Item 1A. Risk Factors
You should carefully consider the following risks and other information in this Annual Report on Form 10-K in evaluating Organon and deciding to invest in the Common Stock. Any of the following risks could materially and adversely affect Organon’s results of operations, financial condition and the price of the Common Stock.
Summary of Risk Factors
The following is a summary of the principal risks that could significantly and negatively affect Organon's business, prospects, financial conditions, or operating results. For a more complete discussion of the material risks facing Organon's business, please see below:
Risks Related to Organon's Business
•Organon has a limited history of operating as an independent company, and its historical financial results included elsewhere in this report are not necessarily representative of what its actual financial position or results of operations would have been as an independent company and may not be a reliable indicator of its future results.
•Key products generate a significant amount of Organon's profits and cash flows, and any events that adversely affect the markets for Organon's leading products could adversely affect its results of operations and financial condition.
•Organon faces continued pricing pressure with respect to its products.
•Organon faces intense competition from competitors' products.
•Organon has limited in-house discovery and early research capabilities and will continue to rely on future acquisitions, partnerships and collaborations to expand its innovative pipeline and early discovery and research capabilities, which may limit its ability to discover or develop new products or expand its existing products into new markets to replace the sales of products that lose patent protection and therefore Organon may not be able to maintain its current levels of profitability.
•Organon may experience difficulties identifying acquisition opportunities or completing such transactions.
•Organon or its partners may fail to demonstrate the safety and efficacy of any of its product candidates in pre-clinical and clinical trials, which would prevent or delay development, regulatory approval or clearance, and commercialization of Organon's product candidates.
•Organon may be unable to market its pharmaceutical products or medical devices if it does not obtain and maintain required regulatory approvals or marketing authorizations.
•Developments following regulatory approval or marketing authorization may adversely affect sales of Organon's pharmaceutical products or medical devices.
•Certain of Organon's products currently benefit from patent protection and market exclusivity. When the patent protection and market exclusivity periods for such products expire, a significant and rapid loss of sales from those products is generally experienced. Expiry of patent protection and market exclusivity for products that contribute significantly to Organon's sales will adversely affect its business.
•Organon depends on its patent rights for the marketing of certain of its products, and invalidation or circumvention of Organon's patent rights would adversely affect its business.
•Organon is subject to minimum purchase obligations under certain supply agreements, and if Organon fails to meet those minimum purchase requirements, its financial results may be unfavorably impacted.
•Organon has incurred substantial indebtedness, which could adversely affect its financial condition and results of operations.
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•Organon is subject to a number of restrictive covenants under its indebtedness, including customary operating restrictions and financial covenants, which could restrict Organon's ability to pay dividends or adversely affect its financing options and liquidity position.
Risks Related to the Spinoff
•As Organon builds its information technology infrastructure and transitions its data to its own systems, Organon could incur substantial additional costs and experience temporary business interruptions.
•Merck may not satisfy its obligations under various transition agreements that have been or will be executed as part of the spinoff or Organon may not have necessary systems and services in place when certain of the transition agreements expire.
•Potential indemnification liabilities to Merck pursuant to the Separation and Distribution Agreement could adversely affect Organon.
•There could be significant income tax liability if the spinoff or certain related transactions are determined to be taxable for U.S. federal income tax purposes.
•Contractual restrictions limit Organon's ability to engage in certain corporate transactions.
Risks Related to Organon's Common Stock
•The price and trading volume of Organon's Common Stock may be volatile, and stockholders could lose all or part of their investment in Organon.
•Organon cannot guarantee the timing, amount or payment of any dividends on the Common Stock.
•Certain provisions in Organon's amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of Organon, which could decrease the trading price of the Common Stock.
•Certain provisions of agreements that Organon entered into with Merck may limit Organon's ability to operate its business.
•Organon's amended and restated bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by Organon's stockholders, and the United States federal district courts as the exclusive forum for claims under the Securities Act, which could limit Organon's stockholders' ability to obtain what such stockholders believe to be a favorable judicial forum for disputes with Organon or its directors, officers or employees.
Risks Related to Organon's Business
Organon has a limited history of operating as an independent company, and its historical financial results included elsewhere in this report are not necessarily representative of what its actual financial position or results of operations would have been as an independent company and may not be a reliable indicator of its future results.
Prior to the spinoff, Merck performed various corporate functions for Organon, including information technology services, research and development, distribution, support for operations, legal, payroll, finance, tax and accounting, general administrative services and other support services. Organon's historical financial results reflect allocations of corporate expenses from Merck for these and similar functions that may be less than the comparable expenses Organon would have incurred had it operated as a separate publicly traded company. Prior to the spinoff, Organon shared economies of scope and scale in costs, employees, vendor relationships and relationships with its partners. While Organon has entered into transition agreements that govern certain commercial and other relationships between it and Merck, those arrangements may not capture the benefits to Organon's business that resulted from being integrated with the other affiliates of Merck.
Key products generate a significant amount of Organon's profits and cash flows, and any events that adversely affect the markets for Organon's leading products could adversely affect its results of operations and financial condition.
Organon's ability to generate profits and operating cash flow depends largely upon the continued profitability of its key products, such as Nexplanon, Cozaar®/Hyzaar®, Singulair® and the Ezetimibe family of products. As a result of
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Organon's dependence on key products, any event that adversely affects any of these products or the markets for any of these products could adversely affect Organon's sales, results of operations or cash flows. These adverse events could include increased costs associated with manufacturing, product shortages, increased generic or over-the-counter availability of Organon's products or competitive products, the discovery of previously unknown side effects, results of post-approval trials, increased competition from the introduction of new, more effective treatments and discontinuation or removal from the market of these products for any reason. Organon also expects that competition will continue to adversely affect the sales of these products.
Organon faces continued pricing pressure with respect to its products.
Organon faces continued pricing pressure globally and, particularly in mature markets from managed care organizations, government agencies and programs that could adversely affect its sales and profit margins. Organon expects pricing pressure to continue in the future. For example, in the United States, Organon experiences significant pricing pressure from: managed care groups, institutional and governmental purchasers, U.S. federal laws and regulations related to Medicare and Medicaid (including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the ACA and state activities aimed at regulating prices and increasing price transparency). Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, could result in further pricing pressures. In addition, in the United States, larger customers have received higher rebates on drugs in certain highly competitive categories. Organon must also compete to be placed on formularies of managed care organizations and other payors. Exclusion of a product from a formulary can lead to reduced usage in the population covered by the managed care organization or other payor. Outside the United States, numerous major markets, including the EU, the UK, China and Japan, have pervasive government involvement in health care funding and, in that regard, extensive pricing and reimbursement mechanisms and processes for pharmaceutical products. Consequently, in those markets, Organon is subject to government decision-making and budgetary actions with respect to its products. In China, pricing pressure from the Chinese government has increased, including through a series of health care reforms to accelerate generic substitution. While pricing pressure has always existed in China, health care reforms have increased this pressure in part due to the acceleration of generic substitution through the government’s volume-based procurement ("VBP") and generic quality consistency evaluation ("GQCE") programs. In Japan, the pharmaceutical industry is subject to government-mandated biennial price reductions of pharmaceutical products. Furthermore, the government can order re-pricing for specific products if it determines that use of such product will exceed certain thresholds defined under applicable re-pricing rules.
Organon faces intense competition from competitors' products.
Organon's products face intense competition from competitors' products, including lower cost generic versions of its products that have lost market exclusivity. Competitors' products may be equally safe and as effective as Organon's products but sold at a substantially lower price than Organon's products. Alternatively, Organon's competitors' products may be safer or more effective, more convenient to use, have better insurance coverage or reimbursement levels or be more effectively marketed and sold than Organon's products. Organon's efforts to compete with other companies or Organon's failure to maintain its competitive position could adversely affect its business, cash flow, results of operations, financial condition or prospects.
Organon has limited in-house discovery and early research capabilities and will continue to rely on future acquisitions, partnerships and collaborations to expand its innovative pipeline and early discovery andresearch capabilities, which may limit its ability to discover or develop new products or expand its existing products into new markets to replace the sales of products that lose patent protection, and therefore Organon may not be able to maintain its current levels of profitability.
Organon has limited in-house discovery and early research staff and facilities, and does not currently intend to extensively hire or acquire such staff or facilities in the near future. Instead, Organon intends to continue to rely on future acquisitions, partnerships and collaborations with third parties to expand its innovative pipeline, existing portfolio and innovation and early research capabilities. Organon intends to grow its business through new indications or formulations of its existing products or expansion of existing products into new markets or new geographies. However, Organon expects that its ability to do so could be limited by the scope of its limited intellectual property licenses for certain women's health products. For example, a license from Merck for Nexplanon permits use of the underlying technology solely as a contraceptive implant containing only the active pharmaceutical ingredient currently used in the product. Additionally, in December 2021, Organon signed a supplemental license with Merck that provides a limited expansion of the fields in which Organon may use the underlying technology of Nexplanon beyond contraception in exchange for milestone payments. Organon may not be able to offset any sales losses for products that lose or do not have exclusivity by growing sales in other markets. If Organon cannot produce sufficient revenues from expansion into new products, new indications or formulations of its existing products or expansion of existing products into new markets or new geographies, then Organon may not be able to maintain its current levels of profitability, and this could adversely affect Organon's business, cash flow, results of operations, financial condition or prospects.
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Organon may experience difficulties identifying acquisition opportunities or completing such transactions.
Organon intends to continue pursuing acquisitions of complementary businesses, licensing arrangements and strategic partnerships to expand its product offerings and geographic presence as part of its business strategy. Organon may not complete these transactions in a timely manner, on a cost-effective basis, or at all, and Organon may not realize the expected benefits of any acquisition, license arrangement or strategic partnerships. Such opportunities may relate to products, technologies or operations with which Organon has limited or no historical experience. For example, Organon has not historically engaged in the medical device business, but in June 2021, Organon completed the acquisition of Alydia Health, a commercial-stage medical device company. In identifying, evaluating and selecting acquisition targets, Organon may encounter intense competition from other companies having a business objective similar to Organon's. Many of these companies are well established and have extensive experience identifying and effecting these types of strategic acquisitions. Moreover, some of these competitors may possess greater financial, technical, human and other resources than Organon does. In addition, certain provisions of the tax matters agreement, which are intended to preserve the intended tax treatment of the spinoff and certain related transactions, may discourage, delay or prevent acquisition proposals or otherwise limit Organon's ability to pursue certain strategic transactions or engage in other transactions, including mergers or consolidations, for a period of time following the spinoff. Even if Organon is successful in making acquisitions, the products and technologies Organon acquires may not be successful or may require significantly greater resources and investments than it originally anticipated. Organon could experience negative effects on its results of operations and financial condition from acquisition-related charges, amortization of intangible assets and asset impairment charges. Organon could experience difficulties in integrating geographically separated organizations, systems and facilities, and personnel with diverse backgrounds. If an acquired business fails to operate as anticipated or cannot be successfully integrated with Organon's existing business, its business, financial condition, results of operations or cash flows could be materially and adversely affected.
Organon may be unable to market its pharmaceutical products or medical devices if it does not obtain and maintain required regulatory approvals or marketing authorizations.
Organon's activities, including the manufacturing and marketing of its pharmaceutical products and medical devices, are subject to extensive regulation by numerous federal and state governmental authorities in the United States, including the Food and Drug Administration ("FDA"), and by foreign regulatory authorities, including in the EU, the UK, China and Japan. In the United States, the FDA administers requirements covering the laboratory testing, clinical trials, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription pharmaceuticals and medical devices. Regulation of Organon's pharmaceutical products outside the United States also is primarily focused on drug safety and effectiveness and, in many cases, reduction in the cost of drugs. In addition, regulatory authorities such as the FDA, the EMA, the MHRA, China's National Medical Products Administration ("NMPA") and Japan’s Ministry of Health, Labour and Welfare have increased their focus on safety when assessing the benefit/risk balance of drugs. These regulatory authorities, including in China and Japan, also have substantial discretion to require additional testing, to delay or withhold registration and marketing approval and to otherwise preclude distribution and sale of a product. Organon currently markets one product in the United States regulated as a medical device, the Jada system (acquired through Organon's acquisition of Alydia Health, as described elsewhere in this report). In the future, Organon also plans to sell its medical devices in additional major international markets and will be subject to the regulatory requirements imposed in those jurisdictions. For example, in order to sell medical devices in EU member countries, Organon will need to comply with the MDR. Foreign sales outside the EU (including in the UK) are subject to the foreign government regulations of the relevant jurisdiction, and Organon will need to obtain marketing authorization by the appropriate regulatory authorities before it can commence clinical trials or marketing activities in those countries.
Organon cannot market its pharmaceutical products or medical devices or new indications or modifications to its existing products unless and until Organon has obtained all required regulatory approvals or marketing authorizations in each relevant jurisdiction. Organon's applications or submissions for regulatory approval or marketing authorization may be rejected or otherwise delayed by the FDA or other foreign regulatory authorities. For example, the FDA may issue complete response letters indicating that Organon's applications for its pharmaceutical products are not ready for approval. Once obtained, Organon must maintain approval or marketing authorization as long as it plans to market products in each jurisdiction where approval or marketing authorization is required. The FDA or other regulators may change their policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay regulatory approval or marketing authorization of Organon's future products or impact Organon's ability to modify its currently marketed products on a timely basis. Organon's failure to obtain approval, significant delays in the approval or marketing authorization process or its failure to maintain approval or marketing authorization in any jurisdiction will prevent Organon from selling the products in that jurisdiction. Organon would not be able to realize revenues for its pharmaceutical products or medical devices in any jurisdiction where it does not have approval or marketing authorization.
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Organon or its partners may fail to adequately demonstrate the safety and efficacy of any of Organon's pharmaceutical product candidates or medical devices in pre-clinical studies and clinical trials, which would prevent or delay development, regulatory approval or marketing authorization and commercialization of Organon’s product candidates.
Before obtaining regulatory approval from the FDA or other comparable foreign regulatory authorities for the sale of Organon's pharmaceutical product candidates, Organon must demonstrate through lengthy pre-clinical studies and clinical trials that its product candidates are both safe and effective for use in each target indication. Obtaining marketing authorization for Organon's devices may also require pre-clinical and clinical trials. Pre-clinical and clinical trials are difficult to design and implement, and can take many years to complete, and their ultimate outcome is uncertain. Failure can occur at any time during the pre-clinical study and clinical trial processes. Accordingly, there is a high risk of failure and Organon may never succeed in obtaining regulatory approval or marketing authorization of its product candidates.
Organon may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent receipt of regulatory approval or marketing authorization, or Organon's ability to commercialize its product candidates, including for example, inability to recruit and enroll study subjects; failure of its product candidates in pre-clinical studies or clinical trials to demonstrate safety and efficacy; receipt of feedback from the FDA and other regulatory authorities that require Organon to modify the design of its clinical trials; and negative or inconclusive clinical trial results that may require Organon to conduct additional clinical trials or abandon certain research and/or development programs.
Organon may be required to conduct additional pre-clinical studies, clinical trials or other testing of its product candidates beyond those that it currently contemplates, or Organon may be unable to successfully complete pre-clinical studies or clinical trials of its product candidates or other testing in a timely manner. If the results of these studies, trials or tests are not positive (or are only modestly positive), or if there are safety concerns, Organon may incur unplanned costs, as well as delays in its efforts to obtain regulatory approval or marketing authorization. Even if Organon receives such approval, it may be more limited or restrictive than anticipated, or be subject to additional post-marketing testing requirements.
Developments following regulatory approval or marketing authorization may adversely affect sales of Organon's pharmaceutical products or medical devices.
Even after a pharmaceutical product or medical device reaches the market, Organon continues to be subject to significant post-marketing regulatory requirements and oversight. The regulatory approvals or marketing authorizations that Organon may receive for its pharmaceutical products and medical devices will require the submission of reports to regulatory authorities and on-going surveillance to monitor the safety and efficacy of its products, may contain significant limitations related to use restrictions for specified groups, warnings, precautions or contraindications, and may include burdensome post-approval study or risk management requirements. In addition, even after a pharmaceutical product or device has obtained marketing authorization, the manufacturing processes, labeling, packaging, distribution, adverse event and device malfunction reporting, storage, advertising, promotion, import, export, recalls and recordkeeping for Organon's products will be subject to ongoing regulatory requirements, and Organon will be subject to periodic inspections. Failure to comply with any of these requirements could subject Organon to a variety of formal or informal enforcement actions by the FDA or other regulators, result in a recall or market withdrawal of Organon's products, require Organon to cease manufacturing and distribution of the products, trigger product liability or other litigation, or otherwise impact Organon's ability to realize revenues for its products.
Likewise, if previously unknown side effects, adverse events, malfunctions or other quality or safety concerns are discovered or if there is an increase in negative publicity regarding known side effects of any of Organon's products, it could significantly reduce demand for the product or require it to take actions that could negatively affect sales, including initiating corrections of a marketed product or removing the product from the market, restricting Organon's distribution or applying for marketing authorization for labeling changes. The FDA could also require Organon to conduct postmarketing studies of its products. Further, Organon is at risk for product liability and consumer protection claims and civil and criminal governmental actions related to its products, research and marketing activities. In addition, dissemination of promotional materials through evolving digital channels serves to increase visibility and scrutiny in the marketplace.
Certain developments may decrease demand for Organon's products, including the following:
•scrutiny of advertising and promotion;
•negative results in post-approval Phase 4 trials or other studies;
•review by regulatory authorities or other expert bodies of Organon's products that are already marketed based on new data or other developments in the field;
•the recall, loss or modification of regulatory approval or marketing authorization of products that are already marketed; and
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•changing government regulations regarding safety, efficacy, quality or labeling.
Certain of Organon's products currently benefit from patent protection and market exclusivity. When the patent protection and market exclusivity periods for such products expire, a significant and rapid loss of sales from those products is generally experienced. Expiry of patent protection and market exclusivity for products that contribute significantly to Organon's sales will adversely affect its business.
Organon depends upon patents to provide it with exclusive marketing rights for certain of its products for some period of time. Loss of patent protection typically leads to a significant and rapid loss of sales for that product where lower priced generic versions of that drug become available. In the case of current or future products that contribute significantly to Organon's sales, a loss of market exclusivity could materially adversely affect its business, cash flow, results of operations, financial condition or prospects. For example, the patent that provided United States market exclusivity for NuvaRing expired in April 2018 and generic competition began in December 2019. Organon experienced a rapid and substantial decline in NuvaRing sales in the United States in 2020 as a result of this generic competition. Organon expects market exclusivity for Nexplanon in the United States to expire in 2027, and market exclusivity for the majority of countries where Nexplanon is commercialized outside the United States will expire in 2025. See "Business—Products" for details, including the patent protection for certain of Organon's marketed products.
Organon depends on its patent rights for the marketing of certain of its products, and invalidation or circumvention of Organon's patent rights would adversely affect its business.
Patent protections are important to the marketing of certain of Organon's products, particularly certain of its women's health products in the United States and in most major foreign markets. Patents covering products that Organon has introduced normally provide market exclusivity, which is important for the successful marketing and sale of certain of its products.
Even if Organon succeeds in obtaining patents covering its products, third parties or government authorities may challenge or seek to invalidate or circumvent Organon's patents and patent applications. It is important for Organon's business to defend successfully the patent rights that provide market exclusivity for its products. Organon is involved in patent disputes relating to challenges to its patents or claims by third parties of infringement against it. Organon defends its patents both within and outside the United States, including by filing claims of infringement against other parties. In particular, manufacturers of generic pharmaceutical products from time to time file abbreviated new drug applications with the FDA seeking to market generic forms of Organon's products prior to the expiration of relevant patents owned or licensed by it. Patent litigation and other challenges to Organon's patents are costly and unpredictable and may deprive it of market exclusivity for a patented product or, in some cases, third-party patents may prevent Organon from marketing and selling a product in a particular geographic area, negatively affecting its business and results of operations.
Additionally, certain foreign governments have indicated that compulsory licenses to patents may be granted in the case of national emergencies or in other circumstances, which could diminish or eliminate sales and profits from those regions and negatively affect Organon's business and results of operations. Further, court decisions relating to other companies’ patents, potential legislation in both the United States and certain foreign markets relating to patents, as well as regulatory initiatives, may result in a more general weakening of intellectual property protection.
If one or more of Organon's important products lose patent protection in profitable markets, sales of those products are likely to decline significantly as a result of generic versions of those products becoming available. Organon's results of operations may be adversely affected by the lost sales unless and until it has launched commercially successful products that replace the lost sales. In addition, if products with intangible assets that were measured at fair value and capitalized in connection with acquisitions experience difficulties in the market that negatively affect product cash flows, Organon may recognize material non-cash impairment charges with respect to the value of those products.
Organon is subject to minimum purchase obligations under certain supply agreements, and if Organon fails to meet those minimum purchase requirements, its financial results may be unfavorably impacted.
Organon is subject to minimum purchase obligations under certain supply agreements, which requires Organon to purchase minimum amounts of materials critical to its product manufacturing over specified time periods. If Organon fails to meet these minimum purchase requirements, it may still be required to pay for the cost of the minimum inventory purchases. If Organon is unable to offset these payments, it could result in a lower margin. During the year ended December 31, 2021, Organon recognized $24 million in Cost of Sales pertaining to estimated unavoidable losses associated with a long-term vendor supply contract conveyed as part of the spinoff. Organon is also aware of a limited number of other arrangements that have similar provisions which could result in these types of payments. Organon does not currently expect these payments to be material; however, in the aggregate they may become material if additional amounts are identified in the future, and they could have a material adverse effect on Organon's financial condition, results of operations or cash flows.
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The health care industry in the United States has been, and will continue to be, subject to increasing regulation and political action.
Organon believes that the health care industry will continue to be subject to increasing regulation and political and legal action at both the Federal and state levels.
In 2010, the United States enacted major health care reform legislation in the form of the Patient Protection and the ACA. Since enactment of that law, various insurance market reforms have advanced and state and federal insurance exchanges were launched in 2014. The ACA also increased the mandated Medicaid rebate applicable to most branded drugs from 15.1% to 23.1% of the product's Average Manufacturer Price, expanded the rebate to Medicaid managed care utilization, and increased the types of entities eligible for the federal 340B drug discount program.
The ACA also requires pharmaceutical manufacturers to pay 70% of the cost of the medicine, including biosimilar products, when Medicare Part D beneficiaries are in the Medicare Part D coverage gap (i.e., the so-called "donut hole"). Also, pharmaceutical manufacturers are required to pay an annual non-tax deductible health care reform fee. The fee is assessed on each company in proportion to its share of prior year branded pharmaceutical sales to certain government programs, such as Medicare and Medicaid.
As discussed in "Business—Competition and the Health Care Environment," there is significant uncertainty about the future of attempts to legislate health care reforms in the United States. For example, efforts to repeal, modify, or invalidate some or all of the provisions of the ACA, some of which have been successful, create considerable uncertainties for Organon's business and other pharmaceutical manufacturers. There also has been increasing legislative and enforcement interest in the U.S. with respect to drug pricing practices. There have been, for example, several recent U.S. Congressional inquiries, hearings and proposed and enacted federal legislation and rules, as well as executive orders designed to, among other things, reduce or limit the price of drugs. Congress also is currently considering a number of bills relating to drug pricing, including the Build Back Better Act passed by the U.S. House of Representatives in November 2021, which if signed into law could, among other things, impose government negotiation of prices for Medicare Part D drugs as well as inflation-based rebates for Medicare Part B and Part D drugs. Because Organon cannot be certain of what provisions ultimately would be enacted into law, Organon also cannot predict how these or future federal legislative proposals will affect it.
In 2016, the Centers for Medicare & Medicaid Services ("CMS") issued the Medicaid rebate Final Rule that implemented provisions of the ACA effective April 1, 2016. The Final Rule provided comprehensive guidance on the calculation of Average Manufacturer Price and Best Price, which are two metrics that determine the rebates drug manufacturers are required to pay to state Medicaid programs. Under this Final Rule, among other provisions that have the effect of increasing Medicaid rebate liability, CMS requires manufacturers to include sales to the U.S. Territories in the calculation of AMP and Best Price; however, that provision has been delayed several times and currently is scheduled to take effect on January 1, 2023. On December 31, 2020, CMS published a Final Rule on the Medicaid Program, which, among other things, introduced for the first time a regulatory definition of the terms "line extension" and "new formulation." CMS defined "line extension" as "a new formulation of the drug, but does not include an abuse-deterrent formulation of the drug[.]" CMS adopted an expansive definition of "new formulation" to include "a change to the drug, including, but not limited to: an extended release formulation or other change in release mechanism, a change in dosage form, strength, route of administration, or ingredients." This expanded definition may result in certain of Organon's drugs being subject to a higher Medicaid rebate liability. The new definitions of "line extension" and "new formulation" took effect on January 1, 2022. Finally, the provisions of this December 2020 Final Rule also may affect rebates owed under the Medicaid Drug Rebate Program in certain circumstances where accumulator adjustment or similar programs are applied to Organon's drugs and the value of its assistance programs, which is intended for patients, is not counted towards the patient’s deductible or other out-of-pocket costs.
In 2020, the FDA issued a final rule implementing provisions of Section 804 of the FDCA, which allows the commercial importation of certain prescription drugs from Canada through FDA-authorized, time-limited programs sponsored by states or Indian tribes, and, in certain future circumstances, pharmacists and wholesalers. At that time, the FDA also released final guidance for industry detailing procedures for drug manufacturers to import FDA-approved prescription drug, biological, and combination products that were manufactured abroad and authorized and intended for sale in a foreign country. A trade organization brought suit, which remains pending in federal district court, challenging the commercial importation final rule. These changes could have a material adverse effect on Organon's business, cash flow, results of operations, financial condition and prospects. Changes to the health care system enacted as part of health care reform in the United States, as well as increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid and private sector beneficiaries, could result in further pricing pressures. As an example, health care reform has contributed to an increase in the number of patients in the Medicaid program under which sales of pharmaceutical products are subject to substantial rebates.
Various executive and legislative actions in the United States have been proposed, or may in the future be proposed, to mandate reduced drug prices. For example, in November 2020, CMS issued a Final Rule that was intended to be effective
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January 1, 2021, which would have instituted a new pricing system for certain prescription drugs and biologic products covered by Medicare Part B, whereby Medicare would reimburse no more than the "most favored nation price." The rule was immediately challenged in at least four federal courts and has been temporarily enjoined from going into effect. The Department of Health and Human Services has indicated that the most favored nation, or MFN, model will not be implemented without further rulemaking.
Additionally, in November 2020, the Department of Health and Human Services Office of Inspector General ("OIG") issued a Final Rule, effective January 1, 2022, that eliminates the Anti-Kickback Statute safe harbor for rebates paid to Medicare Part D plans or to pharmacy benefit managers on behalf of such plans. The effectiveness of this Final Rule was delayed as part of the Infrastructure Investment and Jobs Act, which was signed into law on November 15, 2021 and requires the Secretary of Health and Human Services not to implement, administer, or enforce the provisions of the Final Rule prior to January 1, 2026. In addition, on November 19, 2021, the House of Representatives passed a version of the Build Back Better Act that includes a provision prohibiting the implementation, administration, or enforcement of the Final Rule beginning on January 1, 2026. As a result, it remains to be seen whether, and to what extent, the provisions of this Final Rule will take effect. While Organon cannot anticipate the effects of these changes to the way that it currently contracts, the new framework could significantly alter the way it does business with Part D Plan Sponsors and PBMs on behalf of such plans.
Organon cannot predict the likelihood of additional future changes in the health care industry in general, the pharmaceutical industry in particular, or what impact they may have on its business, cash flow, results of operations, financial condition or prospects.
Organon is subject to a variety of United States, other national and international laws and regulations, and Organon may face serious consequences for violations if it fails to meet the applicable legal and regulatory requirements.
Organon is currently subject to a number of government laws and regulations and, in the future, could become subject to new government laws and regulations. The costs of compliance with such laws and regulations, or the negative results of non-compliance, could adversely affect Organon's business, cash flow, results of operations, financial condition or prospects. The costs of compliance and penalties for non-compliance may be particularly significant with respect to health care reform initiatives in the United States or in other countries, including additional mandatory discounts or fees; new laws, regulations and judicial or other governmental decisions affecting pricing, reimbursement, and market access or marketing within or across jurisdictions; new and increasing data privacy regulations and enforcement, particularly in the EU, the UK, the United States, and China; legislative mandates or preferences for local manufacturing of medical products; emerging and new global regulatory requirements for reporting payments and other value transfers to health care professionals and health care organizations; environmental regulations; and emerging and new regulations on human rights and environmental matters in the supply chain and importation restrictions, embargoes, trade sanctions and legislative or other regulatory changes.
Organon is also subject to anti-corruption and anti-money laundering laws and regulations, including the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the U.S. Foreign Corrupt Practices Act (the "FCPA"), the U.K. Bribery Act 2010 and other anti-bribery and corruption laws. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, agents, contractors and other third-party collaborators from authorizing, promising, offering, providing, soliciting or receiving, directly or indirectly, improper payments or anything else of value to or from persons in the public or private sector. The FCPA also requires U.S. public companies to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls.
In addition to selling its products internationally, Organon currently engages third parties outside the United States, and may engage additional third parties outside the United States, to sell its products internationally and to obtain necessary permits, licenses, patent registrations and other regulatory approvals. Organon has direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities and other organizations. Organon can be held liable for the corrupt or other illegal activities of its employees, agents, contractors and other third-party collaborators, even if it does not explicitly authorize or have actual knowledge of such activities. Any violations of the laws and regulations described above may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments, preclusion from participating in public tenders, breach of contract and fraud litigation, reputational harm, and other consequences.
Organon has significant global operations, which expose it to additional risks, and any adverse event could adversely affect Organon's results of operations and financial condition.
The extent of Organon's operations outside the United States is significant. For example, in 2021, Organon generated $4.9 billion in sales outside the United States, representing approximately 80% of its total Organon Products sales. Risks inherent in conducting a global business include:
•changes in medical reimbursement policies and programs and pricing restrictions in key markets;
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•multiple regulatory requirements that could restrict Organon's ability to manufacture and sell its products in key markets;
•multiple, conflicting and changing laws and regulations such as privacy regulations, tax laws, tariffs, employment laws, regulatory requirements and other governmental approvals, permits and licenses;
•trade protection measures and import or export licensing requirements, including the imposition of trade sanctions or similar restrictions by the United States or other governments;
•financial risks, such as foreign exchange fluctuations, longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for Organon's products;
•volatility of commodity prices, fuel, shipping rates that impact the costs and/or ability to supply Organon's products;
•diminished protection of intellectual property in some countries; and
•possible nationalization and expropriation.
In addition, there may be changes to Organon's business and strategic position if there is instability, disruption or destruction in a significant geographic region, regardless of cause, including health epidemics or pandemics (including the ongoing COVID-19 pandemic), riot, civil insurrection or social unrest, and natural or man-made disasters, including famine, flood, fire, earthquake, storm or disease. In addition, Organon's operations and performance may be affected by political or civil unrest or military action. As a result of global economic conditions, some parties may delay or be unable to satisfy their payment or reimbursement obligations. Job losses or other economic hardships may also affect patients' ability to afford health care as a result of increased co-pay or deductible obligations, greater cost sensitivity to existing co-pay or deductible obligations, lost health care insurance coverage or for other reasons. Further, with rising international trade tensions or sanctions, Organon's business may be adversely affected following new or increased tariffs, as well as the costs of materials, products, and commodities upon which Organon rely. As a result, changes in international trade policy, changes in trade agreements and the imposition of tariffs or sanctions by the U.S. or other countries could materially adversely affect Organon's results of operations and financial condition.
In particular, 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/financial freezes announced by the United States, European Union and other countries against Russian entities and designated individual restrictions 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 and currency exchange rates). Such actions may negatively impact the financial institutions, vendors, manufacturers, suppliers, partners and other third parties with whom Organon conducts business and therefore may negatively impact Organon.
Organon is subject to a significant number of privacy and data protection laws and regulations globally, many of which place restrictions on Organon's ability to transfer, access and use personal data across its business.
The legislative and regulatory landscape for privacy and data protection continues to evolve.
The GDPR and related implementing laws in individual EU or European Economic Area ("EEA") Member States govern the collection and use of personal health data and other personal data in the EU. The GDPR increased responsibility and liability in relation to personal data that Organon processes. It also imposes several obligations and restrictions on the ability to process (which includes collection, storage and access, analysis, and transfer of) personal data, including health data from clinical trials and adverse event reporting. The GDPR also includes requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals prior to processing their personal data or personal health data, potential notification of personal data breaches to the national data protection authorities, potential consultation obligations to national data protection authorities for certain high-risk data processing, and the security and confidentiality of the personal data. There are also new accountability requirements, such as maintaining a record of data processing, potentially conducting data protection impact assessments and appointing data protection officers. Further, the GDPR prohibits the transfer of personal data to countries outside of the EEA that are not considered by the European Commission to provide an adequate level of data protection, including to the United States, except if the data controller meets very specific requirements.
Failure to comply with the requirements of the GDPR and the related national data protection laws of the EU Member States may result in significant monetary fines and other administrative penalties as well as civil liability claims from individuals whose personal data was processed. Data protection authorities from the different EU Member States may still enforce the GDPR differently, reflecting variations that arise under national-level regulations and guidelines (e.g., labor laws,
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processing of national identification numbers), which adds to the complexity of processing personal data in the EU. Guidance at both EU level and at the national level in individual EU Member States concerning implementation and compliance practices is often updated or otherwise revised, resulting in a challenging regulatory environment.
There is, moreover, a growing trend towards required public disclosure of clinical trial data in the EU, which adds to the complexity of obligations relating to processing health data from clinical trials. Failing to comply with these obligations could lead to government enforcement actions and significant penalties against Organon, harm to its reputation, and adversely impact its business and operating results. The uncertainty regarding the interplay between different regulatory frameworks further adds to the complexity that Organon faces with regard to data protection regulation.
Additional laws and regulations enacted in the United States (such as the California Consumer Privacy Act), Europe, Asia and Latin America have increased enforcement and litigation activity in the United States and other developed markets, as well as increased regulatory cooperation among privacy authorities globally. Organon has adopted a comprehensive global privacy program to manage these evolving risks and facilitate the transfer of personal information across international borders, which has been certified as compliant with and approved by the Asia Pacific Economic Cooperation Cross-Border Privacy Rules System.
Organon depends on sophisticated software applications and computing infrastructure. Cyberattacks affecting Organon's IT systems could result in exposure of confidential information, the modification of critical data or the disruption of its worldwide operations, including manufacturing and sales operations.
Organon depends on sophisticated software applications, complex information technology systems, computing infrastructure and cloud service providers (collectively, "IT systems") to conduct critical operations. Certain of these systems are managed, hosted, provided or used by third parties, including Merck pursuant to a transition services agreement, to assist in conducting Organon's business. Disruption, degradation, destruction or manipulation of these IT systems through intentional or accidental means by Organon's employees, third parties with authorized access or cyber threat actors could adversely affect key business processes. The size and complexity of Organon's IT systems, and those of Organon's third-party providers with whom its contracts, make such systems potentially vulnerable to service interruptions. In addition, Organon and its third-party providers have experienced and expect to continue to experience phishing attempts, scanning attempts of Organon's network, and other attempts of unauthorized access to its computer environment. Such attacks are increasingly sophisticated and are made by groups and individuals with a wide range of motives and expertise, including state and quasi-state actors, criminal groups, "hackers" and others. These attacks could lead to loss of confidentiality, integrity and/or availability of Organon's data, applications or systems.
In the ordinary course of business, Organon and its third-party providers collect, store and transmit large amounts of confidential information (including trade secrets or other intellectual property, proprietary business information and personal information), and Organon must do so in a secure manner to maintain the confidentiality and integrity of such confidential information. The size and complexity of Organon and its third-party providers' systems and the large amounts of confidential information present on them also makes them potentially vulnerable to security breaches from inadvertent or intentional actions by Organon's employees, partners or vendors, or from attacks by malicious third parties. Maintaining the confidentiality, integrity, and availability of this confidential information (including trade secrets or other intellectual property, proprietary business information and personal information) is important to Organon's competitive business position. However, such information can be difficult to protect and could be compromised.
While Organon has taken steps to protect such information, and to ensure that the third-party providers on which it relies have taken adequate steps to protect such information, Organon's efforts to protect its data and IT systems or the efforts of third-party providers to protect their IT systems may not succeed. A breach of Organon's IT systems or its third-party providers' IT systems, such as cloud-based systems, or the accidental loss, inadvertent disclosure, unapproved dissemination, misappropriation or misuse of trade secrets, proprietary information, or other confidential information, whether as a result of theft, hacking, fraud, trickery or other forms of deception, or for any other cause, could enable others to produce competing products, use Organon's proprietary technology or information, and/or adversely affect Organon's business position. Further, any such interruption, security breach, or loss, misappropriation, and/or unauthorized access, use or disclosure of confidential information, including personal information regarding Organon's patients and employees, or the modification of critical data, could result in financial, legal, business, and reputational harm to Organon and could result in loss of revenue, or the loss of critical or sensitive information from Organon's or its third-party providers' databases or IT systems, or result in financial, legal, business or reputational harm to Organon and substantial remediation and recovery costs.
Organon may experience difficulties, delays or expenses in manufacturing certain of its products.
Organon or its suppliers and other manufacturing partners may experience difficulties, delays or expenses in connection with manufacturing Organon's products, such as: failure to comply with applicable regulations and quality assurance guidelines; delays related to the construction of new facilities or the expansion of existing facilities; delays related to the supply
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of key ingredients or other components of Organon's products; increased costs of key materials, packaging, or operational procedures; and other manufacturing or distribution problems, including, but not limited to, changes in manufacturing production sites and limits to manufacturing capacity resulting from regulatory requirements, changes in types of products produced and physical limitations that could impact supply. In addition, Organon could experience difficulties or delays in manufacturing its products caused by natural disasters, such as hurricanes, and public health crises and epidemics/pandemics, including the ongoing COVID-19 pandemic. Manufacturing difficulties, delays or shutdowns, as well as difficulties obtaining materials of adequate quality and quantity, can result in product shortages, leading to lost sales, a significant short- or long-term financial impact, government agency actions, and reputational harm to Organon, which are difficult to predict.
The global COVID-19 pandemic may continue to adversely impact Organon's business, operations, financial performance, results of operations, and financial condition.
Organon's business and financial results have been negatively impacted by the outbreak of COVID-19. In 2021, the negative impact of COVID-19 on Organon products sales was estimated to be approximately $400 million. A significant amount of Organon's revenue is comprised of physician prescribed products, which, despite underlying demand, have been affected by reduced access, fewer medical visits and delays in elective procedures. These impacts, as well as the prioritization of COVID-19 patients at health care providers, have resulted in reduced prescription of many products within established brands and women's health, in particular Nexplanon, throughout 2021.
The extent to which the COVID-19 pandemic impacts Organon's business going forward will depend on future developments, which may include the duration of the outbreak, its severity, the actions to contain the virus or mitigate its impact, the economic impacts of the pandemic and its impact on Organon's customers and suppliers. New and emerging variants of the virus present additional uncertainty that could lead to further restrictions that may have a negative impact on Organon's operations and the larger economy.
Even after the COVID-19 pandemic has subsided, Organon may experience significant impacts to its business as a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future.
Organon may be unable to obtain sufficient components or raw materials on a timely basis or for a cost-effective price, or Organon may experience other supply difficulties that could adversely affect both its ability to deliver its products and its results of operations and financial condition.
Organon acquires its components, materials and other requirements for manufacturing from many suppliers and vendors in various countries, including sometimes from itself for self-supplied requirements. Organon endeavors to achieve, either alone or by working closely with its suppliers, continuity of Organon's inputs and supplies, but it cannot guarantee these efforts will always be successful. For instance, Follistim and Atozet1 have been challenged by intermittent supply disruptions. Further, while efforts are made to diversify certain of Organon's sources of components and materials, in certain instances there is only a sole source or it would require months or years to establish an alternative supplier. For many of Organon's components and materials for which a single source or supplier is used, alternative sources or suppliers may exist, but Organon has made a strategic determination to use the single source or supplier. Although Organon does carry strategic inventory and maintain insurance to help mitigate the potential risk related to any related supply disruption, it cannot assure investors that such measures will always be sufficient or effective. Further, if Organon does seek recovery or damages from such supplier for any supply shortages or disruptions, such recovery or damages may be limited and not include indirect or consequential losses or any loss of revenue or lost profits. Organon's ability to achieve continuity of its supply may also be affected by public health crises and epidemics/pandemics. A reduction or interruption in supply and an inability to quickly develop acceptable alternative sources for such supply could adversely affect Organon's ability to manufacture and distribute its products in a timely or cost-effective manner, negatively impacting Organon's ability to sell its products.
Organon may not realize benefits from its investments in emerging markets.
Organon has been taking steps to increase its sales in emerging markets; however, Organon's efforts to expand sales in these markets may not succeed. Some countries within emerging markets may be especially vulnerable to periods of global financial instability or may have very limited resources to spend on health care. In order for Organon to successfully implement its emerging markets strategy, Organon must attract and retain qualified personnel. Organon may also be required to increase Organon's reliance on third-party agents within less developed markets. In addition, many of these countries have currencies that fluctuate substantially and, if such currencies devalue and Organon cannot offset the devaluations, its financial performance within such countries could be adversely affected.
For example, Organon's business in China is growing, and China is now Organon's second largest market, thereby increasing the importance of China to Organon's overall pharmaceutical business. Continued growth of Organon's business in China depends upon ongoing development of a favorable regulatory environment, sustained availability of Organon's currently marketed products within China, and Organon's ability to mitigate the impact of any trade impediments or adverse pricing
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controls. Pricing pressure in China has increased as the Chinese government has been taking steps to reduce costs, including implementing health care reform that has led to the acceleration of generic substitution, where available. While pricing pressure has always existed in China, health care reform has increased this pressure in part due to the acceleration of generic substitution through the government's VBP and GQCE programs. In 2019, the government implemented the VBP program through a tendering process for products that have generic substitutes with a GQCE approval. Mature products that have entered into the first six rounds of VBP had, on average, a price reduction of approximately 50%. Organon expects VBP to be a semi-annual process that will have a significant impact on mature products moving forward.
Furthermore, the Chinese government has started its efforts to unify the reimbursement price ("URP") between GQCE-approved generic products and the applicable originator products. The URP policy will create additional pricing and volume pressure for pharmaceutical products that are subject to the program and may adversely affect Organon's business and results of operations.
In addition, Organon currently relies on a third-party manufacturer to import, repackage and then sell a significant portion of its products in China. China’s regulatory landscape continues to evolve, including reform of the MAH system and change of registration and licensing requirements for imported pharmaceutical products. These regulatory changes may limit the ability for the third-party manufacturer to continue to sell Organon's products to downstream distributors. The regulatory authority has not made it clear in the existing regulatory framework a pathway for selling these repackaged products to public hospitals. If Organon fails to identify a pathway forward, its business in China may be adversely affected.
In addition, Organon plans to pivot in China from a primary focus on the public tender market to growth opportunities in the private retail segment. A failure to make such pivot effectively, or a failure to develop and maintain a presence in emerging markets could adversely affect Organon's business, cash flow, results of operations, financial condition or prospects.
Organon is exposed to market risk from fluctuations in currency exchange rates and interest rates.
Organon operates in multiple jurisdictions and virtually all of its sales outside the United States are denominated in currencies other than the United States dollar. Additionally, Organon has historically entered into, and will in the future enter into, business development transactions, borrowings or other financial transactions that may give rise to currency and interest rate exposure. Since Organon cannot, with certainty, foresee and mitigate against such adverse fluctuations in currency exchange rates, interest rates and inflation could negatively affect Organon's business, cash flow, results of operations, financial condition or prospects.
In order to mitigate the adverse impact of these market fluctuations, Organon enters into hedging agreements from time to time. While hedging agreements, such as currency options and forwards and interest rate swaps, may limit some of the exposure to exchange rate and interest rate fluctuations, such attempts to mitigate these risks may be costly and not always successful. As a result, currency fluctuations among Organon's reporting currency, the U.S. dollar, and other currencies in which Organon does business will affect its operating results, often in unpredictable ways.
Reliance on third-party relationships and outsourcing arrangements could materially adversely affect Organon's business.
Organon depends on third parties, including other suppliers, alliances with other pharmaceutical and biotechnology companies, and third-party service providers, for key aspects of Organon's business, including development, manufacture and commercialization of its products (including supplying its products or key ingredients of its products) and support for its IT systems. In addition, in connection with the interim operating arrangements Organon has been establishing following the spinoff, Organon may enter into agreements with third-parties in certain jurisdictions, including China, to continue its business operations in compliance with local regulatory requirements. Failure of these third parties to meet their contractual, regulatory and other obligations to Organon or the development of factors that materially disrupt the relationships between it and these third parties could adversely affect Organon's business.
The markets for Organon's products, including the women's health market, may not develop as successfully as expected.
Organon's focus on women’s health is a key component of its strategy. Organon's ability to successfully execute its growth strategy in this area is subject to numerous risks, including:
•uncertainty of the development of a market for such products;
•trends relating to, or the introduction or existence of, competing products, technologies or alternative treatments or therapies that may be more effective, safer or easier to use than Organon's products, technologies, treatments or therapies;
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•the perception of Organon's products as compared to other products;
•recommendation and support for the use of Organon's products or treatments by influential customers, such as obstetricians, gynecologists, reproductive endocrinologists and treatment centers;
•changes in government policy or regulations could impair or repeal contraception coverage mandates under the ACA or state laws, which may affect payments to Organon or impose additional coverage limitations or cost-sharing obligations on its patients;
•the availability and extent of data demonstrating the clinical efficacy of Organon's products or treatments;
•competition, including the presence of competing products sold by companies with longer operating histories, more recognizable names and more established distribution networks; and
•other technological developments.
If Organon is unable to successfully commercialize and create a significant market for its women's health products, Organon's business or prospects could be harmed.
Biosimilars carry unique regulatory risks and uncertainties, which could adversely affect Organon's results of operations and financial condition.
There are unique regulatory risks and uncertainties related to biosimilars. The regulation of the testing, approval, safety, effectiveness, manufacturing, labeling and marketing of biosimilars are subject to regulation by the FDA, the EMA and other regulatory bodies. These laws and regulations differ from, and are not as well-established as, those governing pharmaceutical products or the approval of generic pharmaceutical products. In addition, manufacturing biosimilars, especially in large quantities, is often complex and may require the use of innovative technologies to handle living cells and microorganisms. Any changes to the regulatory framework governing biosimilars or in the ability of Organon's partners to manufacture an adequate supply of biosimilars may adversely affect Organon's ability to commercialize the biosimilars in its portfolio.
Organon relies on its collaboration with Samsung Bioepis for the successful development and manufacture of Organon's biosimilars products and expects to do so for the foreseeable future.
Organon's current biosimilars portfolio consists entirely of products developed and manufactured by Samsung Bioepis for which it has worldwide commercialization rights, with certain geographic exceptions specified on a product-by-product basis. Organon's access rights to each product under its agreement with Samsung Bioepis last for 10 years from each such product's launch date on a market-by-market basis. See "Business—Third-Party Agreements—Samsung Bioepis Development and Commercialization Agreement." Organon's ability to successfully commercialize products in its biosimilars portfolio may depend upon maintaining a successful relationship with Samsung Bioepis. The success of Organon's commercialization activities may also depend, in part, on the performance, operations and regulatory compliance of Samsung Bioepis and its suppliers, over which Organon does not have control. Organon cannot assure investors that its collaboration will be successful or that it will achieve the benefits of its collaboration.
Organon has incurred substantial indebtedness, which could adversely affect Organon's financial condition and results of operations.
At December 31, 2021, Organon had outstanding indebtedness of approximately $9.1 billion, as described more fully in the Notes its financial statements. In addition, Organon may incur additional debt from time to time to finance acquisitions or for other purposes, subject to the restrictions contained in the documents that govern its indebtedness. Current or future levels of indebtedness may increase the possibility that Organon will be unable to generate cash sufficient to pay amounts due in respect of such indebtedness.
Organon's ability to issue additional debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for Organon's products, if Organon's customers or suppliers are unable to pay amounts due to Organon or there are other significantly unfavorable changes in economic conditions. Volatility in the world financial markets could increase borrowing costs or affect Organon's ability to access the capital markets. These conditions may adversely affect Organon's ability to obtain and maintain its credit ratings.
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Organon is subject to a number of restrictive covenants under its indebtedness, including customary operating restrictions and financial covenants, which could restrict Organon's ability to pay dividends or adversely affect its financing options and liquidity position.
Organon's current indebtedness contains, and any future indebtedness may contain, customary operating restrictions and financial covenants. This indebtedness may adversely affect Organon's ability to operate or grow its business or could have other material adverse consequences, including by:
•limiting Organon's ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions;
•limiting Organon's ability to refinance its indebtedness on terms acceptable to Organon or at all;
•restricting Organon's operations or development plans;
•requiring Organon to dedicate a significant portion of its cash flows from operations to paying amounts due under its indebtedness, thereby reducing funds available for other corporate purposes;
•impeding Organon's ability to pay dividends;
•making Organon more vulnerable to economic downturns; or
•limiting Organon's ability to withstand competitive pressures.
Any of these restrictions on Organon's ability to operate its business in its discretion could adversely affect its business by, among other things, limiting Organon's ability to adapt to changing economic, financial or industry conditions and to take advantage of corporate opportunities, including opportunities to obtain debt financing, repurchase stock, refinance or pay principal on Organon's outstanding debt, dispose of property, complete acquisitions for cash or debt, or make other investments. In addition, events beyond Organon's control, including prevailing economic, financial, and industry conditions, could affect Organon's ability to satisfy applicable financial covenants, and Organon cannot assure you that it will satisfy them.
Any failure to comply with the restrictions of Organon's current indebtedness, or any future financing agreements, including as a result of events beyond Organon's control, may result in an event of default under these agreements, which in turn may result in defaults or acceleration of obligations under these agreements and other agreements, giving Organon's lenders and other debt holders the right to terminate any commitments they may have made to provide Organon with further funds and to require Organon to repay all amounts then outstanding.
Risks Related to the Spinoff
As Organon builds its information technology infrastructure and transition its data to its own systems, Organon could incur substantial additional costs and experience temporary business interruptions.
In connection with the spinoff, Organon installed and implemented information technology infrastructure to support its critical business functions, including accounting and reporting, manufacturing process control, quality and compliance systems, customer service, inventory control and distribution. Organon may incur temporary interruptions in business operations if it cannot transition effectively from Merck’s existing transactional and operational systems, data centers and the transition services that support these functions as Organon replaces these systems. Organon may not be successful in implementing its new systems and transitioning its data, and Organon may incur substantially higher costs for implementation than currently anticipated. Organon's failure to avoid operational interruptions as it implements the new systems and replace Merck's information technology services, or Organon's failure to implement the new systems and replace Merck's services successfully, could disrupt Organon's business or adversely affect its results of operations. In addition, if Organon is unable to replicate or transition certain systems, Organon's ability to comply with regulatory requirements could be impaired.
Merck may not satisfy its obligations under various transaction agreements that have been or will be executed as part of the spinoff, or Organon may not have necessary systems and services in place when certain of the transition agreements expire.
In connection with the spinoff, Organon and Merck entered into the Separation and Distribution Agreement and various other agreements, including one or more transition services agreements, manufacturing and supply agreements, trademark license agreements, intellectual property license agreements, an employee matters agreement, a tax matters
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agreement and certain other commercial or operating agreements. These agreements are discussed in greater detail in the section entitled "Certain Relationships and Related Transactions." Certain of these agreements provide for the performance of services by each company for the benefit of the other for a period of time after the distribution. Organon may rely on Merck to satisfy its performance and payment obligations under these agreements. If Merck is unable to satisfy its obligations under these agreements, including its indemnification obligations, Organon could experience operational difficulties or losses.
If Organon does not have its own systems and services in place, or if Organon does not have agreements with other providers of these services when these agreements terminate, Organon may not be able to operate its business effectively and its profitability may decline. Organon is in the process of creating its own, or engaging third parties to provide, systems and services to replace many of the systems and services Merck currently provides to Organon. Organon may not be successful in effectively or efficiently implementing these systems and services or in transitioning data from Merck’s systems to Organon's. These systems and services may also be more expensive or less efficient than the systems and services Merck is expected to provide during the transition period.
Potential indemnification liabilities to Merck pursuant to the Separation and Distribution Agreement could adversely affect Organon.
The Separation and Distribution Agreement with Merck covers, among other things, provisions governing the relationship between Merck and Organon with respect to and resulting from the spinoff. Among other things, the Separation and Distribution Agreement provides for indemnification obligations designed to make Organon financially responsible for many liabilities that may exist relating to its business activities, whether incurred prior to or after the distribution, pursuant to the Separation and Distribution Agreement, including any pending or future legal matters. These liabilities, which could be material to Organon, include a general obligation to indemnify Merck for litigation or governmental proceedings relating to Organon's products, including, but not limited to, currently pending litigation relating to Fosamax, Nexplanon, and Propecia / Proscar. More specifically, Organon's obligations to indemnify Merck may in some cases include liability for antitrust litigation; provided, however, Organon will not be liable for the results of the antitrust litigation related to Zetia or the product liability litigation in Brazil related to Vioxx2. For a description of the related legal matters, see Note 12 "Contingencies" to the Financial Statements included in this report. These indemnification liabilities are intended to ensure that, as between Merck and Organon, Organon is responsible for all liabilities it assumes in connection with the spinoff and that Organon pays for any liability incurred by Merck (including directors, officers, employees and agents) related to Organon's failure to satisfy such obligations or otherwise in respect of the operation of its business, or any breach by Organon of the Separation and Distribution Agreement or any ancillary agreement. Organon's indemnity obligations to Merck under the circumstances set forth in the Separation and Distribution Agreement may be substantial.
There could be significant income tax liability if the spinoff or certain related transactions are determined to be taxable for U.S. federal income tax purposes.
Prior to completion of the spinoff, Merck received the tax opinions from its tax advisors that concluded, among other things, that the distribution of all of the outstanding Organon shares to Merck stockholders and certain related transactions qualify as tax-free to Merck and its stockholders under Sections 355 and 368 of the U.S. Internal Revenue Code, except to the extent of any cash received in lieu of fractional shares of Organon Common Stock. The Tax Opinions are not binding on the Internal Revenue Service ("IRS"). Accordingly, the IRS may reach conclusions with respect to the spinoff that are different from the conclusions reached in the Tax Opinions. The Tax Opinions rely on certain facts, assumptions, representations and undertakings from Merck and Organon regarding the past and future conduct of the companies' respective businesses and other matters, which, if incomplete, incorrect or not satisfied, could alter the conclusions of the party giving such Tax Opinion.
If the spinoff is ultimately determined to be taxable, the spinoff could be treated as a taxable dividend to Merck’s shareholders for U.S. federal income tax purposes, and Merck’s stockholders could incur significant U.S. federal income tax liabilities. In addition, Merck would recognize a taxable gain to the extent that the fair market value of Organon Common Stock exceeds Merck’s tax basis in such stock on the date of the spinoff. Each of Merck and Organon generally will be responsible for any tax-related losses imposed on Merck or Organon as a result of the failure of a transaction to qualify for tax-free treatment, to the extent that the failure to so qualify is attributable to actions, events or transactions relating to Merck's or Organon's respective stock, assets or business, or a breach of the relevant covenants made by Merck or Organon in the tax matters agreement.
Contractual restrictions limit Organon's ability to engage in certain corporate transactions.
To preserve the tax-free treatment to Merck of the spinoff, the Tax Matters Agreement restricts Organon from taking any action that prevents the distribution and related transactions from being tax-free for U.S. federal income tax purposes. In particular, under the tax matters agreement, for the two-year period following the distribution, Organon is prohibited, except in certain circumstances, from, among other things:
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•entering into any transaction resulting in the acquisition of above a certain percentage of Organon's stock or substantially all of its assets, whether by merger or otherwise;
•merging, consolidating, or liquidating;
•selling or transferring of Organon's assets beyond certain thresholds;
•issuing equity securities beyond certain thresholds;
•repurchasing Organon's capital stock;
•amending Organon's organizational documents in certain respects;
•ceasing to actively conduct certain businesses or causing Organon's applicable affiliates to cease to actively conduct certain of their businesses; and
•taking or failing to take any action that prevents the distribution and related transactions from being tax-free.
These restrictions may limit Organon's ability to pursue certain strategic transactions or other transactions that Organon may believe to be in the best interests of its stockholders or that might increase the value of Organon's business. In addition, Organon is required to indemnify Merck against any tax liabilities as a result of such actions, even if Organon did not participate in or otherwise facilitate such actions. In the event the spinoff fails to be tax-free as a result of such actions, Organon's indemnity obligation for Merck’s tax liability under the tax matters agreement would be substantial and could materially affect its cash flow.
Certain of Organon's executive officers and directors may have actual or potential conflicts of interest because of their previous positions at Merck.
Because of their former positions with Merck, certain of Organon's executive officers and directors own shares of Merck Common Stock and continue to participate in certain Merck benefit programs. Even though Organon's Board of Directors consists of a majority of directors who are independent, and Organon's executive officers who were previously employees of Merck ceased to be employees of Merck in connection with the spinoff, some Organon executive officers and directors continue to have financial interests in Merck. Continuing ownership of Merck Common Stock and continued participation in Merck benefit programs could create, or appear to create, potential conflicts of interest if Organon and Merck pursue the same corporate opportunities or face decisions that could have different implications for Organon and Merck.
Risks Related to Organon's Common Stock
The price and trading volume of Organon's Common Stock may be volatile, and stockholders could lose all or part of their investment in Organon.
The trading volume and market price of Organon's Common Stock may be volatile. This volatility could negatively impact Organon's ability to raise additional capital or utilize equity as consideration in any acquisition transactions Organon may seek to pursue, and could make it more difficult for existing stockholders to sell their shares of the Common Stock at a price they consider acceptable or at all. This volatility is caused by a variety of factors, including, among the other risks described in this report:
•Organon's liquidity and ability to obtain additional capital, including the market's reaction to any capital-raising transaction Organon may pursue;
•declining working capital to fund operations, or other signs of financial uncertainty;
•any negative decisions by the FDA or comparable regulatory bodies outside the United States regarding Organon's products and product candidates;
•market assessments of any strategic transaction or collaboration arrangement Organon may pursue;
•sales of substantial amounts of Organon's Common Stock, or the perception that substantial amounts of Organon's Common Stock may be sold, by stockholders in the public market;
•changes in earnings estimated by securities analysts or Organon's ability to meet those estimates;
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•issuance of new or updated research or reports by securities analysts or changed recommendations for Organon's Common Stock; and
•significant advances made by competitors that adversely affect Organon's competitive position.
In addition, the stock market in general, and the market for stock of companies in the life sciences and pharmaceutical industries in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of comparable companies. In the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against a company. This type of litigation, if instituted against Organon, could result in substantial costs and a diversion of its management’s attention and resources.
Organon cannot guarantee the timing, amount or payment of any dividends on the Common Stock.
Organon currently expects that it will continue to pay quarterly cash dividends. The timing, declaration, amount and payment of any future dividends to stockholders will fall within the discretion of Organon's Board of Directors. The Board of Directors' decisions regarding the payment of dividends will depend on many factors, such as Organon's financial condition, earnings, corporate strategy, capital requirements, debt service obligations, industry practice, legal requirements, regulatory constraints, and other factors that the Board deems relevant. Organon's ability to pay any dividends will depend on its ongoing ability to generate cash from operations and access capital markets.
Certain provisions in Organon's amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of Organon, which could decrease the trading price of the Common Stock.
Organon is a Delaware corporation, and its amended and restated certificate of incorporation, bylaws, and Delaware law each contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and encouraging prospective acquirors to negotiate with Organon's Board of Directors rather than to attempt a hostile takeover. Specifically, because Organon has not chosen to be exempt from Section 203 of the Delaware General Corporation Law, this provision could also delay or prevent a change of control that stockholders may favor.
Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation may not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or their affiliates becomes the holder of more than 15% of the corporation’s outstanding voting stock.
In addition, Organon's amended and restated certificate of incorporation and bylaws include additional provisions that may have anti-takeover effects and may delay, deter or prevent a takeover attempt that Organon's stockholders might consider in their best interests. For example, Organon's amended and restated certificate of incorporation and bylaws:
•permit Organon's Board of Directors to issue one or more series of preferred stock with such powers, rights and preferences as the Board of Directors shall determine;
•subject to a three-year sunset starting with Organon's first annual meeting of stockholders, provide for a classified Board of Directors, with each class serving a staggered three-year term, which could have the effect of making the replacement of incumbent directors more time consuming and difficult;
•provide that as long as Organon's Board of Directors is classified, Organon's directors can be removed for cause only;
•prohibit stockholder action by written consent;
•provide that special meetings of stockholders can be called only by the Board of Directors;
•provide that vacancies on the Board of Directors could be filled only by a majority vote of directors then in office, even if less than a quorum, or by a sole remaining director; and
•establish advance notice requirements for stockholder proposals and nominations of candidates for election as directors.
Organon believes these provisions will protect its stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with Organon's Board of Directors and by providing its Board of Directors with more
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time to assess any acquisition proposal. These provisions are not intended to make Organon immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that Organon's Board of Directors determines is not in the best interests of Organon and its stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors. In addition, these limitations may adversely affect the prevailing market price and market for Organon's Common Stock if they are viewed as limiting the liquidity of its stock or discouraging takeover attempts in the future.
Certain provisions of agreements that Organon entered into with Merck may limit Organon's ability to operate its business.
Certain of the agreements that Organon entered into with Merck require Merck's consent to any assignment by Organon of its rights and obligations under the agreements. The consent and termination rights set forth in these agreements might discourage, delay or prevent a change of control that stockholders may consider favorable.
Organon's amended and restated bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by Organon's stockholders, and the United States federal district courts as the exclusive forum for claims under the Securities Act, which could limit Organon's stockholders' ability to obtain what such stockholders believe to be a favorable judicial forum for disputes with Organon or its directors, officers or employees.
Organon's amended and restated bylaws provide that, unless Organon selects or consents to the selection, in writing, of an alternative forum, all internal corporate claims, which include claims in the right of Organon company (i) that are based upon a violation of a duty by a current or former director, officer, employee or stockholder in such capacity or (ii) as to which the Delaware General Corporation Law confers jurisdiction upon the Court of Chancery, will, to the fullest extent permitted by law, be exclusively brought in the Court of Chancery of the State of Delaware or, if such court does not have jurisdiction, another state court or a federal court located within the State of Delaware.
Furthermore, unless Organon selects or consents to the selection of an alternative forum, the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Organon's exclusive forum provision does not apply to suits brought to enforce any liability or duty created by the Exchange Act, and investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder.
These exclusive provisions may limit a stockholder's ability to bring a claim in a judicial forum that he, she or it believes to be favorable for disputes with Organon or its directors, officers or other employees, which may discourage such lawsuits. It is possible that a court could find these exclusive forum provisions inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, and Organon may incur additional costs associated with resolving such matters in other jurisdictions, which could materially adversely affect Organon's business, financial condition and results of operations and result in a diversion of the time and resources of its management and board of directors.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Organon's corporate headquarters is located in Jersey City, New Jersey. Organon also maintains operational headquarters in Pennsylvania. Organon owns and operates six manufacturing facilities in Campinas, Brazil, Cramlington, United Kingdom, Heist, Belgium, Oss Pharma, the Netherlands, Panaan, Indonesia and Xochimilco, Mexico.
Item 3. Legal Proceedings
We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, claims or litigation relating to intellectual property, product liability, securities law, breach of contract and tort, or allegations of violation of United States and foreign competition law, labor laws, consumer protection laws and environmental laws and related regulations. We operate in multiple jurisdictions and, as a result, claims in one jurisdiction may lead to claims or regulatory penalties in other jurisdictions. There can be no assurance as to the ultimate outcome of a legal proceeding; however, we intend to defend vigorously against any pending or future claims and litigation, other than matters deemed appropriate for settlement. We accrue a liability for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims. For a discussion of legal matters as of December 31, 2021, please See Note 12 to our financial statements included in this report, which is incorporated into this item by reference.
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Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Organon's Common Stock is listed on the New York Stock Exchange under the symbol "OGN." As of March 14, 2022, there were 79,886 holders of record of Organon's Common Stock. This number does not include persons who hold Organon's Common Stock in nominee or "street name" accounts through brokers or banks.
Dividends
1.In August 2021, Organon'sBoard of Directors declared a quarterly dividend of $0.28 for each issued and outstanding share of Organon's Common Stock. The dividend was paid on September 13, 2021 to stockholders of record at the close of business on August 23, 2021.
2.In November 2021, Organon's Board of Directors declared a quarterly dividend of $0.28 for each issued and outstanding share of Organon’s Common Stock. The dividend was paid on December 16, 2021 to stockholders of record at the close of business on November 22, 2021.
3.In February 2022, Organon's Board of Directors declared a quarterly dividend of $0.28 for each issued and outstanding share of Organon's Common Stock. The dividend was paid on March 17, 2022 to stockholders of record at the close of business on February 28, 2022.
4.The declaration of dividends is subject to the discretion of Organon's Board. The Board is committed to continuing to pay regular cash dividends; however, there can be no assurance as to future dividends. The Board will consider factors such as financial results, capital requirements, financial condition and any other factors it deems relevant. For additional information, see "Risk Factors—Organon cannot guarantee the timing, amount or payment of any dividends on its Common Stock".
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Performance Graph
The following graph compares the cumulative total stockholder returns for the period from June 2, 2021 (the effective date of the registration of Organon's Common Stock) to December 31, 2021 for (i) Organon's Common Stock; (ii) the S&P 500 Index; and (iii) the NYSE Arca Phramaceutical Index. The graph assumes an investment of $100 on June 2, 2021 (first day of trading activity) through the last trading day of fiscal 2021. The calculation of cumulative stockholder return on the S&P 500 Index and the NYSE Arca Phramaceutical Index include reinvestment of dividend. The performance shown is not necessarily indicative of future performance.
Equity Compensation Plan Information
See Part III, Item 12 "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters"
Item 6. [ Reserved ]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Organon makes statements in this Annual Report on Form 10-K, and Organon may from time to time make other written reports and oral statements, regarding its outlook or expectations for financial, business or strategic matters regarding or affecting Organon that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, all of which are based on management's current expectations and are subject to risks and uncertainties which change over time and may cause results to differ materially from those set forth in the statements. One can identify these forward-looking statements by their use of words such as "anticipates," "expects," "plans," "will," "estimates," "forecasts," "projects" and other words of similar meaning, or negative variations of any of the foregoing. One can also identify them by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements include, but are not limited to, statements relating to Organon’s growth and acquisition strategies, financial results, product development, product approvals, product potential and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ materially from Organon's forward-looking statements. These factors may be based on inaccurate assumptions and are subject to a broad variety of other risks and uncertainties. No forward-looking statement can be guaranteed and actual future results may vary materially. The factors described in Part I. Item 1A. Risk Factors of this report
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or otherwise described in Organon's filings with the SEC, provide examples of risks, uncertainties and events that may cause Organon's actual results to differ materially from the expectations expressed in its forward-looking statements, including, but 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;
•the impact of the global COVID-19 pandemic and any future pandemic, epidemic, or similar public health threat on Organon's business, operations and financial performance;
•changes in government laws and regulations in the United States and other jurisdictions, including laws and regulations governing the research, development, approval, clearance, manufacturing, supply, distribution, and/or marketing of Organon's products and related intellectual property, environmental regulations, and the enforcement thereof affecting Organon's business;
•efficacy or safety concerns with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales;
•delays or failures to demonstrate adequate efficacy and safety of Organon's product candidates in pre-clinical and clinical trials, which may prevent or delay the development, approval, clearance, or commercialization of Organon's product candidates;
•difficulties in operating as an independent company;
•costs and temporary business interruptions related to the separation;
•future actions of third-parties, including significant changes in customer relationships or changes in the behavior and spending patterns of purchasers of health care products and services, including delaying medical procedures, rationing prescription medications, reducing the frequency of physician visits and forgoing health care insurance coverage;
•legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental claims and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products;
•lost market opportunity resulting from delays and uncertainties in clinical trials and the approval or clearance process of the U.S. FDA and other regulatory authorities;
•cyberattacks on, or other failures, accidents, or security breaches of, Organon's or third-party providers' information technology systems, which could disrupt Organon's operations;
•increased focus on privacy issues in countries around the world, including the United States, the European Union, and China, and a more difficult legislative and regulatory landscape for privacy and data protection that continues to evolve with the potential to directly affect Organon's business, including recently enacted laws in a majority of states in the United States requiring security breach notification;
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•changes in tax laws including changes related to the taxation of foreign earnings;
•loss of key employees or inability to identify and recruit new employees;
•changes in accounting pronouncements promulgated by standard-setting or regulatory bodies, including the Financial Accounting Standards Board and the SEC, that are adverse to Organon; and
•economic factors over which Organon has no control, including changes in inflation, interest rates and foreign currency exchange rates.
It is not possible to predict or identify all such factors. Consequently, one should not consider the above list or any other such list to be a complete statement of all potential risks or uncertainties. Further, any forward-looking statement speaks only as of the date on which it is made, and Organon undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by law.
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General
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist the reader 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 Consolidated Financial Statements included in Part II, Item 8 of this 2021 Form 10-K to enhance the understanding of our results of operations, financial condition and cash flows.
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 are trademarks of the Organon group of companies.
Separation from Merck
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 combined financial statements were prepared on a standalone basis and were derived from Merck’s consolidated financial statements and accounting records.
For the period subsequent to June 2, 2021, as a standalone publicly traded company, Organon presents its financial statements on a consolidated basis. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
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 Part II, Item 8. Note 19 for additional details).
Key Trends Affecting Our Results of Operations
•Generic Competition: The majority of our established brands products are beyond market exclusivity. However, these products continue to represent a significant value opportunity arising from long-term sustainable revenue streams and well-established supply chains that together generate significant operating profit relative to low promotional and development expenses.
•Sustained Shift Towards Long-Acting Reversible Contraceptives: Although daily contraceptive pills remain the largest market segment, the Long-Acting Reversible Contraceptives ("LARC") market segment, which includes Nexplanon® (etonogestrel implant) (sold as Implanon NXTTM in some countries outside the US), has experienced significant growth in the years leading up to 2019 due to a sustained shift from daily oral contraception to LARC. This was driven by payors, providers and patients looking for options beyond commonly used daily contraceptive pills. The COVID-19 pandemic negatively affected the LARC segment during 2021 and 2020 due to clinic closures and the postponement of non-essential medical procedures during country lockdowns. However, LARC segment growth quickly rebounded during months when clinic restrictions were removed and the sustained shift to LARC is expected to continue with fundamental drivers unchanged.
•Increased Access to Fertility Solutions: We believe governments and payors are implementing favorable policies across major markets that, in turn, drive growth in the market for women’s health therapies. For example, in the United States, there has been an increase in fertility insurance mandates and employer coverage, albeit subject to certain exemptions.
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•Emergence of Biosimilars: Biologics continue to experience strong growth trends. However, given the high cost of many of these biologics treatments, biosimilars are a more affordable alternative and represent a significant opportunity for patients, providers, and payors once a biologics product loses patent protection. Moreover, a significant number of biologics are expected to lose exclusivity over the next decade, representing a large opportunity for more biosimilar approvals.
•Increased Competitive Pressures: The markets in which we conduct our business and the pharmaceutical industry in general are highly competitive and highly regulated. Our competitors include other worldwide research-based pharmaceutical companies, smaller research companies with more limited therapeutic focus and generic drug manufacturers.
Recent Developments
Business Development
In February 2022, Organon acquired the product rights 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 to acquire the rights to these products in Vietnam will close in the first half of 2022 and is subject to customary closing conditions, including regulatory approval.
In December 2021, Organon completed its acquisition of Forendo Pharma, a clinical-stage drug development company focused on novel treatments in women’s health. Forendo is pioneering the science of intracrinology, addressing disease through a novel, tissue-specific approach. Its lead clinical compound is an investigational, potentially first-in-class oral 17β-hydroxysteroid dehydrogenase type 1 (HSD17B1) inhibitor in early development for endometriosis, being evaluated for its potential effect on endometriotic lesions. Total consideration includes a $75 million upfront payment, the assumption of approximately $10 million of Forendo debt, payments upon the achievement of certain development and regulatory milestones of up to $270 million and commercial milestones payments of up to $600 million, which together could amount to total consideration of $955 million. Contingent consideration will be paid by Organon upon achievement and the liability recorded once it is deemed probable of occurrence. The transaction was accounted for in 2021 as an asset acquisition, as substantially all of the value was concentrated in a single identifiable asset. During the year ended December 31, 2021, the Company recorded $79 million, which consisted of the $75 million upfront payment, the assumption of debt of $10 million and other net assets, as Research and Development expense. The Company also incurred $5 million of transaction related expenses reflected in Selling, General and Administrative expenses.
In July 2021, Organon and ObsEva entered into a license agreement whereby Organon licensed the global development, manufacturing and commercial rights to ebopiprant (OBE022) from ObsEva. Ebopiprant is an investigational, orally active, selective prostaglandin F2α (PGF2α) receptor antagonist being evaluated as a potential treatment for preterm labor by reducing inflammation and uterine contractions. Under the terms of the license agreement, Organon gained exclusive worldwide rights to develop and commercialize ebopiprant. ObsEva is entitled to receive tiered double-digit royalties on commercial sales, up to $90 million in development and regulatory milestone payments, and up to $385 million sales-based milestone payments that will be paid by Organon upon achievement of the contractual milestone and the liability recorded once it is deemed probable of occurrence. Upon execution of the agreement, Organon made a $25 million upfront payment, which was recorded as Research and development expense during 2021.
In June 2021, Organon completed its acquisition of Alydia Health, a commercial-stage medical device company. Alydia’s device, the Jada system, is intended to provide control and treatment of abnormal postpartum uterine bleeding or hemorrhage when conservative management is warranted. The transaction consideration included a $219 million upfront payment. Additionally, there is a $25 million sales based contingent milestone payment that will be paid by Organon upon achievement and the liability recorded once it is deemed probable of occurrence. The transaction was accounted for as an asset acquisition as substantially all of the value was concentrated in a single identifiable asset. This resulted in an intangible of $247 million attributed to the Jada system device. This asset is subject to amortization on a straight-line basis over its expected useful life of 11 years. In addition to the intangible asset, Organon also recorded other net liabilities of $7 million, a deferred tax liability of $44 million related to the intangible asset, and compensation expense of $23 million, which was recorded in Selling General and Administrative Expenses. Of the $23 million of compensation expense, $19 million was related to accelerated vesting of Alydia stock-based compensation awards.
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Debt
In April 2021, in connection with the Separation, Organon Finance 1 LLC (“Organon Finance 1”), a subsidiary of Merck, issued €1.25 billion aggregate principal amount of 2.875% senior secured notes due 2028, $2.1 billion aggregate principal amount of 4.125% senior secured notes due 2028 and $2.0 billion aggregate principal amount of 5.125% senior unsecured notes due 2031 (collectively, “the Notes”). Interest payments are due semiannually on October 30 and April 30. As part of the Separation, on June 2, 2021, Organon and a wholly-owned Dutch subsidiary of Organon (the “Dutch Co-Issuer”) assumed the obligations under the Notes as co-issuers, Organon Finance 1 was released as an obligor under the Notes, and certain subsidiaries of Organon agreed to guarantee the Notes. Each series of Notes was issued pursuant to an indenture dated April 22, 2021, between Organon and U.S. Bank National Association. Organon and the Dutch Co-Issuer assumed the obligations under the Notes pursuant to a first supplemental indenture to the relevant indenture, and the guarantors agreed to guarantee the Notes pursuant to a second supplemental indenture to the relevant indenture.
Also upon Separation on June 2, 2021, Organon entered into a 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.
Borrowings made under the Revolving Credit Facility initially bear interest (i) in U.S. Dollars at 2.00% in excess of an Adjusted London Interbank Offered Rate (“Adjusted LIBOR”) (subject to a floor of 0.00%) or 1.00% in excess of an alternate base rate (“ABR”), at our option and (ii) in euros, at 2.00% in excess of an adjusted Euro Interbank Offer Rate (“Adjusted EURIBOR”). The Term Loan B Facility bears interest (i) denominated in U.S. Dollars, at 3.00% in excess of Adjusted LIBOR (subject to a floor of 0.50%) or 2.00% in excess of ABR, at our option and (ii) denominated in euros, at 3.00% in excess of Adjusted EURIBOR (subject to a floor of 0.00%). The interest rate on revolving loans under the Revolving Credit Facility is subject to a step-down based on meeting a leverage ratio target and is subject to a commitment fee which applies to the unused portion of the revolving facility, initially equal to 0.50% and subject to a step-down to 0.375% based on meeting a leverage ratio target. The Revolving Credit Facility is also subject to customary financial covenants.
Organon used the net proceeds from the Notes offering, together with available cash on its balance sheet and borrowings under senior secured credit facilities, to distribute $9.0 billion to Merck and to pay fees and expenses related to the Separation. On December 23, 2021, the Company made a discretionary prepayment of $100 million on the U.S. Dollar denominated term loan. As of December 31, 2021, Organon is in compliance with all financial covenants and no default or event of default has occurred.
Net Investment Hedge
In each quarter subsequent to the Separation, €1.75 billion in the aggregate of both the euro-denominated term loan (€750 million) and 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 a foreign operation. As a result, $162 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 year ended December 31, 2021, respectively.
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.
The negative impact of the COVID-19 pandemic to Organon sales was approximately $400 million in each of the years 2021 and 2020. 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/Implanon NXT, throughout 2020 and 2021.
We believe that global health systems and patients continue to adapt to the evolving impacts of the COVID-19 pandemic, and although we experienced recoveries during 2021, ongoing negative impacts persisted during most of 2021 principally affecting products within established brands and women’s health, primarily Nexplanon/Implanon NXT.
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Operating expenses in 2021 were higher compared to 2020 primarily due to lower promotional and selling costs incurred in 2020 attributable to the COVID-19 pandemic as well as incremental costs associated with establishing Organon as a standalone company.
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Operating Results
Sales Overview
U.S. plus international may not equal total due to rounding.
Worldwide sales were $6.3 billion in 2021, a decrease of 3% compared with 2020. The sales decline is primarily due to ongoing generic competition for products within the established brands business, particularly for cardiovascular products Zetia and Vytorin (ezetimibe and simvastatin), an expiration of a distribution agreement in December 2020 for Rosuzet in Korea, lower sales of respiratory products including Singulair (montelukast) and Dulera (mometasone furoate and formoterol fumarate dihydrate), generic competition for women’s health product NuvaRing (etonogestrel/ethinyl estradiol vaginal ring) and the generic etonogestrel/ethinyl estradiol vaginal ring, as well as the negative impact of volume-based procurement ("VBP") in China. In addition, the COVID-19 pandemic continued to negatively affect sales in 2021 across several markets. The overall sales decline was offset by higher sales of women's health products Nexplanon/Implanon NXT, Follistim AQ (follitropin beta injection) and ganirelix acetate injection due to higher demand, and higher sales of biosimilars resulting from the continued uptake of Renflexis and Ontruzant in the United States as well as the favorable impact of foreign exchange.
Worldwide sales were $6.5 billion in 2020, a decline of 16% compared with 2019, primarily due to generic competition for women’s health product NuvaRing, and ongoing generic competition for products within the established brands business, particularly for respiratory products Singulair and Nasonex, and cardiovascular products Zetia and Vytorin. As described above, the COVID-19 pandemic negatively affected sales in 2020, contributing to declines in established brands, particularly respiratory and cardiovascular products, as well as declines in women’s health products, particularly Nexplanon, Follistim AQ and Orgalutran. The sales decline was partially offset by revenue resulting from an arrangement for the sale of generic etonogestrel/ethinyl estradiol vaginal ring, higher sales of biosimilars resulting from the continued uptake of Renflexis in existing markets and the launch of Ontruzant into new markets, as well as higher sales of cardiovascular product Atozet.
The loss of exclusivity ("LOE") negatively impacted sales by approximately $300 million for 2021 compared to 2020 based on the decrease in volume period over period. Additionally, the VBP in China continues to unfavorably affect a number of our products with an impact to sales of approximately $170 million for 2021 compared to 2020 based on the decrease in volume period over period.
Organon’s operations include a portfolio of products. Highlights of the sales of Organon’s products for 2021, 2020 and 2019 are provided below. See Note 18 “Product and Geographic Information” to the Consolidated Financial Statements for further details on sales of our products.
Women’s Health
Contraception
Worldwide sales of Nexplanon/Implanon NXT, a single-rod subdermal contraceptive implant, increased 13% in 2021 primarily due to favorable impact from pricing and increased demand in the United States, favorable impact from the timing of tenders in Latin America, and higher demand and recovery from the COVID-19 pandemic in the international markets.
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Worldwide sales of Nexplanon/Implanon NXT declined 14% in 2020 primarily due to lower demand in the United States and in the EU resulting from the COVID-19 pandemic.
Worldwide sales of NuvaRing, a vaginal contraceptive product, declined 19% in 2021 primarily due to ongoing generic competition in the United States and the EU. We expect a continued decline in NuvaRing sales as a result of generic competition. Worldwide sales of NuvaRing sales declined 73% in 2020 due to generic competition in the United States resulting from patent expiration in the United States. In addition to sales of branded NuvaRing, we have an agreement with a generic manufacturer that authorizes the sale of 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 $73 million, $148 million and $2 million for 2021, 2020 and 2019, respectively. Revenues for 2021 primarily reflect our share of the profits. Revenues for 2020 and 2019 reflect supply sales of the generic product to the manufacturer. The decline in revenue for 2021 is due to the entry of a new market participant. Given the nature of this arrangement, we expect revenue under this arrangement to continue to decline significantly in 2022.
Fertility
Worldwide sales of Follistim AQ (marketed in most countries outside the United States as Puregon), a fertility treatment, increased 23% in 2021, primarily due to continuous volume growth in the United States, as well as recovery from the COVID-19 pandemic in the United States and China. Worldwide sales of Follistim AQ declined 20% in 2020 largely due to lower global demand resulting from the COVID-19 pandemic.
Worldwide sales of ganirelix acetate injection (marketed in certain countries outside the United States as Orgalutran), a fertility treatment, increased 37% in 2021 primarily due to favorable pricing in the United States, volume growth in Europe and Canada, and China, as well as recovery from the COVID-19 pandemic in China. Worldwide sales of ganirelix acetate injection declined 28% in 2020 primarily due to lower pricing in the United States, as well as lower demand in international markets attributable both to the COVID-19 pandemic and generic competition.
Biosimilars
The following biosimilar products are part of a development and commercialization agreement between Organon and Samsung Bioepis entered into in 2013. See Note 4 to the Consolidated Financial Statements. Our commercialization territories under the agreement vary by product as noted below.
Renflexis is a biosimilar to Remicade (infliximab) (a trademark of Janssen Biotech, Inc.) for the treatment of certain inflammatory diseases. Sales growth in 2021 and 2020 was driven primarily by continued demand growth in the United States since launch in 2017 as well as growth in Canada. We have commercialization rights to Renflexis in countries outside the EU, 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 adenocarcinoma. For 2021, sales reflect uptake since the July 2020 launch in the United States partially offset by a decrease in the EU reflecting increasing competitive pressures and tenders lost. We have commercialization rights to Ontruzant in countries outside of Korea and China. Sales growth in 2020 was driven by the launch in Brazil.
Brenzys (etanercept) is a biosimilar to Enbrel (etanercept) (a trademark of Immunex Corporation) for the treatment of certain inflammatory diseases. Sales in 2021 decreased 15% primarily due to lower demand in Brazil. We have commercialization rights to Brenzys in countries outside of the United States, the E.U., Korea, China and Japan. Sales in 2020 were relatively flat compared to 2019.
Recent Launches
Aybintio is a biosimilar to Avastin (bevacizumab) (a trademark of Genentech, Inc.) for the treatment of metastatic carcinoma of the colon or rectum, metastatic non-squamous, non-small cell lung cancer, metastatic renal cell carcinoma,
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metastatic cervical cancer, epithelial ovarian, fallopian tube, or primary peritoneal cancer and metastatic breast cancer. We recorded sales of $36 million during 2021, with minimal sales during 2020 due to the approval of Aybintio in the EU in August 2020 and its launch in September 2020. We currently have no plan for the timing of any launch of Aybintio in the United States nor do we know when such timing would be determined. We have experienced increased competition, including pricing pressure, which is expected to impact our sales in 2022 and forward. We have commercialization rights to Aybintio in the United States, Canada, Germany, Italy, France, the UK and Spain.
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 in the United States in June 2023 and outside of the United States starting in 2021. 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 $13 million during 2021, with no comparable sales during 2020.
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
Combined global sales of Zetia (marketed in most countries outside of the United States as Ezetrol) and Vytorin (marketed outside of the United States as Inegy), medicines for lowering LDL cholesterol, decreased 18% and 24% in 2021 and 2020, respectively, primarily driven by lower sales of Ezetrol in Japan, as well as lower sales of Ezetrol and Inegy in the EU. The patent that provided market exclusivity for Ezetrol in Japan expired in September 2019 and generic competition began in June 2020. The EU patents for Ezetrol and Inegy expired in April 2018 and April 2019, respectively. Accordingly, we are experiencing sales declines in these markets as a result of generic competition and expect the declines to continue. Higher demand for Ezetrol in China during 2021, resulting from expanded access, partially offset the sales decline.
Sales of Atozet (ezetimibe and atorvastatin calcium) (marketed outside of the United States), a medicine for lowering LDL cholesterol, remained relatively flat 2021, primarily due to increased competition in Germany, partially offset by demand increase in France and the Asia Pacific region. Sales of Atozet grew 16% in 2020 primarily due to higher demand in most markets, particularly in the EU, Japan and other countries in the Asia Pacific region.
Sales of Rosuzet (ezetimibe and rosuvastatin calcium) (marketed outside of the United States), a medicine for lowering LDL cholesterol, declined 48% in 2021 due to the expiration of a distribution agreement in Korea in December 2020, partially offset by higher demand and favorable pricing in Japan. Sales of Rosuzet grew 8% in 2020 primarily due to higher demand in Korea and 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, declined 7% in 2021 primarily due to continued generic competition in Japan and the Asia Pacific region, market decline in China, lower demand in the United States, and lower sales in Canada as sales in 2020 were higher due to competitor supply shortages. Combined global sales of Cozaar and Hyzaar declined 13% in 2020 primarily due to lower demand in China, Japan and the EU.
Worldwide sales of Zocor (simvastatin), a statin for modifying cholesterol, decreased 16% in 2021, primarily due to lower volumes in China due to the VBP impact. Worldwide sales of Zocor declined 31% in 2020 primarily due to lower demand in China.
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Respiratory
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, decreased 11% in 2021 primarily attributable to the impact of VBP in China, lower volume in Japan, Europe and Canada due to generic competition, and the impact of the COVID-19 pandemic in the Middle East region. The sales decline was partially offset by the market recovery from the COVID-19 pandemic in China. Worldwide sales of Singulair declined 34% in 2020 primarily due to lower demand in China and Japan attributable in part to the COVID-19 pandemic.
Global sales of Nasonex, an inhaled nasal corticosteroid for the treatment of nasal allergy symptoms, decreased 6% in 2021 primarily driven by generic competition in Japan, lower demand impacted by the COVID-19 pandemic across several markets in the United States, Latin America, and Europe, partially offset by higher demand in China. Global sales of Nasonex declined 26% in 2020 primarily due to continued generic competition in Japan, as well as lower demand in several other international markets resulting from the COVID-19 pandemic, partially offset by higher demand in China.
Global sales of Dulera, a combination medicine for the treatment of asthma, decreased 15% in 2021, largely due to significant buy-in during 2020 related to the COVID-19 pandemic. Global sales of Dulera increased 2% in 2020 due to higher demand in Canada.
Non-Opioid Pain, Bone and Dermatology
Sales of Arcoxia (etoricoxib) (marketed outside of the United States) for the treatment of arthritis and pain decreased 5% in 2021 primarily due to the impact of VBP in China and lower demand in the Asia Pacific region attributable to the COVID-19 pandemic. Sales of Arcoxia declined 11% in 2020 primarily due to lower demand in the Asia Pacific region related to the COVID-19 pandemic, partially offset by higher demand in the EU.
Other
Worldwide sales of Proscar for the treatment of symptomatic benign prostate enlargement declined 33% in 2021 primarily due to lower performance reflecting the impact of VBP in China. Worldwide sales of Proscar declined 13% in 2020 primarily due to lower demand in China.
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Costs, Expenses and Other
Restructuring costs 3 * 60 * 78
Other (income) expense, net 279 * 35 * 66
* Calculation not meaningful.
Cost of Sales
Cost of sales includes expenses for the amortization of intangible assets which totaled $103 million in 2021, $86 million in 2020 and $284 million in 2019. Cost of sales increased 12% in 2021 primarily due to an increase in manufacturing and freight costs, as well as certain costs related to tolling arrangements with Merck which were not in place in 2020. During 2021, the Company recognized $24 million in Cost of sales pertaining to estimated unavoidable losses associated with a long-term vendor supply contract conveyed as part of the Separation. Due to increased competition during 2021, which resulted in the loss of contract tenders in certain markets and pricing pressure, the Company recorded an impairment charge of $7 millionrelated to a product right for a biosimilar product. Cost of sales decreased 7% in 2020, primarily attributable to the decline in amortization expense for the intangible assets of Nasonex, Clarinex and Atozet, which were fully amortized at the end of 2019.
Gross margin was 62.2%, 67.6% and 70.8% in 2021, 2020 and 2019, respectively. The gross margin decline in 2021 compared to 2020 reflects stand up costs, certain costs related to tolling arrangements with Merck, which have lower gross margin percentages compared to product sales, higher amortization expense, as well as the $24 million charge associated with the long-term vendor supply contract conveyed to Organon and the $7 million of impairment charge related to a biosimilar product. The gross margin decline in 2020 compared with 2019 reflects pricing pressure and product mix, partially offset by lower amortization of intangible assets as noted above.
Selling, General and Administrative
Selling, general and administrative expenses increased 23% in 2021 due to costs incurred to establish Organon as a standalone entity, higher employee related costs, and higher selling and promotional costs. Selling, general and administrative expenses declined 6% in 2020 primarily due to lower selling and promotional costs, reflecting lower travel and meeting expenses due in part to the impact of the COVID-19 pandemic. These declines were partially offset by costs incurred to establish Organon as a standalone entity.
Research and Development
Research and development expenses more than doubled in 2021 primarily due to the $79 million charge for the acquisition of Forendo Pharma, the $25 million upfront payment related to the license agreement with ObsEva, higher expenses related to clinical development, and higher employee related costs incurred to establish Organon as a standalone entity. Research and development expenses declined 5% in 2020 primarily due to lower costs from post-marketing research activities, partially offset by higher spending associated with Organon development programs.
Restructuring Costs
Certain of our operations have been affected by restructuring plans initiated by Merck. The decline in restructuring costs for 2021 and 2020 is due to lower allocated costs from Merck. Currently, Organon does not have an established restructuring program. See Note 6 to the Consolidated Financial Statements.
Other (Income) Expense, Net
For 2021, the increase in other (income) expense is primarily due to $258 million of interest expense related to the issuance of the debt instruments, offset by lower allocated foreign exchange hedging losses as compared to 2020. The decrease in other (income) expenses for 2020 was primarily due to lower allocated foreign exchange hedging losses as compared to 2019.
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Taxes on Income
The effective income tax rates for 2021, 2020 and 2019 were 11.7%, 18.0% and 10.6%, respectively. The decrease in effective interest rates for 2021 reflect the beneficial impact of foreign earnings, the $75 million tax benefit relating to a portion of the non-U.S. step-up of tax basis associated with Organon's Separation from Merck, as 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 the examination conclusion, we reflected an allocation from Merck of $18 million in the 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 and therefore for the year ended December 31, 2021, we have 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 Consolidated Financial Statements for all periods presented.
There was no income or loss from discontinued operations, net of taxes for 2021. Loss from discontinued operations, net of taxes, for 2020 and 2019 was $96 million and $88 million, respectively.
Analysis of Liquidity and Capital Resources
Liquidity and Capital Resources
Up to the date of Separation on June 2, 2021, Organon participated in Merck’s centralized treasury model, which included its cash pooling and other intercompany financing arrangements. We have historically generated, and expect to continue to generate, positive cash flow from operations.
In April 2021, in connection with the Separation, Organon Finance 1, previously a subsidiary of Merck, issued €1.25 billion aggregate principal amount of 2.875% senior secured notes due 2028, $2.1 billion aggregate principal amount of 4.125% senior secured notes due 2028 and $2.0 billion aggregate principal amount of 5.125% senior unsecured notes due 2031. The notes were assumed by Organon and the Dutch Co-Issuer. In addition, on June 2, 2021, we entered into a credit agreement providing for a $3.0 billion U.S. dollar-denominated senior secured term loan due 2028 and a euro denominated senior secured term loan in the amount of €750 million due 2028. We also entered into a secured, unsubordinated five-year revolving credit facility that provides for the availability of $1.0 billion of borrowings. As of December 31, 2021, there are no borrowings outstanding under our Revolving Credit Facility. We distributed $9.0 billion of the $9.5 billion proceeds to Merck in accordance with the terms of the Separation.
After the distribution to Merck of $9.0 billion in net debt proceeds and settlement of certain balances with Merck and its affiliates, we began operations as an independent company with approximately $900 million of cash and cash equivalents, which included approximately $400 million of funds received from Merck for the purchase of inventory from Merck upon exit of certain Interim Operating Model agreements. This purchase was completed at the end of 2021. On December 23, 2021, the Company made a discretionary prepayment of $100 million on the U.S. dollar denominated term loan. At December 31, 2021, we had cash and cash equivalents of $737 million. We expect 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 $1.2 billion at December 31, 2021 and $348 million at December 31, 2020. The increase in working capital of continuing operations was primarily driven by cash funding by Merck in connection with the Separation and an increase in accounts receivable, partially offset by increases in employee benefits and payroll accruals and interest payable.
Cash provided by operating activities was $2.2 billion in 2021, $2.3 billion in 2020 and $3.0 billion in 2019. Cash provided by operating activities in 2021 was unfavorably impacted by the decline in net income and an increase in accounts receivable and inventory partially offset by an increase in trade accounts payable, including amounts due to Merck, and accrued and other current liabilities. Cash provided by operating activities in 2020 was primarily impacted by the decline in net income.
Cash used in investing activities was $481 million in 2021, $250 million in 2020, and $88 million in 2019. Cash used in investing activities in 2021 primarily reflects the asset acquisition of Forendo and Alydia Health and the licensing agreement with ObsEva. Cash used in investing activities in 2020, reflects an increase in capital expenditures.
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Cash used in financing activities was $977 million in 2021, $2.0 billion in 2020 and 2.9 billion in 2019. The change in cash used in financing activities in 2021 reflects the proceeds from the issuance of long term debt, the payment of related debt issuance costs and related principal payment, payment of dividends, and the settlement of the transactions with Merck in connection with the Separation (see Note 19 to the Consolidated Financial Statements). The change in cash used in financing activities in 2020 reflects transactions with Merck.
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.
Capital expenditures were $192 million in 2021, $255 million in 2020 and $92 million in 2019. Capital expenditures in 2021 and 2020 reflect investment in new capital projects focused primarily on establishing Organon as an independent Company. We estimate that we will continue to invest in new capital projects from 2022 to 2023, for ongoing projects to stand up Organon, principally related to investments in information technology.
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 or financial freezes announced by the United States, European Union and other countries against Russian entities and designated individual restrictions 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, 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 year ended December 31, 2021, Organon’s combined revenues of Ukraine and Russia were approximately 2% of total revenues.
Our contractual obligations as of December 31, 2021, which require material cash requirements in the future, consist of purchase obligations and lease obligations. Purchase obligations are enforceable and legally binding obligations for purchases of goods and services which include inventory purchase commitments. Lease obligations exclude reasonably certain lease renewals that have not yet been executed. As of December 31, 2021, total payments due for purchase obligations and lease obligations are $1.5 billion and $251 million, respectively, and extend through 2030. Contractual obligations due within the next twelve months are $349 million related to purchase commitments and $53 million related to lease obligations. In addition, Organon is responsible for settlement of certain tax matters, of which the Company expects to pay approximately $20 million within the next year.
During 2021, Organon paid cash dividends of $0.56 per share. 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.
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.
Critical Accounting Estimates
The audited annual consolidated financial statements are prepared in conformity with GAAP and, accordingly, include certain amounts that are based on management’s best estimates and judgments. 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 below. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.
Revenue Recognition