Summary
Organon fell after posting quarterly results.
Shareholders are nervous about recent acquisition.
Fair value introduced.
This idea was discussed in more depth with members of my private investing community, DIY Value Investing. Learn More »
JHVEPhoto/iStock Editorial via Getty Images Shortly after posting third-quarter results , Organon (NYSE: OGN ) fell sharply. Despite narrowing its guidance , which lowers uncertainty, shareholders did not react well to the Forendo Pharma acquisition for $954 million.
At a forward price-to-earnings ratio of 4.6 times and a dividend that yields 1.95%, should investors buy this Merck (NYSE: MRK ) spinoff? About Organon
Organon focuses on becoming a global leader in woman’s health. Its two core businesses are contraception and fertility. In developed countries, infertility is becoming a bigger problem as people choose career opportunities over family first. Endometriosis is a high-priority unmet need. Chief Executive Officer Kevin Ali said that it affects up to 170 million patients. This is up to 10% of all women of reproductive age.
Organon may build a niche business in developing therapies for patients suffering from related pain with endometriosis. Forendo Acquisition
On November 11, Organon said it would acquire Forendo Pharma . Forendo is a clinical-stage drug development company. In plain English, clinical-stage firms burn cash to fund research and development activities. The acquisition will add Forendo’s HSD17B1 inhibitor, which is in Phase 1. Two more products are in the early discovery phase: Chart courtesy of Forendo
Organon will pay $75 million upfront. It will assume $9 million of Forendo’s debt. Upon regulatory milestones and other achievements, it will pay Forendo up to $270 million. The commercial milestone payments will cost up to $600 million for a total cost of $954 million. Debt Levels
Investors are bearish on the deal because Organon had $9.3 billion in debt against $1 billion in cash and cash equivalents. At a net debt of around $8.6 billion, the company must lower its net leverage. It ended Q3 with net leverage of around 3.7 times.
Just as Teva (NYSE: TEVA ) and Bausch Health (NYSE: BHC ) generated enough cash flow from operations to service debt, Organon may need to do the same: In addition, Organon’s Board committed to a dividend. The dividend is its priority. The target dividend is in the low 20% of free cash flow. The company’s second priority is organic growth. Growth Opportunity
Organon guided revenue for the full-year 2021 in the range of $6.2 billion to $6.3 billion. The top-end guidance is lower than the previous range of $6.1 billion to $6.4 billion. ORN stock is now at post-IPO lows: Source: SA Chart
In a five-year discounted cash flow model (EBITDA Exit), readers may assume a $6.3 billion revenue for this year. Organon did not offer guidance beyond this fiscal year. Investors should assume the worst-case scenario to establish the baseline fair value for the stock. Assume that the loss of exclusivity impacts around $300 million cumulatively in the next four years. The revenue will decline, as shown above.
Set an EBITDA multiple of 8.4 times, and the stock’s fair value is 8.8% higher than the recent closing price: Readers may click on the above link to forecast a more optimistic scenario. For example, if Organon’s Covid impact of $320 million in YTD 2021 is lower in 2021, then it will realize a higher EBITDA. Furthermore, Organon’s biosimilars, which are growing by 30% YTD, may lift revenue growth sooner than expected.
On Simply Wall St., the fair value target for OGN stock is higher: The site uses a two-state free cash flow to equity. The forecast also relies on the company meeting revenue and earnings expectations for this year: Biosimilars
In Q3, Organon’s biosimilars growth was 41%:
Data courtesy of Organon Q3/2021 Presentation It has 11 products in women’s health, 5 in biosimilars, and 49 in established brands. Renflexis, which treats autoimmune diseases, continues to grow four years after launch. The adoption rate for trastuzumab, which treats breast and stomach cancer, has a strong 70% adoption rate among biosimilars.From 2023 onward, Organon will have 7-8 biosimilar launches. Growth in the segment will increase the company’s revenue and profit margins. Similarly, Teva relies on biosimilars in its pipeline to accelerate cash flow growth.Investors seeking generic giants having an extensive portfolio of biosimilars should also consider Viatris (NASDAQ: VTRS ). The company has around 150 marketing authorizations. Over 85 countries use its biosimilars. Risks Organon treated this year as an inflection year for the negative impact of the loss of exclusivity. It is […]
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