OGN - Organon & Co.

[therealbg]

Has anyone looked at Organon?

I did a valuation on it here. 

At a current share price of around $29, it's trading well below my calculated intrinsic value. I found a NAV of $16 a share and an EPV of $65 a share.

The NAV is misleading in my opinion though as Merck saddled it with debt before spinning them off. On the balance sheet, $9B roughly is debt transferred from Merck to Organon.

The other major issue is that most of Organon's product lines (I think all but 1 or 2) are in decline. Revenue is declining, net income is declining etc.

They have $1.2B coming due this year, but with $2B in free cashflows, I think they can handle it.

 

The only person really incentivized in this transaction is Kevin Ali, the new CEO. He's about retirement age in the next 5-10 years and he gets about $8M+ of incentives if he hits his targets. It looks like it's a 3 year plan, which makes me wonder how long-term this company is thinking. The other main exec in the deal, Robert Davis has already mostly cashed out. I didn't find many other insiders who are heavily incentivized.

 

Having said all of that, I see some pros:

-At such a deep discount to value, it seems to have some room to make a decent return

-It was heavily held by institutions prior to the merger - so I think they are dumping it due to charter rules, etc.

-Revenue and FCF has been in decline, but it hasn't gone to zero - its a cigar butt at worst and a turn-around at best

-Though it has a lot of debt, this could give leverage to equity holders and give the share price a nice boost

-The debt is payable to Merck, who loaned it at I believe 3.5% interest - so Merck is heavily incentivized to get paid back - I almost see Merck as the insider in this deal, supporting Organon with different deals etc to ensure they can continue paying their debt

 

For a catalyst - I think once the institutions stop dumping it, Kevin may be able to work to dump some of the tough brands (Nuvaring), re-niche the business and get some lucrative contracts from Merck (speculation). I also wonder if value is the catalyst here as it's trading at such a discount.

 

What do you think?

 

[Spekulatius]

I sold the few shares I received from the MRK spin-off as fast as I could - high debt load and melting icecube business makes for a tough proposition. It is similar to struggling generics companies ( ATRS, TEVA) in many ways. This looks like a sh$tco spin-off.

[therealbg]

Very helpful, thank you. 

Do you think this business is going bankrupt? 

[Spekulatius]

11 hours ago, therealbg said:

Very helpful, thank you. 

Do you think this business is going bankrupt? 

Bankruptcy is extremely unlikely, especially with MRK holding the debt. I just don’t like the setup and risk reward at a staring point. if OGN goes below $20, I would take another look. It is also a good idea to have them get a quarter or two under their belt to get some confidence in management and an idea how fast exactly this icecube is melting.

Edited June 10, 2021 by Spekulatius

[no_free_lunch]

Quote

The shares trade around $34, giving the company a market value of $8.6 billion, plus about $9 billion of net debt. Merck shareholders received one Organon share for every 10 of Merck. Organon trades for just six times 2020 profits of $5.90 a share. Similar earnings are expected this year.

Organon isn’t as cheap when valued against projected 2021 earnings before interest, taxes, depreciation, and amortization, or Ebitda, of $2.3 billion, based on its enterprise value of equity value plus net debt. Then, it trades around eight times, in line with mature drug companies.

 

https://www.barrons.com/articles/fastly-stock-outage-think-apple-51623269551

 

I am looking at it but still no position.  It's a classic spinoff setup, you have a garbage company, loaded with debt and a small size relative to remainco.   However if I recall greenblat the key element is to get shitco after it has sold off.   It would be nice to get some clarity from management on revenue growth and confirmation of earnings.

[therealbg]

11 hours ago, no_free_lunch said:

 

https://www.barrons.com/articles/fastly-stock-outage-think-apple-51623269551

 

I am looking at it but still no position.  It's a classic spinoff setup, you have a garbage company, loaded with debt and a small size relative to remainco.   However if I recall greenblat the key element is to get shitco after it has sold off.   It would be nice to get some clarity from management on revenue growth and confirmation of earnings.

 

Yes, I was re-reading some Greenblatt about this one. It's missing a few key factors from his checklist - the most important one to me is that only Kevin Ali is incentivized heavily in this transaction. But, he is also getting over $1M a year in salary.... so I think he's fine either way. I am not familiar enough for the standard CEO salary for a company of this size, but it seems to be reasonable that he might take it just to flip a coin and see how they do.

 

Earnings could decline another 20-25% this year which is my concern. I think it's 50/50. I put it in the "too tough to call" pile. 

[therealbg]

15 hours ago, Spekulatius said:

Bankruptcy is extremely unlikely, especially with MRK holding the debt. I just don’t like the setup and risk reward at a staring point. if OGN goes below $20, I would take another look. It is also a good idea to have them get a quarter or two under their belt to get some confidence in management and an idea how fast exactly this icecube is melting.

 

Well put, thanks for your take on this one, this was helpful. 

[DeepSouth]

The debt was syndicated as TLB, 1L bonds, and sr unsecured bonds. Merck did not lend the money to Organon.