Matthew Walsh
Chief Financial Officer at Organon & Co.
Thank you, Kevin. Beginning on Slide 9, you can clearly see in this year-over-year revenue bridge that the main driver of the 8% ex-FX revenue increase during the fourth quarter was solid volume growth. Fertility, Biosimilars and Established Brands all had very solid fourth quarters, which drove almost 9% volume growth during the period.
Partially offsetting this solid volume growth was impact from loss of exclusivity, which in the fourth quarter was about $10 million and was primarily related to ongoing generic competition for NuvaRing in the US and, to a lesser extent, the LOE of Atozet in Japan. Volume-based procurement, or VBP, in China was about $20 million in the quarter and reflects the implementation of Round 7, which included Ezetrol, which prior to VBP was our largest product in China, as well as the July implementation of Round 8 that included REMERON and HYZAAR.
We had a negligible impact from price in the fourth quarter, mainly due to actions we took in the Nexplanon 340B channel to peel back voluntary discounts and those actions offsetting pricing pressure in Established Brands where the portfolio is subject to mandatory price reductions in certain markets and in Biosimilars, which inherently is subject to significant price competition. In Supply Other, we captured the lower-margin contract manufacturing arrangements that we had with Merck and have been declining since the spin-off. And lastly, foreign exchange translation had a de minimis impact on revenue during the fourth quarter.
Now turning to the full year on Slide 10. Revenue for fiscal year 2023 was approximately $6.3 billion, up 3% at constant currency. LOE impact for the full year was about $20 million, and just like the fourth quarter was driven mainly by ongoing generic competition for NuvaRing in the US and, to a lesser extent, the LOE of Atozet in Japan. Full year impact from VBP in China was approximately $95 million related to the implementations of Round 7 and 8 impacting Ezetrol, REMERON and HYZAAR, as I just discussed.
Moving on to price. We saw approximately $90 million of price erosion for the full year, and that was pretty equally driven by the familiar dynamics in Established Brands, the Biosimilars portfolio and Fertility. Within Fertility, globally and particularly in the US, health systems and commercial insurers are increasingly reimbursing fertility services. This is expanding the market and thus the volume opportunity for our Fertility products and has also increased price competition.
Volume growth for the year was approximately $420 million or about 7% higher than last year, and we saw volume growth across multiple franchises. In Women's Health, we had strong volume growth from Fertility as well as from Jada. Our Biosimilar products also continued to see strong demand. And in Established Brands, volume growth outstripped pricing pressure during 2023.
And finally, you can see the approximate 190 basis points of financial reporting headwind we had in foreign exchange translation, which is a function of more than 75% of our revenue being generated outside the US.
Now let's turn to performance by franchise. As has been our convention, I'll target my comments over the next three slides to those areas most relevant to your modeling as we think about where we ended the year and what the near-term future may hold.
So let's start with Women's Health on Slide 11. The decision to forego our normal list price increase for Nexplanon in mid-2023 and opting instead to take price in early 2024. The result of that decision is reflected in Nexplanon's performance in the fourth quarter. Specifically, during the fourth quarter of 2023, we didn't have demand pull forward or buy-in that we would normally see during a price protection period.
In the full year Nexplanon results, you also see the impact of more limited participation in the tender in Mexico, as well as supply constraints in some fast-growing international markets like Asia and Africa that have since been resolved. The math on those collective headwinds would indicate that it's hard for us to envision a scenario that Nexplanon doesn't return to strong growth in the high single-digits in 2024.
As we think about phasing for next year, the first quarter of 2024 will be a relatively strong growth quarter, primarily because the first quarter of 2023 was light, following a strong Q4 of 2022 that was helped by that buy-in dynamic that I just discussed. By resetting the timing of list price increase for Nexplanon, we are better aligned commercially with our customers and health care peers in the US. And from a financial reporting perspective, in future periods, we expect to see less volatility in Nexplanon's year-on-year revenue growth rates each quarter.
Fertility had a strong fourth quarter as we expected, and there were two drivers. The first driver was increased demand in the US, primarily tied to onboarding a new and significant PBM customer. The second and actually larger driver was a one-time buy-in as a result of exiting a spin-off-related temporary commercial arrangement with Merck. Given that these volume drivers were one-time in nature, the first quarter of 2024 is likely to be the lightest of the year for Fertility, as inventory levels in the US normalize. We will also benefit from expected continued recovery in China, as well as launches in select markets in the latter part of the year.
Turning to Biosimilars on Slide 12. Biosimilars had a very strong fourth quarter, which was helped by favorable timing of Ontrazon deliveries in Brazil to meet public sector demand. That timing represented about half of the Biosimilars growth in the fourth quarter. If we back that out, Biosimilars were up 24% in the fourth quarter and 17% for the year at constant currency. In 2024, the drivers in the Biosimilars portfolio will continue to be supported by strong performance of Renflexis in the US, even after entering its seventh year on the market, robust growth in key markets such as Canada and Brazil and continued uptake of Hadlima in the US.
Turning to Slide 13. As Kevin mentioned, Established Brands grew for the second year in a row ex-FX. Performance was able to offset the impacts of VBP and the economic challenges in China, as well as for supply interruptions of several injectable steroid products stemming from the market action taken earlier this year. The roughly 2% constant currency growth for the full year was driven by a little over 2% growth in volume across the portfolio, partially offset by just under 1% price pressure. We expect approximately flat performance within Established Brands franchise for full year 2024 on an ex-exchange basis.
Now let's turn to Slide 14, where we show key non-GAAP P&L line items and metrics for the fourth quarter and full year performance. For your 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, purchase accounting amortization and one-time items related to the spin-off, which can be seen in our appendix slides.
So let's talk about the fourth quarter first, and then we'll move to the full year. Adjusted gross margin was 60.3% in the fourth quarter of 2023 compared with 63.1% in the fourth quarter of 2022. The unfavorable impact of foreign exchange translation within cost of goods sold and, to a lesser extent, product mix, more than offset a favorable year-over-year comparison to the fourth quarter of 2022 when we took the market action on certain injectable steroid products.
Non-GAAP operating expense was down in the quarter. SG&A expense was down 3% and total R&D expense was down by 6%. Foreign exchange losses were also lower in the fourth quarter compared with the prior year period by about $15 million. One key driver of this improvement, in the fourth quarter of 2022, we increased the portion of our euro-denominated debt that is designated as a net investment hedge from 85% to 100%.
As a result, we are now able to fully report unrealized FX gains and losses on our euro debt within other comprehensive income, which should dampen the volatility of gains and losses from foreign exchange and thus improve our overall quality of reported earnings, all else equal. These factors culminated in an adjusted EBITDA margin of 28.1% in the fourth quarter of 2023 compared with 25.6% in the fourth quarter of 2022.
Non-GAAP adjusted net income was $226 million or $0.88 per diluted share compared with $208 million or $0.81 per diluted share in 2022. Higher EBITDA more than offset a higher non-GAAP tax rate in the fourth quarter of this year and a $10 million year-over-year increase in interest expense. While I'm speaking in non-GAAP terms here, there was a GAAP tax item in the fourth quarter that deserves mention. In December, a local tax holiday was terminated giving rise to a deferred tax asset in the amount of $686 million. That was offset by a $210 million valuation allowance for a net benefit of $476 million to GAAP net income for the fourth quarter.
For full year 2023, adjusted gross margin was 62.7% compared with 65.7% for full year 2022. The year-over-year decrease in adjusted gross margin reflects higher cost of sales due to foreign exchange translation and product mix and, to a lesser extent, higher post-COVID inflationary impacts on labor, materials and distribution-related costs.
Adjusted EBITDA margin was 31% for the full year 2023 compared with 33.8% for the full year 2022. The year-over-year decrease was a result of lower adjusted gross margin. Higher selling and promotional expenses were mostly offset by lower total R&D spend. And that lower R&D spend was driven by year-over-year comparability of IP R&D. There was $107 million of IP R&D in 2022 against only $8 million of IP R&D in 2023.
Adjusted net income was $1.1 billion or $4.14 per diluted share for full year 2023 compared with $1.3 billion or $5.03 per diluted share in the prior year. The year-over-year decline in net income is primarily due to higher interest expense associated with increased interest rates and accelerated amortization of capitalized financing costs associated with voluntary debt prepayments on the company's US dollar-denominated term loan.
Turning to Slide 15, let's take a look at free cash flow. We ended the year with $940 million of free cash flow before one-time costs, which is above the range that we had guided to in November. The upside was driven by the stabilization of our net working capital position as we continued to make progress toward the global implementation of our new ERP system. One-time spin-related charges totaled $344 million for the full year 2023, slightly favorable to the $350 million we have been guiding to.
Free cash flow generation is obviously important to the investment thesis of Organon. So let's talk about what these line items could look like for 2024. Cash taxes will go up fairly substantially in 2024, largely due to the anticipated payment of certain non-US taxes, as well as settlements in various jurisdictions that will trigger higher cash tax payments relative to 2023, which was an unusually low year for cash taxes.
Interest expense is expected to be a bit lower than last year, and this guidance assumes no reduction in US short-term interest rates during 2024. Working capital use will likely be about $100 million, which reflects typical working capital expansion as our business grows, partially offset by continued gradual work down of our working capital as the global ERP implementation progresses towards full completion in the second quarter of this year.
Given our adjusted EBITDA guide for 2024, these components would put us in the range of $1 billion of net free cash flow before one-time spin-related costs for 2024. We expect to see a significant reduction in one-time spin-related costs in 2024, about 40% lower than 2023, and then again, an even larger reduction in 2025. And beyond 2025, we expect one-time spin-related costs to be de minimis.
You can see on this slide an additional reporting line for other one-time costs, which is a catch-all line item for any one-time costs that are not spin-off related. For 2023, that $35 million represents the first of three annual installment payments in the $80 million settlement of the Microspherix litigation. Going forward, other items that may appear in this line item include costs related to restructuring, as well as costs related to optimizing our manufacturing and supply network as we continue to separate those activities from Merck. These are activities that will enable Organon to redefine our appropriate sourcing strategy and move to fit-for-purpose supply chains while focusing on delivering efficiencies.
By order of magnitude, we're talking about a total of a few hundred million dollars from now until the end of 2031 when our last MSA with Merck will terminate. These investments are not likely to be substantial in any given year and because they're aimed at improving productivity, they will be gross margin accretive over time.
Turning to our net leverage ratio on Slide 16. We ended the year at 4.1 times net leverage, which is a significant improvement over third quarter end. In addition to the strong Q4 cash flow, we dropped the low fourth quarter EBITDA of last year. However, the strength in the euro at the end of the year increased the translated value of our euro-denominated debt by about $100 million. As we think about 2024, the anticipated EBITDA phasing quarter-by-quarter suggests that the net leverage ratio could tick higher in the first half of 2024 and come down in the back half, ending the year just under 4 times net leverage.
Now turning to 2024 guidance on Slide 17, where we highlight the items driving our 2024 revenue guidance range of $6.2 billion to $6.5 billion. Beginning with LOE. We expect an approximate $70 million to $90 million impact for the full year 2024. This is primarily from Atozet, which went LOE in Japan in 2023 and will lose exclusivity in the EU later this year, as well as a provision for DULERA in the US, where we have been expecting a generic since 2020.
Turning to VBP. We expect VBP impact to be in the range of $30 million to $50 million for full year 2024, lower than what we saw in 2023 as we lap the impact from Ezetrol and REMERON and HYZAAR's inclusion. Our range also assumes that the implementation of Round 10 could include Fosamax later in the year.
By the end of 2024, we expect approximately 85% of the portfolio will have gone through VBP. We expect the impact from price to be in the $150 million to $200 million range, and that's about 2.5 to 3 percentage points compared with the pretty low impact of 1.5 percentage points we saw in 2023. And this is really more in the normal range of what we would expect for our business.
And for volume, we expect growth of approximately $400 million to $550 million with most of the volume coming from our growth pillars, Nexplanon, Fertility, Jada, Biosimilars and China Retail, as well as now the latest addition of Lilly's Emgality and RAYVOW in Europe.
And finally, based on current spot FX rates, FX could be $50 million to $100 million headwind to revenue in 2024 or a range of 80 to 160 basis points. Together, these factors result in full year revenue guidance of $6.2 billion to $6.5 billion, which represents constant currency revenue growth a bit over 2.5 percentage points at the midpoint. That's consistent with our guide of low single-digit growth that we provided at JPM back in January, and it would be our third consecutive year delivering constant currency revenue growth.
Moving to other components of guidance on Slide 18. Reiterating Kevin's comments around margin, our objective in 2024 is to deliver a P&L that combines constant currency revenue growth with potential operating leverage. We've incorporated this into our adjusted EBITDA margin range.
So let's talk about the components of that adjusted EBITDA margin guide. From an adjusted gross margin perspective, we delivered 62.7% adjusted gross margin in 2023, and we're guiding to a range of 61% to 63% for 2024. Over time, we aim to improve this metric in part through the network optimization efforts I discussed. So to deliver adjusted EBITDA margin expansion, productivity pickup will need to come from operating expenses. In SG&A, we will have product launches like XACIATO, Hadlima and expansion for Jada internationally, but these growth investments will be largely offset by cost management efforts achieved broadly across the company.
As we think about phasing for the year, you can probably peanut butter spread revenue. Margins will likely be better in the second half compared to the first half as we implement those company-wide cost savings. For R&D, the midpoint of that range would represent about a $50 million year-over-year improvement. Now because IP R&D payments are hard to forecast, this number does not include any estimate of IP R&D in 2024.
Potential milestone payments in 2024 would be primarily related to the two Biosimilar assets in development with our partner, Shanghai Henlius, pertuzumab and denosumab, and none of which are individual materially. On below-the-line items, interest expense should be a bit lower in 2024 based on current interest rates and lower debt balances year-on-year. Just a reminder that our interest expense guide assumes no movement in short-term rates. Any rate cuts by the Fed during 2024 would create upside to our interest expense guidance. Depreciation ticks up a bit this year, and that's related to the implementation of our ERP system.
With respect to tax, like most international companies, we are dealing with the implementation of Pillar 2. As a result of that and other impacts, we expect our effective tax rate to go up. In 2023 and 2022, our first two full years as a public company, our effective non-GAAP tax rate was low, about 18% because we benefited from the termination of a tax holiday. Absent that benefit, our effective tax rate would have been several points higher.
The impact of that termination, together with the implementation of Pillar 2, will increase our tax rate over the next few years, beginning with 2024, for which we are guiding to a range of 18.5% to 20.5%. Beyond 2024 is when we would start to see a more material increase in the rate as these impacts and the increase in US GILTI rates become fully realized.
In closing, it was a strong end to 2023, and we're optimistic that we can deliver on a third consecutive year of constant currency revenue growth, that's also accompanied by some bottom line margin improvement and free cash flow of approximately $1 billion before one-time items.
With that, now let's turn the call over to Q&A.
