Given Organon & Co’s (NYSE:OGN) low growth, its sizeable competition, its lack of concrete positive catalysts, and the fact that its management plans to institute an average dividend in the future, I urge investors to avoid OGN stock for now.

Moreover, although Organon says that it’s looking to make acquisitions, its relatively low cash reserves and high debt could limit the company’s ability to make needle-moving M&A deals.

In light of all of these points, I believe that the stock’s current low valuation is warranted.

Low Growth and Tough Competition

Over the past several years, Organon’s top line has fallen, Merck (NYSE:MRK), its former parent company, reported. The decline was caused by the loss of exclusivity of a number of the company’s key products, i.e., the expiration of the patents on them, Merck explained. When pharmaceutical products undergo loss of exclusivity, the revenue they generate drops sharply.

Merck says that Organon’s revenue is expected to drop less this year than in 2020 and anticipates that the top-line decline will moderate this year. Moreover, Merck expects the spun off company to report “low to mid-single digit {percentage} revenue growth off of a 2021 base year.”

Merck, however, also noted that Organon’s 2020 top line was negatively impacted by the Covid-19 pandemic, as the unit’s significant “long-acting reversible contraceptives (LARC)” business was hurt by women’s inability to undergo medical procedures during lockdowns.

These lockdowns continued, particularly outside of the U.S. and China, for much of 2021. Thus, the 2021 will provide an easy comparison for Organon in subsequent years.

As a result, I would not be surprised if the company’s revenue stagnates or resumes declining in 2023. That potential reality could become apparent to retail investors in early 2022, when the company could begin issuing 2023 guidance, and the smart money may start selling the shares meaningfully ahead of that time. So, it would not be shocking to see OGN stock start meaningfully declining in September or October.

Two key reasons for Organon’s anemic growth outlook are its loss of exclusivity and the tough competition faced by its LARC business. In addition to the huge revenue drop that off-patent medications experience initially following the loss of their patents, their sales in subsequent years tend to increase rather slowly, flatten or even drop, and their profit margins are usually low.

Meanwhile, there are many types of long-acting reversible contraceptives, including multiple types of IUDs, several other implants in addition to Organon’s Nexplanon, and shots.

So although the company has reportedly said that its revenue losses from LOEs will be low over the next few years, I think it will be tough for it to deliver growth, aside from revenue increases generated by M&A, going forward.

Acquisitions Could Be Limited

OGN stock does not currently pay a dividend, although the company says it intends to eventually institute a payout whose yield has been estimated at 3%. It appears that a 2% to 3% yield is a somewhat standard rate for fairly low-growth pharmaceutical companies with no strong, upcoming growth catalysts; Viatris (NASDAQ:VMS), Perrigo (NYSE:PRGO) and Johnson & Johnson (NYSE:JNJ), for example, all have yields in that range.

Organon has said that it would look to make acquisitions. But its top line is trending around $8 billion, while it had $141 million of cash at the end of last quarter and total debt of $966 million, and it has promised to pay a meaningful dividend.

Given that data, I believe it may be very difficult for Organon to make any deals that will move the needle for it and for OGN stock within the next two or three years.

The Bottom Line on OGN Stock

Organon’s forward price-earnings ratio of 4.7 may sound very cheap. But it isn’t that much lower than a number of its low-growth pharma peers that lack (or that are widely believed to lack) strong catalysts: Viatris has a forward P/E ratio of 4.4, Bristol Myers’ (NYSE:BMY) forward P/E is 8.9, while Teva’s (NYSE:TEVA) is 3.7 and AbbVie’s (NYSE:ABBV) comes in at 9.2.

In light of Organon’s weak growth outlook, average dividend, and constrained ability to make needle-moving acquisitions, I recommend that longer-term investors wait for a large pullback in the name before buying the shares.

Patient investors who already own the stock could hold onto their shares in the hope that the company is able to meaningfully accelerate its growth in three or four years. But I think there are many pharmaceutical stocks that are much more attractive than OGN stock for both growth and value investors.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.