Matthew M. Walsh
Executive VP & CFO at Organon & Co.
Thank you, Kevin. Beginning on Slide 7.
Here, we bridge revenue for the first quarter year-over-year, In February for modeling purposes, we suggested that you could consider evenly spreading revenue over the year, which would mean every quarter would be slightly under $1.6 billion in revenue, if you're working from the midpoint of our guidance range. We did a little better than that in the first quarter of 2024 driven by stronger volume especially from NEXPLANON and biosimilars, followed by recovery in injectable steroids namely DIPROSPAN, as well as continued growth from JADA. Outside of FX, the other revenue drivers were fairly neutral in the quarter.
Taken in totality, these other drivers finished Q1 ahead of our expectations, which drove the margin favorability we saw in the quarter. We'll discuss margins in more detail shortly. LOE was about $5 million of impact in the first quarter, which reflects the LOE of ATOZET in Japan. The impact of VBP in China was also about $5 million in the first quarter and reflects lingering effects of the July 2023 implementation of round Round 8 that included REMERON and HYZAAR. There was negligible impact from price in the first quarter.
The benefits of our NEXPLANON pricing strategy in the U.S. muted expected pricing pressure in other parts of our business, particularly in biosimilars and to a lesser degree, fertility. In Supply Other, we captured the lower-margin contract manufacturing arrangements that we had with Merck and have been declining since the spin-off as expected. And lastly, Foreign exchange translation had an approximate $30 million impact or 2 percentage point headwind to revenue, and that's a function of more than 75% of our business being generated outside the U.S. Now let's turn to performance by franchise. As has been our convention, I will target my comments over the next 3 slides to those areas most relevant to your modeling as we think about where we ended the quarter and what the near-term future may hold.
Let's start with women's health on Slide 8. As Kevin mentioned, we expect robust growth for NEXPLANON in the full year. With such strong growth in the first quarter and the benefit of our annual price increase in the U.S., which we took in January. NEXPLANON could achieve double-digit growth this year on a constant currency basis. For fertility, growth will be skewed towards the second half of the year.
In the first half, we'll be absorbing the two Q4 2023 issues that Kevin referenced. First, the buy-in that resulted from exiting a temporary spinoff-related commercial arrangement in the U.S. and second, initial supply chain stocking related to the large contract initiation, which is also in the U.S. In the second half of the year, we will have the benefit of lapping what was a difficult fertility environment in China last year plus, we expect volume growth from the provincial expansion of reimbursement and new launches in other markets, as Kevin referenced.
Turning to biosimilars on Slide 9. With ONTRUZANT, we have had competitive success as a key supplier of a biosimilar of HERCEPTIN in Brazil. And in the quarter, we had the benefit of incremental upside coming from additional volume through that tender. I would note that ONTRUZANT growth would have been down this quarter, if not for the incremental upside we had from these additional volumes in Brazil. In fact, on a global basis, we expect ONTRUZANT will be declining this year due to competition in other markets. And on U.S. HADLIMA, we had a strong first quarter, but given that this market has been difficult to predict and continues to evolve, we'll only say that it is our objective to grow that product sequentially each quarter this year.
Turning to Slide 10. Let's talk about pushes and pulls on established brands for the full year 2024. We'll see VBP impacts pick up later in the year, driven by FOSAMAX's inclusion in round 10 expected late in the third quarter. ATOZET will go through LOE in the EU in September of this year, and that product has been doing very well for us in that market. We expect those headwinds to be offset by continued volume growth. For example, contribution from the new migraine assets in Emgality and REYVOW. We expect injectable steroids to continue to recover and you already see that here with 19% ex-FX growth in the Non-opioid Pain and Bone & Derm portfolio.
These factors should result in about level performance for the established brands portfolio in 2024 FX change. Now let's turn to Slide 11, where we show key non-GAAP P&L line items and metrics for first 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, purchase accounting amortization and onetime items related to the spin-off, which can be seen in our appendix slides.
Adjusted gross margin was 62.1% in the first quarter of 2024 compared with 65.2% in the first quarter of 2023. In the first quarter of 2024, the lower adjusted gross margin was primarily related to unfavorable product mix, foreign exchange translation and higher inflation impacts to material and distribution costs. Despite being below last year, gross margin actually came in stronger than we expected in the first quarter, mostly driven by better performance in price across the aggregated portfolio.
Total non-GAAP operating expense was down 3% in the quarter, excluding IP R&D, reflective of our cost containment efforts. That is especially the case in R&D, where we have reprioritized clinical spending and rationalized headcount to better align with the types of business development programs we've recently completed and plan to pursue in the near term.
IP R&D expense was $15 million in the first quarter compared with $8 million in the prior year period. The $15 million of milestone expense in the first quarter was related to development progression of a denosumab biosimilar. Milestone payments are inherently difficult to forecast, so we will continue to utilize the same convention that we employed this quarter, and that is to include an estimate of IP R&D and milestones to be recorded in the quarter in our earnings date press release, which will be posted as soon as practical after the close of each quarter.
Foreign exchange losses were modestly lower $6 million in the first quarter of 2024 compared with $9 million in the prior year period. In both periods, these are foreign exchange losses primarily driven by normal course business activities in countries where it's not feasible to hedge movements in the local currency. These factors culminated in an adjusted EBITDA margin of 33.2% in the first quarter of 2024 compared with 33.7% in the first quarter of 2023. Non-GAAP adjusted net income was $315 million or $1.22 per diluted share compared with $276 million or $1.08 per diluted share in 2023.
Turning to Slide 12. We provide a closer look at our cash flow for the quarter. For the last 2 years, our free cash flow generation has followed the approximate pattern of 30-70. 30% of our free cash flow was generated in the first half of the year and 70% is generated in the back half. In 2022, we generated $875 million of free cash flow before onetime charges. In 2023, that figure rose to $940 million. And in 2024, we expect to reach approximately $1 billion of free cash flow before onetime items underpinned by our financial guidance. Like many companies with December fiscal year-end, Q1 free cash flow was impacted by accrual runoff, largely related to the timing of annual incentive payments, and that represented about 1/3 of that working capital consumption number.
Typical to the first quarter, we also see seasonal fluctuations in working capital, which drove the remainder of the change. For onetime cash costs related to the spin-off, in February, when we gave full year 2024 guidance, we said to expect about a 40% reduction from 2023, which would put us in the $200 million ballpark. The $68 million you see here is consistent with that expectation. Of note, we have completed the implementation of our global ERP system as of April, which was the main driver of onetime costs up until this point. Next year, we would expect even lower onetime spin-related costs and beyond 2025 and we expect onetime spin-related costs to be de minimis.
In the $36 million of other onetime costs, here, we capture headcount restructuring initiatives and the transition of our manufacturing network related to the spin-off. These costs are distinct from the spin-related standup costs and that they're associated with actions, which will ultimately drive cost efficiencies. Some of which we realized in Q1 and which are already incorporated into our earnings guidance for 2024.
Moving to slide 13 now on debt and leverage. When we provided guidance in February, we were bracing ourselves for leverage to tick higher in the first half of the year before coming down in the second half, ending the year better than 2023 with a view to ending the year below 4x. With stronger-than-expected EBITDA performance in Q1, our net leverage ratio has remained level with 2023 year-end and is holding at 4.1x. This solid result gives us greater confidence in our February commentary around lowering our net leverage ratio during the year.
Now turning to 2024 guidance on Slide 14, where we highlight the items driving our 2024 revenue guidance range of $6.2 billion to $6.5 billion. Some of the individual drivers have changed, but our top line revenue guidance is remaining unchanged. For LOE, that approximate $70 million to $90 million impact for the full year 2024 incorporates ATOZET, both Japan and in the EU later this year.
We also have a provision for DULERA, where we have been expecting a generic since its LOE in 2020. VBP impact is still expected to be in the range of $30 million to $50 million for 2024. By the end of the year, we expect approximately 85% of the portfolio to have gone through VBP. Though minimal in Q1, we expect the impact from price to be in the $180 million to $220 million range, which is up $25 million at the midpoint from the $150 million to $200 million range we talked about in February.
Overall, this represents a bit over a 3 percentage point headwind versus prior year and is more in line with our longer-term expectations of price impact across our entire business, given pricing pressure in Biosimilars and U.S. fertility and the mandatory pricing revisions we expect to see in certain international markets. And for volume, we are raising our estimate by $75 million at the midpoint to $450 million to $650 million to primarily reflect the upside we saw in Biosimilars in the first quarter. Overall, that almost 9% volume growth we expect over last year will be coming from our growth pillars.
NEXPLANON, Fertility and JADA within women's health, Biosimilars and China retail as well as the latest addition of Lilly's Emgality and REYVOW in Europe. And finally, based on current spot rates, we think we could see an increasing headwind from FX, now at 160 to 200 basis points, paired with 80 to 160 basis points that we were forecasting back in February. We've absorbed that impact with an improved view of volume growth. So our constant currency revenue guide effectively went up a bit.
Moving to the other components of guidance on Slide 15. For adjusted gross margin, we are continuing to guide to a range of 61% to 63% for 2024. On opex expense, even though we are tracking to the lower end of the ranges for SG&A and R&D expense, if you simply annualize Q1, it's a little too early in the year to be calling those ranges down. For SG&A, we have some expense in the second half related to product launches. The migraine products, HADLIMA, XACIATO and JADA internationally to cite a few examples.
And that will be partially offsetting the favorable impact of our restructuring cost containment efforts. For R&D, the $400 million to $500 million range still feels good, even inclusive of IP R&D to date, but we'll continue to evaluate this as the year progresses and milestone achievement becomes more clear. Interest, tax and depreciation expense ranges are all unchanged.
All things considered Q1 was a solid start to the year. We're heading in the right direction on volume growth, margins and operating expense discipline, and we're tracking to another year of constant currency revenue growth.
With that, now let's turn the call over to questions and answers.
