Organon (OGN)

Pharmaceutical company Organon (NYSE:OGN) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, but sales fell by 6.7% year on year to $1.51 billion. Its non-GAAP profit of $1.02 per share was 14.2% above analysts’ consensus estimates.

Company Overview

Spun off from Merck in 2021 to create a company dedicated to addressing unmet needs in women's health, Organon (NYSE:OGN) is a global healthcare company focused on improving women's health through prescription therapies, medical devices, biosimilars, and established medicines.

The branded pharmaceutical industry relies on a high-cost, high-reward business model, driven by substantial investments in research and development to create innovative, patent-protected drugs. Successful products can generate significant revenue streams over their patent life, and the larger a roster of drugs, the stronger a moat a company enjoys. However, the business model is inherently risky, with high failure rates during clinical trials, lengthy regulatory approval processes, and intense competition from generic and biosimilar manufacturers once patents expire. These challenges, combined with scrutiny over drug pricing, create a complex operating environment. Looking ahead, the industry is positioned for tailwinds from advancements in precision medicine, increasing adoption of AI to enhance drug development efficiency, and growing global demand for treatments addressing chronic and rare diseases. However, headwinds include heightened regulatory scrutiny, pricing pressures from governments and insurers, and the looming patent cliffs for key blockbuster drugs. Patent cliffs bring about competition from generics, forcing branded pharmaceutical companies back to the drawing board to find the next big thing.

Organon's competitors vary by business segment. In women's health, it competes with companies like Bayer, AbbVie, and CooperSurgical. In biosimilars, competitors include Amgen, Pfizer, and Novartis. For established brands, Organon faces competition from generic manufacturers and companies with similar portfolios like Viatris.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $6.29 billion in revenue over the past 12 months, Organon has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Organon’s demand was weak and its revenue declined by 3.8% per year. This wasn’t a great result and suggests it’s a low quality business.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Organon’s annualized revenue growth of 1.2% over the last two years is above its five-year trend, but we were still disappointed by the results.

This quarter, Organon’s revenue fell by 6.7% year on year to $1.51 billion but beat Wall Street’s estimates by 0.6%.

Looking ahead, sell-side analysts expect revenue to decline by 1.4% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Organon has been an efficient company over the last five years. It was one of the more profitable businesses in the healthcare sector, boasting an average operating margin of 26.3%.

Analyzing the trend in its profitability, Organon’s operating margin decreased by 17.1 percentage points over the last five years. The company’s two-year trajectory also shows it failed to get its profitability back to the peak as its margin fell by 2 percentage points. This performance was poor no matter how you look at it - it shows its expenses were rising and it couldn’t pass those costs onto its customers.

In Q1, Organon generated an operating profit margin of 21.5%, down 1.7 percentage points year on year. This reduction is quite minuscule and indicates the company’s overall cost structure has been relatively stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Organon’s full-year EPS dropped 93.7%, or 18% annually, over the last four years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Organon’s low margin of safety could leave its stock price susceptible to large downswings.

In Q1, Organon reported EPS at $1.02, down from $1.22 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Organon’s full-year EPS of $3.91 to shrink by 1.1%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Organon has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 17.6% over the last five years, quite impressive for a healthcare business.

Taking a step back, we can see that Organon’s margin dropped by 12.5 percentage points during that time. Continued declines could signal it is in the middle of an investment cycle.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Organon hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 17.1%, impressive for a healthcare business.

Organon reported $0 of cash and $0 of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.90 billion of EBITDA over the last 12 months, we view Organon’s 0.0× net-debt-to-EBITDA ratio as safe. We also see its $265 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Organon beat analysts’ EPS and EBITDA expectations this quarter. We were also happy its revenue narrowly outperformed Wall Street’s estimates. Overall, we think this was a solid quarter, but the market seemed to be hoping for more. The stock traded down 23.5% to $9.88 immediately following the results.

Updated: July 8, 2025 at 12:32 AM EDT

Are you wondering whether to buy Organon or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Organon falls short of our quality standards. To begin with, its revenue has declined over the last five years. And while its impressive operating margins show it has a highly efficient business model, the downside is its declining EPS over the last four years makes it a less attractive asset to the public markets. On top of that, its cash profitability fell over the last five years.

Organon’s P/E ratio based on the next 12 months is 2.5x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $14 on the company (compared to the current share price of $9.74).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.