| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| ($ in millions) | 2022 | | 2021 | | | | |
| Sales | $ | 99 | | | $ | 81 | | | | | |
| Cost of sales | 65 | | | 53 | | | | | |
| Selling, general and administrative | 18 | | | 15 | | | | | |
| | | | | | | | | | | |
| ($ in millions) | March 31, 2022 | | December 31, 2021 |
Receivables from Samsung included in Other current assets | $ | 26 | | | $ | 15 | |
Payables to Samsung included in Trade accounts payable | 23 | | | 21 | |
4. Acquisitions and Licensing Arrangements
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 will be 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 Inventory for the fair value of
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
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 is expected to close in the second quarter of 2022 and is subject to customary closing conditions, including regulatory approval.
For details regarding Organon's 2021 acquisitions and licensing agreements, See Note 5 to the audited Consolidated Financial Statements in the Company's 2021 Form 10-K.
5. Financial Instruments
Foreign Currency Risk Management
The Company has a balance sheet risk management and a net investment hedging program to mitigate against volatility of changes in foreign exchange rates.
The Company uses a balance sheet risk management program to mitigate the exposure of net monetary assets of its subsidiaries that are denominated in a currency other than a subsidiary’s functional currency from the effects of volatility in foreign exchange. In these instances, Organon principally utilizes forward exchange contracts to offset the effects of exchange on exposures denominated in developed country currencies, primarily the euro, Swiss franc and Japanese yen. For exposures in developing country currencies, the Company enters into forward contracts to partially offset the effects of exchange on exposures when it is deemed economical to do so based on a cost-benefit analysis that considers the magnitude of the exposure, the volatility of the exchange rate and the cost of the hedging instrument.
Monetary assets and liabilities denominated in a currency other than the functional currency of a given subsidiary are remeasured at spot rates in effect on the balance sheet date with the effects of changes in spot rates reported in Other (income) expense, net. The forward contracts are not designated as hedges and are marked to market through Other (income) expense, net. Accordingly, fair value changes in the forward contracts help mitigate the changes in the value of the remeasured assets and liabilities attributable to changes in foreign currency exchange rates, except to the extent of the spot-forward differences. These differences are not significant due to the short-term nature of the contracts, which typically have average maturities at inception of less than one year. As of March 31, 2022 and December 31, 2021, the fair value of these contracts was recorded as an asset of $29 million and $19 million, respectively, in Other current assets and a liability of $31 million and $5 million, respectively, in Accrued and other current liabilities. The notional amount of forward contracts was $1.6 billion as of March 31, 2022 and $2.1 billion as of December 31, 2021. The cash flows from these contracts are reported as operating activities in the Condensed Consolidated Statement of Cash Flows.
Foreign exchange risk is also managed through the use of economic hedges on foreign currency debt (see Note 7). In each quarter subsequent to the Separation, €1.75 billion in the aggregate of both the euro-denominated term loan (€750 million) and of the 2.875% euro-denominated secured notes (€1.25 billion) has been designated and is effective as an economic hedge of the net investment in euro-denominated subsidiaries. As a result, $37 million of foreign currency gains due to spot rate fluctuations on the euro-denominated debt instruments are included in foreign currency translation adjustments in Other Comprehensive Income for the three months ended March 31, 2022.
The Condensed Consolidated Statement of Income includes the impact of actual net gains and losses of Organon's derivative financial instruments, as well as the impact of Merck’s derivative financial instruments prior to the Separation allocated to the Company utilizing a proportional allocation method:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| ($ in millions) | 2022 | | 2021 | | | | |
Allocated net (gains) loss in Sales | $ | — | | | $ | 32 | | | | | |
Foreign exchange (gains) loss in Other (income) expense, net | (4) | | | (4) | | | | | |
Prior to the Separation, Merck managed the impact of foreign exchange rate movements on its affiliates’ earnings, cash flows and fair values of assets and liabilities through operational means and through the use of various financial instruments, including derivative instruments. Merck established revenue hedging and balance sheet risk management programs that the Company participated in to protect against the volatility of future foreign currency cash flows and changes in fair value caused by volatility in exchange rates.
Organon has established accounts receivable factoring agreements with financial institutions in certain countries to sell accounts receivable. Under these agreements, Organon factored $93 million and $87 million of accounts receivable at
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
March 31, 2022 and December 31, 2021, respectively, which reduced outstanding accounts receivable. The cash received from the financial institutions is reported within operating activities in the Condensed Consolidated Statement of Cash Flows.
6. Inventories
Inventories consisted of:
| | | | | | | | | | | |
| ($ in millions) | March 31, 2022 | | December 31, 2021 |
| Finished goods | $ | 373 | | | $ | 377 | |
Raw materials | 78 | | | 95 | |
| Work in process | 500 | | | 490 | |
| Supplies | 40 | | | 40 | |
| Total (approximates current cost) | $ | 991 | | | $ | 1,002 | |
| Decrease to LIFO costs | (15) | | | (11) | |
| | $ | 976 | | | $ | 991 | |
| Recognized as: | | | |
| Inventories | $ | 946 | | | $ | 915 | |
| Other assets | 30 | | | 76 | |
Inventories valued under the last in, first out ("LIFO") method comprised $72 million and $52 million at March 31, 2022 and December 31, 2021, respectively. Amounts recognized as Other assets are comprised primarily of raw materials and work in process inventories and are not expected to be converted to finished goods that will be sold within one year. The Company has a long-term vendor supply contract conveyed as part of the Separation that includes certain annual minimum purchase commitments.
7. Long-Term Debt and Leases
Long-Term Debt
The following is a summary of Organon's total debt:
| | | | | | | | | | | |
| ($ in millions) | March 31, 2022 | | December 31, 2021 |
| Term Loan B Facility: | | | |
LIBOR plus 300 bps term loan due 2028 | $ | 2,893 | | | $ | 2,893 | |
LIBOR plus 300 bps euro-denominated term loan due 2028 (€750 million) | 825 | | | 843 | |
4.125% secured notes due 2028 | 2,100 | | | 2,100 | |
2.875% euro-denominated secured notes due 2028 (€1.25 billion) | 1,385 | | | 1,412 | |
5.125% notes due 2031 | 2,000 | | | 2,000 | |
| Other borrowings | 10 | | | 10 | |
| Other (discounts and debt issuance costs) | (119) | | | (124) | |
| Total principal long-term debt | $ | 9,094 | | | $ | 9,134 | |
| Less: Current portion of long-term debt | 9 | | | 9 | |
| Total Long-term debt, net of current portion | $ | 9,085 | | | $ | 9,125 | |
Other borrowings represent debt assumed in connection with the acquisition of Forendo Pharma in 2021.
In June 2021, the Company entered into a credit agreement (the “Senior Credit Agreement”) providing for a Term Loan B Facility, consisting of (i) a U.S. Dollar denominated senior secured “tranche B” term loan in the amount of $3.0 billion due 2028 (ii) a euro denominated senior secured “tranche B” term loan in the amount of €750 million due 2028; and a Revolving Credit Facility (“Revolving Credit Facility”), in an aggregate principal amount of up to $1 billion, with a five-year term that matures in 2026.
The interest rate on revolving loans under the Revolving Credit Facility is subject to a step-down based on meeting a leverage ratio target. A commitment fee applies to the unused portion of the Revolving Credit Facility, initially equal to 0.50%
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
and subject to a step-down to 0.375% based on meeting a leverage ratio target. There were no outstanding balances under the Revolving Credit Facility as of March 31, 2022 or December 31, 2021.
The estimated fair value of long-term debt (including current portion) at March 31, 2022 was $9.0 billion compared with a carrying value (which includes a reduction for amortized debt issuance costs) of $9.1 billion and, at December 31, 2021, was $9.4 billion compared with a carrying value of $9.1 billion. Fair value was estimated using inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability and would be considered Level 2 in the fair value hierarchy.
The Company made interest payments of $32 million related to its debt instruments during the quarter ended March 31, 2022. The average maturity of the Company's long-term debt at March 31, 2022 is approximately 6.7 years and the weighted-average interest rate on total borrowings for the three months ended March 31, 2022 is 3.9%.
The schedule of principal payments required on long-term debt for the next five years and thereafter is as follows:
| | | | | |
| ($ in millions) | |
| 2022 | $ | 7 | |
| 2023 | 9 | |
| 2024 | 9 | |
| 2025 | 37 | |
| 2026 | 43 | |
| Thereafter | 9,108 | |
The Senior Credit Agreement contains customary financial covenants, including a total leverage ratio covenant, which measures the ratio of (i) consolidated total debt to (ii) consolidated earnings before interest, taxes, depreciation and amortization, and subject to other adjustments, that must meet certain defined limits which are tested on a quarterly basis beginning September 30, 2021. In addition, the Senior Credit Agreement contains covenants that limit, among other things, Organon’s ability to prepay, redeem or repurchase its subordinated and junior lien debt, incur additional debt, make acquisitions, merge with other entities, pay dividends or distributions, redeem or repurchase equity interests, and create or become subject to liens. As of March 31, 2022, the Company is in compliance with all financial covenants and no default or event of default has occurred.
8. Contingencies
Organon is involved in various claims and legal proceedings of a nature considered normal to its business, including product liability, intellectual property, and commercial litigation, as well as certain additional matters including governmental and environmental matters. In the opinion of Organon, it is unlikely that the resolution of these matters will be material to Organon's financial condition, results of operations or cash flows.
Given the nature of the litigation discussed in this note and the complexities involved in these matters, Organon is unable to reasonably estimate a possible loss or range of possible loss for such matters until Organon knows, among other factors, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, including the size of any potential class, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation, and (v) any other factors that may have a material effect on the litigation.
Organon records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. Individually significant contingent losses are accrued when probable and reasonably estimable. Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable.
Organon's decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing at the time such decisions are made. Organon has evaluated its risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for most product liabilities.
Reference is made below to certain litigation in which Merck, but not Organon, is named as a defendant. Pursuant to the Separation and Distribution Agreement, Organon is required to indemnify Merck for liabilities relating to, arising from, or resulting from such litigation.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Product Liability Litigation
Fosamax
Merck is a defendant in product liability lawsuits in the United States involving Fosamax® (alendronate sodium) (the "Fosamax Litigation"). As of March 31, 2022, approximately 3,460 cases comprising the Fosamax Litigation are pending against Merck in either federal or state court. Plaintiffs in the vast majority of these cases generally allege that they sustained femur fractures and/or other bone injuries ("Femur Fractures") in association with the use of Fosamax.
All federal cases involving allegations of Femur Fractures have been or will be transferred to a multidistrict litigation in the District of New Jersey ("Femur Fracture MDL"). In the only bellwether case tried to date in the Femur Fracture MDL, Glynn v. Merck, the jury returned a verdict in Merck's favor. In addition, in June 2013, the Femur Fracture MDL court granted Merck's motion for judgment as a matter of law in the Glynn case and held that the plaintiff's failure to warn claim was preempted by federal law.
In August 2013, the Femur Fracture MDL court entered an order requiring plaintiffs in the Femur Fracture MDL to show cause why those cases asserting claims for a femur fracture injury that took place prior to September 14, 2010, should not be dismissed based on the court's preemption decision in the Glynn case. Pursuant to the show cause order, in March 2014, the Femur Fracture MDL court dismissed with prejudice approximately 650 cases on preemption grounds. Plaintiffs in approximately 515 of those cases appealed that decision to the U.S. Court of Appeals for the Third Circuit ("Third Circuit"). In March 2017, the Third Circuit issued a decision reversing the Femur Fracture MDL court's preemption ruling and remanding the appealed cases back to the Femur Fracture MDL court. In May 2019, the U.S. Supreme Court decided that the Third Circuit had incorrectly concluded that the issue of preemption should be resolved by a jury, and accordingly vacated the judgment of the Third Circuit and remanded the proceedings back to the Third Circuit to address the issue in a manner consistent with the Supreme Court's opinion. In November 2019, the Third Circuit remanded the cases back to the District Court in order to allow that court to determine in the first instance whether the plaintiffs' state law claims are preempted by federal law under the standards described by the Supreme Court in its opinion. On March 23, 2022, the District Court granted Merck's motion and ruled that Plaintiffs' failure to warn claims are preempted as a matter of law to the extent they assert that Merck should have added a Warning or Precaution regarding atypical femur fractures prior to September 2010. Whether the Plaintiffs will attempt to move forward on other claims, or seek to appeal the District Court's ruling is not yet known.
Accordingly, as of March 31, 2022, approximately 975 cases were actively pending in the Femur Fracture MDL.
As of March 31, 2022, approximately 2,205 cases alleging Femur Fractures have been filed in New Jersey state court and are pending in Middlesex County. The parties selected an initial group of cases to be reviewed through fact discovery, and Merck has continued to select additional cases to be reviewed.
As of March 31, 2022, approximately 275 cases alleging Femur Fractures have been filed and are pending in California state court. All of the Femur Fracture cases filed in California state court have been coordinated before a single judge in Orange County, California.
Additionally, there are four Femur Fracture cases pending in other state courts.
Discovery is presently stayed in the Femur Fracture MDL and in the state court in California.
Nexplanon/Implanon
Merck is a defendant in lawsuits brought by individuals relating to the use of Nexplanon and Implanon™ (etonogestrel implant). In the United States, as of March 31, 2022, there was one filed product liability action involving Nexplanon pending in the Western District of Arkansas (in which Organon is also named as a defendant). The court's schedule for the matter provides for a trial date in the fourth quarter of 2023, should it be necessary. In addition, there were two filed product liability actions involving Implanon, both of which are pending in the Northern District of Ohio as well as 56 unfiled cases involving Implanon alleging similar injuries, which have been tolled under a written tolling agreement. As of March 31, 2022, Merck had 18 cases pending outside the United States, of which 14 relate to Implanon and four relate to Nexplanon.
Propecia/Proscar
Merck is a defendant in product liability lawsuits in the United States involving Propecia® (finasteride) and/or Proscar® (finasteride). The federal lawsuits were consolidated for pretrial purposes in federal multidistrict litigation in the Eastern District of New York (the "MDL"), and the matters in state court in New Jersey were consolidated in Middlesex County ("N.J. Coordinated Proceedings"). In 2018, Merck and the Plaintiffs' Executive Committee in the MDL and the Plaintiffs' Liaison Counsel in the N.J. Coordinated Proceedings entered into an agreement to resolve the lawsuits for an aggregate amount of $4.3 million. The settlement was subject to certain contingencies, including 95% plaintiff participation and a per plaintiff clawback if the participation rate was less than 100%. The contingencies were satisfied and the settlement agreement has been finalized.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
As of March 31, 2022, only three cases remain pending in the United States, including a case currently pending in the MDL, a matter involving Propecia in state court in Los Angeles, California and a matter involving Proscar in the United States District Court for the Eastern District of California. The Company is also defending 18 product liability cases outside the United States, two of which are class actions and four of which are putative class actions.
Governmental Proceedings
From time to time, Organon's subsidiaries may receive inquiries and may be the subject of preliminary investigation activities from competition and/or other governmental authorities, including in markets outside the United States. These authorities may include regulators, administrative authorities, and law enforcement and other similar officials, and these preliminary investigation activities may include site visits, formal or informal requests or demands for documents or materials, inquiries or interviews and similar matters. Certain of these preliminary inquiries or activities may lead to the commencement of formal proceedings. Should those proceedings be determined adversely to Organon, monetary fines and/or remedial undertakings may be required. Subject to certain exceptions specified in the Separation and Distribution Agreement, Organon assumed liability for all pending and threatened legal matters related to products transferred to Organon, including competition investigations resulting from enforcement activity concerning Merck's conduct involving Organon's products. Organon could be obligated to indemnify Merck for fines or penalties, or a portion thereof, resulting from such investigations. Organon is aware of one such enforcement activity pending in Europe.
Hadlima™ (adalimumab-bwwd)
In July 2021, Organon received a Civil Investigation Demand ("CID") from the Office of the Attorney General for the State of Washington. The CID requests answers to interrogatories, as well as various documents, regarding certain activities related to adalimumab and adalimumab biosimilars. Organon is cooperating with the government's investigation and has produced information in response to the CID.
Patent Litigation
From time to time, generic manufacturers of pharmaceutical products file Abbreviated New Drug Applications ("ANDAs") with the U.S. Food and Drug Administration ("FDA") seeking to market generic forms of Organon's products prior to the expiration of relevant patents owned by Organon. To protect its patent rights, Organon may file patent infringement lawsuits against such generic companies. Similar lawsuits defending Organon's patent rights may exist in other countries. Organon intends to vigorously defend its patents, which it believes are valid, against infringement by companies attempting to market products prior to the expiration of such patents. As with any litigation, there can be no assurance of the outcomes, which, if adverse, could result in significantly shortened periods of exclusivity for these products, potential payment of damages and legal fees, and, with respect to products acquired through acquisitions, potentially significant intangible asset impairment charges.
Nexplanon
In June 2017, Microspherix LLC ("Microspherix") sued Organon in the U.S. District Court for the District of New Jersey asserting that the manufacturing, use, sale and importation of Nexplanon infringed several of Microspherix's patents that claim radio-opaque, implantable drug delivery devices. Microspherix is claiming damages from September 2014 until the patents expired in May 2021. Organon brought Inter Partes Review ("IPR") proceedings in the United States Patent and Trademark Office ("USPTO") and successfully stayed the district court action. The USPTO invalidated some, but not all, of the claims asserted against Organon. Organon appealed the decisions that found claims valid, and the Court of Appeals for the Federal Circuit affirmed the USPTO's decisions. The matter is no longer stayed in the district court, and Organon is currently litigating the invalidity and non-infringement of the remaining asserted claims. A claim construction hearing was held on March 2, 2022, and any further dates in the schedule will be set based on the date the court issues a claim construction order.
Other Litigation
There are various other pending legal proceedings involving Organon, principally product liability and intellectual property lawsuits. While it is not feasible to predict the outcome of such proceedings, in the opinion of Organon, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such proceedings is not expected to be material to Organon's financial condition, results of operations or cash flows either individually or in the aggregate.
Legal Defense Reserves
Legal defense costs expected to be incurred in connection with a loss contingency are accrued when probable and reasonably estimable. Some of the significant factors considered in the review of these legal defense reserves are as follows: the
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
actual costs incurred by Organon; the development of Organon's legal defense strategy and structure in light of the scope of its litigation; the number of cases being brought against Organon; and the costs and outcomes of completed trials and the most current information regarding anticipated timing, progression, and related costs of pre-trial activities and trials in the associated litigation. The legal defense reserve as of March 31, 2022 and December 31, 2021 was $9 million for both periods and represented Organon's best estimate of the minimum amount of defense costs to be incurred in connection with its outstanding litigation; however, events such as additional trials and other events that could arise in the course of its litigation could affect the ultimate amount of legal defense costs to be incurred by Organon. Organon will continue to monitor its legal defense costs and review the adequacy of the associated reserves and may determine to increase the reserves at any time in the future if, based upon the factors set forth, it believes it would be appropriate to do so.
9. Stock-Based Compensation Plans
Under the 2021 Incentive Stock Plan, the Company grants stock option awards, performance share units ("PSUs") and restricted share units ("RSUs"). Employee stock options are granted to purchase shares of Company stock at the fair market value at the time of grant. Generally, stock options have a contractual term of ten years and vest one-third each year over a three-year period, subject to limited exceptions. RSUs are stock awards that are granted to employees and entitle the holder to shares of common stock as the awards vest. RSU awards generally vest one-third each year over a three-year period. The fair value of the stock option and RSU awards is determined and fixed on the grant date based on the Company’s stock price. The terms of the Company's PSU awards allow the recipients of such awards to earn a variable number of shares based on total stockholder return of the Company relative to an index of peer companies ("relative TSR") specified in the awards. For PSUs with a market-based relative TSR goal, stock-based compensation expense is recognized based on the estimated fair value of the award at the grant date regardless of the actual number of shares earned. PSU awards generally vest after three years. For RSUs and PSUs, dividends declared during the vesting period are payable to the employees only upon vesting. RSU and PSU distributions will be in shares of Company stock after the end of the vesting or performance period, subject to the terms applicable to such awards.
Stock-based compensation expense incurred by the Company was as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| ($ in millions) | 2022 | | 2021 | | | | |
| Stock-based compensation expense recognized in: | | | | | | | |
| Cost of sales | $ | 3 | | | $ | 2 | | | | | |
| Selling, general and administrative | 10 | | | 5 | | | | | |
| Research and development | 2 | | | 4 | | | | | |
| | | | | | | |
| Income tax benefits | 3 | | | 2 | | | | | |
The Company used the Black-Scholes model to determine the fair value of the stock options as of the grant date using the following assumptions:
| | | | | |
| Three Months Ended March 31, 2022 |
| Expected dividend yield | 3.12 | % |
| Risk-free interest rate | 2.47 | % |
| Expected volatility | 43.43 | % |
| Expected life (years) | 5.89 |
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
A summary of the transactions under the 2021 Incentive Stock Plan as of March 31, 2022 follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | Restricted Share Units | | Performance Share Units |
| (shares in thousands) | Shares | | Weighted average exercise price | | Weighted average grant date fair value | | Shares | | Weighted average grant date fair value | | Shares | | Weighted average grant date fair value |
| Outstanding as of December 31, 2021 | 4,394 | | | $ | 34.35 | | | $ | 8.63 | | | 3,280 | | | $ | 36.69 | | | 120 | | | $ | 51.63 | |
| Granted | 556 | | | $ | 34.93 | | | $ | 11.34 | | | 2,250 | | | $ | 34.93 | | | — | | | $ | — | |
| Vested/Exercised | (15) | | | $ | 37.39 | | | $ | 9.72 | | | (116) | | | $ | 44.18 | | | — | | | $ | — | |
| Forfeited/Cancelled | — | | | $ | — | | | $ | — | | | (41) | | | $ | 36.36 | | | — | | | $ | — | |
Outstanding as of March 31, 2022 | 4,935 | | | $ | 34.40 | | | $ | 8.93 | | | 5,373 | | | $ | 35.80 | | | 120 | | | $ | 51.63 | |
The following table summarizes information about equity awards outstanding that are vested and expected to vest and equity awards outstanding that are exercisable at March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity Awards Vested and Expected to Vest | | Equity Awards That are Exercisable |
| (shares in thousands; aggregate intrinsic value in millions) | Awards | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Remaining Term | | Awards | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Remaining Term |
| Stock Options | 4,650 | | | $ | 34.40 | | | $ | 7 | | | 8.03 | | 1,439 | | | $ | 30.59 | | | $ | 7 | | | 5.38 |
| Restricted Share Units | 4,936 | | | — | | | 188 | | | 2.44 | | — | | | — | | | — | | | — | |
| Performance Share Units | 207 | | | — | | | 8 | | | 2.38 | | — | | | — | | | — | | | — | |
The amount of unrecognized compensation costs as of March 31, 2022 was $178 million, which will be recognized in operating expense ratably over the weighted average vesting period of 2.42 years.
10. Other (Income) Expense, Net
Other (income) expense, net, consisted of:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| ($ in millions) | 2022 | | 2021 | | | | |
| Exchange (gains) losses | $ | (4) | | | $ | (4) | | | | | |
| Interest expense | 97 | | | — | | | | | |
| Other, net | 4 | | | 2 | | | | | |
| | $ | 97 | | | $ | (2) | | | | | |
Interest expense for the first three months of 2022 primarily reflects amounts incurred in connection with the issuance of debt during the second quarter of 2021. See Note 7 for details.
11. Taxes on Income
The effective income tax rates were 21.3% and 15.5% for the three months ended March 31, 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 three months ended March 31, 2021, also reflects the Internal Revenue Service ("IRS") conclusion of its examinations of Merck’s 2015-2016 U.S. federal income tax returns. As a result, the Company reflected an allocation from Merck of $18 million representing the Company's portion of the payment made to the IRS in the Condensed Consolidated Financial Statements. The Company's portion of reserves for unrecognized tax benefits for the years under examination exceeded the allocated adjustments relating to this examination period and therefore the Company included a $29 million net tax benefit also included in the three months ended March 31, 2021. This net benefit reflects reductions in reserves for unrecognized tax benefits and other related liabilities for tax positions relating to the years that were under examination.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
The Company is subject to income tax in the United States (federal, state and local) as well as other jurisdictions outside of the United States in which we operate.
12. Other Comprehensive Income (Loss)
Changes in Accumulated other comprehensive loss by component are as follows:
| | | | | | | | | | | | | | | | | |
| ($ in millions) | Employee
Benefit
Plans | | Cumulative
Translation
Adjustment | | Accumulated Other
Comprehensive
Income (Loss) |
| Balance at January 1, 2021, net of taxes | $ | (32) | | | $ | (590) | | | $ | (622) | |
| Other comprehensive income (loss), pretax | 1 | | | (66) | | | (65) | |
| Tax | (3) | | | — | | | (3) | |
| Other comprehensive income (loss), net of taxes | (2) | | | (66) | | | (68) | |
| Transfer of benefit plans from Merck affiliates | $ | 1 | | | $ | — | | | 1 | |
| Balance at March 31,2021, net of taxes | $ | (33) | | | $ | (656) | | | $ | (689) | |
| | | | | |
| Balance at January 1, 2022, net of taxes | $ | (13) | | | $ | (500) | | | $ | (513) | |
| Other comprehensive income (loss), pretax | (1) | | | (15) | | | (16) | |
| Tax | — | | | — | | | — | |
| Other comprehensive loss, net of taxes | (1) | | | (15) | | | (16) | |
| Balance at March 31, 2022, net of taxes | $ | (14) | | | $ | (515) | | | $ | (529) | |
13. Product and Geographic Information
The Company’s operations include the following product portfolios, which constitute one operating segment engaged in developing and delivering innovative health solutions through its portfolio of prescription therapies within women’s health, biosimilars and established brands.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Revenue of the Company’s products were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| ($ in millions) | U.S. | | Int’l | | Total | | U.S. | | Int’l | | Total | | | | | | | | | | | | |
| Women’s Health | | | | | | | | | | | | | | | | | | | | | | | |
| Nexplanon/Implanon NXT | $ | 116 | | | $ | 55 | | | $ | 171 | | | $ | 141 | | | $ | 42 | | | $ | 183 | | | | | | | | | | | | | |
| Follistim AQ | 30 | | | 31 | | | 61 | | | 25 | | | 27 | | | 52 | | | | | | | | | | | | | |
NuvaRing | 16 | | | 24 | | | 41 | | | 21 | | | 24 | | | 45 | | | | | | | | | | | | | |
Ganirelix Acetate Injection | 8 | | | 22 | | | 30 | | | 8 | | | 21 | | | 29 | | | | | | | | | | | | | |
Cerazette | — | | | 18 | | | 18 | | | — | | | 17 | | | 17 | | | | | | | | | | | | | |
Other Women's Health (1) | 27 | | | 31 | | | 57 | | | 40 | | | 33 | | | 73 | | | | | | | | | | | | | |
| Biosimilars | | | | | | | | | | | | | | | | | | | | | | | |
| Renflexis | 42 | | | 4 | | | 46 | | | 35 | | | 4 | | | 38 | | | | | | | | | | | | | |
| Ontruzant | 7 | | | 15 | | | 22 | | | 4 | | | 19 | | | 22 | | | | | | | | | | | | | |
| Brenzys | — | | | 14 | | | 14 | | | — | | | 10 | | | 10 | | | | | | | | | | | | | |
| Aybintio | — | | | 10 | | | 10 | | | — | | | 8 | | | 8 | | | | | | | | | | | | | |
| Hadlima | — | | | 6 | | | 6 | | | — | | | 2 | | | 2 | | | | | | | | | | | | | |
| Established Brands | | | | | | | | | | | | | | | | | | | | | | | |
| Cardiovascular | | | | | | | | | | | | | | | | | | | | | | | |
| Zetia | 3 | | | 96 | | | 99 | | | 2 | | | 89 | | | 92 | | | | | | | | | | | | | |
| Vytorin | 2 | | | 36 | | | 38 | | | 3 | | | 38 | | | 41 | | | | | | | | | | | | | |
| Atozet | — | | | 119 | | | 119 | | | — | | | 112 | | | 112 | | | | | | | | | | | | | |
| Rosuzet | — | | | 22 | | | 22 | | | — | | | 15 | | | 15 | | | | | | | | | | | | | |
| Cozaar/Hyzaar | 8 | | | 86 | | | 93 | | | 3 | | | 87 | | | 90 | | | | | | | | | | | | | |
Other Cardiovascular (1) | 1 | | | 38 | | | 39 | | | 1 | | | 38 | | | 39 | | | | | | | | | | | | | |
| Respiratory | | | | | | | | | | | | | | | | | | | | | | | |
| Singulair | 3 | | | 127 | | | 130 | | | 5 | | | 102 | | | 107 | | | | | | | | | | | | | |
| Nasonex | 9 | | | 65 | | | 75 | | | 2 | | | 41 | | | 43 | | | | | | | | | | | | | |
| Dulera | 31 | | | 9 | | | 40 | | | 31 | | | 8 | | | 38 | | | | | | | | | | | | | |
| Clarinex | 1 | | | 37 | | | 38 | | | 1 | | | 23 | | | 25 | | | | | | | | | | | | | |
Other Respiratory (1) | 12 | | | 11 | | | 22 | | | 16 | | | 6 | | | 23 | | | | | | | | | | | | | |
| Non-Opioid Pain, Bone and Dermatology | | | | | | | | | | | | | | | | | | | | | | | |
| Arcoxia | — | | | 60 | | | 60 | | | — | | | 56 | | | 56 | | | | | | | | | | | | | |
| Fosamax | 1 | | | 40 | | | 41 | | | 1 | | | 37 | | | 38 | | | | | | | | | | | | | |
| Diprospan | — | | | 31 | | | 31 | | | — | | | 26 | | | 26 | | | | | | | | | | | | | |
Other Non-Opioid Pain, Bone and Dermatology (1) | 3 | | | 66 | | | 69 | | | (1) | | | 62 | | | 61 | | | | | | | | | | | | | |
| Other | | | | | | | | | | | | | | | | | | | | | | | |
| Proscar | — | | | 24 | | | 24 | | | — | | | 32 | | | 32 | | | | | | | | | | | | | |
| Propecia | 1 | | | 29 | | | 30 | | | 2 | | | 29 | | | 31 | | | | | | | | | | | | | |
Other (1) | 8 | | | 74 | | | 83 | | | 11 | | | 78 | | | 89 | | | | | | | | | | | | | |
Other (2) | — | | | 37 | | | 37 | | | — | | | 69 | | | 69 | | | | | | | | | | | | | |
| Total Revenue | $ | 329 | | | $ | 1,238 | | | $ | 1,567 | | | $ | 351 | | | $ | 1,155 | | | $ | 1,506 | | | | | | | | | | | | | |
Totals may not foot due to rounding. Trademarks appearing above in italics are trademarks of, or are used under license by, the Organon group of companies.
(1) Includes sales of products not listed separately. Revenue from an arrangement for the sale of generic etonogestrel/ethinyl estradiol vaginal ring is included in Other Women's Health.
(2) Includes manufacturing sales to Merck and third parties for current and prior periods and allocated amounts from revenue hedging activities through the date of Separation.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
Combined revenue by geographic area where derived are as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| ($ in millions) | 2022 | | 2021 | | | | |
| Europe and Canada | $ | 436 | | | $ | 434 | | | | | |
| United States | 329 | | | 351 | | | | | |
| Asia Pacific and Japan | 314 | | | 278 | | | | | |
| China | 236 | | | 206 | | | | | |
| Latin America, Middle East, Russia and Africa | 209 | | | 167 | | | | | |
Other (1) | 43 | | | 70 | | | | | |
| | $ | 1,567 | | | $ | 1,506 | | | | | |
(1) Primarily reflects manufacturing sales to Merck and third parties for current and prior periods and allocated amounts from revenue hedging activities through the date of Separation.
During 2021, the Company realigned its geographic presentation of sales to reflect the internal management view of Organon as a stand-alone entity. Accordingly, prior period sales by geographic area have been recast to reflect these changes.
14. Third Party Arrangements and Related Party Disclosures
Pursuant to the Separation, Merck ceased to be a related party to Organon and accordingly, no related party transactions or balances have been reported since June 2, 2021.
In connection with the Separation, the Company entered into the Separation and Distribution Agreement, which contains provisions that, among other things, relate to (i) assets, liabilities and contracts to be transferred, assumed and assigned to each of Organon and Merck as part of the Separation, (ii) cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of the Organon business with Organon and financial responsibility for the obligations and liabilities of Merck’s remaining business with Merck, (iii) procedures with respect to claims subject to indemnification and related matters, (iv) the allocation between Organon and Merck of rights and obligations under existing insurance policies with respect to occurrences prior to completion of the Distribution, as well as the right to proceeds and the obligation to incur certain deductibles under certain insurance policies, and (v) procedures governing Organon’s and Merck’s obligations and allocations of liabilities with respect to ongoing litigation matters that may implicate each of Merck’s business and Organon’s business.
Organon entered into other agreements with Merck that govern aspects of Organon’s relationship with Merck following the Separation, including the Transition Services Agreement, Interim Operating Agreements, Manufacturing and Supply Agreement, Tax Matters Agreement, Employee Matters Agreement as well as Intellectual Property License Agreements and Regulatory Agreements. For the first quarter of 2022, material transactions occurred in connection with the Interim Operating Agreements. For details on the rights and responsibilities of the parties under the IOM agreements, refer below; for all other agreements refer to Note 19 to the audited Condensed Consolidated Financial Statements in the Company's 2021 Form 10-K.
•Interim Operating Model Agreements - Merck and Organon entered into a series of interim operating model ("IOM") agreements pursuant to which Merck and certain of its affiliates that held licenses, permits and other rights in connection with marketing, import and/or distribution of Organon products in various jurisdictions prior to the Separation will continue to market, import and distribute such products until such time as the relevant licenses and permits are transferred to Organon or its affiliates, while permitting Organon (or Merck, as applicable) to recognize revenue relating to the sale of its respective products, to the extent practicable. Under such IOM agreements and in accordance with the Separation and Distribution Agreement, the relevant Merck entity will continue operations in the affected market on behalf of Organon, with Organon receiving all of the economic benefits and burdens of such activities. Organon began receiving these economic benefits as of June 2, 2021. Based on the terms of the IOM agreements, the Company determined it is the Principal under these arrangements. Organon holds, all risks, and rewards of ownership inclusive of risk of loss, market risk and benefits related to the inventory. Additionally, Organon has latitude in pricing, has the ability to direct Merck regarding decisions over inventory, and is responsible for all credit and collections risks and losses associated with the related receivables. As such, Organon recognizes these sales on a gross basis.
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
The amount due from Merck under such agreements was $358 million and $403 million at March 31, 2022 and December 31, 2021, respectively, and is reflected in accounts receivable. The amount due to Merck under these agreements was $700 million and $928 million at March 31, 2022 and December 31, 2021, respectively, and is included in accounts payable.
For the first quarter of 2022, sales and cost of sales resulting from the manufacturing and supply agreements with Merck were $33 million and $29 million, respectively.
Prior to the Separation, the Company did not operate as a standalone business and the Condensed Consolidated Financial Statements were derived from the consolidated financial statements and accounting records of Merck. The following disclosure summarizes activity between the Company and Merck up to the Separation, including the affiliates of Merck that were not part of the Separation.
Cost allocations from Merck
Merck provided significant corporate, manufacturing, selling, marketing, administrative, research services and resources to the Company. Some of these services continue to be provided by Merck to the Company on a temporary basis under the Transition Services Agreement. The Condensed Consolidated Financial Statements reflect an allocation of these costs. The allocations reflected in the Condensed Consolidated Statement of Income for continuing operations are as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| ($ in millions) | 2022 | | 2021 | | | | |
| Cost of sales | $ | — | | | $ | 56 | | | | | |
| Selling, general and administrative | — | | | 88 | | | | | |
| Research and development | — | | | 25 | | | | | |
| $ | — | | | $ | 169 | | | | | |
Management believes these cost allocations are a reasonable reflection of the utilization of services provided to, or the benefit derived by, the Company during the periods presented. The allocations may not, however, be indicative of the actual expenses that would have been incurred had the Company operated as a standalone public company at the time. Actual costs that may have been incurred if the Company had been a standalone public company would depend on a number of factors, including the chosen organizational structure, whether functions were outsourced or performed by the Company’s employees and strategic decisions made in areas such as manufacturing, selling, information technology and infrastructure.
Related party transactions
The following transactions represent activity between Organon Entities and Transferred Entities with other Merck affiliates prior to the Separation:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| ($ in millions) | 2022 | | 2021 | | | | |
| Included in continuing operations | | | | | | | |
| Supply sales to Merck affiliates | $ | — | | | $ | 85 | | | | | |
| Purchases from Merck affiliates | — | | | 37 | | | | | |
| Cost reimbursements and fees from Merck affiliates | — | | | 1 | | | | | |
| Included in discontinued operations | | | | | | | |
| Supply sales to Merck affiliates | $ | — | | | $ | 12 | | | | | |
| Purchases from Merck affiliates | — | | | 50 | | | | | |
Net transfers to Merck & Co., Inc.
Prior to the Separation, net transfers to Merck were included within Net investment from Merck & Co., Inc. on the Condensed Consolidated Statement of Equity and represent the net effect of transactions between the Company and Merck. The components of Net transfers to Merck & Co., Inc. for the three months ended March 31, 2021 were as follows:
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
| | | | | |
| Three Months Ended March 31, |
| ($ in millions) | 2021 |
| Cash pooling and general financing activities | $ | 867 | |
| Cost allocations, excluding non-cash stock-based compensation | (158) | |
| Taxes deemed settled with Merck | (123) | |
| Allocated derivative and hedging (losses) gains | (35) | |
Net transfers (from) to Merck & Co., Inc. as reflected in the Condensed Consolidated Statement of Cash Flows for Continuing Operations | $ | 551 | |
| Net transfers to (from) Merck included in Net Cash Provided by (Used in) Discontinued Operations | 482 | |
| Total net transfers to Merck as included in the Condensed Consolidated Statement of Cash Flows | $ | 1,033 | |
Stock-based compensation expense (includes $3 of discontinued operations for the three months ended March 31, 2021) | (11) | |
| Net assets contributed by Merck affiliates | 72 | |
Derecognition of amounts in Accumulated other comprehensive loss related to employee benefit plan transfers to Merck affiliates | 1 | |
Net transfers (from) to Merck & Co., Inc. as reflected in the Condensed Consolidated Statement of Equity | $ | 1,095 | |
Prior to the Separation, transfers between the Organon Entities, the Transferring Entities and Merck affiliates were recognized in Net transfers to Merck & Co., Inc. in the Condensed Consolidated Statement of Equity at Merck’s historical cost. Additionally, in connection with the Separation, certain assets and liabilities included in the pre-Separation balance sheet were retained by Merck and certain assets and liabilities not included in the pre-Separation balance sheet were transferred to Organon. Adjustments for transfers are reflected in the Company's Condensed Consolidated Financial Statements for the three months ended March 31, 2021.
15. Discontinued Operations
In contemplation of the Separation, the Merck Retained Products business in the Transferred Entities was distributed to Merck affiliates and, accordingly, the historical results of operations, assets and liabilities, and the cash flows of the Merck Retained Products for such Transferred Entities are reflected as discontinued operations.
The components of Income (loss) from discontinued operations, net of tax for the Merck Retained Products business are as follows:
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| ($ in millions) | 2022 | | 2021 | | | | | | | | |
| Sales | $ | — | | | $ | 89 | | | | | | | | | |
| Costs, Expenses and Other | | | | | | | | | | | |
| Cost of Sales | — | | | 52 | | | | | | | | | |
| Selling, general and administrative | — | | | 14 | | | | | | | | | |
| Research and development | — | | | 4 | | | | | | | | | |
| Other (income) expense, net | — | | | 10 | | | | | | | | | |
| Income from discontinued operations before taxes | $ | — | | | $ | 9 | | | | | | | | | |
| Taxes on income | — | | | 5 | | | | | | | | | |
| Income from discontinued operations, net of taxes | $ | — | | | $ | 4 | | | | | | | | | |
Discontinued operations includes related party sales of $12 million for the three months ended March 31, 2021. Costs for inventory purchases from related parties was $50 million for the three months ended March 31, 2021.
16. Earnings per Share
On June 2, 2021, the date of the Separation, $253,516,000 shares of the Common Stock were distributed to Merck stockholders of record as of the Record Date. This share amount is utilized for the calculation of basic and diluted earnings per
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
share for all periods presented prior to the Separation. For the first three months of 2021, these shares are treated as issued and outstanding at January 1, 2021 for purposes of calculating historical basic and diluted earnings per share.
Prior to the Separation, certain of the Company's employees participated in stock-based compensation plans sponsored by Merck. Under these plans employees were granted stock options, performance share units ("PSUs"), and restricted stock units ("RSUs"). On June 2, 2021, and in accordance with the Employee Matters Agreement, all Merck stock options, PSUs and RSUs were converted using the conversion ratios set forth in the Employee Matters Agreement. Merck stock options, PSUs and RSUs were converted into Organon RSUs and option awards. Awards were equitably adjusted to reflect the spin-off and to preserve the same intrinsic value and general terms and conditions (including vesting) as were in place immediately prior to the adjustments.
The calculation of basic and diluted earnings per common share for the three months ended March 31, 2022 and 2021 was as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| ($ in millions and shares in thousands, except per share amounts) | 2022 | | 2021 | | | | |
| Net income attributable to Organon: | | | | | | | |
| Income from continuing operations | $ | 348 | | | $ | 395 | | | | | |
| Income from discontinued operations | — | | | 4 | | | | | |
| Net income attributable to Organon | $ | 348 | | | $ | 399 | | | | | |
| Basic weighted average number of shares outstanding | 253,583 | | 253,516 | | | | |
| Stock awards and equity units (share equivalent) | 1,469 | | | — | | | | | |
| Diluted weighted average common shares outstanding | 255,052 | | 253,516 | | | | |
| Earnings Per Share Attributable to Organon common stockholders - Basic | | | | | | | |
| Income from continuing operations | $ | 1.37 | | | $ | 1.56 | | | | | |
| Income from discontinued operations | — | | | 0.02 | | | | | |
| Basic earnings per common share attributable to Organon common stockholders | $ | 1.37 | | | $ | 1.58 | | | | | |
| Earnings Per Share Attributable to Organon common stockholders - Diluted | | | | | | | |
| Income from continuing operations | 1.36 | | 1.56 | | | | |
| Income from discontinued operations | — | | | 0.02 | | | | | |
| Diluted earnings per common share attributable to Organon common stockholders | $ | 1.36 | | | $ | 1.58 | | | | | |
For periods prior to the Separation, it is assumed that there were no dilutive equity instruments as there were no equity awards of Organon outstanding prior to the Separation.
For periods subsequent to the Separation and the Distribution, diluted earnings per share is computed by giving effect to all potentially dilutive stock awards that are outstanding. The computation of diluted earnings per share excludes the effect of the potential exercise of stock-based awards, when the effect of the potential exercise would be anti-dilutive. The weighted-average number of common shares outstanding for basic and diluted earnings per share for the three months ended March 31, 2022 was based on the weighted-average number of common shares outstanding for the period beginning after the Distribution date.
For the first three months of 2022, 4.9 million of common shares issuable under stock-based compensation plans were excluded from the computation of earnings per common share assuming dilution because the effect would have been antidilutive.
Dividend Program
In February 2022, the Board of Directors declared a quarterly dividend of $0.28 per share on Organon’s stock that was paid on March 17, 2022 to stockholders of record at the close of business on February 28, 2022. During each of the second and third quarters of 2021, the Company's Board of Directors also declared a quarterly cash dividend of $0.28 per share on Organon's Common Stock.
17. Subsequent Events
Organon and Daré Bioscience, Inc., a leader in women’s health innovation ("Daré"), entered into an agreement whereby Organon will license global rights to Xaciato® (clindamycin phosphate vaginal gel, 2%). Xaciato is an FDA-approved
Notes to Condensed Consolidated Financial Statements (unaudited) (continued)
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 agreement, Daré will receive a $10 million upfront payment from Organon. Daré is eligible to receive potential 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. Completion of the transaction is subject to review under the Hart-Scott-Rodino Antitrust Improvements Act and other customary conditions. The transaction is expected to close during the second quarter of 2022.