Recordati Industria Chim

Good afternoon. This is the Coruscant Conference Operator. Welcome and thank you for joining the Recordati first half 2021 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Ms. Federica De Medici, Investor Relations and Corporate Communications of Recordati. Please go ahead, madam.

Thank you, Sabrina, and good afternoon or good morning, everyone, and thank you for attending the Recordati conference call today. I'm pleased to be here with our CEO, Andrea Recordati, and Luigi Lacorte, our CFO. that will be presenting the 2021 first half results. They will be running you through the presentation. As usual, the second slide is available on our website under the investor section. After that, we will open up for a Q&A. I will now give the floor to Andrea. Please, guys.

Thank you, Federica. Good afternoon and good morning, ladies and gentlemen. Thank you for having joined us for Recordati's first half 2021 results investor presentation. So if you turn to slide two of the presentation, please, the one first half highlights. So Q2 was characterized by a gradual easing of the COVID-19 restrictions, which resulted in a partial recovery of our main reference markets and a gradual return to the near normal operating conditions. The recovery of several therapeutic areas in SPC, the contribution of Eligard coupled with a high double digit growth of our RRD franchise with both endo and metabolic performing strongly, resulting in a 16.6% revenue growth in Q2, offsetting the 10.3% decline recorded in Q1. Always to be remembered, the revenue trend in both quarters was always distorted by channel movement in 2020. Net revenue at the first half of this year is 770.8 million euros, which equates to a 1.4% growth versus previous year, or a constant exchange rate of 4.9% growth, reflecting the contribution of Edgard for $36.8 million, and that affects headwinds of approximately $26.8 million. Net of this effect, the growth would have been flat. Always considering the loss of exclusivity of psilocybin and beta-vastatin in 2020, which affected us for $19.8 million. and the impact, obviously, of the pandemic of the cough and cold product sales. To be noted, the significant growth of the red disease portfolio in the first half, which is a plus 18.5%, is thanks to the continued positive progress of Signifor and Miss Teresa, with 56.3 million of revenues versus the 32.8 million revenues in the same period last year, but also to the growth of Carbaglou and Sister Drops in the US and Europe. EBITDA of $300.5 million with margin of 39% of revenues. The slight decline minus 3.4% versus previous year is due to a very low level of operating activity in Q2 2020 due to the pandemic restrictions and the increased investments behind Aligards integration and promotion related costs and activities to support also the end of portfolio growth. Net income increased by 5.2%, reflecting non-recurring tax benefits of roughly $25 million, and on which I will leave Luigi to give you more color. As you will see later in more detail, in the first half we delivered roughly $205 million of free cash flow ahead of last year due to the lower absorption of working capital. Full-year guidance remains unchanged. In line with prior year trends, we expect operating margins in the second half to be below the first half levels. also reflecting increased activity in the field as market conditions improve, hopefully. Of course, market conditions remain a bit uncertain given the potential further waves of restrictions post the summer due to the spread of the new COVID variant, with some risk particularly around cough and cold. Just a few words on the latest news regarding the evolution of the governance. As you know, in recent years, I have worked with my team and the board to strengthen the management team. and the appointment of Rob Cormans as Chief Executive Officer effective from the 1st of December this year goes in this direction. I will step up to the role of Chairman and I will remain involved in the development of a group strategy and on strategic transactions and projects, supporting Rob and the senior management team. As mentioned in the press release, Rob is a highly experienced international executive with a strong track record of driving growth in business performance in pharma and biotech. with leadership roles in companies such as Serrano, Grunentab, Zentiva, and Teda, therefore bringing a consolidated breadth of experience across the board in the pharmaceutical industry. I'm therefore very confident that under his leadership, Ricordati will continue to follow this momentum and capitalize on what has been achieved so far. In the various discussions I had with Rob before his appointment, we had many chances to discuss the company's strategy and business model, which he supports. I therefore confirm a commitment to continue to consolidate our trajectory as set out in the recent three-year plan presentation that we presented, combining volume-driven organic growth of the current portfolio with value-enhancing PD and M&A. Before moving on to handing over to Luigi, who will provide more details on our financial performance in this first half, let me provide some updates on Eligard and the endocrinology portfolio. So if you turn to slide three of the presentation, please. Eligard transition moving ahead of plan. So to know the integration of Eligard in our organization is progressing well, if not very well, with 36.8 million of net revenue in the first half, which is slightly ahead of plan. We've completed the transfer of 20 marketing authorization transfers by the end of June, and we have 16 countries directly promoting Eligard. We're encouraging feedback from our customers. It is early days, but we're pleased to see that where we have started promotion, we are seeing a positive impact on the sales trend. Thanks to the early transition to direct selling, we focused full-year revenues now to be around €80 million from the previous €70 million. Note that this is mainly neutral at operating margin levels, being in large part reflecting a count of gross sales versus gross margin transfers revenue level. Moving on to the end of franchise slide, So the commercialization of Signifor and Signifolar is on track, recording net revenue of around $38 million. We have strong new patient acquisitions in all regions across all approved indications. Signifor grew more than 8% in in-market sales compared to 2020, slightly lower than in the prior quarters due to an increase in patient assistance programs in the US, which obviously was accentuated by the economic impact of the pandemic. We're also still very much on track with the Istoriza launch, and new patient acquisitions are progressing in line with our expectations, contributing net revenues of around 80 million, mainly in the US, France, and Germany. We continue to have strong support from top KOLs and patient organizations. And also importantly, we have now launched in Japan and recorded our very first sales for Istoriza there at the end of June of this year. Despite these stories, we're also seeing a higher incidence of patients on PAP, on patient assistance programs, and the slightly adverse USD currency effect in the early part of the year. We remain on track to deliver on the target we have set for the franchise at the beginning of this year, which is the range of 120 to 140 million euros. So at this point, I will leave the floor to Luigi to take you through in more detail on the first half results.

Okay. Thank you, Andrea, and good afternoon, good morning, everyone. Pleased to go into more detail into what was, as Andrea has mentioned, a robust set of results for Q2 with revenue in Q2 up 16.6%, rebounding from the minus 10% of Q1, which, as Andrea said, and as we will go through in this slide, driven really by a very strong growth of a rare disease franchise, a good contribution of Aligarh, but also initial signs of recovery across specialty and primary care, where we know the business was affected by stocking patterns across the quarters in 2020. So looking first at revenue for the key products on slide five, Zanydeep and Stelloclan both showing a mid-single-digit decline, reflecting mainly the impact of these two products having significant share of sales ex-euro markets. It does reflect a roughly three percentage point effects headwind, which impacts on the SPC portfolio. but also is on the back of a strong quarter for Zanadip, sorry, strong half, first half of the year in 2020 for Zanadip. Zanadip, you may recall, in the first half of 2020, it was up by 16.6%, and also Celokane had a strong first half of the year in 2020 of 7.6%. Aside from FX and the strong comparables, we did see on Celokane strong competition in Germany of generic alternatives. Eligard, as Andrea has commented, is off to a very good start, particularly in terms of speed of transition to direct selling. The 36.8 million of revenue which was achieved in the first half is constitutes 25 million being gross margin transferred from Astellas prior to the transfers or the move to direct selling and 12 million roughly of direct sales in Italy, Germany, Spain, Portugal, Poland, Benelux and the Nordics. As Andrea mentioned, the transition is you know, running ahead of schedule and will mean that we will be booking full revenue in some of the markets for, you know, a more larger part of the year, leading to the upgrade in the guidance for Aligard that Andrea has mentioned for 2021. Silodosin and Pitavastatin are both reflecting the full year impact of loss of exclusivity, which they respectively faced in February and late August of last year. You will notice, however, that on silodicin, the gap versus last year's revenue is essentially in line with the gap at the end of Q1, confirming, as we shared during our recent three-year plan presentation, that the erosion has has effectively stopped and the product has stabilized and we expect the same to happen on Pitavastatin soon. Zanipress is still facing a bit of competition from generic alternatives and other combinations with revenue down close to 19%, main decline being in Turkey due to combination of effects but also price reduction due to reference pricing to other European countries. Other corporate products which you may recall is the area where we saw the biggest impact in terms of COVID restrictions last year at 125 million roughly. is down 8.6% versus previous year. Other corporate products continues to reflect the decline in products which are related to and dependent on incidence of seasonal flu, particularly products like Polidexa, Isofra, and the OTC Hexa line in France and other markets. But to note, other corporate products are also starting to show a significant rebound, particularly in products related to GI and the GI franchise. Citrafleet, Enema, Casenlax, all of which suffered significant declines last year, are up high double digits. And we're also seeing continued growth of Regula and Proctoglivenol. meaning that a gap versus prior year of other corporate products, which at the end of Q1 was of just over 28 million, is now reduced to just under 12. So, again, as I said earlier, we're starting to see good signs of recovery in the specialty primary care portfolio. Drugs for rare diseases, as we've commented, had very strong performance. growth of 18.5%, which discounts a level of FX headwind slightly higher than in SBC, close to 6% in the first half of the year, due particularly to the weakness of the dollar in the first month. As Andrea highlighted, growth here, yes, is driven by and led by the endo portfolio, But we've seen good growth in this first half, both in Europe and in the U.S., both carbacool and sister drops, and also continued growth of Juxtapede and Ladaga. I'll also mention Panimatin had a very solid Q2, which in fact was slightly above the level of last year. As we've commented in previous quarters, we have started to see the product stabilize and slightly rebound significantly. from the thrall it had in Q2 of 2020 when the pandemic impacted. So once again, the performance on slide six, you see as usual the breakout of the sales by product. Drugs for rare diseases now represent 23.5% of total, up from 22% in 2020. Aligard obviously is now added to the pie chart, contributing just under 5% of revenue, with small reductions in the weight of local portfolios, OTC, and other corporate products for the reasons mentioned. On slide seven, in looking at revenue by geography, very pleasing to see a majority of our markets are showing positive evolution versus the first half of 2021. Again, reflecting the addition of Eligard, the growth of rare diseases, and the rebound of SPC. Where we see negatives is where the declines are really led by the higher incidence of cough and cold products in the portfolio and or foreign exchange. That is, in the case of Italy, a decline of 6% is driven by weaker revenue of ETHF, Airquart, and RealFloor, which once again suffered from low incidence of flu, and continued erosion of psilocybin, as expected, which more than offset growth of the OTC franchise, which has started to recover, and again, the contribution of air disease and Heligard. Similar dynamics affecting France, which, however, as you will see, has both started signs of stabilizing on the SPC, side of the business, which you'll recall last year had been impacted by measures introduced by the authorities at the beginning of the year, but also where we see an even greater contribution of the rare disease portfolio growth. As we've mentioned in past, France is the market where the Easter Eid launch in Europe is most advanced. Germany growth of 10% reflects good growth of Orthotone Forte and Liracanidipine alongside the rare disease portfolio. Very pleasing to see again Spain, another market which suffered the brunt of the impact in 2020 of both loss of exclusivities but also the impact on the GI portfolio which is very prominent in Spain. And you see it's rebounding strongly with growth of 30%. Clearly, this also reflects the addition of Eligard, with Spain being the most important market for the franchise. And at first, if you like, a contribution of also Flatreal, which delivered 0.5 million of revenue in the first half of the year. Portugal revenue is on par with last year, you know, reflecting the impact of Pitavastatin and Silodesin LOE offset by the new additions. Turkey is down 21.5% in Euro terms with revenue of 35 million. Turkey has witnessed a FX headwind of roughly 25% in the first half of the year and has also faced some of the tougher restrictions which have been introduced in the market since the start of the pandemic. Some of the tougher ones have been introduced actually in the first part of this year. With Turkey being a very promotion-sensitive market, that has had a little bit of an effect. You will see the business in local currency term is up just 1.5% with, in this context, local generic alternatives impacting cabral and creval revenue in particular. But with still good growth in the market of some of our corporate products, First and foremost, actually, the Basel. Russia, CIS, and Ukraine with revenue of just over $33 million, down 27.8%. Russia facing roughly 10% adverse impact. Ukraine slightly higher at 16%. And again, as commented in Q1, we continue to see, particularly in Russia, the impact of the pandemic on the flu portfolio, which represents a significant part of the business there. But on the positive side, we have continued to see in Russia a good performance of some of the other products in the portfolio, in particular proctoglivenol and Revazil. U.S. doing extremely well, growth of 33% or 45% in local currency terms. As you all know, our U.S. business being focused on rare diseases, as we've commented already, driven by both the performance of the endo portfolio and the growth of Esterisa in particular, but also the growth of our metabolic franchise. Other CEE and other Western European countries both growing double digit thanks to the contribution once again of Eligard but with good growth also here of proctoglivenol and metoprolol and again the contribution from the rare disease franchise. North Africa business is down by 16%. Our business in Tunisia is actually flat, reflecting restrictions we've seen coming to a force in the country in the early part of 2021. We're obviously watching the situation on the ground quite closely in recent days. The decline is mostly due to delay in the renewal of import licenses for our export business into Algeria. And finally, international sales of 110 million are still contributing significantly to the business, down by 7.5% reflecting effects and also primarily the loss of exclusivity and therefore lower sales of Livaso and Pitavastatin to some of our franchise partners. And as you will see from slide 8, thanks to the performance in the quarter and in the first half, the U.S. is now account for over 10% of revenue. In fact, just under 11%. Spain grows back to representing 7.5%. And Turkey, Russian CIS, both declining. A contribution of Russia and other CIS in Ukraine actually declining from 7.2% last year to 4.5%. And as we've commented in the past, this reflects both the somewhat weak flu season there and also a level of destocking which we've seen in the market as distributors are managing stock levels more prudently than in the past due to the impact of the pandemic. Moving to the P&L on slide 9, we've commented on revenue. Great to see that growth of 1.4% becomes 3% at the level of gross profit, with gross profit margin continuing to slightly increase on the back of the improving mix. and particularly the contribution of rare disease in the first half of the year. SG&A expenses growing by 9.5%, really driven by additional investments and costs related to Eligard, both transition costs to Stellas, royalty payments to Tolmar, and the start of promotion behind the products in markets where that has increased. already initiated, and of course also reflects the additional investments behind the Endo portfolio. Within SG&A, selling expenses are 24.6% of revenue, and G&A at 5.3%. R&D expenses of 10.5% of revenue are growing by just under 14%. A third of that, a third of the growth is driven by the increased amortization linked to Eligard in particular, but also Istuisa as we sort of progressively launch the product in the markets. The balance of the growth really reflecting the additional resourcing put in place to support regulatory market access, pharmacovigilance and medical behind these new franchises. Operating income of 250 million and EBITDA of just over 300 million, both showing a very healthy level of margins at respectively 32.5% and 39%. Slightly below the levels achieved last year, but as we've consistently said, you know, first half of 2020 in particular, margins were enhanced by, you know, very low level of activity in the field, which we have progressively started to recover from and that we expect will step up in the second part of the year. As commented in Q1, financial expenses are higher due to a combination of Currency gains on two swaps that were no longer treated as hedges in the first part of 2020 of 2.6 million. NFX losses of 4 million in 2021, leading to a net income of 207 million, which despite the somewhat lower opening income and higher financial expenses, is up by 5.2%. thanks to the recognition in Q2 of 26, just over 26 million of non-recurring tax benefits, one being the non-recurring benefit of 12.9 million, which we anticipated from the completion in the quarter of the reverse merger transaction with Rossini Investimenti and SMA. and 13 million being as a result of taking benefit from one of the measures which has been introduced by the Italian government to support companies in the context of a pandemic, which allowed us to release a deferred tax liability related to the Magnesio Supremo brand, which was purchased in 2018. And finally, adjusted net income, which excludes the recurring benefits, was down 7 percent at roughly 210 million. You will see on slide 10 that rare diseases now account for around 28 to 29 percent of operating results, which also means that specialty primary care continues to contribute for a significant part of the operating income of the business and we're therefore delighted to see that business returning to growth. On slide 11, as we did in Q1, we've added to our standard presentation a view of a breakout of our cash flow performance. As you will see, free cash flow has continued to be strong. $204.5 million, close to 100% of net income, which clearly includes those two non-recurring benefits, which are non-cash at the moment. So very strong performance and slightly ahead of last year, thanks to lower absorption of working capital. It also reflects, the cash flow statement reflects The acquisition of the rights from Tolmar of $35 million and Flatreal for $14.5 million. Dividend payments of $108.7 million and net purchases of shares, net of the proceeds from exercise of options of $40.5 million. On slide 12, you will see this leaves our net financial position essentially in line with the end of last year, end of 2020, at $867 million. We've thus funded BD dividends and share buybacks from free cash flow, with leverage remaining at 1.5 times trading 12 months EBITDA. And with that, I will turn back to Andrea to provide an update and latest view on the full-year outlook for the business.

Thank you very much, Luigi. So regarding the full-year financial projections, as I already mentioned, guidance range for full-year 2021 remains confirmed. On the left part of slide 13, you can see the 2021 target assumptions we have communicated in February. Whilst on the left side, the latest view, on the right side, sorry, the latest view of behind, you know, our kind of assumptions for the full year. So basically, revenues remain on track with some headwinds due to a weakened cough and cold market, like already mentioned. We have effects slightly adverse, particularly in USD and Turkish Lira, compared to our original assumption of minus 2%. SPC is returning to growth in Q2. As said before, we have seen some weakness in the first half, as there is some uncertainty also in the second half of the COVID cold market. Aligarh transition is ahead of schedule, like I mentioned before, with revenues of around 18 million expected for the full year. compared to the initial guidance of 70 million. We see robust growth of the current portfolio across all regions in rare diseases with the endo uptake on track and we confirm the guidance for the endo kind of franchise between 120 to 140 million. Going to EBITDA margin, again, we expected this to be on track with second half margins a bit below the first half margins since we predict and have planned for activities and still progressively returning to normality. We have financing costs of about 26 to 28 million, and the tax rate to be around 70%, reflecting also the additional Q2 non-recurring benefit of 13 million from the Manezo Supremo step-up. Which brings me to the end of our presentation, so I think we can move on at this point to the Q&A. Thank you very much.

Excuse me, this is the Corusco conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. We kindly ask to use handsets when asking questions. Anyone who has a question may press star and one at this time. The first question is from Joe Walton of Credit Suisse. Please go ahead.

Thank you. A couple of questions. Looking at 2Q, very strong performance in the US. I wonder if you could tell us a little bit more about that. And in particular, if you could tell us a little bit more about your comments about the patient assistance program that seems to be at a higher level than you had anticipated. Is this pay as... making co-pays higher so patients can't afford it, so that you have to provide more co-pay assistance for people who have insurance, or is this where you're having to take people who don't have insurance, so a little bit behind that. If you can tell us also about how we should think about the longer-term SG&A. Your SG&A has bounced back to a level that it was before the pandemic. And I appreciate you've got new drugs to sell going forward. But a lot of companies have been able to learn to do things in a different way, more electronic, more digital, just other ways of doing things which seem to be lowering their marketing costs. Your marketing costs are just high. And I'm wondering whether the current percentage of sales is appropriate going forward given how much you still have to deal with. And then a final question, please, just on the M&A background. It's clearly important to you to be able to make acquisitions. Is there anything you can say about the pipeline of deals that you have, whether you think there's anything that you would be able to conclude this year, whether prices are good, bad, or indifferent, or whether there are people queuing up to sell things to you? Thank you.

Hi, Joe. I'll start with the last question, Andrea, regarding M&A. I mean, clearly, I'm not going to disclose anything which has not been formalized at this moment in time. As always, like I said in every call that we have, we always have a lot of deals under review and evaluation. I can tell you that the pipeline is extremely rich in opportunities at the moment, and I feel confident that within this year, we should be able to announce something. But I have to leave it at that, clearly, for obvious reasons. But yes, there is a lot of movement. There's a lot of opportunities out there. So it's actually one of the most busiest times from that perspective that we've seen in some time. I'll leave Luigi to answer the other two questions.

Yeah, I think, Joe, I think there were two parts to your first question on the U.S. I think, as Andrea mentioned, the performance has been really broad-based in the U.S. in this first part of the year. We've seen reduced momentum on the metabolic franchise, which has been great. And it's also fair to say, and I think we commented this in the past, penumitant revenue was particularly affected at the beginning of the pandemic and already started to recover in the second part of the year. And we've seen sort of continued acquisition of new patients on both Signifor and East Teresa. very much in line with expectations which were built into the three-year plan that we shared in May. I think as a result of the economic situation on the ground in the U.S., we have seen a higher than expected number of patients presenting who are from sort of start not have access to reimbursement and therefore are staying on patient assistance program to start off on therapy for a bit longer than expected. And I think that is what is reflected in the comment. In terms of SG&A, I mean, of course, we're not gonna give sort of, we haven't given a sort of specific sort of SG&A guidance in the three-year plan. We've given guidance on an EBITDA margin basis, and so I'm not going to give that now. Certainly this year, we're seeing a combination of things. We have a transition cost to Astellas, which we've mentioned. I recall we've mentioned we were expecting this year, in terms of operating income, from Aligard, a kind of level of margin which is lower than what you'd expect from our average SPC products whilst we had expected to then return it to those levels. And of course, we're still investing behind the launch of the Endo franchise. There are also payments to Tolmar, including the royalties due to them. So there's a number of elements. And we did say at the beginning of the year that we would be reinvesting half of the savings which we had realized in 2020 as a result of COVID into the business. While there has been a bit of restriction still in place and a bit of an impact on the cough and cold in particular, we still sort of expect to do that as conditions return to normal. And of course, we are looking at digital and complementary ways to support the products alongside face-to-face promotion, but we still believe face-to-face promotion will remain a key component of the marketing mix. I hope that addresses your questions, Joe.

Yes, thank you.

The next question is from Martino De Ambroggi of Equita. Please go ahead.

Thank you. Good morning, good afternoon, everybody. The first question is on the 2021 guidance package. You mentioned a weak cold market, but could you quantify the magnitude of the impact on your account from this weak reference market? And second, if you could remind me what is the updated expectation for xylotoxin and beta-vastatin in the current year? The second question is more strategic. Referring to the change in the CEO position, so how should we interpret this change? Was it already pre-agreed or who was the originator of this request? And Andrea, I clearly understand that you will stay involved in management, but what will be your responsibilities?

Maybe I'll start with this one then. Look, I think I tried to give a bit of color at the beginning of the presentation on the first slide, but as I already mentioned, I have been working for some time and as you've seen, we've introduced and strengthened the management team in recent years since the change of ownership of the company, which was always my intention and honestly would have happened anyway, had we not another family exited the company. And it was honestly my intention from the beginning that at one point, and eventually, I would have had at one point transitioned to a chairman and stepped up to the chairman position. Clearly, this was agreed also with the majority shareholder and with the board of directors, but it wasn't, let's say, something that was not agreed and which was also not meeting my kind of ideas of planning for the future and continuing to reinforce and strengthen your organization. And I felt that bringing a new CEO on board with a wide experience like Rod's is only beneficial for the company. So with this in mind, in any case, for good practice, I gathered with boards that initiated some scoping some time ago to identify potential CEO succession candidates. And in that context, we saw an opportunity to bring on someone like Rob when he presented and came into the picture due to his broad and deep experience in the sector, in the business sector, you know, that we operate in. That actually, and his experience also having a lot of similarities, you know, having worked in Toronto, in Grunenthal, in Teva, running, you know, the global specialty farm division of Teva with our business. So I felt it was the right time to bring him on when you find, you know, So there was not a formal process that started, let's say, at the beginning of my tenure as CEO, but we were always keeping our antennas nice and high to see if anyone that we deemed what could be a potential successor to myself would come on the market at one point or another. As I said before, I plan to remain very engaged with the business as chairman of the board and look forward obviously working with Rob in this capacity with Rob and the management team contributing to the development strategy. I have a very kind of clear power that was confirmed and given to me by the board which kind of sees my involvement and contribution in the development of a strategy and around all strategic transactions, whatever they might be, from working also together with them, free of grants, or contributing to budget discussions, and obviously the key strategic transactions around business development and M&A. I remain invested. I'd like to remind everybody in this venture in Recordati, and so I am not going anywhere. So my involvement would be very present around everything which is strategic, which I think meets both my needs, but also those of the majority shareholder and the board. And I plan to work closely with Rob. I think that is all I can say on this.

Okay, and Martino, thank you for the questions. Actually, the first two allows me to put into sort of context the sort of year-to-date performance sort of ex-Heligard, ex-FX, which we said is broadly flat. The impact on the cough and cold portfolio from the pandemic sort of meant that a reduction in the first half of the year of around $20 million in terms of revenue, and actually, funnily enough, a roughly similar amount being the reduction to date on PETA and psilocybin. We're not sort of given a sort of specific revised outlook for PETA and psilo, they're pretty much broadly in line with our expectations. And yes, PETA has one more quarter, if you like, to be fully comparable, but in terms of to reflect a full year of LOE, but there are markets where we are continuing to also see PETA grow, like Turkey, like Russia, Switzerland. you know, our outlook hasn't fundamentally changed. Erosion has been a little bit sort of more pronounced in Italy, but all in all, we're not sort of changing our guidance on this, too. But that's the scale of the impact that we've seen in the first part of the year. Hopefully that addresses your question.

Thank you. Thank you. Yes. And just a follow-up on the M&A. Andrea, you mentioned there are a lot of opportunities around. Just to have an idea, are you focusing more on geographies in order to expand your geographical presence? Are you focusing on product portfolio, on therapeutical areas? What's your priority right now based on the several opportunities that you mentioned?

Well, I mean, like we declared in the, you know, in our three year plan, you know, we would keep on doing what we've been doing until now. So we want to obviously look, you know, for licenses or product opportunities in general, even acquisitions for, to reinforce, you know, rare diseases. Clearly with a focus, you know, on the areas we're already present, which offer a lot of therapeutical areas, metabolic diseases, for example, but also in the endocrinology franchise. And we tend to look in that area, you know, for, global rights, and if we're not getting global rights, we look obviously for deals which at least are fit with, let's say, Europe primarily, but also the rest of the world. It tends to happen in certain cases, not always the case, that some of these products are sourced or come out of the U.S., so those companies tend to want to retain the rights of the U.S. market and then find a partner for the rest of the world. established products are still a major kind of you know focus for us as well to reinforce the SPC business so we are looking around several opportunities also in that area and also not to be forgotten we're always looking for you know innovation as well for SPC because we know that is an important kind of you know part of you know developing the SPC business going forward so we would like finding a balance between established products And what we call now affordable innovation. So, you know, say innovation, but which is, you know, especially for European markets where obviously we know market access and P&R is getting more difficult over time. We tend to look, you know, for obviously innovation, but which can be also, you know, affordable for the authorities and so forth. And so make sense for them. So I can tell you that we have... that we're looking at in all of these areas. So established, let's call it affordable innovation, and new rare diseases around the areas, obviously, where we already have a presence and strong competence.

Thank you.

You're welcome.

The next question is from Casey Arikatla of Goldman Sachs. Please go ahead.

Hello, everyone. Thank you for taking my questions. I have two, please. The first one on seasonal flu products, can you provide more color on your geographic exposures? Is it concentrated in any particular region or in any particular country, or is the sales exposure of seasonal flu products similar to your overall group in terms of geographical exposure? And the second one on rare diseases, you've had a very strong sequential EBITDA margin improvement, if my math is right. You went from roughly 46% in 1Q to close to 50% in 2Q. I'm just trying to understand the drivers of this. Is this driven by better endo performance or were there any one-offs in the quarter that we should be aware of? Thank you.

Hi, KC. So on your first question, seasonal flu, it really sort of focused, or at least is significantly more pronounced in Russia, Italy, and France. In terms of the margin on rare diseases, quarter on quarter can be a bit lumpy, I think we've always said. I mean, you know, rare disease is obviously a business with you know, very high gross margin. The additional sort of revenue in Q2 versus Q1, you know, obviously sort of has an operating leverage effect. And as I said, in the quarter, in the second quarter, we did have, you know, very good performance of the metabolic portfolio in the U.S., which both because of being, you know, fairly sort of mature, if you like, portfolio, but also being the U.S., you know, does come with a higher margin. I hope that makes sense. I would caution, though, against sort of taking a single quarter as a sort of, you know, key reference.

Got it. Thank you.

The next question is from James Vayntempest of Jefferies. Please go ahead.

Yes, hi, thanks for taking my questions. Firstly, you mentioned some uncertainty in the cough cold market, just wondering what kind of environment you're assuming in your plan in the second half of the year. Second question is, have there been any changes in the pricing environment of any of your key markets? And then the third question is, we get a lot of questions around profitability and EBITDA margins. So with second half lower than first half outside of what of our M&A you might do? Would you say this is the floor we can expect in profitability? Or if not, why would margins remain where they are? Thank you.

Hi, James. Thank you for the question. So with regards to flu products, you'll recall when we set out the budget, we had said we would expect you know, the markets generally, including flu, are returning to more normal conditions in the second half of the year. And in Q1, we said that, you know, given the sort of continued wave of restrictions and an expectation that we, that particularly the use of masks would remain for longer, we said we would expect, you know, market conditions for flu to still be somewhat impacted by COVID in the second half of the year. Finally, you recall in the three-year plan, we said that we do expect also there a gradual return to normality, but we said it would be a very slow return, if that makes sense. You know, the flu is the one part of the portfolio where since the start of the year, you know, given the way COVID has been evolving, we've taken a view which is slightly more cautious, if you like, than what was set out at the beginning of the year. In terms of pricing, no, there hasn't been any sort of major change to pricing yet. in the so far this year in Europe across any of the markets where I may have mentioned pricing here or there it's you know along the lines of what we've always seen you know maybe one sort of country or one product that happens to have something one year in this case I think I mentioned Zani Press in Turkey where you know there's regular process of referencing to other markets and there was a level of price erosion from that, but it's very much within keeping to what we said when we did the three-year plan. And finally, in terms of EBITDA margins, I did, and I'm sorry, I'm not sure if your question, if you were saying whether the bottom was what we've seen in the first half, because clearly I've said that's not the case. I mean, we do expect that And we've always seen, historically, I think if you look at the competition of results of our business, we've always seen a slightly higher profitability in the first half relative to the second, and we expect that this year as well. And we're not changing the guidance that we've given in terms of margins set in the three-year plan, which we said we expect margins over the plan period to stay around the 38%. Hopefully that makes sense. That's great.

Thank you.

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Sorry, while we wait for other questions, Martino, going back to your question and the answer I gave you before, I think it makes sense for me to kind of clarify, give you a bit more color on what I mean by affordable innovation, I'm talking about SPC now, and established products, okay? When I talk about affordable innovation, I kind of told you what I mean, but the focus will be in therapeutical areas where we already have a presence competence, okay, which are primarily urocardia and gastro. This is where we're going to look for products around affordable innovation kind of theme. As for established products instead, where we see that our presence on the field, our robust presence on the field is a key driver in stopping the decline or even bringing back some of these products back to growth. we are actually TA agnostic because we feel that there it's just a promotional effort. We don't need to have the specific competence in the TA to be able to be successful. Regarding geography, I can tell you now that we are in the process of entering China, okay, with the rare disease business. This is obviously China is required a few years to kind of, you know, implement because of the regulatory kind of approval, P&R and so forth. but a project is underway to enter China, and we will give more color on this at the next three-year plan presentation next year. But this is definitely one of the main focuses for geographic expansion going forward. There are also other countries that we're looking to expand with rare diseases, but China is definitely the primary one. And for FPT instead, unless a specific opportunity arises that allows us to justify And therefore, basically, it gives us critical mass to enter new continents, let's say, not the U.S., but let's say other opportunities. For the moment, we're focusing only on reinforcing, consolidating, you know, our presence in the countries we're already present in, in the region we're already present in, which, as you know, it is already quite extensive since it covers all of Europe, the Mediterranean basin, and goes all the way to Russia and CIS. I think I thought that would be useful to kind of give you a bit more color. So any other questions?

Yes, the next question is from Isacco Brambilla of Mediobanca. Please go ahead.

Hi, good afternoon, everybody. A couple of questions from my side. The first one is on your cross-marketing trends. These are very healthy. If I understood correctly from your comments, you see this trend as an overall trend I was just wondering if you can quantify the tailwind from having just the next margin booked from in the first semester of 2021 on your 73% gross margin. And the second question is on working capital. Your free cash flow generation remains very healthy, but working capital is now traveling a little bit above the usual incidence on sales for Recordati. Can you just tell us if there is anything structural behind this trend or if it is just driven by the current trading environment?

Hi, Isacco. I guess there are two parts to your first question on gross margin. Is it sustainable? I mean, it is driven by the shift in the mix. So I guess if you say it's a sort of you know, current level of sustainable, I would say broadly, yes. But again, we didn't give a sort of, you know, more sort of specific breakout of our sort of longer term guidance on margin. So I won't go beyond that. A good question around sort of what is, there is a little bit in the first half of the year of uplift from, in regard to accounting. Frankly, it was in the first half of 2020 from the accounting of Signifor. Again, we're ahead of marketing authorization transfers. We account for revenue on a gross margin basis as transferred by partners. I would put it to around half a percentage point, but I'll come back on that. Sorry, on the working capital question, the improvement is also due to the fact that I think it's particularly driven by stock. and the management of stock last year, we did have an increase for two reasons. One, it was a sort of taking on board of Signifor and Isturiza, but also, you know, in the midst of the pandemic, you know, we did ensure that we had the right level of supply. So in a way, you know, we have sort of clawed back, or at least, although the business is obviously in the process of taking on a stock at the local level of Heligard where we started distributing. I think it's the change versus last year is really driven by that.

Okay, thank you very much. Just a very brief follow-up. So I appreciate you do not have a guidance on networking capital, but in the long term there is no reason right now to assume that you would not revert to your pre-emergency incidents on sales, correct?

Yes. No, absolutely. Absolutely.

OK. Thank you very much.

Gentlemen, there are no more questions registered at this time.

OK. Thank you very much, everybody. Have a good evening or good day. Bye-bye.