Matthew M. Walsh
Executive Vice President and Chief Financial Officer at Organon & Co.
Thank you, Kevin. I'm pleased to go into further detail on our results for the third quarter, not just because the performance was solid but also because we reached an important milestone in financial reporting this quarter. Organon as a stand-alone entity in both the current and prior year periods, which means this is the first earnings call that we can discuss performance with apples-to-apples comparability to the prior year period without being obstructed by the carve-out basis of accounting that we needed to employ for pre-spin-off accounting periods. And with that opener, we'll start the financial discussion on Slide 7.
I'm showing this slide for two reasons: first, to highlight operational performance by geography; and second, and really more important, to provide a basis for understanding just how much Organon's results are subject to foreign exchange translation. On an operational basis, our best performance in the third quarter came from the United States and Asia Pacific, Japan regions. The U.S. is an important market, representing 1/4 of our business, so the 6% growth in that market during the quarter was meaningful and was primarily driven by growth in NEXPLANON and also ONTRUZANT and RENFLEXIS, the two biosimilars that we offer in the United States.
On a constant currency basis, the APJ region grew 13% during the quarter. We continue to benefit in Japan where generics since -- really since the start of the year, have been having structural supply issues related to GMP conformance and quality issues. Now this presents an opportunity for Organon, and we've been able to flex our manufacturing and supply chain capabilities to meet market demand. We've also seen growth in Southeast Asia and Thailand. And as Kevin mentioned, we shipped our first order of Marvelon to Vietnam in the third quarter. Our remaining regions were level with prior year during the quarter on a constant currency basis.
We had very strong performance in China during the third quarter of last year related to resupply of key products from long back orders. So it was a tough comparison point in China for Established Brands, but growth in fertility and in other Women's Health, namely Marvelon, offset the modest decline in Established Brands. We're seeing strong demand for NEXPLANON and HUMIRA, but that was offset by the phasing of an ONTRUZANT tender that we received in the third quarter of last year but moved to the second quarter of this year. In EUCAN, we had good volume growth in Biosimilars and Established Brands, but that was offset with annualized pricing erosion in Established Brands in Europe. As we think about foreign exchange, other than the U.S. dollar, which represents about 30% of our revenue exposure, we have most exposure to the euro, which is about 20% of our revenue; the Chinese renminbi, which is about 15%; and the Japanese yen, which is less than 10%.
But my main point here is that with about 3/4 of our revenue outside the U.S., our portfolio faced a significant headwind from FX, not unlike a lot of other multinational companies. But in our case, it amounted to a full 7% point swing in revenue growth for the quarter, but unfortunately masked the operational growth in local currencies that we delivered. Turning to Slide 8, which bridges our year-over-year quarterly revenue performance by key driver. Revenue for the third quarter was approximately $1.5 billion, down 4% as reported, but up 3% at constant currency when compared to the third quarter of last year. These are the components of the s7% point swing in revenue that I was referencing.
The impact of loss of exclusivity or LOE during the third quarter compared to last year was negligible. In the first half of this year, the majority of LOE exposure in the portfolio was coming from NuvaRing, but that was countered this quarter by favorable volume demand in the United States, and NuvaRing revenue actually grew modestly year-over-year in the third quarter. In addition, we didn't have any LOE impact in Established Brands this quarter. The most significant LOEs facing the portfolio washed out prior to the spin-off, and we expect only modest new LOE exposure going forward. Now since the spin-off in 2021, we have been expecting a generic entrant in the U.S. for DULERA. That did not happen in 2021 and now looks very unlikely for the remainder of 2022.
Continuing to read across the waterfall chart, the impact from volume-based procurement in China was also negligible in the third quarter, which is also the case year-to-date as the implementation of the next rounds of VBP have been delayed. That said, we expect the VBP implementation to resume in the fourth quarter and that it will primarily impact EZETROL. Moving across, we saw an approximate $30 million impact coming from price in the third quarter, which is consistent with our expectation that we'll see low single-digit price erosion on a company-wide basis. This is mostly coming from Established Brands where products are subject to mandatory price reductions in some markets. We had good volume growth in the quarter.
That came mostly from our growth pillars, NEXPLANON, particularly the United States and Latin America; biosimilars in the U.S.; respiratory and cardiovascular products in the APJ region; and just overall growth in fertility. And finally, foreign exchange translation continues to be a significant headwind for us. As I introduced on the last slide, and here you can see the translation impact of approximately $100 million on the top line. Now let's take a look at our performance by franchise, and we'll start with Women's Health on Slide 9. We had very strong growth in the United States in Women's Health during the quarter, driven by 34% growth in NEXPLANON. We did have a favorable comp in NEXPLANON in the third quarter of last year as annual patient well visits were depressed, and there was also a tender in Mexico that would normally hit the third quarter but moved into the fourth quarter of last year.
In addition to volume growth, our Q3 2022 performance also reflects our ability to secure a modest price increase in NEXPLANON, but that had a lesser impact relative to volume. And as Kevin mentioned, we also saw a double-digit growth in Fertility this quarter. We had better performance in NuvaRing and in other Women's Health, which reflects the reacquisition of Marvelon rights in China. Turning to Biosimilars on Slide 10. Biosimilars declined 7% as reported and 4% ex FX in the quarter, which really reflects timing of revenues. Year-to-date, Biosimilars has grown revenues double digits and is on track to grow double digits for the full year. What we're seeing here in this quarter is the tendency for the Biosimilars business to be lumpy due to timing of tenders.
Both ONTRUZANT and RENFLEXIS performed strongly in the U.S. during the quarter, and overall, the U.S. biosimilars business was up 23% on a constant currency basis, but year-over-year tender phasing and, in this case, in Brazil for ONTRUZANT offset those increases in the quarter. Turning to Established Brands on Slide 11. With close to 90% of the revenue in Established Brands coming from outside the U.S., FX translation impacts are most prevalent in this franchise. Revenue for Established Brands was down 11% as reported and down 2% ex FX in the third quarter. We've seen very strong year-to-date performance with revenue up 6% at constant currency.
And given the strong nine-month performance, we now expect that revenue for Established Brands will land in modestly positive territory for full year 2022 on a constant currency basis. The question we receive most from investors is, what can the Established Brands franchise do next year and over the longer term? So since the spin-off, we've said we could manage this business to very low single-digit erosion on the top line at constant currency. We think we can deliver at least that performance over the intermediate term. And there's three reasons why we believe this. First, our actual revenue performance in the first five quarters since the spin-off has exceeded our expectations.
Two, more than half of our Established Brands portfolio will have already gone through VBP in China by the end of this year. And three, there's very modest LOE left in the portfolio. So now turning to our income statement on Slide 12. We've already discussed revenue, so we'll move down the P&L. For gross profit, we're excluding from cost of goods sold, purchase accounting amortization and onetime items related to the spin-off. Making these straightforward adjustments in the third quarter of 2022, non-GAAP adjusted gross profit was $1.032 billion on revenues of $1.537 billion, representing a gross margin of 67.1%, which was up from 64.9% in the third quarter of last year. The year-over-year improvement in gross margins is primarily due to favorable product mix and the $24 million charge in 2021 related to a long-term vendor supply contract conveyed as part of the spin-off.
Adjusted EBITDA margin was 35.5% in the third quarter of this year compared with 38.2% in the third quarter of last year. And just a quick reminder that we've revised our presentation of adjusted EBITDA to conform with industry-wide SEC guidance to include IP R&D and milestone payments within any adjusted income reported. And in our case, adjusted EBITDA margin this quarter includes $10 million of acquired IP R&D and milestones compared with $25 million of similar costs in the prior year period. Higher selling and promotional costs as well as R&D spending associated with recent acquisitions of clinical-stage assets contributed to the decline in adjusted EBITDA margin year-over-year.
As we have been communicating consistently since the spin-off, expenses to develop new products, to support commercial product launches and to build core capabilities are going to be drivers of our adjusted EBITDA margin in the intermediate term. As we look at debt capitalization and leverage on Slide 13, as of September 30, 2022, we have debt of $8.7 billion netted against cash and cash equivalents of $500 million. Our bank covenant calculations provide for the add back of acquired IP R&D and milestones to our last 12-months EBITDA calculation, which is how we have been presenting leverage ratios in prior slide decks and on prior earnings calls. Now on that basis, net leverage was about 3.6 times as of September 30. Recall that at the time of the spin-off in 2021, we had a pro forma net leverage ratio of about 4.0 times.
And we said then that we were targeting a leverage ratio of less than 3.5 times on a sustained basis. So we've made progress on leverage reduction, which has been aided by $200 million in voluntary prepayments of our U.S. Term Loan B since the spin-off. Turning to free cash flow on Slide 14. Part of the Organon investment thesis for stakeholders is that the stand-alone business generates significant free cash flow. We set the dividend at a rate that would imply that we expect Organon to generate north of $1 billion of free cash flow per year, and that basic math still holds. The recency of the spin and related timing of some payments to Merck, coupled with unfavorable foreign exchange translation, obfuscate this important characteristic of the business on our year-to-date free cash flow calculation.
So on this slide, I'm going to walk through a few of the issues, most of which are transient in nature. This simplified year-to-date free cash flow on this slide starts with $1.7 billion of adjusted EBITDA, which, as I mentioned earlier, includes the impact of acquired IP R&D and milestones. The biggest change relative to what we had expected at the start of the year is the working capital line item highlighted in green. And there are three components making up this $764 million use of cash. First is the timing of about $300 million of working capital build related to the spin-off and separation from Merck. We expected this figure to be built during the prior year period, but it slid into 2022. Second is an increase in normal course cash cycle working capital of about $250 million.
About half of that is related to intentional, strategic growth in inventory where it can drive revenue performance in our growth pillars, and that's mainly in Biosimilars and the completed acquisitions in Women's Health, with the remainder in line with volume growth across our businesses. And the third driver is foreign exchange translation, and the reporting impact there is about $160 million. So the working capital build associated with the spin together with the FX impact has been significant year-to-date. We wouldn't expect items like these to be of this magnitude in future years. Our capital allocation priorities remain consistent with past communications.
Our first priority, of course, is servicing the dividend. 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, we expect to see annual capex in the range of 3% to 4% of revenue on an ongoing basis, excluding separation costs, although we're very likely to finish below this level in 2022. That should leave significant self-generated cash flow for our third capital allocation priority, which is really a tie between execution of external growth plans to develop a portfolio of new product opportunities with an increased focus on immediately accretive or imminently accretive acquisitions, we'll balance that against discretionary debt reduction.
We're committed to maintaining our BB/Ba2 parent rating balancing debt reduction with capital deployed for externally sourced growth initiatives. Turning to revenue guidance on Slide 15. Here, we bridge our expected revenue change year-on-year. The impact of foreign exchange translation has increased throughout the year to where we now expect an approximate $400 million or an approximate 650 basis point headwind based on where spot rates are today. And given where we are in the year, we're able to narrow our guidance range for full year 2022 revenue from $6.1 billion to $6.3 billion to $6.1 billion to $6.2 billion, consistent with the movements we've seen in foreign exchange translation. For LOE at this stage in the year, a generic in DULERA is looking unlikely.
So together with recent favorability in NuvaRing, we expect LOE impact for 2022 will be about $25 million for the full year. For VBP in China, the implementation of rounds seven and eight have been delayed. So again, we've not had any year-to-date impact from VBP this year. However, the inclusion of EZETROL is likely in the fourth quarter, so we're now forecasting just under $50 million of impact from VBP for the full year 2022. We continue to expect about $150 million of price erosion in 2022, in line with historical pricing trends for global markets that we've been selling into for many years. Our teams across the world are focused on improving profitability and delivering profitable growth.
You can see that in our estimates for price erosion, those have actually improved by about $50 million from our original 2022 guidance back in February. And for volume, we're tracking to approximately $550 million of growth for the full year, which has come down from the $600 million to $700 million of growth since we last guided, and that's primarily related to two factors. First, given the protracted nature of lockdowns in China, we've seen slower-than-anticipated recovery, particularly in the fertility clinics and the overall retail market. In spite of this transient headwind, we still feel very good about our business in China and in our ability to grow our business in China.
Second, in order to meet emerging demand trends we're seeing for certain Established Brands products, we've strategically aligned our supply priorities to more timely meet those demands, and that has resulted in different shipment schedule for the fourth quarter that we anticipated in prior volume guidance. The majority of our year-over-year volume increase is coming from our multiple growth pillars: NEXPLANON, Biosimilars, Fertility, followed by favorable onetime items like the competitive issue in Japan and, to a lesser extent, recent business development activity. We do expect net volume growth across our product portfolio and Established Brands as well, which is supported by our year-to-date results.
Turning to other guidance metrics on Slide 16. As I mentioned, we're recasting our revenue range to incorporate the continued strength in the U.S. dollar. We're also tightening our estimates on depreciation and interest expense given where we are in the year. The other range we're modifying this quarter is for adjusted EBITDA margin to reflect the operational favorability we've seen year-to-date. So we're adjusting upward the range accordingly from 32% to 34% to 33.5% to 34.5%. That includes $107 million of acquired IP R&D year-to-date. Taking the midpoint of our guidance, that would imply second half margins -- EBITDA margins just north of the 30% area.
As we said last quarter, second half 2022 margins are a directional indicator for what 2023 adjusted EBITDA margins could look like in advance of Organon formally releasing 2023 guidance, which we will do when we report our full year results in February. The movement in our EBITDA margin is a function of reinvestment in our business, primarily in new clinical programs, new commercial product launches and in our R&D and commercial capabilities that position the company very well to deliver sustained revenue growth in the future. Wrapping up the financial discussion. On a constant currency basis, the business has performed very well in the third quarter and nine months year-to-date, really as we expected.
Actually better-than-expected in Established Brands, which is over 60% of our total revenues. And together with Biosimilars and Women's Health, our guidance range implies annual revenue growth of about 3% to 5% on a constant currency basis, which is right where we thought we would be. At this point, I'll turn the call back to the operator for questions.
