Matthew Walsh
Chief Financial Officer at Organon & Co.
Thank you, Kevin. As I've done in previous quarters, I'll remind you that our results prior to spin-off are presented on the carve-out basis of accounting, which is a GAAP convention. It's not intended to present results as if Organon were a stand-alone company. So, I want to be clear as we discuss our results, that because our spin date was June 2nd, it won't be until the third quarter of 2022 that we can draw true apples-to-apples comparisons to prior year results, where all P&L line items represent post-spin stand-alone financials for Organon. Until that time, revenue is where we'll have the best comparability to prior year periods, and that's where we'll start the financial discussion.
So, turning to Slide 7, revenue for the third quarter was $1.6 billion, up 4% as reported and up 8% at constant currency exchange rates when compared to the first quarter of 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 the loss of exclusivity or LOE during the first quarter was approximately $30 million, and it's primarily related to NuvaRing's LOE in the United States. We didn't have any LOE impact in established brands this quarter. The most significant LOEs facing the portfolio washed out in 2021, and we expect only modest new LOE exposure going forward.
Since December of 2020, we have been expecting a generic entrant in the U.S. for Dulera. That did not happen in 2021 and has not happened thus far in 2022. Our current expectation is that any potential LOE for Dulera, should it happen this year, will have a limited impact on 2022 results, and that view is currently incorporated into our full year guidance.
Continuing to read across the waterfall chart. In the first quarter of last year, the impact from volume-based procurement in China was significant due to the December 2020 implementation of the third round of VBP. Now back then, that was the largest round to that point and included four of Organon's products, Singulair Paediatric, Proscar, Propecia and Arcoxia. That compares with the first quarter of this year when there was no new LOE impact from VBP on Organon's products.
Moving to volume now, which grew significantly in the first quarter. The increase in volume came from our growth pillars, fertility, biosimilars, Nexplanon outside the U.S. this quarter and China retail but also from volume growth in our base business and established brands, particularly demand in China for non-VBP brands as well as for products in Europe and the LAMERA region.
As Kevin mentioned, some of the favorability in established brands this quarter was due to one-time items. If we think about the 15% ex FX revenue growth in the quarter for established brands, 18% of that was volume growth offset by 3% pricing pressure. And in that 18% volume growth, it was about evenly split between one-time items and underlying growth in the base business.
Given the product and geographic diversity in the established brands franchise, taken alone, none of the one-time items would be needle moving, but just to give you an example of the kind of things that we're talking about, the largest among them was a temporary supply issue currently impacting several competitors in the Japanese market. That drove outperformance in Japan this quarter, which compares to weaker performance in Japan in the first quarter of last year when demand was lower due to the expectation that the government was preparing to take action to lower prices.
The supply of other bucket [Phonetic] primarily represents supply sales to Merck and other third parties, which consist of lower margin sales of pharmaceutical products under contract manufacturing arrangements. For the quarter, supply sales were down about $30 million year-over-year, and that's consistent with our view that we expect volume under these arrangements to decline.
Finally, foreign exchange translation represented about 400 basis points of headwind for this quarter, which is not surprising given the fluctuations in global currency markets and also understanding that approximately 80% of our revenues were derived outside the United States during the first quarter.
Briefly on Slide 8. This is where we show geographic distribution of revenue. All of our ex U.S. regions were nicely ahead of prior year at constant currency, and following up on my earlier comment, here you can see the favorability we had in Japan showing up in the APJ region, the good growth in Nexplanon and in established brands in Latin America, in the solid performance in China in both established brands and fertility.
So now, let's take a look at performance by franchise. We'll start with women's health on Slide 9. Our women's health business was down 5% as reported and 3% at constant currency in the first quarter versus prior year, driven by a 5% constant currency decline in Nexplanon and a 6% decline in NuvaRing. Those declines were partially offset by continued strength in fertility led by Follistim, which grew 20% ex FX in the quarter.
As Kevin mentioned and as we've explained in prior quarters, Nexplanon's performance can vary quarter-to-quarter based on customer buying patterns and tenders, but we saw good trends exiting the first quarter, second quarter is off to a solid start, we continue to expect Nexplanon to deliver double-digit revenue growth on a constant currency basis for the full year 2022.
Turning to biosimilars on Slide 10. Biosimilars grew 22% as reported and 25% ex FX. We have five products 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 21% ex FX in the quarter driven by continued strong performance in the U.S. And Ontruzant was up 5%, driven by continued uptake in the U.S. since its launch in 2020 -- July 2020 and partially offset by competitive pressures in Europe.
Turning to established brands now on Slide 11. Revenue for Established brands was up 10% as reported and 15% ex FX in the first quarter. And while we did have volume growth in the base business, this should be taken in the context of, first, there was no VBP impact this quarter; second, there was no LOE in established brands this quarter; and third and final, if you look at Slide 5 that Kevin showed earlier, our established brands revenue in the first quarter of 2021 shows a dip, which made Q1 of last year a favorable comparison point.
Some of the prior year dynamic was related to Japan, some was COVID and some was related to buying patterns of consumers. So, as good as the double-digit year-on-year performance looks, the more important comparison point really is how that established brands do versus our expectations embedded in the guidance we provided in February. And the answer there is quite well and nicely ahead of our expectations. Established brands getting out of the gate this well in the first quarter is what underpins Kevin's comment that we now believe revenue growth in this franchise can get close to flat for 2022 at constant currency, which is better than our estimated longer-term trajectory of low single-digit erosion.
Now, turning to our income statement on Slide 12. Our GAAP income statement for the first quarter is available in our earnings release, and I encourage investors to look at that important information. Here on Slide 12, we'll be looking at our non-GAAP income statement for the first quarter. For gross profit, we're excluding purchase accounting amortization and one-time items related to the spin-off from our GAAP cost of goods sold. Making these straightforward adjustments in the first quarter of 2022, non-GAAP adjusted gross profit was $1 billion, representing gross margin of 66.5% compared with 62.2% in the first quarter of 2021. And again, I'll remind you that at this point in the Company's history, it's hard to draw meaningful comparisons because there were pre-spin allocated costs in the first quarter of 2021, which were not incurred this year. [Indecipherable] operating lens though, we can point to reduce supply sales, which are lower margin compared with product sales as a driver of the year-over-year improvement in gross margin. Adjusted EBITDA margins were 41.3% in the first quarter and benefited from the higher gross margin as well as operating expenses that, due to timing, were at their lowest expected point in this year. I'll speak more about adjusted margins in a moment when we discuss the outlook for the full year.
As we look at debt capitalization and leverage on Slide 13, as of March 31st, we have bank debt of $9.1 billion netted against cash and cash equivalents of $694 million. Using an LTM EBITDA number that does not adjust for acquired in-process R&D expense per the SEC's recent guidance, our net leverage ratio was approximately 3.6 times as of March 31st. Our capital allocation priorities remain consistent with past communications.
Our first priority, of course, is servicing the dividend, which we're targeting at 20% of free cash flow before one-time items and which we believe strikes an appropriate balance between reinvesting for growth and delivering near-term value for shareholders.
Our second priority is organic growth, which would include life cycle management opportunities for existing products within our portfolio, supported by capital deployed in our manufacturing plants. On the latter [Phonetic], we expect to see annual capital expenditures in the range of 3% to 4% of revenue on an ongoing basis, excluding separation costs.
Now, because these first two priorities are not big absorbers of capital, that leaves significant self-generated cash flow for our third capital allocation priority, which I would really say is a tie between execution of external growth plans to develop a new pipeline of new product opportunities. We'll balance that against discretionary debt reduction, just like we did in the fourth quarter of last year.
We're committed to maintaining our BB/Ba2 parent rating, and we will continue to make progress towards a net debt to adjusted EBITDA ratio sustained below 3.5 times, once again balancing debt reduction with capital deployed for externally sourced growth initiatives.
Turning now to guidance on Slide 14. Here, we bridge our expected revenue change year-on-year. The biggest difference on this slide from the version that we showed you in February is the FX translation impact, which has gone from an approximate $100 million to $200 million or a headwind of 200 to 300 basis points to an approximate $200 million to $300 million impact or 300 to 475 basis point headwind based on where spot rates are today.
Operationally at constant currency, the year is unfolding mostly aligned with our expectations. No significant net changes to the business, and most of the drivers on this page are identical or even slightly better than our original 2022 guidance.
With the data that we have at present, we continue to see 2022 revenue within the original guidance range. Although if exchange rates don't improve from where they are today, we would likely be at the lower end of our $6.1 billion to $6.4 billion revenue range.
For LOE, we still expect an approximate impact of $100 million as we communicated last quarter, coming from NuvaRing and a possible generic competitor for Dulera in the U.S. As both Kevin and I have reiterated today, 2021 was the last year, for which we expected significant LOE revenue impact within our product portfolio.
We continue to manage VBP in China. And based on our assumption that VBP rounds seven and eight will be implemented later this year, we think that VBP will be an approximate $100 million impact, which is also the same message we communicated last quarter.
We expect about $200 million of price erosion in 2022, and that's in line with the historical pricing trends for the global markets that Organon has been selling into for many years. And for volume, we're tracking to $600 million to $700 million of growth for the full year. This important component of our guidance remains unchanged, and it is supported by our first quarter actual performance. The majority of that volume increase is expected to come from multiple growth pillars, Nexplanon, biosimilars, fertility, China retail and to a lesser extent, recent business development activity. We do expect volume growth in our base business and established brands as well, once again supported by our first quarter actual results. And by the way, we estimate that less than 20% of the volume growth that we're projecting can be attributed to COVID recovery.
Turning to other guidance metrics on Slide 15, all of which we are affirming today. With regard to adjusted EBITDA margins, looking forward in 2022, the margin favorability we saw in the first quarter will be absorbed and balanced downward over the remaining quarters of 2022, with expected increases in operating expenses related to execution of business development initiatives that will drive future revenue growth as well as increased supply chain costs driven by higher energy costs as well as inflation. We expect the impact of increased supply chain cost and inflation will impact all operating expense line items, although mainly [Indecipherable].
Incremental operating expense for completed business development deals will show up primarily in R&D, Forendo as an example of that, and SG&A where the examples would be launch costs for Xaciato and promotional spending around the reacquisition of Marvelon on Mercilon marketing rights in certain Asian countries.
As operating expenses build throughout the year, the fourth quarter is expected to be the lowest point for adjusted EBITDA margins. And while our range for the full year is being maintained at 34% to 36%, just as I discussed for revenue, if exchange rates remain where they currently are, we need to be looking at the low end of that range as well for the full year 2022.
Important to our guidance practices going forward and along with other companies in our sector, beginning in 2022, Organon will no longer exclude expenses for in-process R&D from our non-GAAP results. These changes are being made to align with views expressed by the SEC. There were no such expenses in the first quarter of this year or last year. The third and fourth quarters of last year along of course with the full year 2021 have been recast to reflect these changes and full detail of that recasting can be found in Tables 7 and 8 of our press release as well as in the appendix slides to this earnings presentation.
We're not incorporating an estimate of future in-process R&D into our guidance for any business development transactions not yet executed. Our criteria for inclusion will be to have a signed contract. Business development is a strategic priority for us as future business development activity that involves upfront and/or milestone payments would impact our non-GAAP results and would also impact any guidance we might provide. And while we'll work to provide details on those relevant payments when we announce the transaction, we do not plan to update our guidance between quarters based solely on those associated payments alone.
And wrapping up the financial discussion, we're off to a solid start to the year. Operationally, the business is performing well, with strong demand trends in Nexplanon, structural tailwinds in fertility, double-digit growth in biosimilars and the stabilization of the established brands business that we have been signaling for some time.
At this point, I'll turn the call back to the operator for questions.
