Matthew M. Walsh
Executive Vice President & Chief Financial Officer at Organon & Co.
Thank you, Kevin. Beginning on Slide 9, let's walk through the drivers of our 4% constant currency revenue growth in the quarter. Starting with the impact of loss of exclusivity. LOE was negligible in the second quarter as it was in the first quarter and the small amount that we have realized year-to-date was related to generic competition for NuvaRing in the U.S. In the second quarter, we had about a $25 million impact from VBP in China related to last year's implementation of Round 7 that included our cardiovascular product, EZETROL, which is sold as ZETIA in some markets outside of China. Year-to-date impact from VBP is about $50 million, which is tracking to our expectations for the year.
Moving across the price. We saw approximately $30 million of price erosion in the quarter. As Kevin mentioned, through various initiatives, we have been able to do a bit better on stemming price erosion in Established Brands, but given the nature of biosimilars, we will see pricing pressure in that franchise. Additionally, in the United States, we're attempting to gain share in fertility, especially in reimbursed markets, so we have to price our products competitively in that channel.
We continue to see strong volume increases across all of our franchises, about $115 million in the second quarter. About 60% of the volume growth came from our growth pillars, biosimilars, Nexplanon, fertility, JADA and China retail. The remainder came from volume growth within Established Brands. The bar for Supply Other primarily represents revenue to Merck with the plus $5 million from this quarter bringing us to a level with our expectations six months year-to-date.
As we have advised in the past, this revenue stream is essentially a series of lower margin contract manufacturing agreements that have been declining since the spin-off and will continue to decline going forward. And finally, you can see the financial reporting headwind we had in foreign exchange translation, about 250 basis points for the second quarter, which is a function of more than 75% of our revenue being generated outside of the United States. Now this moderated from the first quarter when we saw a 450 basis point headwind and we expect the impact of FX translation to continue to moderate through the end of 2023.
Now let's turn to Slide 10 where we take a look at revenue by geography. The U.K. and region grew 6%, primarily related to growth in ATOZET and particularly in France, as well as growth in biosimilars in Canada where multiple provinces are executing a mandatory transition from originator drugs to biosimilars. Partial offsets in the quarter were mandatory price declines typical in Europe as well as supply constraints related to the market action on injectable steroids as we're steadily rebuilding supply chain inventories to our desired stocking levels.
The U.S. grew 6% in the quarter as a result of the strong performance across most of our key growth platforms, Nexplanon, RENFLEXIS, JADA and to a lesser extent fertility. Asia Pacific Japan declined 5% in constant currency in the second quarter, driven mainly by an unfavorable comparison to the very strong performance in the second quarter of last year when certain competitors in Japan were out of the market because they didn't receive GMP or good manufacturing practice certification.
Despite VBP, China grew 2% in the second quarter on a constant currency basis, driven by the COVID recovery in fertility and modest growth in the retail channel. Constant currency growth in the LAMERA region of 11% was mainly driven by solid contributions in women's health across contraception and fertility coupled with robust growth from our Established Brands products, primarily in cardiovascular. This was partially offset by supply constraints related to the first quarter market action for injectable steroids as we just mentioned in the U.K. and region.
The next few slides lay out our performance by franchise. Kevin covered the highlights very well in his opening comments and the details are provided in the supporting earnings materials. So I'll focus on topics that may be relevant to your modeling as we think about the remainder of 2023.
We'll start with Women's Health on Slide 11. A key volume driver in both Nexplanon as well as our fertility portfolio results from expanded access moving from traditionally out-of-pocket markets into the reimbursed segments. For example, in the United States, the Dobbs decision has driven an increase in demand from patients obtaining Nexplanon through providers under the 340B program, which is a more highly discounted channel. And in fertility, while volume demand is strong, we are trying to expand access into the reimbursed segments, which requires competitive pricing. Ex U.S., we've seen strong performance from fertility in LAMERA and also in China as patients return to the clinics post-COVID.
Turning to biosimilars on Slide 12. Kevin covered the U.S. Hadlima launch, which began on July 1, but I would also highlight that the second quarter was a very solid quarter for biosimilars, which grew 15% ex FX in the quarter and has grown 18% ex FX year-to-date. RENFLEXIS grew 20% in the quarter and is on track for its sixth consecutive year of annual revenue growth in the U.S. ONTRUZANT is weathering competitive headwinds in Europe and more recently in the U.S. But in the U.S., the team has been able to substantially grow volumes to offset competitive pricing dynamics.
Turning to Established brands on Slide 13. As Kevin mentioned, that franchise continues to demonstrate its durability. The team has been able to cover what was on a company-wide basis about a percentage point of revenue headwind from the market action on injectable steroids, DIPROSPAN and CELESTONE and we expect the Established Brands to be flat for the full year on a constant currency basis.
Now let's turn to key P&L line items on Slide 14. 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 on Table 4 in our appendix slides. Non-GAAP adjusted gross margin was 62.9% compared with 66.1% in the prior year period. The year-over-year decline in gross margins is primarily due to product mix and FX translation as well as inflationary cost pressures that impacted distribution and employee-related costs. Our adjusted EBITDA margin was 33% in the second quarter compared to 32.3% in the second quarter of last year. The increase in adjusted EBITDA margin was primarily a result of $97 million of IP R&D and milestones in the second quarter of last year where no such costs were incurred in the second quarter this year.
With regard to IP R&D. These milestones are subject to a great deal of uncertainty and are difficult to forecast. Based on our current view into the rest of the year, we do not anticipate any additional IP R&D payments in 2023 tied to current assets in the portfolio. That includes $25 million tied to the I&D acceptance for ebopiprant. Last quarter, we said that the I&D for ebopiprant could be filed as early as the second quarter of 2023. Since then, [Technical Issues] additional development work that's required to inform a clinical program for this asset. As a result, we currently do not have an updated date for filing the I&D and we'll plan to evaluate future development of this program as new data is available.
Non-GAAP adjusted net income was $336 million or $1.31 per diluted share compared with $319 million or $1.25 per diluted share in 2022. The year-over-year increase in net income was a result of higher adjusted EBITDA compared with the second quarter of 2022 as well as a tax benefit in the second quarter related to foreign earnings. This was partially offset by an increase in interest expense related to our variable rate debt.
Turning to our net leverage ratio on Slide 15. Reiterating comments I made on our last two earnings calls, I said that we would see upward pressure on our net leverage ratio through the third quarter, ultimately ending 2023 close to where it was at the start of the year. This is both a function of investments we've made to support our business development strategy that have an impact on our trailing 12-month EBITDA calculation as well as a debt figure that trues up immediately when the dollar weakens, because it increases the translated value of our euro-denominated debt on the balance sheet.
Turning to Slide 16. We provide a closer look at our cash flow. As a reminder, in 2022, we generated just over 75% of our annual cash flow in the second half of the year, and we expect this year to follow that same pattern. The biggest use of cash in the first half is working capital. There are a few items in working capital that are timing related and we expect to be absorbing cash in the first half of the year and then releasing it in the back half. That includes certain accruals, which for instance include annual incentives among others that represented about $110 million of that $440 million working capital use.
There's about $130 million use of cash related to a planned first half inventory build to support the growth of the biosimilars business, including the Hadlima launch and to achieve target fill rates across the portfolio. In addition, as inventory turns, the replenishment cycles reflect the impact of both inflation and foreign exchange on our purchased raw material and labor inputs. And if you're tracking our trade days of sales outstanding or DSO, you'd probably notice that metric ticked up by about five days this quarter and that was largely driven by strong sales in the month of June.
We believe we will revert back to our norm of about 65 days trade DSO during the second half of the year, which alone should improve working capital by about $100 million in the second half. So there are some very logical levers that will unwind a fair bit of this first half use of working capital use in the back half and that will drive us towards that approximately $1 billion of free cash flow before onetime costs on an annual basis for 2023.
Onetime cash costs related to the spinoff transaction are trending in line with our expectation of about $350 million for the full year 2023 and the single biggest component of separation costs relates to the implementation of stand-alone IT systems and the largest of which is our stand-alone SAP global single instance ERP system, which is scheduled for completion in the second quarter of 2024. Looking ahead, capex for PP&E of 3% to 4% of revenue remains a good range for forecasting purposes as we continue to deploy that capital into our internal manufacturing and packaging capabilities as well as our technology infrastructure to help drive cost efficiency and productivity.
Turning to revenue guidance now on Slide 17. Here, we bridge our expected revenue change year-on-year. Compared with our last guidance update, the biggest difference on this slide is the FX translation impact and that dynamic is improving. We're moving from an approximate $50 million to $100 million impact or a headwind of about 80 to 160 basis points to an approximate $0 to $50 million impact, representing an 80 basis point headwind on the high end based on where spot FX rates are today.
Accordingly, we're adjusting our guidance range for full year 2023 revenue from $6.15 billion to $6.45 billion to $6.25 billion to $6.45 billion consistent with the movements we've seen in foreign exchange. LOE impact has been minimal so far in 2023 and is primarily related to the continued impact of generics for NuvaRing in the United States. In the second half of the year, we still expect an approximate $50 million to $75 million impact related to the continuing erosion of NuvaRing, generic competition for ATOZET in Japan following recent LOE in that market, as well as a possible generic entrant for DULERA in the U.S. by year-end.
We now expect the annual impact from VBP to be in the range of $100 million to $125 million, an improvement from the bridge we showed last quarter. The VBP impact in 2023 will be driven mostly by EZETROL's inclusion in the implementation of Round 7 in November 2022 as well as the recent Round 8 implementation in July, which will include for Organon our REMERON and HYZAAR products.
We're raising our estimate of potential exposure to price erosion to $100 million to $150 million, which is about $25 million higher than our previous estimate. This is less about Established Brands, but rather is tied to my earlier comment around expanding access for Nexplanon and commercial strategies in fertility and U.S. biosimilars. We continue to expect approximately $500 million to $600 million of volume growth in 2023, unchanged from prior guidance with that growth coming from our multiple growth pillars, biosimilars, fertility, China retail, JADA and Nexplanon, as well as contributions from Established Brands.
Moving to the other components of guidance on Slide 18. We continue to expect adjusted gross margin to be in the low to mid-60% range. And in fact, the back half of 2023 gross margins should look much like what we saw in the second quarter. This is primarily due to product mix. The biosimilars franchise operates as a profit share model, so growth in that franchise from the U.S. launch of Hadlima will be unfavorable with the gross margin line. Additionally, the inflationary cost pressures we saw in the second quarter will persist through the remainder of 2023.
On operating expenses, our ranges for SG&A and R&D as a percentage of sales are consistent with what we laid out last quarter for our expectations for the full year and reflect continued investment in the business as we position it for future growth, but I would add that typically, our second half opex spending tends to trend a bit higher than the first half of the year. Operationally, all of these ranges are largely in line with the financial guidance we laid out back at the beginning of the year.
Consistent with our view that we no longer expect about $30 million of IP R&D in the remainder of the year, we are raising the bottom end of our adjusted EBITDA guidance by 0.5 percentage point, so the new range is 31.5% to 33%. We also expect to have some net favorability below the EBITDA line. Given the favorability on tax rate we had in the second quarter, we are lowering our estimate of our non-GAAP tax rate by about 150 basis points, which represents about $20 million of net savings in 2023. We increased our estimate of annual interest expense by $10 million due to the Fed's most recent rate hikes, but that's offset by a $10 million decrease in our estimate of depreciation for the year.
In summary, second quarter results represent solid execution against our expectations and guidance for the full year. Our businesses continue to deliver constant currency performance aligned with our long range targets. We're looking forward to the results from Hadlima's launch in the U.S. as well as the upcoming U.S. launch of XACIATO. Also important, we're starting to see moderation in the strength of the U.S. dollar, which bodes well for near-term reported results in terms of closer alignment between our reported results in U.S. dollars and our relatively stronger performance in local currencies.
With that, let's now turn the call over to questions and answers.
