Matthew M. Walsh
Executive Vice President and Chief Financial Officer at Organon & Co.
Thanks, Kevin. Beginning on Slide 9, let's walk through the drivers of the 3% constant currency revenue growth in the quarter. Starting with the impact of loss of exclusivity. LOE was negligible in the first quarter, and the small amount that we did realize was related to generic competition for NuvaRing in the U.S. In the first quarter, we had about a $30 million impact from VBP in China, and that was related to the fourth quarter implementation of Round 7, which for Organon included EZETROL, which is sold at ZETIA in some markets outside of China. Moving across to price, we saw approximately $30 million of price erosion in the quarter.
This was primarily driven by customer mix and pricing in U.S. fertility, which was exacerbated by an unfavorable comparison to Q1 of last year when we had a more favorable customer mix in fertility. In addition, the established brands portfolio is subject to mandatory pricing reductions in the first quarter of 2023, and that was particularly the case in Japan and in some EU markets. We continue to see strong volume increases across all of our franchises, about $100 million in the first quarter. The majority of the volume increase came from established brands, particularly in China and the APJ region, but also from biosimilars, fertility and contribution from Marvelon and Mercilon.
The bar for supply other represents revenue to Merck and other third parties, which consists of relatively low-margin sales of pharmaceutical products under contract manufacturing arrangements, and which are expected to decline over time. And finally, you can see the financial reporting headwind we had in foreign exchange translation, about 450 basis points for the first quarter, which is a function of more than 75% of our revenue being generated outside the United States. While we're on that topic, let's turn to Slide 10, we'll take a look at revenue by geography. In the first quarter, as Kevin mentioned, China grew at constant currency primarily due to strong performance in the retail channel. And this growth was achieved despite the impact of VBP and despite the impact that COVID had on the fertility business in China early in the year.
Asia Pacific, Japan grew 12% in the first quarter, driven by contraception, namely NEXPLANON and Marvelon and Mercilon as well as from established brands. For Marvelon and Mercilon in this region, just a reminder that this was a marketing rights acquisition that we did in February of 2022. In established brands, we do continue to benefit from generics being out of the market in Japan, but at a significantly lower level than we saw in the first quarter of last year. Established brands' strength for this region was mostly realized in countries outside of Japan we saw a pickup in demand for respiratory products associated with seasonally poor air quality.
The impact of the market action for injectable steroids, Diprospan and Celestone was the most pronounced in the Humira region, but this was offset by better pricing in some established brands products. The UCAN region, on the other hand, has a more competitive pricing environment, which tends to pressure results in that region. In addition, UCAN results also reflect some of the supply disruption from the market action on Diprospan and Celestone. With regard to the market action we described in the last earnings call for Diprospan and Celestone, it's worth noting that we restarted production earlier than anticipated, and we are already supplying key markets such as Mexico, China and the United States, which are in the top five markets for these products.
Overall, the financial impact of the market action is being realized within the parameters that we incorporated into our 2023 annual guidance that we previously provided and that we're affirming today. And last, in the United States, what you're seeing here is the strong performance of biosimilars, ONTRUZANT and RENFLEXIS, fully offsetting unfavorable customer mix in the fertility business this quarter and also covering a $10 million benefit we had in the first quarter of last year related to a onetime milestone payment we received for NASONEX. The next few slides in the presentation lay out performance by franchise. I think Kevin covered very well the highlights and the details are provided in the supporting earnings materials.
So I'll focus on topics that may be relevant to your modeling as we think about the remainder of 2023. We'll start with women's health on Slide 11. There are three important takeaways on this slide for women's health. First, in contraception, NEXPLANON sales in the U.S. in the first quarter have tended to reflect customer buying patterns around announced price increases more than they have underlying patient demand. So the first quarter is not indicative of the rest of the year. Second, we will lap the Marvelon and Mercilon transaction next quarter, so you won't see the pronounced growth we saw here in the first quarter, but these products have performed very well for us, we are pleased with the way this acquisition is operationalizing in Organon and we do expect solid performance from Marvelon and Mercilon for the remainder of the year.
Third and final takeaway on this slide, we expect to see good growth from fertility driven by the reopening of China as well as strong demand in the United States, where volume and growth should outpace the pricing pressure that we're seeing domestically. Turning to biosimilars on Slide 12. Clearly, a good quarter in biosimilars with 20% revenue growth year-on-year at constant currency, but where I would like to focus is on our upcoming launch of HADLIMA. As Kevin mentioned, we continue to believe there will be a gradual market formation for Humira biosimilars in 2023. And because HADLIMA revenues will only be a partial year contribution, we expect that globally HADLIMA will still represent no more than about 1.5% of our consolidated 2023 revenue, and this is consistent with what we said last quarter when we provided 2023 guidance.
Turning to established brands on Slide 13. As Kevin mentioned, this franchise is performing very well. And in 2023, our expectation is that we should achieve at least flat performance with last year on a constant currency basis. Let's turn now to key P&L line items on Slide 14. For gross profit, we are excluding from cost of goods sold purchase accounting amortization and onetime items related to the spin-off, which can be seen on Table four in our appendix slides. Non-GAAP adjusted gross margin was 65.2% compared with 66.5% in the prior year period. The year-over-year decline in gross margins is primarily due to product mix as well as inflationary cost pressure that impacted distribution and employee-related costs. Adjusted EBITDA margin was 33.7% in the first quarter compared with 41.3% in the same period of last year.
Higher product promotional costs for new and existing products as well as increasing R&D spend associated with recent acquisitions of clinical stage assets were the primary contributors to the decline in adjusted EBITDA margin year-over-year. I should also point out that in the first quarter of last year, operating expense was at a low point as we were still staffing up positions that were vacant as of the spin-off. Contrast that now to the current quarter where we are essentially at steady state from a staffing perspective. Non-GAAP adjusted net income was $276 million, or $1.08 per diluted share compared with $420 million or $1.65 per diluted share in the first quarter of 2022.
The year-over-year decline in net income was a result of, of course, lower adjusted EBITDA, but also attributable to increased interest expense. Our variable rate debt, which comprises 38% of our total debt balance, is subject to higher rates compared with last year, and we also recorded $5 million of accelerated amortization of debt issue costs in conjunction with the $250 million voluntary prepayment on the U.S. dollar variable rate term loan that we completed in the first quarter. We also experienced $9 million of foreign exchange translation losses driven by fluctuations in certain foreign currencies, which are impractical to hedge. So together, that's about $14 million or about $0.04 of tax effect at EPS that likely wouldn't have been in anyone's models.
Turning to leverage on Slide 15. As Kevin mentioned at the outset, during the quarter, we made a $250 million voluntary prepayment on our U.S. dollar variable rate term loan. Since the spin-off, we've now made $450 million of voluntary debt prepayments, which demonstrates the priority we're placing on managing debt and leverage as a core component of overall value creation at Organon. That said, I will reiterate a comment from our last earnings call about our leverage ratios being stubborn during 2023. Our net debt to adjusted EBITDA ratio was likely to end 2023 close to where it was at the start of the year. This is the impact of the inevitable math around this metric given our strong ex-U.S. revenue base and two dynamics this metric faces this year.
The first dynamic is relatively smaller and more technical related to FX translation around the U.S. dollar that has been weakening since the start of the year. As this happens, the numerator of the leverage ratio, the debt figure trues up immediately in terms of the increased translated value of our euro down the balance sheet. The denominator, however, is a trailing 12-month figure, which exhibits a more lagged response to FX translation. This results in a leverage ratio that's slower to show improvement when the U.S. dollar weakens, and that's exactly what we saw this quarter. The second dynamic is more impactful, fundamental and cuts right to the strategy that we're executing. We're reinvesting in the business to create a pipeline of future revenue opportunities.
The eight transactions that we've done since the spin have all required reinvestment of some kind. And that shows up on the income statement is either increased R&D expense or commercial launch and promotional expenses on the SG&A line. In the near term, this weighs down our LTM adjusted EBITDA. But over the intermediate and long term, we believe this reinvestment is essential for Organon to more reliably deliver sustainable revenue growth. Turning to Slide 16. We provide a closer look at our cash flow for the quarter. What probably stands out is the $200 million of working capital use of cash. Like many companies with December fiscal year-end, Q1 free cash flow was impacted by the timing of annual incentive payments.
And in addition, we also typically see cash cycle working capital ticking up in the first quarter, and that absorbed approximately $80 million or about a 4% increase relative to year-end. Over the course of the full year, these two effects normalize. The key takeaway is that first quarter cash flow is not indicative of our full year expectation, that we will be able to generate north of $1 billion of free cash flow before onetime items this year, which is consistent with our expectations when we issued 2023 guidance. Onetime cash costs related to the spin-off transaction are trending in line with our expectation of about $350 million for the full year 2023.
The single biggest component of separation cost relates to the implementation of stand-alone IT systems, the largest of which is our own global single instance ERP system with SAP. With this complex project well underway in the finish line in sight in mid-2024, we now have a clearer picture of onetime costs and the time frame, which approximates $950 million over 3.5 years post spin. So for those of you modeling these onetime costs, this would imply that we see approximately $125 million of spin-off cash outlays remaining beyond 2023, with essentially all of that figure occurring in 2024. We expect that the composition of these remaining cash outlays will be split [Indecipherable] expensing capex, respectively.
The free cash flow we are able to generate on a quarterly basis allows us to service the dividend and take a balanced approach to capital allocation. In fact, the $450 million of discretionary debt payments that I referenced earlier, compares with approximately $500 million of capital deployed into M&A-related activity, and this evidence is the balance that we have said we would be targeting. Looking ahead into 2023, capex for PP&E of 3% to 4% of revenue remains a good range for modeling purposes. As we continue to deploy that capital into our internal manufacturing and packaging capabilities, as well as our IT infrastructure to help drive cost efficiency and productivity.
Now turning to our full year guidance on Slide 17. This bridge is identical to the one we showed in February. Changes on these various drivers still hold, driving us to affirm our 2020 revenue guidance range of $6.15 billion to $6.45 billion. Though LOE was minimal in the first quarter, we still at an approximate $50 million to $75 million [Indecipherable] for the full year, which reflects the continued generic competition for NuvaRing, [Indecipherable] in Japan, which happens midyear 2023 and the expectation for a generic entrant for DULERA towards the end of the year in the United States. We expect the impact from VBP to be in the range of $125 million to $175 million, driven mostly by EZETROL's inclusion and the implementation of Round seven in November of last year as well as Round eight implementation in the second half of this year, which will include for Organon, the products, Remeron and Hyzaar.
On a total company basis, we continue to expect approximately $75 million to $125 million of price erosion this year, representing about a 200-basis-point headwind, mostly related to mandatory pricing decreases in certain markets we operate in as well as some pressure from U.S. fertility. We still expect strong volume growth in 2023 of approximately $500 million to $600 million. The main drivers here will come from our multiple growth pillars, biosimilars, fertility, China retail and NEXPLANON as well as some contribution from established brands. We're currently estimating an approximate $50 million to $100 million impact from foreign exchange translation for the full year, which would represent about a one percentage point headwind.
So that means that our guidance range implies a constant currency revenue growth of approximately 3.5% at the midpoint. If foreign exchange rates remain where spot rates are currently, this could be a factor in driving us to the higher end of that revenue range. Moving to the other components of guidance on Slide 18. We expect adjusted gross margin to be in the low to mid-60% range, just modestly lower than where we finished 2022. As I've talked about previously, much of the inflationary impacts from 2022 were held in inventory, and therefore, have a greater impact to our cost of goods sold this year in 2023. On operating expenses, our ranges for SG&A and R&D as a percentage of sales are consistent with what we laid out last quarter for our expectations for the year and reflect continued investment in the business as we position it for future growth.
Our estimate R&D expense includes $40 million of IP R&D expense that's tied to the $8 million investment we made in Claria Medical, which we recorded in the first quarter, plus a $25 million estimate for a milestone achievement for Ebopiprant tied to the acceptance of the IND filing. Now because we know it's important to your modeling, we will make a public statement upon achievement of that milestone so that you can factor that payment into your quarterly phasing. The remaining approximate $8 million of IP R&D is tied to other milestones in the portfolio that could possibly be achieved this year, so we continue to incorporate that into the guidance.
These items bridge you to an adjusted EBITDA margin in the range of 31% to 33%. First quarter adjusted EBITDA margin was 33.7%, just above the high end of the guidance range. In our short operating history, first quarter margins have been the highest of the year, with fourth quarter being the lowest. We're starting to see that smooth a bit as we get further from the spin-off. So for 2023, we do expect first quarter margins still to be the highest of the year. But if you think about the remaining three quarters, they do not look markedly different on an ex-milestone basis, though the second quarter does bear some incremental promotional costs related to upcoming product launches in the back half of the year.
Additionally, the $25 million milestone for Ebopiprant could be triggered as early as the second quarter. For interest expense, we're nudging up our estimates slightly to reflect the accelerated debt amortization expense recorded in the first quarter actuals associated with our term loan prepayment. We now expect about $515 million of interest expense in 2023. Our range for effective tax rate remains in the range of 19% to 21%. In the first quarter, our rate was 22.8%, which included a discrete item related to a true-up of a 2022 valuation allowance. We expect our tax rate to trend downward over the rest of the year. The last point I'll make on this slide is, due to the impact of employee share awards that vest in 2023, we've increased our guidance for fully diluted weighted average shares outstanding by two million shares.
As Kevin said, and I will reiterate here in closing, 2023 is off to a solid start. The business continues to perform well, capital allocation is on track with a meaningful debt repayment in the first quarter as well as a completed pipeline transaction in women's health, where we continue to invest in our already strong market position. Overall, we're pleased with the first quarter, and we remain confident about the diversity and durability of our business. With that, now let's turn the call over to questions.
