Recordati Industria Chim

Good afternoon. This is the Coruscant Conference Operator. Welcome and thank you for joining the Recordati 2021 First 9 Months 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, madame.

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

Good afternoon or good morning, ladies and gentlemen, and thank you for having joined us for the Recordati 2021 first nine-month results investor presentation. If you could please move to the first slide of the presentation with the key highlights. So I am pleased to have the opportunity to announce another quarter of very solid results for the group. Q3 confirmed the trends recorded during the second quarter with a progressive recovery in the main reference market, and operating conditions starting to return to near normal. Even more limited access to medical personnel in many countries and social distancing measures continue to impact certain product categories. The recovery of several therapeutic areas in SPC, combined with contribution for the new product Aliguard and the continued growth in the rare disease segment, resulted in a net revenue increase in the quarter of 15.5% or 17% of cost of the exchange rates. in Q3, compared to the same period, clearly, in 2020, which has, let me remind you, been most significantly impacted by the COVID-19 restriction measures. If we look at EBITDA on quarter-to-quarter, we grew 15.4% year-on-year. Net revenue in the first nine months of 2021 closed at $1,156 million, with a growth of 5.7% versus previous year, reflecting an adverse currency exchange rate effect of around $31.6 million, and the contribution from Aligarh for $59.4 million. Net of this effect, growth was at 3.2%, with good momentum in recent months, more than offsetting the full-year impact of the 2020 LOEs of psilocybin and phthalacetine, which show a decrease of $23.8 million. and the impact of the pandemic, especially on seasonal flu medications in the first part of 2021. The growth of the disease portfolio was significant in the first nine months of 2021, at 20.2%, thanks especially to the increase in Signiforin and Istoriza, which basically closed at 90.5 million versus 53.8 million in the same period last year, but also to the solid performance of our metabolic portfolio product. Financial results are in line with expectations, with EBITDA at $447.9 million, up 2.1% compared to the first nine months of 2020, and with a margin of $38.7 of revenue. Growth was driven by the very solid revenue performance, partially offset by planned increases in investments to support the end of portfolio growth. the costs related to integrating and promoting early guard, as well as the gradual recovery and operations in the territory. With face-to-face promotion across markets now tracking at 75% to 80% of a normal core plan. It should be reiterated that margins in the first nine months of 2020 benefited from the sharp drop in commercial operations in the territory following the introduction of lockdowns and of social distancing measures over most of this period. Net income at 296.4 million increased by 8.1% compared to the first nine months of 2020, reflecting the greater impact of net financial expenses due to exchange rate losses of 6.8 million euros and the non-recurring tax benefits of 426.2 million euros recognized in Q2. As you will see later, In more detail, the first nine months of 2021, we delivered roughly $362.9 million of free cash flow, an increase of around $70 million versus the same period last year, thanks to the increase in operating results and careful management of working capital. Just a few words on sustainability rating. I am pleased to say that our continued focus on the ESG agenda results and an MSCI rating improvement and inclusion in the Euronext EFG index. Consistent with our dividend policy, the board has approved an interim 2021 dividend of 0.53 per share to be distributed in November. Lastly, the board today approved a share buyback program to serve as a stop option plan. Before handing over to Luigi Lacoste, who will provide you more details on our financial performance in this first nine months, Let me provide some more updates on the Eligard and the endocrinology portfolio. If we move to the next slide, please. So, Eligard. The integration of Eligard is progressing well with close to 59.4 million of revenue in the first nine months of the year, which is slightly ahead of the plan and we're just under half of this in direct sales of our organization. As of the 30th of September 2021, the transfer of the marketing authorizations of sales licenses for record-active court in most countries subject to the license agreement of TOLMR, except for Russia and Ukraine. We have 30 marketing authorizations transfers already completed and 24 countries directly, plus six countries directly selling, where ELEGAL is now being promoted with encouraging feedback from HCPs. It is very early days, but we're pleased to see where promotion has started since a few months, encouraging signs of changes in the sales trend. We've all seen market sales returning to growth in Spain and Germany and improvements in other markets, including France and Italy. The development of a new device by Tormar is progressing. The new device variation filing is now expected in the first quarter of 2022. Thanks to the early transition to direct selling, we forecast full year revenue just over $80 million, in part due to the fast transition to direct sales. If you can move to the next slide, please. With regards to the end of franchise, the commercialization of Cignafor and Cignafor Live is on track, recording net revenue in the first nine months of around $58.5 million. We have strong new patient acquisitions in all regions and across all approved indications. and significantly grew around 10% in in-market terms compared to 2020. We are also still very much on track with the stories at launch, and new patient acquisitions are progressing in line with our expectations, contributing with net revenue of around 32 million as of 30th of September 2021, mainly in the US, France, and other EU markets. We continue to have strong support from top QOLs and patient organizations. Reimbursement was agreed, the reimbursement price was agreed in Germany in line with expectations and discussions are ongoing in other European markets. Also importantly, we have launched now in Japan where we're performing according to plan. Furthermore, as economic conditions continue to improve, we are starting to see improvements also in the gross to net in the US. We remain on track to deliver on the targets that we set for the franchise this year, which is between 120 and 140 million euros. At this point, I will leave the floor to Luigi to take you through in more detail on the first nine-month results.

Thank you. Thank you, Andrea, and good morning, good afternoon, everyone. Pleased to, as always, take you through in more detail the financial results for the quarter. On the back of another quarter of solid growth, much in line with the trends that we saw in the second quarter of this year, with the continued recovery of our specialty and primary care portfolio, a good contribution of Adegard, and strong growth of our rare disease franchise. Starting with main product sales on slide 5, and with what is still our key franchise of Lyricanidipine, you will see that Lyricanidipine sales at roughly $107 million are slightly up versus prior year, plus 1%, with good volume growth across markets and initial sales to our distributor in China offsetting a slight decline in Italy and the effects impact on the Turkish business. Turkey accounting for roughly half of the decline on the combination product Zany Press, which also continues to see some level of volume erosion due to a generic competition and competition from other combination products. The Metropolis franchise of 73 million is down by 6%. Now, this is on the back of, you'll recall, strong growth in 2020, where metoprol grew 7%, also in part due to a temporary lack of availability of competitive products in some markets, and we are seeing as a result a slight decline in some geographies, in particular in Germany and Poland this year. As Andrea said, Eligard is continuing to progress very well. The integration is on track and in fact has been running ahead of plan. Revenue in the first nine months of 59.4 million includes 26 million roughly of revenue that was recognized by Astellas. and 33 million of direct sales by our own organization with all of our key markets now selling directly. As Andrea said, the earlier transition to direct sale has allowed us to slightly increase the guidance for Aligarh for the full year to now just over 80 million euros. Silodovin and Pitavastatin, clearly continue to reflect the four-year impact of the loss of exclusivity in 2020. We do expect both products now to start stabilizing. You will see the erosion on zoologicin just slightly higher than the one we had forecast at the beginning of the year due mainly to somewhat higher decline in Turkey once again in part due to the headwinds from a foreign exchange perspective in that market. I would add it's great to see pitavastatin still growing in markets where generics have not entered, namely Turkey and Switzerland. Other corporate products at 198 million, broadly flat versus previous year. and starting to recover. You'll recall these are products that bore the brunt of the COVID pandemic and the decline both last year and in the first quarter of this year. It's great to see the first signs of recovery of the cough and cold portfolio, particularly in Russia, which remains, however, still below the levels of last year and significantly below the levels of 2019. But in this portfolio, we're also continuing to see very strong growth of the GI portfolio. You recall significant impact in 2020 on products like CitraFleet and other GI products and ones related to elective hospital procedures, all of those that started to rebound and grow high double digits and equally starting to see and continue to see double digit growth of key products in our OTC portfolio, a call out for octoglivenol in Central and Eastern Europe and Turkey. Good growth also of Regela, all of these growing double digit year to date. And finally, drugs for rare diseases growing by 20% at 279.4 million. with very broad-based growth. Yes, a significant contribution from the growth of the Endo franchise, both Cine4, but particularly Histoisa, but also their legacy metabolic portfolio, which is also growing. And I'll call out here actually Panimetin, which following decline in 2020 at the start of the pandemic, has actually returned to growth in the nine months of this year. And on slide six, you will see that with those results rare disease now represents just over 24% of our total revenue, well on track to achieve over 25% target that we set out in the three-year plan. On slide seven, moving to looking at revenue by geography, and I'll try and go through this and call out the highlights for each market, but overall and consistent with the picture that we described at the end of Q2, thanks to Eligard and thanks to the growth of rare disease, it's great to see most of our geographies this year are starting to show growth. with the markets which have greater exposure to cough and cold and facing greater effects headwinds, being the ones which are still showing a decline. So starting with Italy, still our major market, 195.8 million euros of revenue in the nine months, a decline of 3.5%. And again here, cough and cold, and continued erosion in Ourarec, being the main drivers, which more than upset the contribution of Eligard, the growth of rare disease, and good growth also of Regula and the OTC portfolio. Somewhat similar dynamics in France, with a decline in the exospray OTC line, being more than upset in this case by the growth of rare disease. You'll recall France being the market where our launch of Easterisa is more advanced, and good performance of methadone, and again here, good first contribution from Aligard. Both specialty primary care and rare disease are growing in Germany, which at 111.7 million of revenue is up 11% versus last year. Lyricanidipine and Aligard, they're driving the growth on the SPC side. combined with good growth of the rare disease portfolio, offsetting a slight decline of metoprolol, as I said earlier. Spain, a significant contributor to growth year-to-date, at 36%, just under 86 million of revenue. And here, as I said earlier, Spain saw a significant impact in 2020 on the GI portfolio, which is rebounding very strongly and offsetting the four-year impact of generic erosion on silogacin and pitavastatin, with additional contribution both of Eligard and initial sales of Flathril to the tune of 2 million euros. Portugal, sales of 33.5 million, once again with good growth of Regila, and contributions from Eligard, which offset the LOE impact from 2020. Turkey declined at 14.3% in Euro terms, but you will see it's growing by 6.3% in local currency. Turkey facing significant effects winds this year, which are likely to get even slightly worse in Q4, given recent trends. But nonetheless, in local currency terms, growth driven by the rare disease portfolio, good growth of pitavastatin and proctoglivenol, offset by generic pressure and local competition on some of our markets. local product portfolio and on the North Caribbean franchise together with a decline also in the flu portfolio as in other markets. Going to Russia and CIS and Ukraine, you recall we commented a Russia decline of 50% in Q1. It's great to see the business starting to recover and now down only by 5.5% in the nine months in local currency terms, reflecting the combination of impact on the cotton coal portfolio, which makes up a significant portion of the business in Russia, and also destocking, which we saw in the first part of the year. CIS and Ukraine slightly growing on the back of the rare disease portfolio. U.S., which, as you know, is focused on rare disease, continuing to grow significantly, 42.6%, achieving revenue of $127.5 million, growth of 51.6% in local currency. And as I said earlier, growth here really broad-based, with the endo portfolio clearly contributing significantly, a very strong growth of sister drops, Pernivitin and Carboglu as well. Other Central Eastern Europe and other Western European countries which combined make up for roughly 15% of our revenue. You will see our both growing by strong double digits. And this is on the back of the ongoing rebound in specialty and primary care. And I'll call out the good performance of Proctoglivenol in Central Eastern Europe. together with the initial sales from Eligard and the continued growth of the rare disease portfolio here as well. North Africa, minus 18.1%, has revenue of $27 million. And here, really, it's a combination of factors, or in fact, it masks the ongoing growth of our local business in Tunisia, Opalia, which is growing by close to 6% or 8% in local currency terms, but that is more than upset by restrictions in Algeria, which have held back our export sales due to the lack of renewal of import licenses, which did not allow us to sell vitamin D3 and Hexa line to that market this year. And finally, other international sales, so sales that we achieved through our distributors of 153.7 million, down slightly by 3.5% versus last year, mostly reflecting the year-on-year impact of psilocybin and pitavastatin, plus a minor product discontinuation of Cantera, again, to the tune of around 2 million euros. um and you'll see from slide eight um you know the business is becoming growingly diversified or say growingly international uh with uh our legacy market italy now accounting for less than 18 percent of revenue uh france germany and us both roughly 10 percent of a total pharmaceutical sales um moving to the pnl uh on slide nine um You will see that growth of both revenue at 5.7% or 8.6% of the customer exchange rate and in gross profit as planned is partially offset by the growth of operating expenses. SG&A expenses of 347.1 million are growing by 11.8% versus 2020. with selling cost at 24.8% of sales, reflecting both transition costs on Aligard and the royalties that are paid to Tolmar on the product, which account for roughly 18 million of increase, and also with the growth in spend driven by the additional support behind the Endo franchise, and gradually return to activities in the field, which, however, on a year-to-date basis still remain below pre-COVID-19 levels. R&D expenses, around 10.4% of sales are up 12.6%. This reflects the continuation of studies which we've inherited from Novartis on the Endo franchise. and also additional resources and spend on market access and regulatory costs behind both ENDO and AirGuard. An increase also reflects roughly 2 million incremental amortization costs related to new products. Other income and expenses of 3.5 million mostly reflect 2 million, just under 2 million of non-recurring costs related to COVID. significantly down versus last year, and hopefully due to wind down in the near future. This leads to operating income of 372.9 million, margin of 32.3%, and EBITDA of just under 448 million, a margin of 38.7%, both growing by just over two percentage points versus last year, with margins remaining very healthy, but of course not at the levels of 2020. And we've always said and recognized that margins in 2020 were enhanced by the impact that COVID had both on revenue but also on operating expenses. And we do expect that as activities in the field continue to resume, EBITDA margin will trend towards the target that we set in the guidance at the beginning of the year of just over 38% for 2021. Looking finally briefly at the non-operating lines, you will see a significant increase in financial expenses to 22.2 million. As Andrea mentioned, this reflects FX losses of 6.8 million in part due to consolidation adjustments, due to the volatility in exchange rates, and a couple of million due to FX losses on hedging of intercompany transactions. This compares to a period in the first nine months of 2020 where we actually recorded 2.6 million of exceptional gains if you like, on two currency swaps, which we closed and which were no longer treated as hedges. These additional FX losses are more than upset, obviously, by the non-recurring tax benefits of $26 million, which we recorded in Q2, and which reflects in a net income of $296.4 million. which is growing by 8%, just over 8% versus 2020. Adjusted net income, which reflects the impact of the effects losses, but strips out the non-recurring tax benefit, is down by 1.3% versus last year. And moving over to slide 10, you will see again, once again, margins on both businesses remain very strong with rare disease now representing close to 30% of group PBTA. And finally, on slide 11, as we've done in the previous two quarters, we've included a summary and breakout of our cash flow performance which hopefully you will see was very strong in the first nine months of 2021, with free cash flow of just under €353 million, up by close to €70 million versus the first nine months of 2020, and over 100% of net income in the period. The improvement versus last year being really driven by... working capital where 2020 was impacted by combination of increases in inventory, both due to the start of sales of the Endo franchise, but also as we work to sort of build additional safety stocks at the beginning of the COVID crisis. It also reflected the timing of supplier payments with both of those contributing to the positive performance in the first nine months of this year. I will point out, you will see that actually on a cash basis, interest paid is broadly in line with last year and income tax paid slightly higher. due to the benefits in 2020 of both the 2019 significant non-recurring patent box that we recorded in Italy and also lower payments on accounts which many governments allowed companies to make in the midst of the COVID pandemic. That free cash flow went into dividends of $109.4 million in the first nine months. We paid $35 million to Tolmar, $15 million to Almiral, and we had net purchases of shares to the tune of $29 million net of receipts from proceeds from exercises of stock options. And finally, from my side of slide 12, that strong crash flow contributes to a very solid net financial position at the end of September with net debt of just under $715 million being roughly 1.24 times trailing 12-month EBITDA. And with that, I'll hand back over to Andrea to talk about the outlook for the remainder of the year. Thank you.

Okay. Thank you, Luigi. Please turn to slide 13 of the presentation. So with respect to our full-year outlook, we confirmed, like we said in the press release, our guidance range, expecting the full-year results at the lower end of the range. I remember the guidance range was giving net revenues between 1,570,000,000 and 1,620,000,000. EBITDA was between 600,000,000 and 620,000,000 and adjusted net income between 420,000,000 and 440,000,000. The underpinning assumptions behind this lower end of the range guidance are basically that the recent trends show SBC returning to growth with good momentum and progressive recovery of market conditions post Q1. However, rebounding the cotton-cold market portfolio is unlikely to fully offset the higher impact in the first part of the year, coupled with, obviously, the market headwinds that we've seen in Central Eastern Europe and Turkey. Also, we assume no significant new waves of COVID restrictions in the latter part of the year. In fact, headwinds are a bit worse than what we actually planned at the beginning of the year, and we expect something between minus 2 and an impact between 2 and 3 percent, negative impact. But on a positive note, as already mentioned, Eligard continues to be on track, ahead of plan. And also, we continue to see robust growth of our rare disease franchise across all regions, clearly driven primarily by the endo, but not only. Also, our metabolic portfolio is actually performing very well. For example, also, like mentioned by Luigi before. EBITDA margin is on track to be above 38% on revenues. The second half reflects seasonality, as well as a return to a higher level of activity in the field. Financing costs of around $28 million are expected with reflecting clearly what we mentioned already about between $6 to $7 million of FX losses. And finally, we expect the tax rate to be around 17% reflecting the planned actual benefit from the reverse merger and additional Q2 non-recurring benefit of $13 million from the Magneto Supremo set-up. So that brings us to the end of our presentation, and I think we can move to the Q&A. Thank you.

Excuse me. This is the Coruscant Conference Operator. We will begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone 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 a star and one at this time. The first question is from Brian Borokin of Barclays Bank. Please go ahead.

Hi, thanks for taking my questions. I just got two. First, I was hoping to gauge your confidence levels in achieving your 2023 endocrinology targets, just given an expected increase in penetration of lanreotide and ocreotide in the EU in 2022. And the second one was just if you could give us an update on timing, the approval of ARS1, and then if we should still be expecting data for your neurotrophic keratitis asset second half of 22.

Cheers.

Yeah, so thank you, Brian. Starting with the first one, Level of confidence on the 2023 guidance on endo. We see no reason to change that, frankly, and we think we're on track. We're going well. We're continuing to see growth of Signifor whilst increasing penetration of its Syriza. We said we would start achieving reimbursement in key European markets just about now. We're doing that, so from our perspective, on endo, we are on FACT.

In terms of ARS1... ARS1, I mean, the product is currently under regulatory review by the European authorities, and we are working with ARS to kind of answer some of the questions that came up from the set of authorities. So the profile is ongoing with some delay compared to the original plan. But based on the current planning, we expect the regulatory decision to be in late 2022. Regarding MTH for neurotrophic keratitis, as you know, it is in phase two. It has obviously suffered some delay in recruitment due to the COVID restrictions that impacted, you know, a lot of the centers that were actually recruiting patients for the study. But the study is ongoing. We are recruiting patients, and we're seeing an increase in the patients. So we expect the last patient in around November of 2022, and the clinical study report out by the second quarter of 2023. Great.

Thanks very much.

The next question is from James Gordon of J.P. Morgan.

Please go ahead.

Hello, James Gordon, Jake Morgan. Thanks for taking the questions. Two, please. The first one was just about the outlook for deal-making and to what extent has COVID-19 slowed things down a bit? And hopefully things get better there. To what extent do we see an acceleration in licensing? And what are you seeing in terms of ability to do in-person diligence? Has that made a difference and could that change? And then the second question, which is heading into 22, we're not looking for specific guidance at this time, but the key puts and takes for us to think about How much rebounding field activity could we see and how much of a headwind could that be? And is something like a flat EBITDA margin still the most likely outcome?

So look, I mean, deal making, the connection was not very good.

I apologize, but if I'm just correct, you're asking me if there were any kind of impact on deal making uh due to to in recent times i mean as you know um you know the ambition remains we keep on uh working on slightly of different doses both for enlightening opportunities in sdc but also in red diseases and clearly also the whole mna uh you know part of our strategy is still valid and is obviously being you know uh it remains very ambitious so we are Like I said, in June, we have a lot of potential deals under review and evaluation. We feel that the pipeline is reaching opportunities at the moment. But, you know, given that, as always, it's tricky to be definitive on timeline. And at this moment in time, honestly, I cannot give you any more information. I cannot say anything else at this stage. But believe me, we are very busy reviewing and assessing many, many opportunities.

And James, on your second question in terms of, as Andrea mentioned, we're now running at 75-80% in terms of field activity. The kind of things we're still not seeing is large-scale events and group gatherings. We will look to, I think as many organizations, we have learned to leverage even more digital over the pandemic. We're not going to give out today a sort of margin guidance for 2022. You'll have to stay tuned for that. We did, we're very clear in terms of where we set the guidance for the three-year plan being, you know, around 38% of EBITDA and we'll stick with that and, you know, again, we'll provide a sort of a more crisp view for 2022 presumably in February when we set out the targets for the year.

Thank you.

The next question is from Martino D'Ambrogio of Equitasim.

Please go ahead.

Thank you. Good afternoon, everybody. Sorry to bother you on the same question on M&A, but you were particularly vocal in the last call and you are today. So I'm just wondering if you can provide us just a qualitative perception of some step ahead, if any, I don't know, on the very busy pipeline that you mentioned. This is my first question.

Martino, obviously I cannot give you a lot of color on something that has not been kind of, you know, finalized yet. I mean, we are a little confident, you know, So I reiterate what I said. Yes, I was vocal in July when we had the last poll, and I'm still vocal now. But it depends. Deals are very different in shape. There's a lot of variables to be taken into account. So I can tell you we are working on various fronts, and when the time will come to communicate something, we will do so. But at this moment in time, I cannot give you more color around this for obvious reasons. Thank you.

Yeah, obvious reason, yes. The second question is on the end of franchise. If I look at, I know very well profitability on a quarterly basis doesn't make a lot of sense. But if I look at the last four quarters, since you start sales of East Teresa, profitability of rare diseases is a little bit lower than what it used to be in the last couple of years. Is it due to the launch costs or just, I don't know, temporary effect of some variables or probably just there is no particular reason justifying it?

Hi, Martino. No, I mean, it's a combination, obviously. I mean, we are in launch phase on the endo portfolio, so as you'd expect, we have additional, we did put additional resources on the ground to support that, and we do have sort of the costs that we are taking on of additional both market access and regulatory resources to support that, particularly where we're going into sort of new markets. I would say, and I think we may have touched this on the previous call, that if you're comparing the evolution to last year, the rare disease margin would have been slightly flattered, particularly in the first part of 2020, by the accounting of the significant revenue during the transition from Novartis, where we accounted for it on a sort of gross margin level at the level of net revenue. So there is a little bit of that, which is similar to what we have this year on Eligard for the SPC side. If you look at it on aggregate, the two kind of balance each other out. But if you're looking at rare disease particularly, there is a little bit of an effect of that. But it's a combination of these factors rather than there being any sort of particular other type of reason.

Okay, just to check if there is nothing structural due to the end of franchise development.

No, the end of franchise, of course, is to raise up their royalties, but on the other hand, the U.S. is a significant growth market, and as is often the case, margins in the U.S. tend to be higher than in the rest of the world. There's nothing structural to that. I think it's really a timing, again, which I think I've often commented when asked around the margin guidance. we have to bear in mind that when we take a launch asset, the first years of a launch, you will see a bit of additional investment going into the business.

Okay, and last on the end of franchisee, you guided for 120, 140 sales this year. Looking at the trend, you are perfectly in line with your guidance, but I see quite hard to achieve the high end of this range. I totally ignore what could be the contribution of Japan.

I won't give specifics in terms of where we expect to land on the range. Again, particularly in the case of the endo portfolio, where there's a significant contribution from Japan The U.S., you may recall, U.S. faced quite some headwinds in terms of effects at the beginning of this year. And still, if you look at a sort of year-to-date basis, I think it's around sort of 98% negative from an effects rate perspective if you isolate the U.S. So again, obviously, there's a little bit of that in there. But as we said, we are We're very happy with the progress so far with all the launches tracking and confident we will hit the range that we set out at the start of the year.

Thank you. And very, very last on the free cash flow. It is mainly driven by working capital change. As I understand, it's just one offer, so there is nothing structural on the working capital that could last for a longer period.

I think I was asked a question. I think I had a question on the call at Q2 where someone was asking whether we'd start seeing working capital sort of trend back to more historical level. Again, we did increase the level of stocks a bit last year just to be on the safe side during COVID. And you're starting to see a little bit the reabsorption of that as the supply chain improves. And again, and there's a little bit of, yes, one time event where many of our suppliers in 2020 did ask to work with a slightly shorter payment terms on our side to us to provide some support during COVID, which we were happy to do, given the flexibility that the group has.

Okay, thank you. Thank you very much.

The next question is from Joe Walton of Credit Suisse. Please go ahead.

Thank you. A few questions. A simple one to start with is to why the new device for Elagard isn't filing until next year. I think we originally thought that would be happening by September, October time. More broadly, I wonder if you could tell us just a little bit about your view of the background to the markets. An awful lot of the European markets that you're in are effectively government funded. Governments are increasingly strapped for cash. Are you seeing any signs of, you know, any constraints, any issues in pricing new products? Some other companies have said that it's getting tougher to get new product pricing through. And I know you've been looking for reimbursement of Isterisa. Perhaps you could talk particularly about Turkey as an example, because that seems to have had some problems. I know some of that was foreign exchange related. Do you think that that foreign exchange problem will ultimately mean that the Turkish government becomes less generous? Could this become a longer-term issue? My next question would just be a quick one on your comment about stabilizing for Livaso and Eurorack. We've seen decline rates of sort of 30% or so. When do we think we could go back down to maybe only 0% to 5% decline? Is that reasonable for next year, or do you think that the decline will continue for longer? And my final question on Isterisa, at the Capital Markets Day, you indicated that you thought you might have 145 patient starts on Isterisa in 2021. Are you still on track for that number? Thank you.

Joe, thank you for the questions. I may take them in a slightly different order, if that's okay. In terms of challenges from government-funded systems, again, I'll probably repeat what I said in other instances. At the moment, we're certainly not seeing a broad-based sort of landscape change across payer markets in Europe, nor in the U.S. for that matter. You know, pricing is still very much decided at country by country level, which provides a natural hedge in the sense that it would take all markets and all countries suddenly to coordinate to suddenly lead to a significant impact. I know that Turkey on the backdrop of, usually the Turkey does allow, and we did see it last year, I mean, in the face of significant devaluation of last year, Turkey did allow a generous It did allow a level of price increase to the industry, which didn't quite fully recover the effect evaluation, but recovered quite a chunk. We'll find out in the next month if they'll do that again for next year, but we don't have reasons to believe they wouldn't. I think they may have put in place some limitation on prescriptions of certain product classes, but they only impact certain product classes. So again, it's difficult to generalize. Negotiating prices for new products has always been difficult in Europe, frankly, unless you come forward with very strong innovation and significantly better clinical proposition relative to existing standards of care. We believe on the case in point that is three that does that and we think that was recognized in Germany But again, it will be a country-by-country negotiation on yellow ease that we really We actually I think if you look at the numbers that you would see that I think what you see there is a year-to-date Erosion if you look at quarter-on-quarter You should start you should see that on synonyms in empty the vast attainment It is starting to significantly reduce the decline. Psilocybin has now fully lapped the year. It did have a little bit of effects, headwind in Turkey and slightly higher erosion in Italy, but by and large, it's stabilizing as is. as we expect PetaVastatin will be. So to your question, yes, absolutely. We do expect those to start stabilizing now and so before for 2022 on the basis of current environment. I think, I must admit, I can't, I don't recognize the 140,000 patients, but I'll maybe answer in a different way. We believe to be on track in terms of patient acquisitions in the U.S., and obviously we were aware of competitor products in pipelines when the guidance was given out. And so, of course, we will prepare for the potential launch of a new competition in the U.S., but we're quite confident with the clinical profile of this Teresa, and very happy that we will have had at least a two-year advantage to penetrate the market, which is always good. On the new device, I don't know what I can say. Yes, I think, as we said, very happy with the Aligarh transition. There are multiple dosages that are undergoing all the due process to prepare the file, and it just looks like it's going to take us and Tomar a little bit longer to be ready for that. We don't anticipate it being an issue, frankly. It's just going to take a little bit more than anticipated. I hope I've addressed all your questions, Jo.

Yes, just one final one, if I could, just to go back, push you a little bit on marketing. You've said that you're 75% to 85% of the way back in terms of field force activity. Do we expect that that will go back to 100%? Or are there things that you've learned in the COVID world that mean that some things that you now do perhaps digitally that you did in person before you'll continue to do digitally? So just wondering whether there will be a full rebound back or whether there's some permanent cost savings?

No, I think I mentioned, Joe, we don't expect that things will go 100% back to normal, and we're looking at that also as we think about 2022. But the reality is that we've seen that the business, particularly mature products, can be supported with a slightly lower level of in-field effort and complement that with digital. And we will be looking at that and certainly will look at the opportunity that that provides. So things will not go back to fully 100%, just like, and again, I think I made the example before, I wouldn't expect as much spend on things like international conferences really national conferences and events as once was the case i imagine a lot of that will be digital going going forward thank you the next question is from giorgio tavolini of intermonte please

Hi, good evening everyone. I have three questions on my side. During the presentation, you were mentioning the panamethin in the US. I was wondering if you can provide more color on the legacy metabolic products, panamethin in the US, carbaglue in Europe. The second is on the patent box for the next years. Are you considering the option to extend the patent box for next years according to the new regime introduced by the Italian government that allows revaluation of the brand costs up to 90% for tax purposes? And the third one is on Coffin Cold Impact. You expect 40 million impact on sales for this year in the business plan presentation. What was the impact to date? And what are your expectations on Q4 in terms of flu market products? Thanks.

Okay, so on the first two questions, as you know, Giorgio, we don't give out sort of, you know, specific revenue by product on rare diseases for commercial reasons, but on Panimitin in the U.S., I would say we're very happy that whilst the product, you recall we commented in 2020, we had the plan for a very gradual erosion because we believe, and we still believe, that penimitin will continue to be an important treatment option for patients, even in the face of competitor launch in the U.S. And unfortunately, we saw erosion in the first part of 2020 higher than expected due to the impact that COVID had, which penalized an infusion product like penimitin relative... a bit more significantly than expected. And we're very happy that we've seen that bounce back. We already saw that stabilize in the back end of 2020 and very happy that we've actually seen that return to a level of sales which is actually ahead of last year in the nine months. And actually on this, a big credit to our team in the US that's been doing a fantastic job in really revitalizing the metabolic franchise. Carbogluin-EU, I mean, it's a product that has been, as you know, it's a very mature product. It's faced competition now since years and has continued to perform well. But again, I think we had said in the presentation in our three-year time presentation, not expecting significant growth from that. On the patent box in Italy, a short answer, yes, we will be looking at the option and we've secured our options around that, so we're looking to continue Taking benefit, as you know, I think it's a little bit up in the air in terms of right now what exactly that means. But the short answer is yes, we believe at this stage we should continue to benefit from that. But we're going to have to see how the recent decree sort of whether or not it gets confirmed in the same format as it was published a few days ago. On the impact of flu, we're still running, even though we've seen a nice recovery in Q3. Unfortunately, our flu business is overweight in markets, which wearing a mask is still prevalent. It's still down versus 2020. It's still running at around... 60% of the 2019 levels. But, you know, we're seeing good signs, certainly seeing good signs of recovery in Russia. I hope I've addressed your questions, Giorgio.

Yes, thanks a lot for your answers. Thanks.

The next question is from James Van Tempest of Japanese. Please go ahead.

Yes, hi, thanks for taking my questions. Just one actually. Can you remind me the sensitivity of the business to foreign exchange? I mean, you mentioned currencies a little bit worse and sort of the slide I said around 2% to 3%. And from memory, I think it was roughly 1.5% per year planned in your business plan. So if we just say, for example, it's an incremental 1%, if there's, say, a 15 million euro impact at the top line, Is that sort of half of the EBITDA level? So that's like an 8 million impact at the EBITDA level. Just to help us kind of understand if it's more of the low end, how much of that impact has been due to FX versus underlying reasons? Thank you.

Hi, James. So first of all, just to be clear in terms of the FX impact this year, a lot of that has been due to the you know, the evolution of effects, particularly over the course of 2020, and then the sort of full effect that that has over the course of 2021. You know, the way things are looking at the moment, it's certainly going to be higher than the sort of two percentage points that we sort of foresaw at the beginning of this year, probably not as high as 3%. with the big driver of Delta being the Turkish lira relative to the expectations that we had, which were effectively the ones of sort of consensus FX rates at the beginning of 2021. In terms of the modeling, the impact of sort of a one percentage point on revenue on the bottom line. I think the honest answer on that one is going to have to be, I'll get back to you. I don't have a sort of precise number in mind. There is a level of hedge, obviously, particularly when it impacts in places like Turkey, because as you know, a significant part of our portfolio in Turkey is also locally produced, but it's not all of the portfolio. So whether it's a half or a bit less than a half, I'll have to get back to you. But it's really not 100%.

That's great. Thank you.

The next question is from Katerina Chakowsky of BlackRock.

Please go ahead.

Hi. Can you give me a guidance of to what extent you're seeing any inflationary pressures from labor, raw materials, or logistics that other industries are seeing? If you could just give us an idea of how much of your cost base is each one of these, the labor, the logistics, and the raw materials, if they are significant at all. We've heard some CDMOs talking about some packaging materials, significant inflation because of foils and because of wood-based materials that they're planning to pass on to pharma companies. So I was wondering to what extent are you affected by that? And also, you talked a little bit about negotiating prices for new products, but to the extent you see massive inflation, what is the mechanism for you to pass that on to these countries with whom you have a negotiating price or a reference price.

So thank you, Katrina. To be honest, so I can point you, we can point you to the relevant pages of sort of our earnings release for detailed points around the sort of breakout of our cost base between labor, materials, and other. The short answer, though, is yes, You can't compare us to a CMO. Frankly, our P&L structure is completely different. Do we see inflationary pressures? Yeah, we see a little bit, but frankly, it doesn't impact a pharmaceutical company as significantly as a CMO, certainly, and other sectors. And also being candid, I mean, pricing... in the industry is certainly not comparable to other industries either. I mean, we have flexibility in OTC, we have flexibility in some markets, Russia, in Turkey, a little bit in the US, but we've always taken also a prudent approach with pricing, it being a sensitive topic in the industry. So yes, there's a little bit of pricing power. But at the same time, we don't really see, I don't think we are subject to inflationary pressures as other sectors, if you're comparing us to very different ones. But we see a little bit of a pinch on that in cost of goods next year, yes. But if you look at a level of stocks relative to purchases and raw materials, it's north of six months. So that will provide some buffer as well, and we do tend to fix energy contracts for a relative long period of time, and that's where you've seen a lot of inflation. So long answer to say I'm not sure it's going to be as relevant for us as other sectors you may be following. I hope that gives you at least some flavor. And again, to the extent that we publish data externally, we can point you to the numbers in the financial report.

Okay, thank you.

The next question is from Isacco Brambilla of Mediobanca. Please go ahead.

Hi, good evening everybody. A couple of questions from inside. The first one is on Illigard. It looks like the integration is proceeding very well and Give us a figure of the trend in market sales for Heligard, such as you have been doing for Sydney over the last year, and also a qualitative comment on how it is comparing with the underlying trend of the reference therapeutic area. And the second question is on... The M&A arena, I appreciate you cannot disclose much on your intense M&A pipeline, but how are multiples evolving in the industry? Are you observing any kind of pressure on acquisition multiples due to the presence of new players interested in consolidating or acquiring assets in the industry? Thanks.

So in terms of on your first question, and I'm not sure I've caught all of it, but on Eligard relative to its reference market and like for like, I think as we shared in a three-year plan presentation, Eligard, due to the lack of support, was a product that was gradually declining in a market that was sort of broadly stable. So losing a little bit of share. It is very, very, very early days, so we're not going to get overexcited quite yet, but as Andrea said, we're very pleased with the early signals of what we see in markets where the promotion has already started since the early months of this year in terms of either stabilizing or actually seeing some growth of the product. And as we've always said, we expect the new news of the new device next year to act as a further catalyst to that. But as I said, very early days. I mean, the trend overall is still broadly in line with the trend of the last few years with the product slightly underperforming its relevant market, but where we started promoting, we're starting to see that picture change. But again, it's very, very early days, and so to be taken with caution for the time being. And sorry, I didn't make... On the PD, maybe I'll add my voice to Andrea so that you hear it also from me. I don't know what else we can say other than say that... We're actively in due diligence on a number of opportunities, but the beauty of the game is that until you sign the deal, you don't know if and when you will have a deal. There's no point trying to speculate on timelines, frankly, or if and when things will happen. When they do, you'll hear it. Before then, you'll continue to hearing this kind of response.

And on the multiple side and so forth, honestly, we've always had competition on assets in the past, and we haven't seen any drastic change on this competitive aspect. So, yes, I mean, there's always been competition. Some people are willing to pay higher multiples, others are not, but nothing has changed from the past, honestly.

I'm also fresh from meeting with some banks suggesting that when you look at multiples in the sector, they've come down a little bit in the last few months. So, you know, it will always be very specific to the asset.

Okay. Very clear. Many thanks.

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

Thank you everybody for participating in this call and have a good day, evening or rest of the day. Thank you. Bye bye.