Matthew Walsh
Chief Financial Officer at Organon & Co.
Thank you, Kevin. Before we dive into the specifics of our financial performance, let's start briefly with basis of presentation and make sure we align on exactly what numbers we're looking at, where we have apples-to-apples comparability and where we may have something less than that. On the plus side, our third results marked the first time that Organon an entire quarter of standalone results.
As I discussed in last quarter's call, our results prior to the June second spin-off date are presented on the carve-out basis of accounting. Carve-out accounting is a GAAP convention, which has a lot of positives. However, it's not intended to present results as if Organon were a standalone company. So I want to be clear as we discuss results for this quarter and for the next three quarters, that any comparisons to prior-year periods will be somewhat apples-to-oranges, and that we'll be comparing Organon's standalone performance to pre-spend carve-out basis of accounting. With that said, where we'll have the best comparability is at the revenue line. So I will be focusing attention at the top line as we discuss our performance.
So turning to Slide 8. Revenue for the third quarter was $1.6 billion, down 1% as reported, and down about 3% at constant currency exchange rates when compared to the third quarter last year. In this graphic, we break out the change in revenue according to key drivers and I'll highlight some of the more significant impacts. The impact of loss of exclusivity or LOE during the third quarter compared to the third quarter of last year is approximately $70 million and it's primarily related to the LOE of Zetia in Japan and NuvaRing's LOE in the United States. Continuing to read across the waterfall chart, the established brands portfolio has exposure to VBP in China. The total impact to sales for the third quarter compared to the third quarter of last year was approximately $60 million and was associated with the third round of VBP, the largest round so far, which occurred in the fourth quarter of 2020 and that included four of Oregon's products. Singulair pediatrics, Proscar, Propecia and Arcoxia.
In the third quarter of 2021, the negative impact of COVID-19 was estimated to be approximately $100 million, which is about $20 million above Q3 of last year. Our product portfolio is comprised of physician-prescribed products which have been inspected by the shortage of qualified personnel, social distancing measures, and delayed medical visits. In the third quarter, we continued to see lingering effects from COVID as compared to the year-ago quarter, including as Kevin just mentioned, a slower return of well visits which particularly impacts Nexplanon. We continue to observe restrictive measures which vary by country and region, so we expect to see some further lingering negative impacts from COVID persisting into the fourth quarter. Although we believe we're starting to see encouraging trend developments in U.S. Nexplanon early in the fourth quarter, which could be pointing to stronger sequential performance in Q4 versus Q3.
Foreign exchange translation had about 200 basis points of favorability for the quarter. Year-to-date, that impact is more pronounced at about 350 basis points is not really surprising given the impact of COVID-19 on global currency markets in the prior year period and also understanding that about 75% of our revenue is derived outside the United States. And finally, on the plus side, we saw volume growth in Q3, mainly driven by growth in China, in U.S. biosimilars and in Europe with established brands.
So, now we'll take a look at performance by franchise and we'll start with women's health on Slide 9. Our women's health business was down 10% as reported, and 11% at constant currency in the third quarter versus the prior year. Nexplanon declined 8% ex-FX in the quarter. As Kevin mentioned, well visits are not yet back to pre-pandemic levels in the U.S. and Nexplanon sales are largely tied to that metric. So we know the question on investors' minds is can Nexplanon have a $200 million revenue quarter in Q4? And while we don't provide specific guidance by products, this question is important enough to address and provide you with lead to directional answer.
And based on current visibility into the data that we're looking at, we do see fourth quarter as being favorable for U.S. Nexplanon, and there's three reasons why. Reason number one goes back to the quarter just completed. Third quarter negative growth should be considered in the context of Q3 2020 being a tough comp from the standpoint that in September of last year, even though we were in the pandemic, we saw a short-lived resurgence in patient well visits that positively impacted third quarter 2020 Nexplanon sales. There has been volatility in the trend of patient OB-GYN well visits over the last year. But for the third quarter of last year, those visits were almost back to a pre-COVID baseline and Q3 2020 Nexplanon sales were the highest since the start of the pandemic. So the message here is that the third quarter of 2020 was a tough comp for Nexplanon.
Second reason goes to phasing of revenues within this year. There was a tender that we were expecting in the third quarter in Mexico that was delayed and has now become signed business for us in the fourth quarter. Third and final reason goes back to what Kevin said about our Nexplanon DTC campaign in the United States, which began running this summer. It's starting to show results now, as well as other new digital campaigns that are raising brand awareness for Nexplanon and driving sizable increases in our website traffic by potential new users. Beyond Nexplanon, also pressuring women's health this quarter was the continuing and expected decline in NuvaRing, down 17% ex-FX in the quarter related to increased generic penetration as a result of the products LOE in 2018 in the U.S.
On a positive note, our fertility portfolio continues to show strength. FOLLISTIM grew 18% ex-FX in the quarter. Volume growth came from an increase in demand from new accounts, as well as from patients returning to clinics. And our observation has been that patients seeking fertility treatments are more motivated to return to doctors' offices than those patients seeking normal course OB-GYN well visits.
Turning to biosimilars on Slide 10, biosimilars grew 41% as reported in the third quarter, and 39% ex-FX. We have five assets in the portfolio, three in immunology and two in oncology. Renflexis, and Ontruzant are our two largest offerings and both are offered in the U.S. Globally, Renflexis grew 43% ex-FX in the quarter, driven by strong performance in the U.S. And Ontruzant, which was launched in the U.S. in July of last year, was up 47%. The biosimilars business outside the U.S., which represents about half of our total biosimilars revenue, is tender-driven and therefore is more price-sensitive. And timing of tenders can also make this business somewhat lumpy and we benefited from that in the third quarter. So while we're coming off two quarters of about 40% year-on-year revenue growth in biosimilars, we see some moderation of that growth rate for the remainder of 2021 resulting in solid double-digit revenue growth year-on-year.
I now turn you to established brands on Slide 11. Revenue for established brands was down 6% as reported and 8% ex-FX in the third quarter of 2021. Excluding the impacts of LOE, revenue was down 4% ex-FX Volumes were up incrementally, mainly driven by COVID rebound, although not as strong as it was in Q2, as well as growth in China retail. Price was down above 5% across these established brands portfolio. They've given us this is a portfolio of medicines that, for the most part, are well beyond our LOEs, it may be counterintuitive to investors to hear that in the third quarter more than 50% of established brands revenue came from products for which volumes grew. These brands are well-known, they respond to promotion. We're actively managing life cycle opportunities across the portfolio. These factors support our May Investor Day discussion that we expect erosion in this portfolio to be in the low single-digit area, ex-LOE, over the intermediate term.
China; China is an important market for established brands and part of our strategy in this market has been to drive volumes into the retail channels versus our historical presence in the hospital channel. And this effort continues to be successful. The retail channel in China grew 20% in the third quarter versus prior year. And now represents almost 50% of established brands revenue in China, up from approximately 35% a year ago.
Now, turning to our income statement on slide 12. Our GAAP Income statement for Q3 and year-to-date are available in our earnings release, and I encourage investors to look at that important information. Here on Slide 12, we will be looking at our non-GAAP income statement for these same time period. For gross margins were excluding purchase accounting, amortization, and one-time items related to the spin off from cost of goods. So making these straightforward adjustments in the third quarter of 2021, non-GAAP adjusted gross profit was $1 billion, representing gross margin of 64.9% compared with 68.6% in the third quarter of 2020. The decline reflects costs associated with standing up Organon as independent company, including certain costs related to manufacturing agreements between Organon and Merck, which have lower gross margin percentages compared to product sales. Those manufacturing agreements sat an approximate 180 basis point negative impact to gross margins in the third quarter.
Also included in cost of goods sold this quarter was a $24 million one-time cost related to estimated losses associated with a vendor supply contract conveyed as part of the spend, which had a 160 basis point negative impact to gross margins. There were some spin-related accounting items that partially offset this unfavourability. But this quarter's gross margin is a good example actually of where we have apples and oranges comparability issues with prior-year comparisons and why our 2021 guidance becomes a much more useful yardstick for investors. That said, our gross margin for the third quarter was squarely aligned with the guidance that we've communicated in the low to mid-60 percent range. Adjusted EBITDA margins were 39.8% in the third quarter, which brings year-to-date margins to 38.9%.
We had told you last quarter that we expected second half EBITDA margins to be lower than the first half. The reason why our EBITDA margins are running stronger than we forecasted is driven by lower operating expenses and this is mainly timing-related. We're onboarding our standalone operating expenses a bit more slowly than we thought in headcount costs, as well as promotional spending in certain markets. And if you're doing back of the envelope math, you'd likely draw the conclusion that Q4 adjusted EBITDA margin would have to be markedly lower than year-to-date for us to finish within the EBITDA margin guidance range that we'll be discussing shortly. But we do expect operating expenses to increase sequentially in the fourth quarter relative to the third quarter as the pace of on-boarding some of these expenses speeds up going into year-end. Given the strong EBITDA performance in Q3, we did consider raising the adjusted EBITDA margin guidance range for the full year, but it would have been by a relatively small amount. So instead, we elected to just narrow the range and communicate to you a high and improved level of confidence in the guidance that we are affirming.
A few words on debt capitalization on Slide 13. At September 30, our bank debt was $9.3 billion against cash and cash equivalents of $1 billion. Now, embedded in that cash balance is approximately $320 million that is earmarked for finished goods inventory purchases from our former parent that's really related to the spinoff transaction. So more representative net debt number as of September 30 is closer to $8.6 billion. If we used the implied midpoint of our 2021 EBITDA guidance just for illustrative purposes, that will put our pro forma net leverage at about 3.7 times, which is a modest improvement in leverage ratio compared sequentially to last quarter.
And one more item here are imputed cash flow for the third quarter. It is good indicator that we are meeting our pre-spin forecasting and is representative of the cash-generating power of this business. Our capital allocation priorities remain consistent with what we laid out in our pre spin-off communications, and we are reiterating them today. Now that our board has established a dividend, the dividend becomes our first priority. We're targeting the dividend at a low twenties percentage of free cash flow, excluding one-time costs of the separation, a level at which we believe is very manageable.
Our second priority will be organic growth. And that would include lifecycle management opportunities for existing products within our portfolio, supported by capital deployed in our manufacturing plants. And on the latter, we expect to see annual capex in the range of 3% to 4% of revenue on an ongoing basis, once again, excluding separation costs. Our third priority for capital allocation's really a tie. It's a tie between, A, execution of external growth plans to develop a pipeline of new product opportunities, like you've seen in finance already; Alydia Health and the Jada System, investigational ebopiprant for pre-term labor, and now Forendo, targeting endometriosis. We'll balance that against B, debt reduction and our commitment to maintaining our BB/Ba2 parent rating. We are targeting a long-term leverage ratio below 3.5 times net-debt to adjusted EBITDA.
Turning to guidance on Slide 14. Consistent with previously communications, this guidance is all non-GAAP and pro forma as if the spin-off happened on January 1 of this year. Beginning with revenue, this is a chart we showed at Investor Day and changes to incentive really been at a margin. Based on where we are in the year, we are narrowing our full year 2021 revenue range from $6.1 billion to $6.4 billion to $6.2 billion to $6.3 billion. And this revenue is essentially all organic. We do include a de minimus partial year revenue contribution from the acquisition of Alydia Health.
The biggest component to the year-over-year change in revenue, the expected LOE impacts. Impacts from LOE were approximately $280 million year-to-date, are primarily related to the loss of patent protection for Zetia in Japan and NuvaRing in the U.S. We continue to expect the full year LOE impact of approximately $300 million to $400 million. As we've been careful to describe previously, 2021 is an inflection year for Organon as regards to LOE impacts. After 2021, our LOE exposure dissipates to approximately $300 million cumulatively over the next four years, combined, 2022 to year-end 2025.
We now think our VBP exposure in China for the year will be on the low end of a $200 million to $300 million range we previously communicated. Year-to-date exposure has been about $150 million and we have a fairly good understanding of what will be included in the next rounds in VBP, which is likely to include Ezetrol, Hyzaar and Nasonex.
Now, COVID is something that we're obviously watching very closely. We updated our view on COVID impact last quarter to expect that our total year impact from COVID in 2021 would be about even with what we experienced in 2020, which was about $400 million. Year-to-date 2021 impact from COVID was $320 million. And given the recent trends that we've seen in Nexplanon prescriptions, which is the product where we see the most lingering COVID impact, we are comfortable with that implied estimate of about $80 million of COVID impact in the fourth quarter. On a yearly basis, we expect foreign exchange translation to be a modest tailwind based on year-to-date currency performance and where spot rates are currently. And finally for performance, we've tweaked this bucket down a hair. And this is mostly tied to my earlier commentary on biosimilars and the lumpiness of tenders quarter-to-quarter. Taken as a whole, year-to-date revenue performance is largely to be expected, despite the uncertainties introduced by COVID.
The key themes that we've been talking about in our public communications prior to spin off, and since the spin-off remains very much intact, and those are LOE issues that are waiting, women's health, especially fertility, and biosimilars that are delivering growth, and China, that's performing very well despite VBP headwinds. Turning to other guidance metrics on Slide 15. The message here is that for all the items shown, we're affirming prior guidance from most metrics. And for revenue and adjusted EBITDA, we're simply narrowing the ranges in light of where we are in the fiscal year.
Reiterating the point I made earlier, during 2021, we've on-boarded operating expenses more deliberately than we had forecasted. We're not yet at our run rate for SG&A expenses in independent company. We know R&D expense will be increasing in 2022 and beyond as we add pipeline assets. And I'd say this more as we start to look forward to next fiscal year, and we will provide quantitative guidance for 2022 when we report our full-year 2021 results in February. Wrapping up the financial discussion, the franchises are progressing as we had expected. And given our outlook for 2021, we continue to believe that we're well-positioned for future organic revenue growth in the low-to-mid single-digits on a constant-currency basis. This will be driven by stabilization in the established brands portfolio and continued growth in both women's health and biosimilars, each of which has the potential to grow at low double-digit CAGRs in the intermediate term.
At this point, I'll turn the call back to Kevin for closing remarks.
