OGN - Organon: Too Cheap To Ignore

Summary

• Organon has a solid portfolio driven by steady established brands and fast-growing Women's Health.
• Management is exercising balance sheet discipline by paying down debt all while maintaining a very well covered dividend.
• Investors could potentially see strong total returns from its current cheap valuation.

A number of big pharma stocks have seen decent rallies over the past year, and this includes names like Merck ( MRK ) and Gilead Sciences ( GILD ), both of which are up significantly in price. There is still plenty of value to be had, however, in unloved names that still have plenty of potential.

This includes Organon ( OGN ) which as shown below, has fallen by 12% over the past year, and currently trades at a very low PE. In this article, I highlight what makes OGN a sound value and income buy in this topsy turvy market.

Why OGN?

Organon is an independent global healthcare company that was spun off from Merck in the middle of 2021. It’s focused on women’s health and has a portfolio of more than 60 medicines and products across a range of therapeutic areas as well as a sizeable portfolio of established medicines.

This means that OGN is far from being a speculative pharmaceutical company with unproven medicines, and is reflected by its A profitability grade. As shown below, OGN generates EBITDA and Net Income margins that are well above the sector median.

It's no secret that OGN's stock price has underperformed many of its larger peers in recent months, and that's perhaps due to its lackluster revenue performance. OGN saw its revenue decline by 4% YoY during the third quarter (3% YoY growth in constant currency), and that was largely driven by a decline in Established Brands, partially offset by strong double-digit growth in Women's Health, as shown below.

While the decline in Established Brands may give some investors pause, it's important to note that much of this segment's portfolio of drugs is sold overseas, thereby giving OGN outsized currency exposure. After adjusting for currency effects, Established Brands saw its revenue decline by just 2% YoY in the last reported quarter. Plus, management noted that peak loss of exclusivity for this segment was in 2021, and that LOE no longer represents a significant impediment to stable long-term performance in this segment.

Looking ahead, OGN has plenty of growth runway in its Women's Health franchise. This includes its flagship Nexplanon therapy, which is contributing to growth in a meaningful way, with $229 million in revenue during the last reported quarter.

To get a sense for how fast Nexplanon is growing, this was the first time in which OGN generated more than $150 million in sales for the therapy in a single quarter. As of November, OGN has trained more than 16,000 healthcare providers on this birth control therapy, and also has educational and direct-to-consumer campaigns that are reaching millions of potential patients.

OGN also has all of its basis covered, as it also has a fertility treatment that is expected to pick up growth, especially in overseas markets. While revenue growth during the third quarter was tempered by COVID lockdowns in China, I would expect results to be better in the upcoming Q4 results and beyond given that restrictions have been lifted there. Management noted the importance of the size of the China market to growth for the fertility segment during the last conference call :

China is a particularly important fertility market with over a million IVF cycles a year. That is 5x the number of cycles in the U.S. As you've heard us discuss many times before, fertility is a therapy area with strong demographic tailwinds. Women are waiting longer to start a family, resulting in higher infertility prevalence, and more governments are realizing that they need to take action to address the associated low birth rates. Globally, the top five markets with the highest infertility rates are in the Asia-Pacific region where the fertility rate or the number of births per woman is significantly below the replacement rate required to sustain a population and a GDP growth.

Also encouraging, OGN is making dents in its leverage profile by paying down its long-term debt in every quarter since it was spun off from Merck. Since the middle of 2021, OGN has reduced LT debt to $618 million. While its net debt to EBITDA ratio is still elevated at 4.2x, I would expect for the leverage ratio to continue to trend towards the 3x level as debt reduction continues.

This lends support to the 3.8% dividend yield, which is well-protected by a low 20% payout ratio. While dividend growth has been lacking, I would expect to see raises down the line with further debt paydown.

Meanwhile, OGN appears to be dirt cheap at the current price of $29.58 with a forward PE of just 5.9. That means it wouldn't take much for OGN's stock price to move upward, even in a no-growth scenario long-term scenario, which I do not believe will be the case. Analysts have a conservative near-term price target of $33.33 , which would still translate to double-digit total return potential.

Investor Takeaway

Overall, I believe that OGN offers attractive risk-reward potential for investors. With a diversified portfolio of drugs and therapies across established brands and women's healthcare, OGN has a strong foundation in place, and the latter segment shows plenty of growth promise.

Moreover, management is being disciplined in paying down debt and currently pays a respectable dividend that could grow down the line. While OGN is not a sleep well at night stock like Merck or Amgen ( AMGN ), it could give investors potentially strong total returns from its current dirt cheap valuation.

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