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

Good afternoon. Welcome and thank you for joining the Recordati Full Year 2023 Preliminary Results [Operator Instruction]. At this time, I would like to turn the conference over to Ms. Eugenia Litz, Head of Investor Relations of Recordati. Please go ahead, madam.

Thank you, Sabrina, and good afternoon, everyone. I'm pleased to be here today with Rob Koremans, our CEO; and Luigi La Corte, our CFO, who together will present the full year 2023 results. Also joining for the Q&A session will be Alberto Martinez, Executive Vice President of Specialty & Primary Care; and Scott Pescatore, Executive Vice President of Rare Diseases. As always, the presentation is available in the Investors section of our website. It is now my pleasure to pass the call over to Rob. Please go ahead.

Good afternoon, and thank you for joining us today. Before moving on, please let me give a warm welcome to Eugenia Litz, our new Head of Investor Relations, who recently joined the group. Let's start with the full year of 2023 preliminary results. We're very pleased to share our strong performance across the business, starting with the group net revenue at EUR 2,082.3 billion, up 12.4% versus previous year or 14% on a like-for-like at constant exchange rate. This reflects strong double-digit growth across both specialty and primary care, which was up 13.6% like-for-like at a constant exchange rate and rare disease, which was up 14.9% like-for-like at a constant exchange. Luigi will review this in more detail a bit later on the presentation. This robust growth was achieved despite increased FX headwinds over the recent months, with an adverse impact of minus 5.4% for the full year, mainly affecting our SPC business. The FX impact was mainly driven by Turkey, which was also offset by higher price inflation there. We have continued to sustain sector-leading margins with EBITDA at 37% for the full year, reflecting revenue growth and our efficiency initiatives. Adjusted net income was EUR 524.6 million, up 10.8% versus previous year and above the top end of our guidance range, driven by strong operating performance and a lower-than-expected tax rate for the year. We've ended the year with free cash flow of EUR 456 million, a EUR 17 million increase versus previous year and with a leverage at 1.96x EBITDA. Our key targeted R&D projects are progressing according to plan with key updates expected in 2024. And with the strong momentum driving the business and excellent execution across the group, we are well positioned to continue delivering profitable growth into '24 and beyond. Before Luigi gets into details of the full year results, I'd like to highlight our strong and consistent financial results over the last decade. The successful execution of our strategy has resulted in high single-digit growth over the last 10 years, consistently achieving or slightly exceeding objectives. And once again in 2023, we delivered results above guidance provided at the beginning of last year. This growth, combined with high margins and cash generation, has yielded significant return on capital with an average of 15% to 20% over the last decade. We are all extremely proud of this and our ability to create outstanding value for all our stakeholders. We expect this strong performance to continue. Let me now hand over to Luigi to take us through more detail in the performance in '23.

Thank you, Rob, and good afternoon or good morning, everyone. I'm delighted to once again have an opportunity to comment on -- as Rob has described what was really an outstanding set of results for 2023, where as a business, we managed to grow strongly revenue across both business units, sustained margins and continue to build for the future with the deal we did with GSK and the progression of our pipeline projects. Let me start, first of all as usual, from revenue and Specialty & Primary Care specifically. Which, as you will have seen from our presentation, Andre Alberto's leadership has continued to achieve growth rates which are ahead of the relevant markets. And as you will see from Slide 5, really exciting to see all of our therapeutic areas growing nicely, including our foundational cardiovascular TA, which grew primarily, thanks to good growth of lercanidipine, not just in our international markets, but actually grew also in most of our -- the markets where we sell directly. They also saw accelerating growth of Reselip and resilience of some of our more mature products in cardiovascular. 23% -- just over 23% growth of Urology clearly also includes the initial revenue from Avodart and Combodart and once again, underline the key strength of the group in transitioning effectively and smoothly new products into the portfolio. Avodart, Combodart, contributed EUR 25.6 million in the later part of the year. And we estimate that based on GSK's input, the sales of those 2 products in our relevant territories in 2023, we're around EUR 120 million. In Urology, we continue to see Eligard gain market share and pleased to say the new device has now been introduced in most of the main markets. And we also Silodosin returning to growth. GI portfolio continued to deliver a solid high single-digit growth for the year, close to 8%, very broad-based across both our Rx and OTC portfolio. Call out Procto-Glyvenol, our [indiscernible] based products and the Casen-Rx portfolio. Cough and cold that you recall, we commented quite a bit at the beginning of the year. Also recorded a strong year where we gained market share, benefiting also from a strong season. Ended the year 9%, 9.3%, above 2022 and with sales above prepandemic levels, absorbing quite some significant headwinds in terms of FX, particularly in the second part of the year. And finally, as called out also at the 9 months within our other products, we've got some really nice performances in products like Magnesio Supremo, Reagila, and many of our local products particularly in Turkey, in part, offset by reference pricing and the exit of tenders from Ortoton in particular in Germany. So all in all, a very strong year for specialty primary care thanks to renewed focus on commercial excellence and outstanding really, considering these results were achieved whilst also streamlining the organization across many of our markets. But as you will see from Slide 6, rare disease performance for 2023 was just a strong under Scott's leadership with really strong momentum in both our really key franchises, Onco and Endocrinology with metabolic sales remaining resilient. A number of great milestones achieved during the year. Oncology, which was in its first full year after the acquisition. You see, achieved revenue of just over EUR 200 million, which is clearly ahead of the expectations that we set when we announced the acquisition of EUSA Pharma and that's really thanks to higher-than-expected sales of both Qarziba and Sylvant. And both of those really showing significant opportunities for continued growth in the future. Great performance, obviously, also of the Endo portfolio with both Signifor and Isturisa achieving over $100 million of revenue in the year. Isturisa actually around $140 million. Both products, very much on track to deliver on the midterm and longer-term objectives that we set. And obviously, excited that we've also -- now in '23 filed for Isturisa approval in China and expect to also file in this -- in 2024 for Signifor. Metabolic as commented already over the course of 2023, continue to remain quite resilient. We did see good growth of Panhematin, Ledaga, which part offset the -- what continues to be a very gradual erosion of Carbaglu in U.S. and across some of the European markets. And obviously, very happy. We've now had the first commercial sales of Carbaglu in China at the end of '23. And we expect, obviously, to continue penetrating that market in '24. And finally in Rare Disease. Obviously, excited that we continue to see good progress in our development programs. And we do expect a news flow on that side over the course of 2024, particularly around midyear, with further interactions planned over the next months with the FDA, following feedback they provided at the Type C meeting we had in November for Dinutuximab beta in Neuroblastoma. We do expect also to engage with the FDA around the regulatory pathway for the extension of the Isturisa label in the U.S. over the course of the next months, and expect a readout from REC 0559, where we have completed enrollment around middle of the year. So again, also for rare disease and throughout the business. Really solid performance across the portfolio, which you will see on Slide 7 is very much the same also, if looking at the business from a geography lens. All regions showing really strong growth in 2023. The picture is very much unchanged since we looked at it at the end of September. U.S. has become, as expected, our #1 business in '23 with revenue of EUR 316 million. But nice to see that's not -- Italy also growing nicely, 13.6%. Obviously, on the back also of the start of activities on Avodart and Combodart and also with broad-based growth on many of our key products, both on the Rx side and OTC. The addition of Avodart and Combodart clearly also behind the acceleration of growth in Spain. We did see in the later part of the year, growth rates in euro terms come down in Russia and other CIS countries in Ukraine, but remaining solid, above 20% in local currency. And finally, you will have seen that throughout the presentation, we do comment on constant exchange rate growth, both including and excluding Turkey because of the very high devaluation and price inflation, which distorts a little bit the figures. But once again, and also in the case of Turkey, very, very solid underlying performance with -- in euro terms, 31% growth and double-digit volume growth in the year. So really strong performance throughout the business, both in terms of therapeutic areas and geographies. Turning to the P&L. Obviously, very proud that we once again were able to deliver in line with expectations. Expectations that, of course, you recall, we upgraded during the course of 2023, delivering double-digit operating and the bottom line profits for the year. It was still clearly not the easiest of financial environment. Particularly pleased of the great work, which we did to mitigate the impact of inflation. Particularly in the first part of the year with gross margins -- adjusted gross profit margin remaining strong, just over 71% of revenue, with the slight decline in the later part of the year, mostly due to the integration of Avodart and Combodart, where we share the economics with GSK through the supply price as announced at the time of the deal. But the slight reduction in adjusted gross profit margin versus '22, was more than offset by the synergies and operating leverage that we see at the level of SG&A at 28.9% of revenue, which also more than offset the increase as planned in R&D expenses to 12.3% of revenue. R&D expenses, excluding amortization, still remaining below 7% on a cash basis. And again, very much in line with the guidance that we gave when we set out the plan in early 2023. Happy to see, obviously, other expenses just under $8 million, significantly reduced versus '22 levels. These being mostly nonrecurring cost related to residual integration costs of EUSA, and also the continued streamlining of operations in the specialty primary care business. With these results, we delivered a very strong operating profit as said, with EBITDA just under EUR 770 million, 37% EBITDA margin as noted by Rob, 14.4% growth versus 2022. And adjusted net income closed just above the top end of the guidance range that we provided at $524.6 million, thanks to both the strong operating performance and a slightly lower tax rate than expected. And I will note just in closing on the P&L. Thanks to the operating results and lower nonrecurring cost, reported net income up 24.6% versus 2022. As always, turning those profits into cash flow has always been a trademark of Recordati and pleased to see on Slide 9 that '23 was also very much a year of strong cash flow generation with free cash flow of EUR 456 million, above '22 levels with the strong growth of EBITDA, in part offset by increase in working capital and higher interest payments. And now, of course, the increase in working capital, very much driven by the increased volume of business. We did see actually inventory days come down in 2023, [indiscernible] days slightly increasing. We do feel this is in current times, a very strong performance. We'll look to tighten the screws further on the working capital in 2024. But delighted to see that with this free cash flow generation and despite investing $350 million in intangibles being mostly the upfront payment to GSK and residual milestones to Tolmar and Novartis and paying dividends of close to EUR 246 million. As you would see on Slide 10, we ended the year with once again, a very solid balance sheet with net debt of at $1,580 billion roughly being just under 2x trailing 12 months EBITDA, once considering a full year benefit from the Avodart and Combodart products. So we're ending 2023 with a very strong momentum, a very solid balance sheet and obviously, well positioned to continue on our journey of profitable growth. And with that, I will turn back to Rob to talk about targets for '24.

Thank you, Luigi. So turning to our '24 guidance. We are very pleased to announce our expectations for continued growth across all key metrics. Targeting double-digit growth in revenue and EBITDA. Specifically, we expect revenue between EUR 2,260 billion and EUR 2.320 billion, reflecting mid-single-digit growth of SPC at constant exchange rate and double-digit growth of rare disease at constant exchange rate and both of them organically. EBITDA between EUR 830 million and EUR 860 million, confirming sector-leading margins at around 37% and an adjusted net income between EUR 550 million and EUR 570 million or at 24.5% of net revenues. And with our continued strong momentum and solid execution across the business, we are extremely confident in our ability to achieve these targets for '24. We'll most gladly provide more color on this during the Q&A. But let me turn to the last slide of the presentation to just capture the fact that our overall value proposition has been quite constant in the recent years and will remain the same. We continue to drive organic growth of the business and complementing it with BD and M&A. We will sustain our sector-leading margins. With the current portfolio being forecasted to deliver over EUR 2.4 billion of revenues by '25, excluding any additional BD transactions, thanks to continued growth of both SPC and Rare Disease. We have a very strong momentum behind the business with many opportunities ahead. Our solid track record speaks to the fact that we've been able to consistently deliver, and we expect to continue to be able to do so in the future, enhancing our value going forward. This ends our presentation. Thank you, everyone, and the team is ready to take your questions.

[Operator Instructions] At this time, the first question is from Brian Balchin of Jefferies.

I've got 3. The first is on debt refinancing considerations. Just hoping you can share plans for the debt expiring in 2024. Are you going to retire or refinance and just thoughts on shifting towards more fixed versus floating. Second is your sales guide for GSK products. It looks to be at EUR 150 million for 2024 despite sales of EUR 120 million for full year '23. So can you just help us understand the moving parts there, please? And then just third, on Qarziba. What was the feedback from the Type C meeting in November? And I guess, what's the path forward from here?

Thanks, Brian. Let me start with the last question. So we had a very good and constructive meeting with the FDA in November Type C. The FDA fully recognizes the unmet need. There was a very good dialogue. They also asked for some further analysis but we will submit in the first half of this year. And this will give a slight delay of 2 to 3 months for a submission. But that does not change the value of Qarziba in the U.S. at all. And so we remain confident, and we've seen that the FDA actually also strongly recognize the fact that there is an unmet need. And we'll keep you updated on the further developments. Luigi, do you want to take the first question of Brian?

Brian, I guess from -- at the Recordati level, frankly, the debts maturing, loans maturing in 2024 is really a nonevent in the sense that we will part -- repay those through cash flow apart. We're actually in the process already of finalizing a couple of bilateral loans with banks to replace them. I think you may be referring to perhaps refinancing needs of a majority shareholder, Rossini. All I know is, I think they've stated, they will look to refinance those over the course of 2024, but I don't really have any more insights on that process, to be honest. So hopefully, that addresses the part of the question that relates to Recordati.

Thank you for the question, Brian, on the GSK products. I can confirm that the expectation for 2024 of EUR 150 million is actually in line or above the initial expectation that we had for these 2 products in 2024. The driver of the deviation is mainly a decision that GSK took back last year to exit unprofitable tenders. And that's a decision that we have also taken for our own products. So it's somehow providing around EUR 10 million impact in 2024 versus 2023. But that is partly offset with the growth that we are not only sustaining but now also adding in Spain and in Italy. So as I said, it's consistent with what we expected. And in the case of Germany, it's more of a one-off effect, and we will expect moving forward to continue to see the growth in the 2 main markets, Italy and Spain, and driving the growth from EUR 150 million onwards in the following years.

The next question is from James Gordon of JPMorgan.

James Gordon, JPMorgan. Two questions, please. The first one was about on-market assets, in particular, the Endo franchise, which has been a key growth driver for the Rare Disease business so Isturisa and Signifor. And I know there are some newer branded drugs potentially coming to market and also generics or some older drugs. And the drugs, they don't work the same way and they're not exactly the same things like GR2 antagonists and steroidogenesis inhibitors. So my question is how durable do you think the strong growth in the Endo franchise is going to be? Is there a lot more market expansion still to happen? What's your penetration looking like? And do we need to keep an eye on any of those competitors? Or are they not really directly competing with you? So that's the first question, please. Second question was on guidance. And so the 2025 guidance is at least EUR 2.4 billion of revenues. But if we take the midpoint of this year's guidance, that's about 5% revenue growth, if you adjust the EUR 2.4 billion. So is there anything for next year that could cause a bit of a slowdown versus the growth this year and the last year, 9% last year, by 10% this year? Or is it that, that guidance just hasn't been updated yet, but you might update that at some point in this. So when might you do that?

James, it's Luigi. Let me take the second one and just to clarify. The updated guidance or steer that we gave in November for 2025.was revenue from current portfolio above EUR 2.4 billion. Now we didn't really sort of specify more in detail than that. So I don't know what number above EUR 2.4 billion you're picking to work out that growth rate. We provide usually an update in terms of midterm plans every other year. So the normal cadence would be some point in the first part of 2025. Obviously, we have also a lot of things, as we said, reading out over the course of this year. So expectations should be that we would keep to that same cadence in terms of further updates. Now, of course, the situation changes and warrants a further update, we'll provide it. But again, our guidance for 2025 was revenue above EUR 2.4 billion from the current portfolio. So yes, hopefully, that addresses your question. Scott?

Thanks, Luigi. Thank you, James, for the question. This is Scott Pescatore. I'm happy to tell you a little bit more about the growth of the Endocrinology franchise, both in the Europe and in the U.S. And as you've seen over the last year since we launched the franchise in the U.S. and in Europe, we've seen significant growth across all markets in all regions. And as you see from the slides, we grew the franchise at 41% versus last year, versus 2022 and 2023. And we anticipate continuing that strong growth in '24 and beyond. We have a very, very strong customer base, both in U.S. and in Europe. We're anticipating to grow that customer base, getting new patients from existing customers and new customers as well and new patients from those customers. and then continuing our geographic expansion with our continued rollout into markets like in Latin America, and of course, in China. So we anticipate seeing both Isturisa and Signifor significantly growing without too much of an issue that we've seen like we've seen in the past.

The next question is from Martino de Ambroggi of Equita.

My first question is on a follow-up on Isturisa. Isturisa in the franchise as you prefer. Specifically on Isturisa, trying to translate into figures what you commented in your last answer. You achieved EUR 242 million, which is the high end of the guidance range you provided for '23. May I ask you what is a reasonable range for '24? And as you provided, EUR 300 million, EUR 340 million as a range for '25. Probably we are high end, if not above that range. This is my first question. The second one is similar but on Oncology because in this case, you are above the previous guidance range. So -- the same question is repeated also for oncology. So probably the EUR 250 million high end of the ranges can be even more looking at the growth path? And a follow-up later.

Martino, it's Luigi. So I think -- and I'm not taking the question because I think I may have answered to maybe with others on this before. we actually, I think, already signaled in November that -- when we upgraded the guidance for -- or actually gave an updated steer for 2025 that it's likely that those franchises are going to be at the high end of those ranges that we provided, right? As you rightly point out, the momentum is very strong. We're certainly on track and in fact, on track to be at the high end of those ranges that we provided for 2025. We didn't provide details, and I don't think we ever do really for on a product-by-product basis for 2024. So I'm afraid that we're not going to give a lot more on those that we've given. But I can only reiterate what Scott has said, that, which is we're very confident on the strength of the portfolio and the ability for rare disease to continue growing at double-digit over the next years, both for Endo and for Oncology. Hopefully, that addresses your question albeit not fully for 2024.

Yes, I understand. The second part of my question is on the growth for '24 in terms of sales because if you consider GSK portfolio consolidation in Rare Diseases growth, basically, the SPC implicit growth is probably 1% or maybe 2%, which is lower than the Euro growth. So I was wondering if it's just a matter of ForEx? Or is there any consideration on prices and overall for the portfolio?

No, you're exactly right, Martino. It is the ForEx. Most of the ForEx pressure that we expect, as was the case this year, we expect to impact on SPC. And that's why actually we've called it out to help on the modeling. We do expect SBC to grow mid-single digit at constant exchange rate. Obviously, '23, we said it many times, was a very strong year. Of course, that mid-single digit is organic. And then you have obviously the additional contribution of Avodart and Combodart on top of that.

Okay. And very last on the EBITDA margin because if you grow more in Rare Diseases rather than SPC, there is a positive mix effect. So what are the missing pieces justifying a stable EBITDA margin?

We're very proud of our 37% EBITDA margin. No -- but I think -- yes. So organically, the business is -- Rare Disease will grow at a higher rate. But on SPC, we have the addition of the full year of Avodart - Combodart. So actually, if you work out the numbers, yes, we will end up the year with a higher share of Rare Disease, but not by much, right, because you've got that additional component on SPC. We will have, as you may have seen on the slide, we do expect the benefit, obviously, of the operating leverage. We are continuing to drive efficiencies, and we always look for efficiencies in the portfolio. On the other hand, we are going to invest a little bit more in R&D in line with the plan that we had set out. And also a little bit, we do have a number of programs to on the system side, but we feel very confident around maintaining the margins at current strong levels.

The next question is from Charles Pitman of Barclays.

Just maybe starting with the tax. I was wondering if you could just give us a little bit more detail on how come you ended up reporting a lower-than-expected tax rate in FY '23? And if you could just dive a little bit more into the expected impact of the OECD tax reforms you were talking about in your press release this morning? And how you expect this to filter out of FY '24, '25. And then maybe, just a second question on SG&A and costs. So given your kind of continued growth in expansion into the U.S. Kind of how should we think about SG&A given the expected increased cost and necessary marketing that goes with increasing your exposure in this region? And to what extent does your efforts within digital kind of play a role in these efforts?

Thanks, Charles. Let me -- this is Rob. Let me take the second question. Our footprint in the U.S. is actually what we need. So we're not going to expand the footprint. We're not going to up our expenditure. We will see actually improved performance probably in the U.S. because with that same team, we do expect to sell more than we sold in '23, right? So I don't -- and we're very -- I think long before anyone in this room joined Recordati, Recordati was already very, very conscious, and we continue to be that. So I don't expect any negative impact at all on SG&A. If anything, we continue to do to benefit from the rightsizing and the commercial leverage and the impact we're making in the market. And for the tax question, let me hand over to Luigi.

Charles, on the tax side, we had -- and I don't know, it's obviously within the European Union, in particular. As a result of the pandemic, there are a number of programs to incentivize investments. We've taken those opportunities that we thought were appropriate. So we had a little bit more benefits on that side, a little bit higher benefit from patent box in Italy. We also had a one-off benefit, which would adjust in adjusted net income in Turkey, where hyperinflation effects became relevant for tax purposes for the first time this year. So there are a number of things, which help push down the tax rate when we rolled out the final numbers at the end of '23. For 2024, statutory tax rates are increasing. As you know, there's this [ offset ] guidance to at least achieve a 15% tax rate in various jurisdictions. We estimate that will push our average tax rate closer to 23% for 2024. And that's consistent with the guidance that we have given for adjusted net income for the year. Hopefully, that answers your question, Charles.

The next question is from Niccolò Storer of Kepler Cheuvreux.

I have a couple of questions. The first one is on your margin guidance for 2024, specifically on gross margin. If you can comment on whether you see further erosion on an adjusted basis going forward or not? The second one is on your revenue growth guidance, in particular, SPC, you say, you see mid-single-digit organic growth at constant exchange rates. At the same time, you say that you see ForEx headwinds. I was wondering if your mid-single-digit organic growth guidance is already including also some price adjustments in Turkey, which clearly have supported 2023 figures or not. Then if you can maybe elaborate -- last question, can you elaborate a little bit more on digital spend? You mentioned as a reason, which contributes to keep margin at 37% in 2024, you expect to [ envision ]?

Niccolo, on the digital, I think like many companies, we're experimenting a little bit with improving our impact on customers or improving our efficiency using generative AI in things like medical writing or supply chain that will come with some of these use cases and some spend to that. That's not anything earth shocking. And if anything, it should improve our performance further. So I don't -- my bet will be that many of the more alert pharma companies are doing this at the moment because of the opportunities that are there. And we have done it already in '23 and we'll continue to drive this omnichannel and now also, embedding more and more where possible and we're beneficial also some of the artificial generative AI -- sorry, initiatives. But there isn't any super substantial spend all of a sudden on digital. Let me pass to Luigi for the questions on gross margin. And maybe also on the SPC, I think that's an easy straight forward.

Yes. And I probably -- Rob, if you don't mind, I'll just add on the digital side, I guess, that's Digital Systems and simply one thing quite proud of. You will recall in February '23, we had announced that we've gone live with a new SAP system. In Italy, it's now gone live in 4 other markets in Europe, with 0 disruption to the business. And in fact, with the business really rallying around implementation so very happy with that. On the gross margin, we're not going to go as we've never done exact line-by-line guidance for the P&L. I will say we do expect the -- I talked about Avodart - Combodart having a slight dilutive impact at the level of gross margin, but then obviously, positive impact in terms of operating leverage on SG&A. We'll continue to see some of that, that you already saw that in a way in the Q4 gross margin of 2023. And the revenue growth for SPC, yes, of course, that includes Turkey as well. But you may be aware, Niccolo, the Turkish authorities are actually putting in place, but some programs to reduce inflation, stabilize the Turkish lira. So at this stage, we're not expecting to see a very -- a significant price increases in '24 as we saw in '23. Should that be different? I mean, what we have seen today is that price inflation being offset by higher devaluation. So as it stands, the -- yes, Turkey is included in that guidance for SPC. And the level of devaluation is included in that sort of average of between 2% and 3% adverse effects for the group. Hopefully, that makes sense.

The next question is from Alistair Campbell of Royal Bank of Canada.

I was actually just thinking about the 0559 data readout midyear. I'm just want quickly with your trial. I mean, obviously, it's as like a 100-patient trial. It actually looks not too dissimilar in size to trials that got Oxybate approval in the U.S. And also actually similar end points. So it strikes me that the data actually could give a very deep insight into whether this is a real product or not. So with that in mind, assuming we get good data, sort of 3 questions really. First of all, what extra work do you think you need to do then to progress to market?

Sorry, Alistair, could you increase the voice a little bit? We can hardly hear you. It's very faint. So you're asking about REC 0559, but we're not sure what the question specifically, sorry.

Yes. It's just assuming we get good data midyear, we're trying to understand really, what further work do you think you have to do to get the product to market? Also in terms of ideally, how would you like to differentiate the product? Is that going to be on efficacy or convenience? And then just finally, given what you're seeing in the market, can you maybe remind me what sort of market opportunity you see for this one?

Alistair, let me just give a first answer and then I'll also hand over to Scott. I mean, obviously, we're -- we've completed enrollment in Phase II. Last patients not completely finished. I expect data midyear. Phase II data is always a bit speculative. So start to announce all sorts of differentiation on the basis of this, I think is -- we have to be very careful. But what we do see and know from Oxybate is that it's very cumbersome in the administration and really leading to problems for patients and fairly painful in the use. And so far, we've not observed any of that in REC 0559. Of course, it will go through the -- depending on the outcome of the data, if they are positive, we'll go into a Phase III program for REC 0559. And we have good hope for this product, but I've learned to be very cautious with products still in Phase II. And I think it's right to do that here. Scott, anything you...

No, thanks. Thanks, Rob. Thanks for the question, Alistair. Because this is obviously a key trial for us and a key development program. And as Rob mentioned, I mean, we're very pleased that the Phase II completed enrollment. And looking forward to the next phase. The next phase and looking at the data and then moving into Phase III and bringing this to market as quickly as possible. Because we do anticipate there'll be benefits versus Oxybate and there certainly is a place in the market for REC 0559. And it's our objective to push this forward as quickly as we possibly can to get this to patients.

And maybe one part of the question. We have flagged that this is above EUR 100 million opportunity, which compared to the Oxybate revenues, as I'm sure you're aware, is fairly modest, right? But frankly, before we haven't seen the Phase II data, I'm a bit reluctant to make any other projections on the opportunity there.

The next question is from Isacco Brambilla of Mediobanca.

Couple of questions from my side. First one is on the very short-term outlook. The reason for asking is that in the first quarter, we will face an extremely tough comparison base. So it would be helpful to understand if your guidance is assuming a positive like-for-like performance in the first quarter of of this year? Second question is actually on M&A or a cash deployment strategy. In November, we were quite vocal in indicating the commitment to continue our consolidation campaign will be just a [indiscernible] understand how things are moving and if this commitment is renewed for 2024?

Isacco, thanks. On the M&A, we continue to be really focused on this, and I see good progress, but I've learned not to shout hurray before the ink isn't really dry and then we'll share the [indiscernible] with you, of course. But what I can say is that our pipeline of opportunities is definitely not smaller than any time before, and we're very committed to continue to pursue that. What we always said is, both businesses are equally important. But with the most recent deal on the SPC side, we would be delighted to announce something on the Rare Disease side. But we'll continue to explore opportunities out everywhere because it's very difficult to really time those things. And we continue also to be as disciplined as Recordati has been in the past. On the first quarter expectations. I think it's probably good if Luigi comments or maybe Alberto, but yes, last year's first quarter was very good, extremely good. To be equally good this year would be a good achievement. But let me pass to Luigi or Alberto to maybe comment a bit more.

No, I think you've said it Rob, and you absolutely saw right, Isacco. I mean last year, Q1, we said it last year was high. Let's see. I mean there's a lot of coughing and sneezing in Europe at the moment. So in terms of incidence of flu, it looks robust. But let's see, I mean, last year, Q1 was high. Of course, last year Q1, we didn't have Avodart - Combodart. So we'll see the growth from that we're going in the year with strong momentum. But of course, yes, the organic growth for Q1 will compare to a strong Q1 2023.

Mr. Koremans, that was the last question -- sorry, I have just one registered from Bruno Permutti of Intesa Sanpaolo.

I would like to know if you have some milestone payments that are expected during 2024. And at the end on R&D, if the 13% on sales could be a good estimate by 2025. And lastly, on the -- particularly on the Rare Disease business. Do you see any possible change in the U.S. market related to the net selection? So any potential impact or nothing should change?

Thanks for your questions, Bruno. So maybe to start with the U.S., it's difficult to speculate. But what we do need -- know -- and that's, I think, absolutely what is key for Recordati. You focus on products with a very strong unmet medical need where you bring really good value to patients. I would argue that with -- and those patients really depend on the products for their quality of life or sometimes even the fact that they are still alive. So it's -- for me would be unexpected and unlikely that the new government would all of a sudden change these policies, right? Also, the existing government has already done something, for instance, the IRA to help and maybe mitigate strong price increases into the future. And that's how we have planned. We've really planned for '24 also to not exceed inflation with our price increases. I don't see that this is going to -- any new government is going to make a dramatic -- but yes, I'm not a political specialist, and we don't have crystal balls that are any better than you, but this is how I would expect things to happen there. The other question...

On R&D.

Bruno, this is Luigi. On the milestones, no, we're not really expecting. I think we paid now the main sort of milestones that we had on deals which were already done. We paid the $70 million to Tolmar. There's no -- sort of milestones on the GSK agreement. We paid what was left on the Novartis agreement. The next one, which is on my radar, I think we've disclosed in the past that we have about 20 -- between EUR 20 million, EUR 25 million, which will be due on eventual approval of Qarziba BLA in the U.S. and we'll see when that comes. But that's it in terms of future milestones from existing deals. In terms of R&D as a percent of revenue. I'll stick with the guidance that we gave with the plan. And when we did the -- we announced the plan in February of '23, where we said, if you recall, that we'd expect R&D, excluding amortization to increase by roughly 1 percentage point over the plan period. If you strip out amortization and compare '23 to '22, you've seen it's gone up by, I think, around 40 basis points. So obviously, we're tracking in line with what we said, but that's still the guidance. I would work with.

The next question is a follow-up from Martino De Ambroggi of Equita.

Yes. The free cash flow be similar to net profit this year was penalized by net working capital. So just to understand what is the expectation to net working capital in '24? And presumably, free cash flow will be in excess of EUR 500 million this year.

Yes. I think that -- in terms of working capital, I mean, as the business grows and we are projecting at the midpoint of our range on revenue is a 10% increase. We are a big company. I would expect a level of increase for 2024 as well. Hopefully not to the same degree, I would say, as was the case in 2023. It does, barring, if we were -- we to take a new business, which brings with it additional inventory, that may change. But I would expect a number, hopefully below EUR 100 million, for sure. But again, it will depend on a number of things.

Mr. Koremans, there are no more questions registered at this time. Back to you for any closing remarks.

Let me thank everyone for having joined our call. We -- as you could feel, I'm extremely proud of the achievements in '23, but look forward to '24, which is off to a good start. And we're very confident to continue our momentum with beautiful opportunities. We'll keep you updated on some of the developments -- for all of the relevant developments in the company. And as we have also indicated, we're making really -- the planned progress on our R&D programs, we'll update you there as well. So thank you for having joined and look forward to our next interaction. And I'd like to close the call

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