Most of the companies I cover on Seeking Alpha are small-to-mid cap healthcare companies that offer immense upside, however, they are typically incredibly speculative and have plenty of risks. I typically trade these tickers in order to generate some cash to either reinvest or move into growth opportunities in the healthcare sector. However, ultimately, the alpha finds its way into my “Healthy Dividends Portfolio” where I keep most of my blue-chip healthcare names from a variety of industries. These companies don’t offer the same level of returns as the speculative tickers, and they are a bit dull to cover; however, these are the grandees that are proven and provide a source of income through their dividends. As a result, the composition of that portfolio doesn’t change that often and portfolio management is more of a programmed activity. Still, every once in a while, this portfolio needs attention to bring it up to date. Recently, I have been on the lookout for tickers to update the portfolio when lo and behold, I saw the Organon (OGN) shares from the Merck (MRK) spin-off. Admittedly, the name and ticker did not strike up any excitement… in fact, I had to look up the ticker and reacquaint myself with the company’s background. Obviously, it only took a brief moment to remind that Organon was a spin-off of Merck and the reasoning behind the separation. To my surprise, I saw that OGN was already offering a respectable dividend, and the company has the elements needed to report significant growth; thus, making it a prime candidate for long-term investment and a spot in the Healthy Dividends Portfolio.
I intend to provide a brief background on the company as well as its valuation, dividend, growth opportunities, and risks. In addition, I will discuss my views on the company and how I plan to find a spot for OGN in the Healthy Dividend Portfolio.
Organon is a spin-off that was carved out of Merck, taking their Women’s Health, Biosimilars, and Established Medicines segments. The Women’s healthy portfolio is filled with 11 products, including several big names such as NuvaRing and NEXPLANON, along with the newly acquired Jada System. The Biosimilar segment contains five products with RENFLEXIS and ONTRUZANT leading the way. The company’s Established Brands segment has 49 products, including several hallmark names, such as SINGULAIR and NASONEX.
Since separating from Merck, the company has made several deals, including the acquisitions of Alydia Health/Jada and Forendo Pharma. In addition, the company secured a licensing deal with Obseva for ebopiprant.
The company sells its products around the world to wholesalers, retailers, government agencies, managed care, and directly to hospitals.
First Look At The Fundamentals
The company is really only months old, so regrettably, we don’t have a substantial track history for us to extract any trends from earnings. So, we are going to have to rely on analyst revenue estimates and the company’s forecasts or guidance to pencil in some projections.
Looking at the Street’s revenue estimates, we can see that analysts are not expecting Organon to report significant growth in the coming years.
Indeed, it looks as if the analysts are anticipating the company to only report undulating revenue yielding incremental growth over the remainder of the decade. Meanwhile, the company expects low single-digit growth in the coming years, depending on the FX conditions.
In terms of expenses, the company is expecting 2022 to be an inflection year and that will increase R&D spending as they drive future revenue growth from their recently acquired products. In addition, Organon expects to hit their target of a 10K headcount this year.
For margins, management believes they will have 33% EBITDA margins for Q4, with similar EBITDA margins this year due to the uptick in R&D efforts.
Back in November, the company declared their first-ever quarterly dividend of $0.28 per share, which will provide $1.12 per share annually. The current TTM yield is at 1.74%, with the payout ratio being exceptionally healthy at 8.79%.
As a result, I anticipate Organon to increase its dividend in the coming years.
Determining Organon’s valuation grade is difficult due to our limited data set to reference. However, OGN’s valuation metrics are jaw-dropping compared to the sector’s median and its peers. I would suggest readers to take a look at Seeking Alpha’s Valuation Page for OGN and scroll down the list of various valuations and ratios. I would direct your attention towards the P/E grades that are roughly 5-6x, which are roughly 75%-80% under the sector’s median. That trend continues for EV valuations, price-to-sales, price-to-book, and price-to-cash flow. So, we can say that OGN is drastically undervalued compared to its peers. Even with the projected little to no growth, OGN is trading at an exceptionally low valuation. I spend a decent amount of time trying to find another company with such a great pedigree that is trading at these valuations and couldn’t find anything that came close.
Despite the Street’s dismal growth projections, I believe Organon has several opportunities to drive growth in the coming years. Primarily from their Women’s Health business with their current portfolio and the potential for additional acquisitions.
At the moment, Women’s Health companies are not excelling in this pandemic environment. It looks as if office visits and check-ups are still below pre-pandemic, so the opportunities for products to expand and gain market share are limited.
Luckily, the company has NEXPLANON, which has the prospects to become a top product since it’s easy to insert and remove and has 3-year efficacy. NEXPLANON has already performed well in the pandemic, and should only accelerate as we return “back to normal.” The company believes NEXPLANON has the potential to report incredible growth in the years on its way to being a blockbuster product.
I believe Organon can take advantage of the current weakness in the Women’s Healthcare industry by making deals with floundering women’s health companies that are struggling to get some traction or make ends meet in this current environment. Luckily, there are several publicly-traded companies that offer unique women’s health products and have respectable pipelines. I have covered TherapeuticsMD (TXMD) and Agile Therapeutics (AGRX) in the past and have watched both of these companies struggle to make inroads with their new FDA-approved products and their tickers have lost between 70%-90% over the past twelve months. Daré Bioscience (DARE) is another women’s health company that has an FDA-approved product and interesting pipeline at a dirt-cheap valuation. Of course, there are plenty of other women’s health companies, both listed and private, that could be great acquisitions for Organon and would immediately improve their growth projections.
Hadlima is another growth opportunity that comes from the company’s Biosimilar portfolio. Hadlima is low-dose biosimilar to AbbVie’s (ABBV) Humira, which is the world’s number one selling drug with sales of around $20B. Humira is approaching its U.S. patent cliff in 2023, which will allow Organon to start claiming some of Humira’s market. What is more, the company recently announced that the FDA accepted sBLA for a high dose (100 mg/mL) formulation of Hadlima and could be launched on or after July 1st of next year. Admittedly, there appears to be about six FDA-approved Humira biosimilars ready for launch in 2023, so Organon and Samsung Bioepis won’t be able to claim the majority of the market, but the additional revenue will not be marginal.
Although Organon already has an extensive product portfolio that is established and already generating profit, we have to concede there are a few risks that investors need to consider at this point in time. Primarily, the threat from current and future competition and their ability to take advantage of Organon being extracted from Merck. Now, Organon’s products are being pushed with diminished pricing power, reduced logistics, and cash reserves. It won’t be easy… or cheap for the company to go up against big pharma companies such as Pfizer (PFE), AbbVie, Bayer (OTCPK:BAYRY), and several other large-cap healthcare companies. I’m not expecting the company to get crushed by their competition, but the company is going to have to work hard to seize opportunities and commit their capital to increase the R&D budget to have products to step up as their current products face patent cliffs.
Despite having a minimal amount of history, Organon’s fundamentals appear to be firm at this point in time. The ticker offers an extremely attractive valuation, which is only bolstered by a healthy dividend. Although the company’s portfolio is projected to provide slow growth in the coming years, the company is willing to make moves to acquire and license assets that should drive future growth. As a result, I believe that investors will find Organon worthy of a long-term investment and will enjoy the dividend that is expected to grow in the coming years.
Finding A Spot In The Healthy Dividends Portfolio
Personally, I am convinced that Organon offers a great opportunity to get a discounted dividend investment. I suspect it might take a few quarters for the company to establish a track record and give the market time to recognize OGN’s prospects. As a result, I am ready to put OGN in the Healthy Dividends Portfolio and will allocate a generous portion of Healthy Dividend funds to the position.
Now that I am committed to putting OGN in the portfolio, I have to determine a fair value or price target/threshold. Using the sector’s average price-to-sales of 5x along with discounts for time and error a price target of $97 per share. So, I will continue to add to OGN as long as the ticker is trading under $97 per share. I know that $97 looks a bit rosy considering the stock is trading around $32 per share, but that disparity illustrates how discounted OGN is compared to its peers.
Long term, I am looking to hold OGN for at least 5 years in anticipation the company is establishing itself as a leading women’s health company and is able to facilitate growth out of their Biosimilars and Established Medicines segments.
Thank you for reading my research on Organon. If you want to learn even more about my method and how I discover these investment opportunities, please stand by because I am launching On The Pulse Analytics, a subscription marketplace service on Seeking Alpha, in the near future and the initial wave of subscribers will be offered a lifetime discount. Further details are around the corner, so please keep an eye out and read my research.