Doretta Mistras
Chief Financial Officer at Viatris
Thank you, Philippe, and good morning, everyone. To echo the comments from the team, we reported a strong quarter, and I want to spend some time walking through the highlights. But before I dive into the details, I want to take a moment to expand on our financial strengths and how we think about it in the context of our overall strategy.
First, we have built an extensive global footprint that already enables us to reach over one billion patients annually. We've successfully stabilized the base business, and expect it to be a source of growth, and today we have a broad and diversified portfolio across markets and therapeutic areas.
Second, we have a strong balance sheet. We are committed to continuing to pay down debt and maintaining our investment grade rating, and have a clear line of sight to reach our long-term gross leverage target this year. And finally, our ability to generate significant cash flow is sector leading. This gives us the financial agility to fund our vision and continue returning capital to shareholders.
Now, on to the results for the quarter. Our second quarter results demonstrate the power of what our portfolio can deliver. Operational revenue grew for the fifth consecutive quarter, up approximately 2%. This performance also carried through to adjusted EBITDA and adjusted EPS, growing approximately 2% and 3% respectively. We also generated significant free cash flow of $426 million in the quarter, which was in line with our expectations. This excluded transaction costs and taxes from the divestitures.
Let's move on to discuss the performance of our base business which grew operationally on a year-over-year net sales basis. Both generics and brands grew this quarter up approximately 2%. The growth of our base business included new product revenue that was exceptionally strong with $210 million in the quarter. The year-to-date performance and outlook give us confidence to increase our expectation for the year to a range of $500 million to $600 million. This quarter, all of our segments grew operationally versus the prior year.
In developed markets, net sales grew 1% and was driven by strong new product performance, including contributions from Breyna, lisdexamfetamine and other generics in North America and Europe. In Europe, we are seeing durable growth across our diversified business. This is as a result of portfolio breadth across brands and generics, well-developed market positions and strong performance in key countries such as France.
In North America, we saw continued growth in generics which was up over 3% versus prior year. The portfolio is benefiting from complex products such as Wixela and Breyna, and within our brands business, net sales continue to be impacted by increased Medicaid utilization in certain non-promoted brands as well as lower EpiPen volumes resulting from formulary changes in the previous quarter.
In greater China, net sales growth was approximately 5% over the prior year. This was as a result of strong demand across multiple channels in China, including e-commerce, retail and private hospitals. In emerging markets, net sales grew 7% driven by the expansion of our cardiovascular portfolio in certain Latin American countries as well as strength in our MENA and Eurasia regions. These benefits help to absorb the ongoing impact of the therapy shift in the ARB market.
And lastly, JANZ grew approximately 1% over the prior year, benefiting from new products in Australia and volume growth of our promoted brands in Japan. This served to offset the impact from government price regulations in these countries.
Turning to the P&L and free cash flow, this quarter served as another demonstration of our financial strength and ability to generate significant free cash flow. Our segment and product mix led to stable adjusted gross margins. The performance was in line with our expectations of approximately 58%. With respect to operating expenses, we are continuing to invest behind the business to fund our growth, which includes investments across segments, eye care and in R&D.
Free cash flow for the quarter was primarily impacted by lower adjusted EBITDA due to the closing of divestitures. Our free cash flow and existing cash on hand allowed us to strengthen our balance sheet with debt paydown of approximately $800 million in the quarter, and as we look towards the rest of the year, we expect to have an excess of $3 billion in cash available for deployment. This takes into account divestiture proceeds received in the third quarter, expected divestiture costs and our latest outlook for free cash flow. We expect the significant financial flexibility will allow us to pay down additional debt to reach our long-term gross leverage target of approximately three times by the end of the year. We also expect to return capital in the form of dividends, and we'll remain opportunistic with potential share repurchases and business development activity.
Let's move on to items related to our financial guidance and key metrics for the remainder of the year. We expect our strong momentum to continue, and as a result we expect operational revenue growth of approximately 2% versus 2023 and stable adjusted EBITDA and adjusted EPS. Our expectation for the year is to be at the midpoint of the estimated guidance ranges. The assumptions driving total revenue growth include continued growth in developed and emerging markets and better than expected performance in Greater China and JANZ, and new product revenue of $500 million to $600 million as a result of the strong uptake of generic launches and additional new products.
We are adjusting the following metrics across the P&L. Increase in adjusted gross margin range due to better segment mix and SG&A as a percentage of revenue is expected to be higher. This reflects the reduction in total revenues from the divestitures and the impact of dyssynergies and costs of providing transition services. We expect certain costs associated with performing the transition services to be included in operating expenses. The transition income is expected to be recorded in nonoperating other income.
A few comments on anticipated phasing for the third and fourth quarters. Total revenue is expected to be slightly higher in the third quarter, mainly due to normal product seasonality, and adjusted gross margin is expected to moderate in the fourth quarter due to normal product and segment mix. Taking these factors into consideration, we expect adjusted EBITDA, adjusted EPS and free cash flow to be higher in the third quarter.
To summarize, the results for the quarter demonstrate our solid fundamentals, including our diversified and growing base business and our consistent significant free cash flow generation. We are well positioned for a strong second half of the year, and expect to deliver on our capital allocation framework in support of the vision Scott laid out at the top of this call.
And with that I'll hand it back to the operator to begin the Q&A.
