusted brands in women’s health, they could carve a solid niche for themselves.
  • Network Effects in Distribution: Organon’s efforts to improve distribution channels might give them an edge over their competitors.
  • Patent Portfolio: Despite the challenges, if the company can continue developing new patented drugs, then the company might be able to create a moat based on the strength of its portfolio.

Understandability: 3 / 5

The company’s operations are fairly easy to understand at a high level. Its business model is not that complex, but a detailed analysis of financial statements can take some time to fully grasp the situation. However, the nuances of pharmaceuticals and biosimilars, including how they are developed, tested, sold and purchased can make valuation more complex.

Balance Sheet Health: 3 / 5

Organon has high debt relative to their equity and cash flow, therefore creating a potential risk. While current assets exceed current liabilities they have a high degree of dependence on debt for funding operations, which in times of a downturn, could pose a risk to the business. The company has been cutting down operating costs, but further restructuring and improvements are still needed to consider the balance sheet to be healthy.

It’s crucial for investors to be vigilant of any further changes and deterioration in the company’s operations and financial performance and its implications for the sustainability of the business.