Organon (NYSE: OGN) is an American manufacturer of drugs, related to female fertility, and generics - copies of other people's drugs, whose patents have expired. In 2021, pharmaceutical giant Merck spun it into a separate company..
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What the company makes money on
Organon's revenue is divided into segments:
- Preparations for the cardiovascular system, bones, dermatology and painkillers 64%. This usually includes drugs, which are developed on the basis of other people's patents, — generics.
- Preparations, related to female fertility: contraceptives and drugs for the treatment of infertility - 25%.
- Immunological and oncological drugs - 7%.
- Other products - 4%.
The company's revenue is distributed worldwide, the United States accounts for only 22%. On the one hand, diversification, but on the other hand, the strengthening of the dollar against the currencies of other countries will lead to a drop in sales in dollar terms. Treasure 47% revenues come from countries with strong currencies: Europe, Japan and Asia.
For the last 12 months Organon received $ 6.4 billion in revenue and operating cash flow of $ 2.5 billion.
Organon Revenue by Segment, billion dollars
| 9м2020 | 9м2021 | The change | |
|---|---|---|---|
| Generics | 3,48 | 3,03 | −13% |
| Preparations, related to female fertility | 1,16 | 1,20 | 3% |
| Immunological and oncological drugs | 0,23 | 0,31 | 35% |
| Other | 0,05 | 0,17 | 236% |
| Total | 4,92 | 4,70 | −4% |
Positive points
Lots of quality content coming soon. The company plans to work at an accelerated pace and launch new drugs every 1-2 years.
Organon will launch a generic in 2023, which helps treat types of arthritis. This is a $50-60 billion market, which the, according to forecasts, will grow by 2-3% annually, taking into account compound interest over the next few years. Another drug, which helps fight cancer, planning to launch in Europe. This is also a multi-billion dollar market with a growth rate above the average GDP growth in the world..
Market capture should not be expected - the share will be small.
Work on trends. Late pregnancies are on the rise, As a result, the demand for contraceptives is increasing.. Organon solves this problem with an implant, who has been working for several years.
Besides, the company has a number of products and drug licenses, that prevent preterm birth or its consequences. If the situation in the USA has not been consistently good for the last ten years, about 10-11% of births are premature, – then in China the situation worsened from 2012 to 2018: the proportion of preterm births increased from 5,9 to 6,4%. And China is a potential major market.
Cheap. Organon is worth paying attention to, if only because of the price.. The company is cheap in terms of income and one of the most profitable on the investment from the management of the company.
The company was heavily indebted, but it's not that scary. Merck spun off the company, and in return received 9 billion dollars. The money was raised by raising Organon's debt. On 30 September 2021 loans and borrowings of the company amounted to $ 9.2 billion. There were still 0.3 billion dollars left in the accounts, which, if necessary, can be used to pay off the debt.
In the coming years, debt will not interfere much, but about $340-380 million annually will have to be spent on interest payments. The company also has 7 years, to rectify the situation with a drop in revenue and not get problems with creditors. At the same time, the company plans to reduce debt in the first 12-24 months after the spin-off from Merck..
Dividends. Despite all the hardships, the company plans to send approximately 20% free cash flow for dividends. The first dividend payment was 0,28 $ for a neighborhood, or 1,12 $ in year. This gives an approximate dividend yield. 3%.
Controversial points
Lockdown hinders sales of top-selling drug. 11% proceeds for 9 months of 2021 fell on Nexplanon - this is an implant, which is implanted under the skin in the upper arm, to prevent pregnancy by secreting female sex hormone.
However, the drug is sold mainly through hospitals and clinics.. During the pandemic, the target audience began to visit medical institutions less, because of what sales fell. The situation improved in the third quarter of 2021, and sales revenue increased, but if new lockdowns begin, the scenario will repeat.
The company can't stop the bleeding. Over the past five years, the company lost about $ 5 billion in revenue due to the loss of exclusive rights to developed drugs.. Alas, this is the way of any samurai in the biotechnology industry.
According to management, Until 2025, the company will lose $ 0.3 billion annually due to the expiration of patents. Part of the revenue can be offset by the growth in sales of other products and the launch of new ones. But there is one problem.
Costs will rise. If we compare the company's spending on research and development (R&D) in relation to revenue, this would be the lowest rate among companies within the drug industry. Moreover, the lag is serious: 6% company versus median 18%.
CEO has already confirmed, that starting from 2022 R&D-costs will increase. Falling revenue and rising costs create a situation, which the English sage Brick has already described: "Gentlemen, you're walking on very thin ice.".
What's the bottom line?
Probably, in 2022, Organon expects two negative events at once. Revenue will continue to fall; costs will rise due to research and development, as well as potential acquisitions of other companies and licenses. Cash flow will decrease too. But sales of new products will arrive by 2023, And, maybe, revenue will start to grow.
Now the company is extremely cheap - about two annual cash flows. But the corresponding risks. I will keep a close eye on company news., because any positive event can become a driver of rapid growth in stocks.
