Matthew Walsh
Chief Financial Officer at Organon & Co.
Thank you, Kevin. Beginning on Slide 9, here we bridge revenue for the third quarter year over year. As Kevin mentioned at the outset, third quarter revenue of $1.58 billion was up 4% over third quarter of last year and ahead 5% at constant currency. Impact from LOE was about $5 million in the quarter, which reflects the loss of exclusivity of Atozet in Japan and negligible impact from the beginnings of the Atozet LOE in Europe, which happened in September.
We didn't have any meaningful VBP headwind in the third quarter as the effects of Round 8 that began in the third quarter of last year and included Remeron and Hyzaar are now washing out. There was an approximate $70 million impact from price in the third quarter or about 4.6%. You may recall that in our second quarter call, we said that the back half of 2024 would face steeper headwinds from price than the first half due to the timing of mandatory pricing reductions in Japan, mainly in the cardio and respiratory portfolios, which is what we are seeing. We're also seeing pricing headwinds coming from the September LOE of Atozet in Spain and France as well as from certain mature products in the U.S. like NuvaRing, Dulera and Renflexis.
Volume growth in the quarter was $150 million or almost 10% across several drivers. Hadlima and Emgality were the largest contributors to volume growth, followed by Fertility, Nexplanon, and established brands, especially in China. Timing of tenders of Ontruzant and NuvaRing in the U.S. were the biggest offsets to volume growth.
In supply/other, here we capture the lower margin contract manufacturing arrangements that we had with Merck, which had been declining since the spinoff as expected, although there was only a small change year-over-year in this bucket this quarter. And lastly, foreign exchange translation had an approximate $20 million impact or 130 basis points of headwind to revenue, which reflects the strengthening U.S. dollar versus certain foreign currencies, which this quarter included the Mexican peso, Japanese yen and Brazilian real.
Now, let's turn to Slide 10, where we show key non-GAAP P&L line items and metrics for third quarter performance. For reference, GAAP financials and reconciliations to the non-GAAP financial measures are included in our press release and the slides in the appendix of this presentation. For gross profit, we are excluding from cost of goods sold, purchased accounting amortization, and one-time items, which can be seen in our appendix slides.
Adjusted gross margin was 61.7% in the third quarter of 2024, compared with 62.6% in the third quarter of last year. In the third quarter of 2024, the lower adjusted gross margin was primarily related to unfavorable product mix and price. Excluding $51 million of IPR&D expense incurred during the period, non-GAAP operating expenses were down 5% year-over-year, reflective of our cost containment efforts. Of the $51 million of IPR&D expense in the third quarter, virtually all of it related to our collaboration with Shanghai Henlius for further advancement of the denosumab and pertuzumab biosimilar candidates.
While we have an established practice of not guiding to IPR&D, we do have pretty good line of sight from now until the end of 2024. We don't expect to surpass any further milestones that would trigger IPR&D payments. While the total of $81 million of IPR&D expense for the full year represents a headwind of about 170 basis points year-to-date, these payments are strong signals that our pipeline is progressing and we are building our ability to sustain revenue growth well into the future. These factors culminated in an adjusted EBITDA margin of 29% in the third quarter of 2024, compared with 29.4% in the third quarter of 2023.
Non-GAAP adjusted net income was $226 million or $0.87 per diluted share, almost equal with 2023's $223 million or $0.87 per share in the same period. GAAP net income was actually higher than non-GAAP net income this quarter. GAAP net income benefited from the release of evaluation allowance in the amount of $210 million against the tax asset of one of the company's Swiss entities. And this development, while favorable, does not impact our non-GAAP effective tax rate for earnings guidance purposes, which remains in the range 18.5% to 20.5%.
Turning to Slide 11, we provide a closer look at our cash flow year to date. And despite some minor headwinds from the Dermavant acquisition, as Kevin mentioned, we're well on track to deliver approximately $1 billion of free cash flow before one-time charges. Year to date, those one-time spin-related costs were $137 million. Our global ERP implementation is now behind us, and that was the largest driver of these one-time costs. Our view into the fourth quarter is that costs in this category will be minimal, so we expect to finish the year at approximately $150 million, which is better than the $200 million of one-time spin-related costs that we were originally forecasting for 2024. Next year, in 2025, we would expect one-time spin-related costs to be de minimis.
In the $129 million of other one-time costs, here we capture headcount restructuring initiatives and manufacturing network optimization. The cash outlay for these network optimization costs have amounted to $44 million year-to-date 2024. They are distinct from the spin related costs in that they're associated with actions to separate our manufacturing and supply chain activities away from Merck, which will ultimately drive cost efficiencies and eventual gross margin improvement. We expect this bucket to total about $75 million this year.
Turning to Slide 12, we ended the quarter at 4.0 times on our net leverage ratio, which was 0.25 turn better than this time last year and also slightly better than where we were year-end, 4.1 times. Year-to-date, we have had stronger EBITDA generation, which has resulted in a leverage ratio at September 30, 2024 that is more favorable than our expectations at the start of the year. That said, it will take us several quarters to digest the Dermavant acquisition before leverage can return to the 4.0 times net leverage ratio that we've achieved as of this quarter end.
Now turning to 2024 guidance on Slide 13, where we highlight the items driving our 2024 revenue guidance range. As Kevin mentioned, we've tightened our revenue range and raised the midpoint by $50 million, representing 1.8% to 2.6% nominal growth year-on-year, which equates to 3.1% to 3.8% on a constant currency basis. For LOE, we lowered our range from $70 million to $90 million to $40 million to $50 million, which reflects slower uptake for generics for Atozet.
Moving to the right, we lowered the range on VBP impact from $30 million to $50 million to $15 million to $25 million, which similarly reflects a slight delay in realizing the full revenue impact of Round 8 for Remeron and Hyzaar. We've been doing a bit better on price year-to-date, so we lowered our view of pricing impact from $180 million to $200 million to $145 million to $155 million, representing an approximate 2.5 percentage point headwind versus prior year, which is in line with our longer term expectations from price across our entire business.
Sequentially, the impact from price has been and is expected to be more acute in the back half of 2024 as the mandatory pricing revisions in Japan accelerate and reductions in price associated with the Atozet LOE in the EU more fully materialized. Additionally, we're facing increasing competitive pressures in the U.S. within mature products such as Dulera, Renflexis, and NuvaRing.
For the year, we've narrowed and lowered the range on volume to $445 million to $465 million, down from $500 million to $600 million. The range for volume reflects an approximate 7% growth rate over last year, tempering down from the 9% volume growth rate we expected, and that's mainly attributable to a softer outlook in fertility for the year.
And finally, based on our current view of FX, we lowered our view of FX impact to $75 million to $85 million, down from $110 million to $140 million, and that $50 million improvement is the principal driver for raising the midpoint of our revenue guide by $50 million. Kevin mentioned at the outset that we were also revising our range on adjusted EBITDA from 31% to 33%, to 30% to 31%.
In Slide 14, we bridge the items driving the change. The largest driver is the incremental $51 million of IPR&D expense we booked in the third quarter, worth about 80 basis points of margin for the full year. Second, in our view into fourth quarter revenue, we can see that we'll likely have some unfavorable product mix worth about 50 basis points of gross margin on the full year. This is primarily related to certain products in our U.S. portfolio that are subject to higher competitive pressure. Ontruzant, NuvaRing and Dulera to be specific, where we're seeing some pricing pressure and unfavorable channel mix from this group of products, which are at the mature part of their growth cycle.
While we have seen pressure year-to-date in our U.S. fertility business, we see a fairly strong rebound next year. When combined with the strong gross margin profile of VTAMA, these two items in tandem should serve as an offset to the margin pressure dynamic in our mature brands. The fourth column here represents two months of onboarding of Dermavant at their current expense rate, so no synergies yet reflected in this number. The last column represents net productivity in the base business and that bridges you to the new midpoint of the adjusted EBITDA margin range.
Turning now to Slide 15, where we show all components of our earnings guidance. For full year 2024 and consistent with the revenue commentary that we just discussed, we are revising our gross margin range from 61% to 63% to approximately 61.5%. On SG&A expense, we tightened our range from $1.5 billion to $1.7 billion, to $1.55 billion to $1.60 billion, $25 million better at the midpoint, driven by year-to-date favorability.
For R&D, we tightened our range around the midpoint on the base R&D spend and adjusted for the incremental $51 million of IPR&D that we booked in the third quarter. On a full year basis, the year-to-date total of IPR&D expense is $81 million and that's worth about 130 basis points of adjusted EBITDA margin using the midpoint of our guide.
As Kevin said, it's too soon to be guiding to 2025, but directionally, we do expect to see revenue growth year-on-year. This includes organic growth across the portfolio, plus the $150 million plus of revenue from Dermavant that Kevin referenced. Those will be offsetting factors to the Atozet LOE next year, as well as any other challenges we believe we might see across the portfolio.
We do expect the Dermavant acquisition to be dilutive to 2025 profitability, accretive in 2026 and thereafter. In 2025, we expect operating expense for Dermavant will be about $180 million and will be focused on successful launch of VTAMA in the atopic dermatitis indication, for which we hope to receive approval this quarter, pending FDA approval. About one-third of this operating expense is fixed and is in the form of onboarding Dermavant sales and marketing capabilities. The other two-thirds is promotional spend around the launch and other business support that will either naturally flex down after the AD launch or else become opportunities for further synergies.
In 2025, directionally, we expect Dermavant to account for approximately 0.5 point [Phonetic] of EBITDA margin headwind, which of course, we will be looking to see if we can offset with further expense discipline enacted across other parts of our business, as we've been doing quite successfully this year. In 2026, we expect VTAMA margins to grow to be above Organon's company average as revenue accelerates from the AD launch and synergies are realized and continue to grow from there.
Closing out, in 2024, we set ourselves up to deliver a trifecta of growth in revenue and EBITDA dollars, a leveraged P&L ex milestones and $1 billion of free cash flow before one-time items. With three quarters of the year under our belt and two months left to go, we feel very good about our ability to deliver on that goal.
With that, now let's turn the call over to questions and answers.
