Recordati Industria Chimica e Farmaceutica S.p.A. (REC) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Recordati First Half 2021 Results Conference Call. [Operator Instructions] 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 this -- the Recordati conference call today. I'm pleased to be here with our CEO, Andrea Recordati; and Luigi La Corte, our CFO, that will be presenting the 2021 first half results. They will be running you through the presentation. As usual, the set of slides is available on our website under the Investors section. After that, we will open up for Q&A. I will now give the floor to Andrea. Please go ahead.

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 2 of the presentation, please. We -- 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. Also to be remembered, the revenue trend in both quarters was always distorted by China movements in 2020. Those are worth saying. Net revenue in the first half of this year is EUR 770.8 million, which equates to a 1.4% growth versus previous year or at constant exchange rate at 4.9% growth, reflecting the contribution of Eligard for EUR 36.8 million and a FX headwind of approximately EUR 26.8 million. Net of these effects, the growth would have been flat. Also considering the loss of exclusivity of silodosin and pitavastatin in 2020, which affected us some EUR 19.8 million and the impact, obviously, of the pandemic of the cough and cold product sales. To be noted, the significant growth of rare disease portfolio in the first half, which is a plus 18.5%, is thanks to the continued positive progress of Signifor with EUR 56.3 million of revenues versus EUR 32.8 million revenues in the same period last year, but also to the growth of Carbaglu and Cystadrops in the U.S. and Europe. EBITDA at EUR 300.5 million was margin of 39% of revenues. The slight decline, minus 3.4% versus previous periods due to the very low level of operating activity in Q2 2020 due to the pandemic restrictions and increased investments behind Eligard's integration and promotion-related costs and activities to support also the end of portfolio growth. Net income increased by 5.2%, reflecting nonrecurring tax benefits of roughly EUR 25 million, and of 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 EUR 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 ways 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 Koremans as Chief Executive Officer effective from the 1st of December of this year, of cause in this direction. I will step up to the role of Chairman, and I will remain involved in the development of the 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 Serono, Grünenthal Zentiva and Teva. Therefore, bringing a consolidated breadth of experience across the board and pharmaceutical industry. I am therefore very confident about his leadership and Recordati will continue its positive momentum and capitalize on what has been achieved so far. In the various discussions I've 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 3-year plan presentation that we presented comparing volume-driven organic growth of the current portfolio with value-enhancing BD and MS. 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 3 of the presentation, please, Eligard transition moving ahead of time. So as you know, the integration of Eligard in our organization is progressing well, if not very well, with EUR 36.8 million of net revenue in the first half which is slightly ahead of plan. We have completed the transfer of 20 marketing authorization transfers by the end of June, and we have 16 countries directly promoting Eligard with 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 forecast full year revenues now to be around EUR 80 million from the previous EUR 70 million. Note that this is mainly neutral at operating margin levels being in large part reflecting accounting of gross sales versus gross margin transfer revenue level. Moving on to Signifor and to the end of franchise slide. So the commercialization of Signifor and Signifor and LAR is on track, recording net revenue of around EUR 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 quarter due to an increase inpatient assistance programs in the U.S., which obviously was accentuated by the economic impact of the pandemic. We're also still very much on track with Isturisa launch, and new patient acquisitions are progressing in line with our expectations, contributing net revenues of around EUR 18 million, mainly in the U.S., 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 this at the end of June as of this year. Despite Isturisa also seeing a higher incidence of patients on PAP, on patient assistant programs and the slightly adverse USD currency effect in the early part of the year, we remain on track to deliver on the targets we have set for the franchise at the beginning of this year, which is the range of EUR 120 million to EUR 140 million. 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 and 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 our rare disease franchise, a good contribution of Eligard, 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 there first at revenue for the key products on Slide 5. Zanidip and Seloken, both showing a mid-single-digit decline reflecting mainly the impact of these 2 products having significant share of sales, ex euro markets. It does reflect a roughly 3 percentage point FX headwind, which impacts on the SPC portfolio. But also is on the back of a strong quarter for Zanidip -- sorry, strong half -- first half of the year in 2020 for Zanidip. Zanidip, you may recall, in the first half of 2020, it was up by 16.6%. And also, Seloken had a strong first half of the year in 2020 of 7.6%. Aside from FX and the strong comparables, we did see on Seloken 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 EUR 25 million being gross margin transferred from Astellas prior to the transfer of -- or the move to direct selling, and EUR 12 million roughly of direct sales in Italy, Germany, Spain, Portugal, Poland, Benelux and the Nordics. As Andrea mentioned, the transition is now running ahead of our schedule and will mean that we will be booking a full revenue in some of the markets for a more -- larger part of the year, leading to the upgrade in the guidance for Eligard 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 silodosin, 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 3-year plan presentation that the erosion has effectively stopped and the product has stabilized. And we expect the same to happen on the 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 a combination of FX, 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 EUR 125 million roughly, is down 8.6% versus previous year. But other corporate products continues to reflect the decline in products which are related to -- dependent on incidence of seasonal flu, particularly products like Polydexa, Isofra and the OTC Hexa line in France and other markets. But to note, other corporate products is also starting to show a significant rebound, particularly in products related to GI and the GI franchise, CitraFleet, Enema Casen, lux, all of which suffered significant declines last year, up high double digits. And we're also seeing continued growth of Reagila and Procto-Glyvenol, meaning that a gap versus prior year of other corporate products, which at the end of Q1 was of just over EUR 28 million is now reduced to just under EUR 12 million. So again, as I said earlier, we're starting to see good signs of recovery in the specialty primary care portfolio. Drug for rare diseases, as we commented, had a very strong performance, growth of 18.5%, which discounts a level of effect headwind slightly higher than in SPC 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, the growth here, yes, is driven by and led by the endo portfolio. But we're seeing good growth in this first half, both in Europe and in U.S., both Carbaglu and Cystadrops and also continued growth of Juxtapid and Ledaga. I'll also mentioned Panhematin had a very solid Q2, which, in fact, was slightly above the level of last year. As we commented in previous quarters, we have started to see the product has stabilized and slightly rebounded from the trial it had in Q2 of 2020 when the pandemic had impacted. So once again, the performance on Slide 6, you see as usual, the breakout of the sales by products, drugs for rare diseases now represent 23.5% of total, up from 22% in 2020. Eligard, obviously was now added to the pie chart, just under 5 -- contributing just under 5% of revenue, with more reductions in the weight of local portfolios, OTC and other corporate products for the reasons mentioned. On Slide 7 and looking at revenue by geography. Very pleasing to see a majority of our markets are showing a 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 [indiscernible] Aircort and REUFLOR, which once again suffered from incidence of flu and continued erosion of silodosin as expected, which more than offset the growth of the OTC franchise, which has started to recover. And again, the contribution of rare disease and Eligard. Similar dynamics affecting France, which, however, as you will see, as 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 Isturisa launch in Europe is most advanced. Germany growth of 10% reflects good growth of Ortoton forte and lercanidipine alongside the rare disease portfolio. Very pleased to see, again, Spain in another market, which suffered a 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 us rebound strongly with growth of 30%. Clearly, this also reflects the addition of Eligard, with Spain being the most important market for the franchise. And first, if you like, contribution of also flat real, which delivered EUR 0.5 million of revenue in the first half of the year. Portugal revenue is on par with last year, reflecting the impact of pitavastatin and silodosin LOE, offset by the new additions. Turkey. Turkey is down 21.5% in euro terms with revenue of EUR 35 million. Turkey has witnessed an FX headwind of 25% in the -- 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 that were introduced actually in the first part of this year, with Turkey being a very promotional sensitive market. That has had a little bit of an effect. We will see the business in local currency term, is up just 1.5%. Within this context, local generic alternatives impacting CABRAL and KREVAL revenue in particular. But with still good growth in the market of some of our corporate products, first and foremost, actually ALIPZA so pitavastatin. Russia, CIS and Ukraine with revenue of EUR 33 million -- just over EUR 33 million, down 27.8%. Russia had roughly 10% FX impact, 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 good performance of some of the other products in the portfolio, in particular Procto-Glyvenol and Livazo. U.S. is doing extremely well. Growth of 33% or 45% in local currency terms. As you all know, our U.S. business being focused on the diseases, as we commented already, driven by both the performance of the endo portfolio [indiscernible] in particular, but also the growth of our metabolic franchise. Other CEE and other Western European countries, both growing double digits, thanks to the contribution once again of Eligard but with good growth also here of Procto-Glyvenol 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 come into force in the country in the early part of 2021, and 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 EUR 110 million, still contributing significantly to the business. Down by 7.5%, reflecting FX and also primarily the loss of exclusivity, and therefore, lower sales of Livazo 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 accounts for over 10% of revenue, in fact, just under 11%. Spain grows back to representing 7.5%. And Turkey, Russia and CIS, both declining. The contribution of Russia and other CIS and Ukraine, actually declining from 7.2% last year to 4.5%. And as we commented in the past, this reflects both the somewhat weak flu season there. And also a level of destocking which we see 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% is -- 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 Astellas, and royalty payments to Tolmar, and the start of promotion behind the products in markets where that has 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%. 1/3 of that -- 1/3 of the growth is driven by the increased amortization linked to Eligard in particular, but also Isturisa as we've sort of progressively launched the products in the market. The balance of growth really reflecting the additional resourcing put in place to support regulatory market access pharmacovigilance and medical behind these new franchises. Other -- sorry, operating income of EUR 250 million and EBITDA of just over EUR 300 million, both showing a very healthy level of margins up, respectively, 32.5% and 39%, slightly below levels achieved last year. But as we've consistently said, first half of 2020, in particular, margins were enhanced by a 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 the Q1 financial expenses are higher due to a combination of currency gains on 2 swaps that were no longer treated as hedges in the first part of 2020 of EUR 2.6 million and FX losses of EUR 4 million in 2021, leading to a net income of EUR 207 million, which despite the somewhat lower operating income and higher financial expenses, is up by 5.2%, thanks to the recognition in Q2 of EUR 26 million -- just over EUR 26 million of nonrecurring tax benefits. One being the nonrecurring benefit of EUR 12.9 million, which we anticipated from the completion in the quarter of the reverse merger transaction with Rossini Investimenti and Fimei and EUR 13 million being as a result of taking benefit from one of the measures which have been produced 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 nonrecurring benefits, was down 7% at roughly EUR 210 million. You will see on Slide 10 that the rare diseases now accounts for around 28% to 29% of operating results, which also means that Specialty Primary Care continues to contribute to a significant part of the operating income of the business, and we're, therefore, delighting 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. You would see free cash flow has continued to be strong at EUR 204.5 million, close to 100% of net income, which clearly includes those 2 nonrecurring benefits, which are noncash 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 EUR 35 million, and [indiscernible] for 14.5 million and dividend payments of EUR 108.7 million and net purchases of shares, net of the proceeds from exercise of options of EUR 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, up EUR 867 million. With that funded dividends and share buybacks from free cash flow, with leverage remaining at 1.5x the trailing 12-month 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 in 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 FX effects slightly 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 cough and cold market. Eligard transition is ahead of schedule. Like I mentioned before, with revenues of around EUR 80 million expected for the full year compared to initial guidance of EUR 70 million. We see robust growth of our current portfolio across all regions with -- in rare diseases with the end of the contract, and we confirm the guidance for the endo franchise between EUR 120 million to EUR 140 million. Going to EBITDA margin. Again, we expect 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 EUR 26 million to EUR 28 million. And the tax rate to be around 70%, reflecting also the additional Q2 nonrecurring benefit of EUR 13 million from Magnesio Supremo set up, which brings me to the end of our presentation. So I think we can move at this point to the Q&A. Thank you very much.

[Operator Instructions] The first question is from Jo Walton of Credit Suisse.

A couple of questions. Looking at 2Q, very strong performance in the U.S. 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. And is these payers 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 to do 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, where the prices are good, bad or indifferent? Or whether there are people queuing up to sell things to you.

Jo, I'll start with the last question, it's 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, if you may recall 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 on 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 the -- one of the most busiest times from the perspective that we've seen in some time. I'll leave Luigi to answer the other 2 questions.

Yes. I think, Jo, I think there were 2 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 the first part of the year. We've seen renewed 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, community 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 Isturisa, are very much in line with expectations, which were built into the 3-year plan that we shared in May. I think as a result of the economic situation on the again U.S., we did see -- we have seen higher-than-expected number of patients presenting who are from start have not had access to reimbursement and therefore, 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 going to give sort of -- we haven't given any sort of specific sort of SG&A guidance in the 3-year plan. And we've given guidance say, at the EBITDA margin basis. And so we're not going to give that now. Certainly this year, we're seeing a combination of things. We have transition costs to Astellas, which we've mentioned. Recall, we've mentioned we were expecting this year in terms of operating income from Eligard a level of margin, which is lower than what you'd expect from our average SPC products, whilst we had expected again 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. And whilst there has been a bit of restrictions still in place and a bit of an impact on the cost in COVID in particular, we still sort of expect to do that as conditions return to normal. And of course, we are looking at our digital and complementary ways to support the product 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, Jo.

The next question is from Martino De Ambroggi of Equita.

The first question is on the 2021 guidance. You mentioned a weaker cough and 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 silodosin and pitavastatin 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 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 else it will happen anyway had we not another family exit as a company. And it was honestly my intention from the beginning that at one point and eventually, I would have had one point transition to a Chairman and step up to the Chairman position. Clearly, this was agreed also with the majority shareholders 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 the strength of the organization. And I felt bringing a new CEO on board with a wise experience like Rob is always beneficial for the company. So with this in mind, in any case of the practice I got with the Board have initiated some scoping some time ago to identify for a potential CEO succession candidate. 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 and -- in the business sector that we operate in. But actually and his experience also having a lot of similarities having worked in Serono, in Grünenthal and Teva, running Global Specialty Pharma division of Teva with our business. So I thought it was the right time to bring him on when you find. So there was not a formal process that started, let's say, at the beginning of my tenure as CEO, but we're always keeping our antennas kind of maxing high to kind of if see anyone we deemed what could be a potential successor to myself will come on the market at one point or another. As I said before, I'd like to retain the business as a Chairman of the Board, and we look forward to 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 meet our Board, which kind of sees my involvement and contribution in the development of strategy and around all strategic transactions, whatever they might be from working also together with them in their future plans or contributing to positive discussions and obviously, the key strategic transactions around business development and M&A. I remain invested. I'd like to remind everybody is in this venture, in Recordati and so I'm not going anywhere. So my involvement would be very, very, very present around everything which is strategic, which we think is very important, meets both my kind of needs but also those of the majority shareholder and the Board. And I plan to work closely with Rob. I think that is -- no more to say on this.

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

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. And 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 -- in our 3-year plan, we will keep on doing what we've been doing until now. So we want to obviously look for licenses, product opportunities in general, even acquisitions for -- to reinforce our rare diseases. Clearly, with a focus on what is already present, which offer a lot of therapeutical areas, in metabolic diseases, for example, but also in the endocrinology franchise. And we tend to look in that area for global rights and if we don't get global rights, we look obviously for deals which at least kind of are fit with, let's say, Europe primarily, but also for 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 keep or retain the rights for the U.S. market and then find a foreigner for the rest of the world. Established products are still a major kind of focus for us as well to reinforce the SPC business. So we are looking around at several opportunities also in that area. And also not -- we're always looking for innovation as well for SPC because we know that it's an important kind of part of developing the SPC business going forward. So we would like to find a balance between established products. And what we call now affordable innovation. So let's say, innovation but which is not specifically in the European markets where obviously we know market absent T&R is getting more difficult over time. We tend to look for, obviously, innovation, but that we can be also affordable for the authorities and so forth, and so make a sense for them. So I can tell you that we have opportunities that we're looking at in all of these areas. So established, let's call it affordable innovation and in rare diseases around the areas, obviously, that we already have a presence and a strong competence.

The next question is from KC Arikatla of Goldman Sachs.

I have 2, 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, 2Q, 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?

So your first question, seasonal flu, it's 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, it can be a bit lumpy. I think we've always said I mean, a rare disease is obviously a business with very high gross margin. The additional sort of revenue in Q2 versus Q1 obviously sort of had an operating leverage effect. And as I said, in the quarter -- in the second quarter, we did have a very good performance of the metabolic portfolio in the U.S. which both because of being fairly sort of mature, if you like, portfolio, but also being in the U.S. does come with a higher margin. I hope that makes sense. I would caution though against sort of taking a single quarter as a key essence.

The next question is from James Vane-Tempest of Jefferies.

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, has 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 whatever 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?

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 the market generally, including flu, returning to more normal conditions in the second half of the year. And in Q1, we said that given the sort of continued rate of restrictions and an expectation that we -- particularly the use of masks, would remain for longer. And we said we would expect market conditions for flu to still be somewhat impacted by COVID in the second half of the year. And if you recall in the 3-year plan, we said that we do expect also there a gradual return to [indiscernible] we said it would be a very small return if that makes sense. So the flu is the one part of the portfolio where since the start of the year, 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 algorithms, there hasn't been any sort of major change to our pricing in the -- so far this year in Europe across any of the markets where I may have mentioned pricing here and there. It's along the lines of what we've always seen, maybe one sort of country, one product that happens to have something one year. In this case, I think I mentioned Zanipress in Turkey, where there's a regular process of referencing to other markets. And there was a level of price revision from that. But it's very much within keeping to what we said when we did the full 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 said we don't, that's not the case. I mean, we do expect, and we've always seen thirdly, I think if you look at the composition 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 3-year plan, which we said we expect margins over the plan period to stay around 38%. Hopefully, that makes sense.

[Operator Instructions]

Sorry. While we wait for other questions, I think Martino going back to your question and the answer I gave you before. I think it makes sense for me to kind of clarify and give you a bit more color on what I mean by a formal innovation. I'm talking about FCC 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 and confidence, okay, which are primarily uro, card and gastro. This is what we're going to look for products around affordable innovation kind of seen, as for established products instead that we see that our presence on the field, a 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 PA-agnostic because we feel there is stuff with very promotional effort. We don't need to have a specific competence in the PA to be able to be successful. Regarding geographies, I can tell you now that we are in the process of entering China, okay, with the rare disease business. This is obviously China, will require some few years to kind of enter in there because of the regulatory kind of approval, P&L and so forth. But a project is underway to enter China, and we have -- we will give more color on this in the next 3-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. China is definitely the primary one. As far as SPC, unless a specific opportunity arises that allows us to justify and therefore, basically like 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 and we'll enforce in consolidating our presence in the countries we already tried and in the regions we're already present in, which we know is already quite expensive since it covers all of Europe, the Mediterranean base and goes all the way to Russian 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.

A couple of questions from my side. The first one is on your marketing trends and these are very healthy if I understood correctly from your comment you see this trend as overall sustainable? I was just wondering if you can quantify the tailing from having just demand, the net margin booked from pita 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 covering a little bit above the usual incidents outside for Recordati. Can you just tell us if there is anything structural behind this trend, although it is just driven by the current trading environment.

Isacco. I mean on your sort of -- I guess there are 2 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 if the sort of current level are sustainable, I would say broadly, yes. But again, we didn't give a sort of more sort of specific breakout of our sort of longer-term guidance on margin. So I won't go beyond that. The question around sort of what is, there is a little bit in the first half of the year of uplift from regarding accounting, frankly, there was in the first half of 2020 from the accounting of Signifor. Again, we're ahead of marketing authorization funds where 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. So sorry, on the working capital question. The improvement is also due to the fact that I think particularly driven by stock and the management of stock last year. We did have an increase for 2 reasons. One, it was just sort of taking on board of Signifor and Isturisa. But also in the midst of the pandemic we did ensure that we had the right level of supply. So in a way, we have what's kind of clawed back or at least although the business has -- is obviously in the process of taking on a stock at the local level of Eligard when we started distributing. I think it's -- with the change versus last year is really driven by that.

Just a very brief follow-up. So I believe you do not have a guidance on net working capital but in the long term, there is a lever right now to assume that you would not revert to your pre-emergency on sales, correct?

Yes. No, absolutely, absolutely.

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

Okay. Thank you very much, everybody, and have a good evening or good day. Bye-bye.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.