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ORGANON & CO.

(OGN)
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ORGANON & CO. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/05/2022 | 06:05am EDT

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION


Some statements and disclosures in this document are forward-looking statements.
Forward-looking statements include all statements that do not relate solely to
historical or current facts and can be identified by the use of words such as
"may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan"
or "continue." These forward-looking statements are based on our current plans
and expectations and are subject to a number of risks and uncertainties that
could cause our plans and expectations, including actual results, to differ
materially from the forward-looking statements. Risks and uncertainties that may
affect our future results include, but are not limited to, expanded brand and
class competition in the markets in which Organon operates; difficulties with
performance of third parties Organon relies on for its business growth; the
failure of any supplier to provide substances, materials, or services as agreed;
the increased cost of supply, manufacturing, packaging, and operations;
difficulties developing and sustaining relationships with commercial
counterparties; competition from generic products as Organon's products lose
patent protection; expiration of current patents or loss of patent protection
for Organon's products; difficulties and uncertainties inherent in the
implementation of Organon's acquisition strategy or failure to recognize the
benefits of such acquisitions; pricing pressures globally, including rules and
practices of managed care groups, judicial decisions and governmental laws and
regulations related to Medicare, Medicaid and health care reform, pharmaceutical
reimbursement and pricing in general; and other factors discussed in Organon's
most recently filed Annual Report on Form 10-K and subsequently filed Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, including those discussed
in the "Business," "Risk Factors," "Cautionary Factors that May Affect Future
Results" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" sections of those reports.

General


The following Management's Discussion and Analysis of Financial Condition and
Results of Operations is intended to assist in understanding the Company's
financial condition and results of operations. The following discussion and
analysis should be read in conjunction with the Company's Condensed Consolidated
Financial Statements included in Part I, Item 1 of this report and with our
audited financial statements, including the accompanying notes, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K. Operating results discussed herein
are not necessarily indicative of the results of any future period.

Organon & Co. ("Organon") is a global healthcare company formed through a
spinoff from Merck & Co., Inc. ("Merck") to focus on improving the health of
women throughout their lives. Organon develops and delivers innovative health
solutions through a portfolio of prescription therapies within women's health,
biosimilars and established brands (the "Organon Products"). Organon has a
portfolio of more than 60 medicines and products across a range of therapeutic
areas. The Company sells these products through various channels including drug
wholesalers and retailers, hospitals, government agencies and managed health
care providers such as health maintenance organizations, pharmacy benefit
managers and other institutions. The Company operates six manufacturing
facilities, which are located in Belgium, Brazil, Indonesia, Mexico, the
Netherlands and the United Kingdom ("UK"). Unless otherwise indicated,
trademarks appearing in italics throughout this document are trademarks of, or
are used under license by, the Organon group of companies.

Separation from Merck


As previously disclosed, on June 2, 2021, Organon and Merck entered into a
Separation and Distribution Agreement (the "Separation and Distribution
Agreement"). Pursuant to the Separation and Distribution Agreement, Merck agreed
to spin off the Organon Products into Organon, a new, publicly-traded company
(the "Separation"). The Separation from Merck was completed on June 2, 2021, in
which Organon's Common Stock was distributed to all holders of outstanding
shares of Merck Common Stock as of the close of business on May 17, 2021 (the
"Record Date"). For each share of Merck Common Stock held, such holder received
one tenth of one share of Common Stock, and holders received cash in lieu of any
fractional share of Common Stock they otherwise would have been entitled to
receive in connection with the Distribution. Organon is now a standalone
publicly-traded company and, on June 3, 2021, regular-way trading of the Common
Stock commenced on the New York Stock Exchange ("NYSE") under the symbol "OGN."
Until the Separation on June 2, 2021, Organon's historical consolidated
financial statements were prepared on a standalone basis and were derived from
Merck's consolidated financial statements and accounting records.

For the periods subsequent to June 2, 2021, as a standalone publicly-traded
company, Organon presents its financial statements on a consolidated basis. The
Condensed Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.

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The Separation was completed pursuant to the Separation and Distribution
Agreement and other agreements with Merck related to the Separation, including,
but not limited to, a Tax Matters Agreement, an Employee Matters Agreement and a
Transition Services Agreement (See Note 14 for additional details).

Recent Developments

Business Development

Shanghai Henlius Biotech, Inc. ("Henlius")


In June 2022, Organon and Henlius, a global biopharmaceutical company, entered
into a definitive agreement whereby Organon will license commercialization
rights for biosimilar candidates referencing Perjeta® (pertuzumab, HLX11), (a
trademark of Genentech, Inc.), used for the treatment of certain patients with
HER2+ breast cancer in combinations with trastuzumab and chemotherapy and
Prolia®/Xgeva® (denosumab, HLX14), (trademarks of Amgen Inc.) used for the
treatment of certain patients with osteoporosis with high risk of fracture and
for the prevention of skeletal-related events in patients with multiple myeloma
and in patients with bone metastasis from solid tumors. Organon will acquire
exclusive global commercialization rights except for China; including Hong Kong,
Macau and Taiwan. The agreement includes an option to negotiate an exclusive
license for global commercialization rights for a biosimilar candidate
referencing Yervoy® (ipilimumab, HLX13) (a trademark of Bristol-Myers Squibb
Company). Ipilimumab is used for the treatment of certain patients with
unresectable or metastatic melanoma, as adjuvant treatment of certain patients
with cutaneous melanoma, certain patients with Renal Cell Carcinoma, Colorectal
Cancer, Hepatocellular Carcinoma, Non-Small Cell Lung Cancer, Malignant Pleural
Mesothelioma and Esophageal Cancer.

Under the terms of the license agreement, Organon paid a $73 million upfront
payment during the third quarter of 2022, of which $3 million was reflected in
Other current assets. Henlius is eligible to receive potential developmental,
regulatory and commercial milestone payments of up to $468 million. As of June
30, 2022, the Company determined that certain developmental milestones were
probable of occurrence and recognized $97 million reflecting the $70 million
upfront payment and $27 million related to development milestones as Acquired
in-process research and development and milestones. The remaining potential
milestone payments will be recognized by Organon when achievement of the
contractual milestones is probable. Henlius will be responsible for development
and, if approved, will supply the products to Organon.

Daré Bioscience, Inc. ("Daré")


In March 2022, Organon and Daré, a leader in women's health innovation, entered
into an agreement whereby Organon licensed the global commercial rights to
Xaciato® (clindamycin phosphate vaginal gel, 2%). Xaciato is an FDA-approved
medication for the treatment of bacterial vaginosis (BV) in females 12 years of
age and older. Xaciato received both Qualified Infectious Disease Product (QIDP)
and Fast Track designations from the FDA for the treatment of bacterial
vaginosis.

Under the terms of the license agreement, Organon paid a $10 million upfront
payment during the third quarter of 2022. Daré is eligible to receive potential
regulatory and commercial milestone payments of up to $182.5 million and tiered
double-digit royalties based on net sales. Xaciato is expected to be available
commercially in the U.S. in the fourth quarter of 2022. As of June 30, 2022
management determined that the first commercial milestone was deemed probable of
occurring, and recognized an intangible asset of $12.5 million reflecting the
$10 million upfront payment and $2.5 million commercial milestone. The
intangible asset will be amortized over its useful life of 12 years. The
remaining potential milestone payments will be recognized by Organon when
achievement of the contractual milestones is probable.

Bayer AG


In February 2022, Organon acquired the product rights and related inventory from
Bayer AG to Marvelon™ (ethinylestradiol, desogestrel) and Mercilon™
(ethinylestradiol, desogestrel), combined oral hormonal daily contraceptive
pills, in the People's Republic of China, including Hong Kong and Macau, and has
entered into an agreement to acquire the rights to these products in Vietnam.
Marvelon and Mercilon are already owned, manufactured, and marketed by Organon
as prescription oral contraceptives in 20 other markets. The transaction was
accounted for as an asset acquisition. In the first quarter of 2022, Organon
paid $30 million to acquire the product rights and inventory in China and
accrued an additional $35 million related to these rights which was paid during
the second quarter of 2022. This resulted in Organon recognizing an intangible
asset of $42 million related to the product rights with the remainder of the
consideration recorded to Inventories for the fair value of acquired inventory
during the first quarter of 2022. The intangible assets related to currently
marketed products will be amortized over their estimated useful lives of 10
years.

The transaction to acquire the rights to these products in Vietnam closed in the third quarter of 2022.

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COVID-19 Update


Organon remains focused on protecting the safety of its employees and supporting
Organon's communities in response to the COVID-19 pandemic. COVID-19-related
disruptions, including patients' inability to access health care providers,
prioritization of COVID-19 patients, as well as social distancing measures have
negatively affected our results.

Our product portfolio is comprised of physician prescribed products, mainly in
established brands, which have been affected by social distancing measures and
fewer medical visits. Additionally, our portfolio in women's health includes
products that are physician administered, which have been affected by limited
access to physicians and healthcare centers. These impacts, as well as the
prioritization of COVID-19 patients at health care providers, resulted in
reduced administration of many products within established brands particularly
for respiratory and cardiovascular products and women's health product
Nexplanon® (etonogestrel implant) (sold as Implanon NXT™ in some countries
outside the US), throughout the prior year. During the second quarter of 2022,
our business was impacted by lockdowns in selective cities across the People's
Republic of China, across our portfolio in Fertility and Established Brands.

We believe that global health systems and patients continue to adapt to the
evolving impacts of the COVID-19 pandemic. Due to the significant uncertainty
that exists relative to the duration and overall impact of the COVID-19 pandemic
resulting from resurgences in COVID-19 infections or new strains of the virus,
our future operating performance, particularly in the short-term, may be subject
to volatility.

Operating Results

Sales Overview

                           Three Months Ended June 30,                                  % Change               Six Months Ended June 30,                                     % Change
                                                                                       Excluding                                                                            Excluding
($ in millions)               2022              2021             % Change           Foreign Exchange             2021                2020             % Change           Foreign Exchange
United States              $    351          $   339                     4  %                   4  %       $         680          $   690                    (1) %                  (1) %
International                 1,234            1,257                    (2) %                   5  %               2,472            2,412                     2  %                   9  %
Total                      $  1,585          $ 1,595                    (1) %                   5  %       $       3,152          $ 3,101                     2  %                   6  %

U.S. plus international may not equal total due to rounding.


Worldwide sales were $1.6 billion for the three months ended June 30, 2022, a
decrease of 1% compared with 2021. The decrease is primarily due to the
unfavorable impact of foreign exchange of $83 million and the impact of discount
rates in the United States. Offsetting these declines are increases primarily
due to strong performance of women's health product Nexplanon® (etonogestrel
implant) (sold as Implanon NXT™ in some countries outside the US), primarily due
to the impact of favorable pricing and demand uptake in the United States as
well as volume growth across Latin America and the institutional business in
Africa. Worldwide sales also reflect strong performance in biosimilar products
mainly in the United States resulting from the continued uptake of Renflexis®
(infliximab-abda) and strong performance for Ontruzant® (trastuzumab-dttb).

Worldwide sales were $3.2 billion for the six months ended June 30, 2022, an
increase of 2% compared with 2021. The sales increase is primarily due to strong
volume growth for products within the established brands business, particularly
for respiratory products Nasonex® (mometasone) and Singulair® (montelukast
sodium) primarily in Japan and China. Worldwide sales also reflect strong
performance in biosimilar products mainly in the United States and Canada,
resulting from the continued uptake of Renflexis® in the United States, as well
as strong performance of Ontruzant®, primarily in the United States. These
increases were offset by generic competition for women's health product
NuvaRing® (etonogestrel/ethinyl estradiol vaginal ring) and the authorized
generic etonogestrel/ethinyl estradiol vaginal ring in the United States and the
unfavorable impact of foreign exchange.

The loss of exclusivity ("LOE") negatively impacted sales by approximately $10
million and $40 million during the three and six months ended June 30, 2022,
respectively, compared to the three and six months ended June 30, 2021, based on
the decrease in volume period over period, mainly impacting NuvaRing in the
United States. Volume-based procurement ("VBP") had a de minimis impact on sales
during the three and six months ended June 30, 2022 compared to the prior
periods.

Organon's operations include a portfolio of products. Highlights of the sales of
Organon's products for the three and six months ended June 30, 2022 and 2021 are
provided below. See Note 13 to the Condensed Consolidated Financial Statements
for further details on sales of our products.

                                      -29-

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Women's Health

                                   Three Months Ended June 30,                                 % Change              Six Months Ended June 30,                                     % Change
                                                                                              Excluding                                                                           Excluding
($ in millions)                       2022             2021             % Change           Foreign Exchange             2022               2021             % Change           Foreign Exchange
Nexplanon/Implanon NXT             $    195          $  184                     6  %                   8  %       $         366          $  368                     -  %                   1  %
NuvaRing                                 42              53                   (21) %                 (18) %                  83              98                   (16) %                 (12) %
Follistim AQ                             58              65                   (11) %                  (9) %                 119             117                     2  %                   4  %
Ganirelix Acetate Injection              32              31                     3  %                   9  %                  61              60                     3  %                   7  %


Contraception

Worldwide sales of Nexplanon, a single-rod subdermal contraceptive implant,
increased 6% for the three months ended June 30, 2022 compared to 2021,
primarily due to the impact of favorable pricing in the United States and demand
uptake in the United States, Latin America and volume growth from the
institutional business in Africa, offset by unfavorable discount rates in the
United States. Sales of Nexplanon for the six months ended June 30, 2022, were
consistent with the prior year period reflecting lower volume in the United
States in the beginning of the year, resulting from distributors' buying
patterns in prior periods, offset by a favorable impact from the timing of
tenders in Latin America and volume growth from the institutional business in
Africa.

Worldwide sales of NuvaRing, a vaginal contraceptive product, declined 21% and
16% for the three and six months ended June 30, 2022 compared to 2021,
respectively, primarily due to ongoing generic competition in the United States.
We expect a continued decline in NuvaRing sales as a result of generic
competition. In addition to sales of branded NuvaRing, we have an agreement with
a generic manufacturer that authorizes the sale of a generic
etonogestrel/ethinyl estradiol vaginal ring in the United States. Under the
terms of the agreement, we are reimbursed on a cost-plus basis by the generic
manufacturer for supplying finished goods and receive a share of the net profits
recorded by the generic manufacturer. Under the terms of the agreement, our
share in the profits declines over time as new participants enter the market.
Revenues from this arrangement were $14 million and $19 million for the three
months ended June 30, 2022 and 2021, respectively, and $25 million and $51
million for the six months ended June 30, 2022 and 2021, respectively. The
decline in revenue for the three and six months ended June 30, 2022 is due to
the entry of a new market participant. Given the nature of this arrangement, we
expect revenues under this arrangement to continue to decline significantly for
the remainder of 2022.

Fertility

Worldwide sales of Follistim AQ® (marketed in most countries outside the United
States as Puregon™), a fertility treatment, decreased 11% for the three months
ended June 30, 2022 primarily due to an unfavorable shift in customer mix in the
United States and the negative impact from the COVID related lockdowns in
certain territories in China. Sales of Follistim AQ® increased 2% for the six
months ended June 30, 2022 compared to 2021, primarily due to higher demand in
China during the first quarter of 2022 and continuous demand growth in the
United States, partly offset by an unfavorable shift in customer mix in the
United States.

Biosimilars

                           Three Months Ended June 30,                                  % Change            Six Months Ended June 30,                                  % Change
                                                                                       Excluding                                                                      Excluding
($ in millions)                2022             2021          % Change              Foreign Exchange          2022             2021             %
Change           Foreign Exchange
Renflexis                  $      59          $   43                    38  %                  39  %       $    105          $   81                    30  %                  30  %
Ontruzant                         35              22                    57  %                  61  %             57              45                    28  %                  33  %
Brenzys                           14              11                    28  %                  34  %             28              21                    34  %                  39  %
Hadlima                            2               2                     5  %                   3  %              8               4                    99  %                 101  %

The following biosimilar products are part of a development and commercialization agreement between Organon and Samsung Bioepis entered into in 2013. See Note 3 to the Condensed Consolidated Financial Statements. Our commercialization territories under the agreement vary by product as noted below.


Renflexis® (infliximab-abda) is a biosimilar to Remicade® (infliximab) (a
trademark of Janssen Biotech, Inc.) for the treatment of certain inflammatory
diseases. Sales growth for the three and six months ended June 30, 2022 was
driven primarily by continued demand growth, favorable channel mix and favorable
discount rates in the United States. We have commercialization rights to
Renflexis in countries outside Europe, Korea, China, Turkey and Russia.

Ontruzant® (trastuzumab-dttb) is a biosimilar to Herceptin® (trastuzumab) (a
trademark of Genentech, Inc.) for the treatment of HER2-overexpressing breast
cancer and HER2-overexpressing metastatic gastric or gastroesophageal junction

                                      -30-

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adenocarcinoma. Sales in the three and six months ended June 30, 2022 increased
driven by the phasing and timing of tenders in Brazil and the continued uptake
in the United States since its launch in July 2020, partially offset by
competitive pressures in Europe. We have commercialization rights to Ontruzant
in countries outside of Korea and China.

Brenzys™ (etanercept) is a biosimilar to Enbrel® (etanercept) (a trademark of
Immunex Corporation) for the treatment of certain inflammatory diseases. Sales
in the three and six months ended June 30, 2022 increased 28% and 34%,
respectively, primarily due to volume growth in Canada. We have
commercialization rights to Brenzys in countries outside of the United States,
Europe, Korea, China and Japan.

Hadlima™ (adalimumab-bwwd) is a biosimilar to Humira® (adalimumab) (a trademark
of AbbVie Technology Ltd.) for the treatment of certain inflammatory diseases.
We have worldwide commercialization rights to Hadlima in countries outside of
the EU, Korea, China, Turkey and Russia. Samsung Bioepis reached a global
settlement with AbbVie permitting us to launch Hadlima outside of the United
States starting in 2021 and in the United States in June 2023. Hadlima is
currently approved in the United States, Australia, Canada, and Israel. Hadlima
was launched in Australia and Canada in February 2021. Following these launches,
we recorded sales of $2 million and $8 million during the three and six months
ended June 30, 2022, respectively, reflecting an increase from modest sales
during the six months ended June 30, 2021.

Established Brands

Established brands represents a broad portfolio of well-known brands, which generally are beyond market exclusivity, including leading brands in cardiovascular, respiratory, dermatology and non-opioid pain management, for which generic competition varies by market.

Cardiovascular


                           Three Months Ended June 30,                                 % Change              Six Months Ended June 30,                                     % Change
                                                                                      Excluding                                                                           Excluding
($ in millions)               2022             2021             % Change           Foreign Exchange             2022               2021             % Change           Foreign Exchange
Zetia/Vytorin              $    136          $  144                    (5) %                   -  %       $         273          $  276                    (1) %                   4  %
Atozet                          122             121                     -  %                  11  %                 240             233                     3  %                  12  %
Rosuzet                          16              18                   (10) %                   3  %                  38              33                    15  %                  29  %
Cozaar/Hyzaar                    92              86                     7  %                  12  %                 186             177                     5  %                   9  %



Combined global sales of Zetia® (ezetimibe) (marketed in most countries outside
of the United States as Ezetrol™) and Vytorin® (ezetimibe/simvastatin) (marketed
outside of the United States as Inegy™), medicines for lowering LDL cholesterol,
declined 5% and 1% for the three and six months ended June 30, 2022, compared to
2021, respectively, primarily driven by increased competition and lower
performance in Europe and Asia Pacific, partly offset by volume growth in China.

Sales of Atozet™ (ezetimibe and atorvastatin calcium) (marketed outside of the
United States), a medicine for lowering LDL cholesterol, remained consistent for
the three months ended June 30, 2022 and increased 3% for the six months ended
June 30, 2022, compared to 2021, primarily due to increased demand in France and
Spain.

Sales of Rosuzet™ (ezetimibe and rosuvastatin calcium) (marketed outside of the
United States), a medicine for lowering LDL cholesterol, decreased 10% for the
three months ended June 30, 2022 compared to 2021, primarily due to the effect
of foreign exchange and increased 15% for the six months ended June 30, 2022
compared to 2021, primarily due to higher demand in Japan.

Combined global sales of Cozaar® (losartan potassium), and Hyzaar® (losartan
potassium and hydrochlorothiazide) (a combination of Cozaar and
hydrochlorothiazide that is marketed in Japan as Preminent™), a medicine for the
treatment of hypertension, increased 7% and 5% for the three and six months
ended June 30, 2022, compared to 2021, respectively, primarily due to favorable
volume demand resulting from competitors' supply disruptions in various markets.

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Respiratory

                           Three Months Ended June 30,                                  % Change              Six Months Ended June 30,                                     % Change
                                                                                       Excluding                                                                           Excluding
($ in millions)                2022             2021             % Change           Foreign Exchange             2022               2021             %
Change           Foreign Exchange
Singulair                  $      92          $   92                     -  %                   8  %       $         222          $  199                    11  %                  18  %
Nasonex                           58              52                    12  %                  16  %                 133              95                    40  %                  45  %
Dulera                            47              52                    (9) %                  (8) %                  88              91                    (3) %                  (3) %


Worldwide sales of Singulair, a once-a-day oral medicine for the chronic
treatment of asthma and for the relief of symptoms of allergic rhinitis,
remained consistent for the three months ended June 30, 2022 compared to 2021,
and increased 11% for the six months ended June 30, 2022 compared to 2021. The
increase in sales during the six months ended June 30, 2022 was primarily
attributable to volume recovery from the COVID-19 pandemic and demand resulting
from competitors supply disruptions in Japan.

Global sales of Nasonex, an inhaled nasal corticosteroid for the treatment of
nasal allergy symptoms, increased 12% for the three months ended June 30, 2022
compared to 2021, primarily driven by increased demand in Europe, Canada and the
Middle East region as well as higher demand resulting from competitors' supply
disruptions in Japan. Nasonex sales increased 40% during the six months ended
June 30, 2022 primarily driven by higher demand resulting from competitors'
supply disruptions in Japan, recovery from the COVID-19 pandemic in China, and
increased demand across several markets. In addition, sales during the six
months ended June 30, 2022 included a $10 million milestone payment related to a
regulatory approval in the United States.

Global sales of Dulera® (formoterol/fumarate dihydrate), a combination medicine
for the treatment of asthma, decreased 9% and 3% for the three and six months
ended June 30, 2022 compared to 2021, respectively, primarily due to unfavorable
discount rates and lower volume growth in the United States.

Non-Opioid Pain, Bone and Dermatology


                           Three Months Ended June 30,                                  % Change              Six Months Ended June 30,                                     % Change
                                                                                       Excluding                                                                           Excluding
($ in millions)                2022             2021             % Change           Foreign Exchange             2022               2021             %
Change           Foreign Exchange
Arcoxia                    $      61          $   62                    (2) %                   2  %       $         121          $  119                     2  %                   7  %


Sales of Arcoxia™ (etoricoxib) (marketed outside of the United States), a
medicine for the treatment of arthritis and pain, were slightly lower for the
three months ended June 30, 2022 compared to 2021, primarily due to the impact
of foreign exchange. Sales of Arcoxia increased 2% during the six months ended
June 30, 2022 compared to 2021, primarily due to the higher demand in China and
the South East Asia region.

Other

                           Three Months Ended June 30,                                  % Change               Six Months Ended June 30,                                     % Change
                                                                                       Excluding                                                                            Excluding
($ in millions)                2022             2021             % Change           Foreign Exchange             2022                2021             %
Change           Foreign Exchange
Proscar                    $      26          $   32                   (18) %                 (16) %       $           50          $   64                   (21) %                 (20) %


Worldwide sales of Proscar, a medicine for the treatment of symptomatic benign
prostate enlargement, declined 18% and 21% for the three and six months ended
June 30, 2022 compared to 2021, respectively, primarily due to lower demand in
China.

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Costs, Expenses and Other

                                        Three Months Ended June 30,                                  Six Months Ended June 30,
($ in millions)                            2022              2021             % Change                 2022                2021             % Change
Cost of sales                           $    588          $   583                     1  %       $       1,149          $ 1,174                    (2) %
Selling, general and administrative          423              416                     2  %                 794              798                    (1) %
Research and development                     106               76                    39  %                 202              143                    41  %
Acquired in-process research and
development and milestones                       97                -                     *                     97                -                     *
Restructuring costs                            -                1                        *                   -                2                        *
Interest expense                              98               62                    58  %                 195               62                     215%
Other (income) expense, net                  (14)              20                        *                 (14)              18                        *
                                        $  1,298          $ 1,158                    12  %       $       2,423          $ 2,197                    10  %


* Calculation not meaningful.


Cost of Sales
Cost of sales increased 1% for the three months ended June 30, 2022 compared to
2021 primarily due to product mix offset by favorable foreign exchange. For the
six months ended June 30, 2022, cost of sales decreased 2% compared to the same
period in 2021, primarily reflecting lower supply sales compared to the prior
year, as well as pre-spin allocated costs related to the Separation incurred
during the prior year which were not incurred during the six months ended
June 30, 2022 and favorable foreign exchange. During the three and six months
ended June 30, 2022, the Company recorded an impairment charge of $9 million
related to a product right for a biosimilar product.

Gross margin was 63% for the three months ended June 30, 2022 compared with 63%
for the same period in 2021. Gross margin was 64% for the six months ended
June 30, 2022 compared with 62% for the same period in 2021. The gross margin
increase compared to the prior year reflects lower margin supply sales as well
as pre-spin allocated costs related to the Separation incurred during the prior
year which were not incurred during the three and six months ended June 30,
2022.

Selling, General and Administrative


Selling, general and administrative expenses increased 2% for the three months
ended June 30, 2022 due to higher selling and promotional costs offset by
pre-spin allocated costs related to the Separation incurred during the prior
year which were not incurred during the three months ended June 30, 2022. For
the six months ended June 30, 2022, selling, general and administrative expenses
decreased 1% reflecting pre-spin allocated costs related to the Separation
incurred during the prior year which were not incurred during the six months
ended June 30, 2022, partially offset by higher selling and promotional costs.

Research and Development


Research and development expenses increased 39% and 41% for the three and six
months ended June 30, 2022, primarily due to higher costs associated with the
Company's recent acquisitions of clinical stage assets and higher
employee-related costs.

Acquired In-Process Research and Development and Milestones


Acquired in-process research and development and milestones for the three and
six months ended June 30, 2022 represent the upfront and development milestones
related to the Henlius transaction.

Interest Expense

For the three and six months ended June 30, 2022, interest expense increased, due to the $9.5 billion of debt which was assumed by the Company during the second quarter of 2021.

Other (Income) Expense, Net

For the three and six months ended June 30, 2022, other (income) expense, net decreased 170% and 178%, primarily attributable to fluctuations in foreign exchange.

Taxes on Income


The effective income tax rates were 18.5% and 1.4% for the second quarter of
2022 and 2021, respectively. These effective income tax rates reflect the
beneficial impact of foreign earnings, offset by the impact of U.S. inclusions
under the Global Intangible Low-Taxed Income regime. The effective income tax
rate for the first six months of 2021 reflects the beneficial impact of foreign
earnings, the $70 million tax benefit relating to a portion of the non-U.S.
step-up of tax basis as

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well as the income tax benefit recognized in connection with the conclusion of
the Internal Revenue Service (IRS) examination of Merck's 2015-2016 U.S. federal
income tax returns. As a result of that examination conclusion, we reflected an
allocation from Merck of $18 million in the Condensed Consolidated Financial
Statements representing our portion of the payment made to the IRS. Our portion
of reserves for unrecognized tax benefits for the years under examination
exceeded the allocated adjustments relating to this examination period.
Therefore, for the six months ended June 30, 2021, we reflected a $29 million
net tax benefit. This net benefit reflects reductions in reserves for
unrecognized tax benefits and other related liabilities for tax positions
relating to the years that were under examination.

Income/Loss from Discontinued Operations


The historical results of certain Merck non-U.S. legal entities that were
contributed to Organon in connection with the Separation included operations
related to other Merck products that were retained by Merck. The Merck Retained
Products business of the Transferred Entities were contributed by Organon to
Merck and its affiliates. Accordingly, the historical results of operations of
the Merck Retained Products have been reflected as discontinued operations in
the Condensed Consolidated Financial Statements for all periods presented.

There was no income or loss from discontinued operations, net of taxes for the
three and six months ended June 30, 2022 and the six months ended June 30, 2021.
Loss from discontinued operations, net of taxes, was $4 million for the three
months ended June 30, 2021.

Analysis of Liquidity and Capital Resources

Liquidity and Capital Resources


As of June 30, 2022, Organon had cash and cash equivalents of $545 million. On
June 6, 2022, the Company made a discretionary prepayment of $100 million on the
U.S. Dollar-denominated term loan. The Company has historically generated and
expects to continue to generate positive cash flow from operations. We plan to
continue to fund our ongoing operating, investing and financing requirements
mainly through cash flows from operations, available liquidity through cash on
hand, available capacity under our Revolving Credit Facility and access to
capital markets.

Working capital of continuing operations was $1.4 billion as of June 30, 2022
and $1.2 billion as of December 31, 2021. The increase in working capital of
continuing operations was primarily driven by a decrease in trade accounts
payable and an increase in accounts receivable.

Net cash provided by operating activities was $274 million for the six months
ended June 30, 2022 compared to $1.7 billion for the same period in the prior
year. The decrease in cash provided by operating activities in 2022 was
primarily attributable to the decrease in trade payables, including balances
with Merck.

Net cash used in investing activities was $146 million for the six months ended
June 30, 2022 compared to $287 million for the same period in the prior year,
primarily reflecting the asset acquisition of Marvelon and Mercilon in the six
months ended June 30, 2022 and the asset acquisition of Alydia Health in the six
months ended June 30, 2021.

Net cash used in financing activities was $274 million for the six months ended
June 30, 2022 compared to $772 million for the same period in the prior year.
The change in cash used in financing activities reflects the settlement of the
transactions with Merck in connection with the Separation in 2021, partially
offset by the payment of dividends in the current year (see Note 14 to our
Condensed Consolidated Financial Statements).

Our ability to fund our operations and anticipated capital needs is reliant upon
the generation of cash from operations, supplemented as necessary by periodic
utilization of our Revolving Credit Facility. Our principal uses of cash in the
future will be primarily to fund our operations, working capital needs, capital
expenditures, repayment of borrowings, payment of dividends and strategic
business development transactions.

In February 2022, the armed conflict between Ukraine and Russia escalated, which
may adversely impact Organon's business. Specifically, trade sanctions, travel
bans and asset and financial freezes announced by the United States, European
Union and other countries against Russian entities and designated individuals,
as well as counter-measures announced by Russia, have impacted and may continue
to impact many global businesses in direct and indirect ways (including, but not
limited to, product shipping delays, supply shortages, delays in regulatory
approvals and audits, constraints in energy supply, currency exchange rates and
exchange controls). Such actions may negatively impact the financial
institutions, vendors, manufacturers, suppliers, partners and other third
parties with whom Organon conducts business. Organon will continue to monitor
the impacts of the conflict, which may negatively impact Organon's operations,
financial position or cash flows. For the six months ended June 30, 2022 and the
year ended December 31, 2021, Organon's combined revenues from Ukraine and
Russia were approximately 2% of total revenues. As of June 30, 2022, the
Company's assets in Ukraine and Russia are not material.

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Our contractual obligations as of December 31, 2021, which require material cash
requirements in the future, consist of purchase obligations and lease
obligations. In addition, Organon is responsible for settlement of certain tax
matters, of which the Company expects to pay during 2022. Refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
2021 Form 10-K for further details. As of June 30, 2022, there have been no
material changes to our contractual obligations, or settlements of tax matters
outside the ordinary course of business.

During the first and second quarter of 2022, Organon paid cash dividends of
$0.28 per share. On August 4, 2022, the Board of Directors declared a quarterly
dividend of $0.28 for each issued and outstanding share of the Company's common
stock. The dividend is payable on September 15, 2022 to stockholders of record
at the close of business on August 15, 2022.

We believe that our financing arrangements, future cash from operations, and
access to capital markets will provide adequate resources to fund our future
cash flow needs.

The economy of Turkey was deemed hyperinflationary during the second quarter of
2022. Consequently, in accordance with U.S. GAAP, the Company began remeasuring
its monetary assets and liabilities for those operations in earnings beginning
in the second quarter of 2022. The impact to the Company's results is
immaterial.

Critical Accounting Estimates


Our significant accounting policies, which include management's best estimates
and judgments, are included in Note 3 to the Consolidated Financial Statements
included in our Form 10-K for the year ended December 31, 2021. See Note 2 to
the Condensed Consolidated Financial Statements for information on the adoption
of new accounting standards during 2022. There have been no changes to our
accounting policies as of June 30, 2022. A discussion of accounting estimates
considered critical because of the potential for a significant impact on the
financial statements due to the inherent uncertainty in such estimates are
disclosed in the Critical Accounting Estimates section of Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Organon's Form 10-K for the year ended December 31, 2021.

Recently Issued Accounting Standards

For a discussion of recently issued accounting standards, see Note 2 to the Condensed Consolidated Financial Statements.

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