We are initiating coverage of Organon (OGN) with a BUY rating.
Last Wednesday, post-close, Merck spun-off its Organon operations to investors. Merck shareholders received 1 share of OGN for every 10 shares of MRK.
Since then, shares of Organon (OGN) have fallen sharply, down nearly 15%. We are starting shares of Organon (OGN) at a BUY. While we are not particularly enthusiastic about Organon’s long-term prospects (“uninspiring but not dour” as we described last week), the discounted price makes the shares appealing.
The sell-off appears to be mostly technical: many Merck investors have little interest in holding yet another pharma company facing patent erosion risks. And, given Organon’s much-smaller market cap (perhaps $8 billion) compared to Merck’s $185 billion, large-cap fund managers have no incentive to keep OGN shares. A fund manager with a 3% weight in MRK would receive only a 13 basis point (or, 0.13%) weight in OGN – resulting in an easy order of “just dump it” to the trading desk. Hence, our opportunity.
We are placing a $37 price target on Organon shares. Our timing may be off by a few days – the stock might fall again tomorrow, or it might bounce – with spin-offs there is no definitive way to pick the exact bottom.
Please feel free to reach me by email if you have questions or comments – I’ll respond as quickly as possible.