Organon & Co (OGN)

When a large company spins off a smaller part of its business to form an entirely new company it is common for the spinoff to fail to gain the interest of Wall Street investors. Usually, long time shareholders prefer to own the company that have always owned and the one that they know. They tend to sell off of the new company indiscriminately, regardless of the fundamentals. It’s often an unwanted and neglected byproduct of an otherwise successful operation.

It’s also hard for such a company to attract new investors. The spinning off of a company does not come with the performance, marketing budget, and fanfare of a newly listed IPO. It mostly goes unnoticed by those that aren’t already in the know. There’s also a lack of trading history for prospective shareholders to get behind, and usually, the financials are a little worse for wear given the parent company’s original penchant for separating the two companies in the first place. These new spinoffs can be quite easily forgotten, and can therefore fly under the radar despite being otherwise good investments. It always pays to keep an eye on such offcuts.

Today’s stock report subject Organon is such a company. It’s a spinoff from mega-pharmaceutical company Merck & Co, the sixth-largest pharma by market cap. In actuality, the company has been around since 1923 when it started mass producing insulin. It then went through many different mergers and acquisitions before being acquired by Schering-Plough in 2007 which then merged with Merck two years later, and then was spun off into its own company again in June of this year.

The idea behind the new company was to create a leading proponent in the area of women’s health. It’s a majority female-led leadership team that is focused on improving access to contraceptive and fertility products. It has a portfolio of more than 60 treatments and products, selling into 140 markets globally with 80% of its annual revenue of $6.5 billion coming from outside of the US. CEO Kevin Ali claims “Our vision is to create a better and healthier every day for every woman around the world. There is no other healthcare company with our global footprint dedicated to putting women at the centre that will focus on identifying medicines and solutions that they so urgently need.”

As you can imagine, the issue of women’s fertility and reproductive rights is a political hot potato in the United States. You rarely hear anyone from big pharma poke their noses into the debate for fear of getting unwanted publicity. Considering the women’s health market is expected to be worth upwards of $50 billion by 2025 it’s confounding that these companies aren’t clamouring to get a piece of it. It’s why the spinoff of Organon is a good move for Merck and an even greater move for Organon. I see the spinoff as having the larger upside out of the two.

The Edge, the research firm not the U2 guitarist, who specialise in finding investments outside of the mainstream markets, believe that Organon “will become one of the major players in the women’s health space on top of benefiting from the highly profitable portfolio of legacy dermatology, pain, respiratory, and cardiovascular drugs.” It’s also a fan of the Organon biosimilars business which it has taken with it in the spinoff. Biosimilars are generic drugs that are copies of biologic drugs made from organic materials. Grandview research expects the Biosimilars market to be worth $61.47 billion in three years time with a compound annual growth rate of around 34%. Biosimilars take less capital to develop and are cheaper to manufacture. Organon took in $330 million in revenue from the sector in 2020 and expect this to double in the next three years.

Organon’s revenue has been in decline since 2016. It’s the most likely reason that investors weren’t interested in keeping their shares at spinoff time. These declines have been stemming from a loss of patents that expire after a certain time period. It’s called a “loss of exclusivity” or LOE and means that any other company can copy and sell the original product. This has seen revenues decline from $9 billion a year in 2016 to $6 billion today. However, management claims that future LOE risk is now down to just $250 million, which will be more than offset by organic growth elsewhere.

Remember, most of the revenue currently comes from outside of the US. 25% comes out of Europe, another 25% from Japan and the Asia Pacific region, 15% out of China, and another 15% from the rest of the world. Management is expecting most of the company growth to come from within the US going forward. The strategy in the years ahead will be to be increase margins on existing brands, increase sales of long term contraception products such as its Nexplanon/Implanon NXT device, especially in markets such as China, and grow its biosimilars business as $220 billion worth of products lose patent protection over the next ten years.

Since the spinoff in May where it began trading around the $33 mark, the price rose slightly before falling back to just below the $30 where it is today. That’s trading at around 5 times next years expected earnings. If growth hits the levels expected over the next few years investors will come back to this story that has so quickly been forgotten and the share price could be in for a massive bump. There certainly seems to be a lot more upside potential than downside at this price point and could be a great little earner to hold over the next few years.