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Edited Transcript of REC.MI earnings conference call or presentation 30-Jul-19 2:00pm GMT

Q2 2019 Recordati Industria Chimica e Farmaceutica SpA Earnings Call

Milan Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Recordati Industria Chimica e Farmaceutica SpA earnings conference call or presentation Tuesday, July 30, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrea Recordati

Recordati Industria Chimica e Farmaceutica S.p.A. - CEO & Director

* Fritz Squindo

Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director

* Marianne Tatschke

Recordati Industria Chimica e Farmaceutica S.p.A. - Director of IR & Corporate Communications

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Conference Call Participants

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* Christopher Anthony Ryan

BofA Merrill Lynch, Research Division - Analyst

* Jo Walton

Crédit Suisse AG, Research Division - MD

* Martino De Ambroggi

Equita SIM S.p.A., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Recordati 2019 First Half Results Conference Call. After the presentation, there will be an opportunity to ask questions.

At this time, I would like to turn the conference over to Ms. Marianne Tatschke, Director, Investor Relations and Corporate Communications of Recordati. Please go ahead, madam.

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Marianne Tatschke, Recordati Industria Chimica e Farmaceutica S.p.A. - Director of IR & Corporate Communications [2]

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Good afternoon or good morning to everyone, and thank you for attending the Recordati conference call today. Andrea Recordati, our CEO; and Fritz Squindo, our CFO, will be presenting and commenting upon our first half 2019 results. For a better understanding of his presentation, please access the second slide available on our website, www.recordati.com under the Investors section and Presentations tab. At the end of the presentation, we will answer any questions you may have.

Andrea, please go ahead.

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Andrea Recordati, Recordati Industria Chimica e Farmaceutica S.p.A. - CEO & Director [3]

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Okay. Good afternoon, ladies and gentlemen. Thank you for connecting to our first half results highlights presentation. So let me start off. So we are obviously pleased with our first half results, which show continued growth in 2019. Our consolidated revenue is EUR 743.3 million, and is up 6.8%. This includes sales generated by Natural Point, the Italian company acquired and consolidated as of the 1st of July 2018, which equates to EUR 9.7 million. It also includes the sales generated by Tonipharm, which was acquired in France at the end of 2018 and consolidated as from the 1st of January 2019, with sales of EUR 13.6 million. And finally, also, the sales of Juxtapid that we acquired under license in Japan in February 2019, with sales of EUR 4.4 million in addition to an estimated negative currency exchange rate effect of approximately EUR 8.9 million. Excluding these items, growth would have been 4.1%. EBITDA at 37.6% of sales is EUR 279.3 million, and is up 7.4% from last year. Operating income at 32.6% of sales is EUR 242.6 million, with an increase over last year of 4.6%.

Finally, net income of 23.4% of sales is EUR 134.3 million and shows an increase of 6.1% over the same period of the preceding year. Net debt is at EUR 610.9 million compared to a net debt of EUR 588.4 million at the 31st of December 2018. During this period, the dividends were distributed for amount of EUR 96.1 million. An amount of EUR 30 million was paid for the license agreement with Aegerion Pharmaceuticals Asia to cover exclusive rights to Juxtapid in Japan and a EUR 20 million milestone was paid to Helsinn for the license agreement for Ledaga. Furthermore, the application of the IFRS 16 generated medium long-term debt of EUR 26.4 million.

Regarding our corporate development initiatives during the period, license agreement was signed with Aegerion for exclusive commercialization of Juxtapid in Japan. The drug is indicated for the treatment of homozygous familial hypercholesterolemia and is a very important development for our recently established subsidiary in Japan, given its potential for significant growth. Companies are under -- operating under the name of Orphan Europe but they renamed Recordati Rare Diseases, which has now become the global brand of our rare disease business.

Most recently, on the 12th of July an agreement was signed with Novartis for the acquisition of worldwide rights for Signifor and Signifor LAR for the treatment of Cushing's disease and acromegaly. The agreement also provides for the acquisition of worldwide rights to osilodrostat, an investigational drug for the treatment of Cushing's syndrome in part of the U.S. and in EU. This transaction represents a very significant and strategic contribution to our rare disease business.

Moving on to Slide 3 of the presentation. We will give you a bit more color on the latest transaction with Novartis. So the transaction clearly is an achievement in the acceleration of the development of our rare disease business unit. And it implies like I include, as I mentioned before, the acquisition of one marketed product and one late phase pipeline product in the endocrinology segment. The key highlights of this transaction are complementary portfolio and to the high-growth market of endocrinology, orphan designated drugs with IP protection and limited additional R&D spend and global and perpetual intellectual property life. More specifically on Signifor and Signifor LAR, it is an injectable somatostatin analogue for the treatment of Cushing's disease and acromegaly. It has IP protection until 2026, estimated sales of USD 75 million in 2019 and an average EBITDA margin to potential peak sales of more than USD 100 million. This drugs are covered by orphan drug designation in the U.S. and Europe.

Moving on to osilodrostat. This is important highly specific oral inhibitor of cortisol and aldosterone synthesis for the treatment of Cushing's disease and syndrome. It has IP protection until 2031. Marketing authorization applications have been filed in the European Union and the U.S.A. and potential approval is expected in 2020 in Europe and 2022 in the U.S. The drug is also called -- has orphan drug designation in both the U.S. and Europe. Last but not least, we expect potential big sales for this drug of -- in excess of $100 million.

Moving on to Page 4 of our presentation, a few details on the transaction. As communicated in our press release, there was an upgrade up from cash consideration of $319 million. And there will also be a regulatory milestones in addition to royalties and net sales contingent upon approval and market access of osilodrostat. Funding was by existing liquidity and new debt facility and leverage -- regarding leverage, this is an acceptable pro forma net debt-to-EBITDA level, leaving room for additional future M&A, which is clearly very strategic for us. Timing is expected for closing -- the closing is expected in the end of Q3 2019.

Moving on to Page 5 of the presentation. A bit on the strategic rationale behind this deal. Those who are saying that it reinforces the Recordati as a major rare disease player globally. It is a driver of long-term value growth and has a well established and high potential products with material revenue and EBITDA contribution. It expands a rare disease franchise into an attractive endocrinology space and leverages and expands our existing capabilities and organization.

Moving on to Page 6 of the presentation. I think that it's -- last but not least, I think it's important to underline that we are delivering our strategy. This deal is fully in line with the group's strategic objective announced our Capital Markets Day on the 9th of May, when we presented the 3-year plan of the company. And if we look more specifically in the area in question, which is rare diseases, it delivers on 3 objectives that we had stated as primary objectives for this part of the business, being continued developing the existing portfolio of global brands, consolidation of our Latin America and Asia Pacific presence and invest in targeted BD and M&A to reinforce the global portfolio.

At this point, I will leave the word to Fritz, who will take you through the first half results of the company.

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [4]

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Okay. Thank you, Andrea. Good afternoon or good morning to everyone. Then on Slide 7, we are presenting the performance of our company product, which is in line with our expectations. Zanidip lercanidipine [on page] does show a slight growth and we'll continue to grow our [lercanidipine pace] while for the sake of the Zanipress, which is the combination of lercanidipine and enalapril, we [shaved] down with the competition from the generic version, as expected. But in this environment, generic competition is always the [media] market, we are, let me say, only decreasing our sales by 11.4%. We are very pleased by this result.

The other corporate product, the overall sales Urorec generated sales with a growth of 6.5%, and this is due to the good performance of the product in all the main markets. Also for -- in the gross sales grow by 11.4% [of course] is really due to the good performance of the product in all the main market. Then we had the other corporate products, which are up by 12.2%, and [increased] initially on (inaudible) due to the new treatment of patients with the new treatment for the schizophrenia. Then regarding the [sales] of different [size] the [pharmacia] from AstraZeneca when the sales are pretty in line with a slight increase of 3.4% compared to the sales of last year. Sales in the first half were EUR 48.7 million. And then our special (inaudible) for the treatment of rare diseases generated sales of EUR [115.6 million] during the period. Here, we had an increase of 5% despite that the competition we've had from the generic version of Cosmegen in the United States. That's good performance for practically all our conference calls.

Then move on Slide 8, which presents our diversified product portfolio. And this graph, as usual, shows the breakdown of our revenues by type of product and our corporate product included also the rare disease drug account in the period for 67.1% of our revenue.

Now on Slide 9, you can find composition of revenues by geography. Then just as usual we start with -- for our Italian business space the pharmaceutical in Italy are up by 7.1%. Below our Italian business worth mentioning is the good performance of Urorec and Cardicor as well as the sales of Natural Point, the finance company, which we have acquired in June last year and consolidated (inaudible) pharmaceutical space in France are up by 18.5% and this is also French (inaudible) in addition to the (inaudible) of the product portfolio of Ginkor, the other brands, which are the 2 main products belonging to Tonipharm, the French company that we acquired in December '18. In Germany, sales are down by 0.9%, and this is mainly due to the competition from a generic version of Zanipress, which is our brand of the combination of lercanidipine and enalapril in the German market.

Revenue generated in Russia, Ukraine, and the other CIS countries is EUR 51.6 million and are up by 6.1% compared to the same period of the preceding year and includes an estimated currency exchange losses of EUR 0.6 million. Sales in Russia in local currency are up about 7.9%. And then we have seen a good performance now in Russian business, in particular, in the second quarter of the year. And in terms of the performance worth mentioning is the significant growth of the corporate growth (inaudible) Urorec and Zanidip.

Then in the U.S. The group pharmaceutical business in U.S.A. is only dedicated to product for the treatment of rare disease. Sales in the first half of 2019 are EUR 51.6 million and are up by 3.9%. This is the Euro-denominated sales and local currency sales are slightly down, and we reduced, as I said, the competition from a generic version of (inaudible). On the other hand, worth mentioning, the growth of our important product (inaudible) in the U.S. (inaudible) and Recordati in particular.

In Spain, sales are EUR 46.6 million, up about 6.3%, with a good performance of all our major product. Let's mention also the sales for the treatment of rare disease in Spain are posted and are significant. Sales in Turkey are up by 1.7%, and include important negative tariff exchange effect, which could be estimated to be EUR 11.7 million. In local currency sales of our Turkish subsidiary is very, very impressive, with a growth of 31.3%, and this is thanks to the good performance of all the corporate product as well as some important local products.

Then we have also a significant increase in sales in the other European countries, which is mainly due to the growth of sales in Poland, in Czech Republic as well as the direct commercialization by Recordati, by our organization, in Nordic countries and Benelux, where sales were previously made (inaudible). And the reason -- the only reason why we have is the international sales are down by 3.8%, which is due to the integration as I said with the local portfolio of [further clearly shows] through license agreement. The overall good performance practical in all our geographies.

Slide #10, we've got the graph showing geographical breakdown of our pharmaceutical revenue with no major changes compared to what was the breakdown anticipated before.

Now we can move on Slide 11, for presenting our first half results. We already analyzed and commented our revenue for the period. Let's move on the gross profit. Gross profit in the period is EUR 520 million with a margin of 70% of sales, which is lower compared to same period, which is particularly due mainly to price and currency effects. [We are bang] our [lipitor] franchise in U.S. dollar from (inaudible) and this has an effect, a negative effect in the cost of sales.

Regarding SG&A expenses increased -- our selling incentive increased less than sales, and are therefore down as a percentage of (inaudible) revenue underlying, despite marketing expenses for the launch of the Aegerion and also the new commercial transition we have put in place in the Nordic countries in Benelux and also in Baltics.

Regarding R&D expenses are EUR 59.8 million and that's half of that 11.4% and this is due to the appointment of a new development program that is also linked to the amortization of the intangible assets we have acquired in 2018 and the beginning of the year. G&A expenses are up by 4.4%, but are being used as a percentage of sales that we comment on. In India, which is 37.6% of sales. And with an increase of 7.4%, based on our growth from other revenue. (inaudible) depreciation, amortization charges of EUR 34.6 million and depreciation charges are EUR 12.2 million and in particular, depreciation charges include the application of the new accounting increases for IFRS 16 with the positive effect of EUR 5.2 million.

Then we had a negative impact in the application of this new (inaudible) but we have a positive effect in this year due to this increase on the -- mainly on the depreciation. Net financial charges are EUR 7.9 million. There was an increase of EUR 2.5 million, which is mainly due to the recommission in this quarter in the P&L of the term value of the cross-currency we offer, which is due to the following early investment during the period of an underlying loan. This was a private placement we issued in the United States in 2015, and we have invested in the first half of the year.

Then the effective tax rate during the period is 24.8%, which is lower than the same year that -- the same period of the preceding (inaudible).

Let me finish again with our net income. Net income is 23 -- at 23.4% is EUR 174.8 million, and we have an increase of our net income by 6.1%. Very solid performance in the first half of the year.

Slide #12, we have our [material], the presentation of the split of revenues, EBIT and EBITDA between our business segments. And regarding EBITDA, margins are 50.2% for the rare disease segment and 35.3% for the specialty & primary care segment, and these are in line with the previous quarter -- also in line with the previous quarter. The EBIT margin itself for the 6-month period 47 -- 46.5% for the rare disease segment and 30.1% for the specialty primary care segment.

Just on Slide 13, again, our net financial position, which shows debt of EUR 610.9 million as compared to a net debt at the beginning of the year of EUR 588.4 million. As Andrea mentioned at the beginning of the presentation, during the period, dividend was distributed for a total amount of EUR 96.1 million, then we pay out for USD 30 million for the license agreement with Aegerion for the position of the right to compete in Japan, and we paid another EUR 20 million here in this case for the milestone we have since then. We -- furthermore, we have this negative impact due to application of IFRS 16 then. We continue to have a solid cash generation in the company also in the first half of the year.

Now we are at the end of the presentation and Andrea will present you the revised target for the quarter.

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Andrea Recordati, Recordati Industria Chimica e Farmaceutica S.p.A. - CEO & Director [5]

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So the revised targets are following the good performance obviously in the first half of this year. And obviously, the integration, starting from Q4 contribution of the Signifor and Signifor LAR and osilodrostat, the business from Novartis. We expect Signifor and Signifor LAR to be accretive to group EBITDA already in 2019. So the new revised targets are EUR 1.460 billion -- go in range of EUR 1.460 billion to EUR 1.480 billion versus EUR 1.430 billion -- EUR 1.450 billion of the previous target. Our EBITDA target go up to 500 -- to a range of EUR 540 million to EUR 550 million -- sorry, EUR 535 million, EUR 545 million and compared to the EUR 530 million, EUR 540 million previously. And the operating income and net income stay on the same target already previously communicated because this acquisition on Novartis, we perceive, and, obviously, is an investment for growth and, therefore, implies costs in R&D, which, obviously, have to be taken into account in the EBIT and net income line.

So said that, I think we can move on to the Q&A.

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Marianne Tatschke, Recordati Industria Chimica e Farmaceutica S.p.A. - Director of IR & Corporate Communications [6]

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Operator, can you please open the Q&A session?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Jo Walton of Crédit Suisse.

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Jo Walton, Crédit Suisse AG, Research Division - MD [2]

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I'm very sorry for it, but it was extremely difficult to hear what you were saying. I think you were a little too far away from the microphone. So at least for us, so I do apologize if I ask questions.

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [3]

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(inaudible)

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Jo Walton, Crédit Suisse AG, Research Division - MD [4]

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No, no, if I just ask questions where you've already given the answers. I apologize. My first -- I have 3 main questions. Firstly, from the guidance, how much of the uplift of the guidance has come from the new acquisitions? And how much has come from perhaps better-than-expected performance for the underlying business? I wonder whether you can give us -- and I think you mentioned this, but again, I didn't hear it, the level of amortization that you have taken in the first half. I believe most of that's taken within the R&D line, and if you can help us on what the level of amortization will be going forward, let's say, for next year when you have all of your current crop of acquisitions fully embedded in the business. I'm particularly interested in the amortization for the Signifor business, because it would be indicative of whether you expect that to have greater longevity than the 2026 patent life, whether you feel that you'll be able to sustain that beyond the patent life.

And another question that I would just ask, and I think you may well have given it, could you give us any idea of the Reagila sales and how that is developing this year? Because that's your first specialist product. And I'd also ask for a little bit more detail on Juxtapid because it looks like the sales there were really very strong. Was it that it hadn't been promoted for a while? Or is the level of sales of Juxtapid we're seeing indicative of what we're seeing going forward? And I do apologize if you covered this in your presentation.

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [5]

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Okay. Sorry for not -- the inconvenience during my presentation, but no probably these are not questions I have already answered during my presentation. Do you hear me now?

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Jo Walton, Crédit Suisse AG, Research Division - MD [6]

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Yes, I can.

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [7]

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Okay, perfect. Then the first question, which is linked to the guidance, then we have increased our guidance as Andrea said, thanks to both the good performance of the business, also the contribution for the last quarter of the 2 assets we have acquired mainly for Signifor. And then in term of sales, roughly, we can say that half is linked to the good performance and half is linked to the contribution of Signifor sales, while in terms of EBITDA, the contribution of Signifor is less than half also because a view that in the year, in 2019, also some extraordinary items and costs, which are related to the transaction then.

In this quarter, the contribution in terms of EBITDA of Signifor is a bit less than half that we have included in our guidance. This is the first question. The second one was linked to the amortization then. In our first 6-month results, amortization charges are EUR 24.6 million. And what can I say, on a yearly basis increasing also the amortization of the USD 390 million we have paid for the acquisition of the assets and we expect to amortize this cost over 20 years in the U.S. to include -- multiplied by -- to what we had in the first half. Then we have also to add the amortization of some milestones that is linked to the [Recordati] position, and then you have to add the amortization over 20 years of this amount we have paid for Signifor and osilodrostat. Then -- and I agree with you, the majority of this amount has been to rectify as usual the R&D expenses.

The third, regarding the amortization period for Signifor, then we -- usually, we have the amortization period [fully] active, for which we have the full rights and for both osilodrostat and Signifor we bought the rights for the 2 assets. Then we expect to amortize over a long period of time, even if during this period could some generic competition arrive because this is a worldwide business, and we expect to maintain a value in the long-term material. And then it's not leading to a termination because there is no termination because we have the rights forever. And with that, the value, we believe that the business could have a long-term value even if it could be the case, there will be some generic competitor could arrive.

Regarding Reagila, Reagila sales in the first half were around EUR 3 million. Then we -- the uptake the co-market -- market taxes was very positive as we have always said. Now in the quarter, we have had the price reduction, which we expected for our product in Germany, the uptake is a little lower than expected. And overall, probably, we expect to have sales of Reagila for the full year, which has been included in our target, which is a bit less than EUR 10 million. Other question?

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Jo Walton, Crédit Suisse AG, Research Division - MD [8]

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And Juxtapid sales were strong. Is this indicative of growing sales?

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [9]

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Okay. Juxtapid strong. We believe that this is a good asset in Japan. And we believe that, and it's definitely performing ahead of our expectations in the market -- Japan markets. So it looks like a promotion put in place following the, as you mentioned, Jo, quite a few years of, let's say, not a lot of focus on the asset by Aegerion is actually starting to have an effect, and we are definitely performing better than we expected in our initial business plan for the product.

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Operator [10]

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The next question is from Chris Ryan of Bank of America.

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Christopher Anthony Ryan, BofA Merrill Lynch, Research Division - Analyst [11]

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So you mentioned that there is still room for acquisitions. In that, do you mean that, that's in reference to the 1.5x net leverage, kind of soft limit? And then also, how do you mean on that in terms of timing, since the acquisition is going to be done in Q3 '19, would that effectively end the acquisitions for 2019? Or would you still be open to acquisitions in the rest of the year?

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Andrea Recordati, Recordati Industria Chimica e Farmaceutica S.p.A. - CEO & Director [12]

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Look, I will answer this question. I mean, as I mentioned in my -- well, as I mentioned, we think we still have -- we have an expectation to end the year around, considering the current acquisition to remain around 1.5, 1.6x EBITDA kind of level of leverage, considering also the Novartis acquisition that we just completed. Regarding opportunities, honestly, it's really linked to the opportunities. Obviously, we're looking for high-quality assets. And if high-quality assets don't come around regularly, so clearly, if something does come along our way also in the last -- later part of the year, we will look at it, and we will assess it and see what -- if we want to pursue it. So it's -- we think we are [stayed] organizationally and financially to pursue other acquisitions. Clearly, the company now is focused on the execution of integration and the business plan of the Novartis acquisition. And as I said, we cannot exclude, since we have a financial capability in the organization enough to be worth that we might look at other potential targets if they do come across and they're high quality.

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Christopher Anthony Ryan, BofA Merrill Lynch, Research Division - Analyst [13]

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Okay. And just one follow-up. How important is consumer health or OTC in terms of the strategy, such as it relates to acquisitions going forward?

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Andrea Recordati, Recordati Industria Chimica e Farmaceutica S.p.A. - CEO & Director [14]

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We believe we are -- I think we clearly stated that in our Capital Markets Day, when we presented the 3-year plan. OTC for us is a major area of ranges for our specialty primary care business. We have an established presence in all the markets -- main markets we operate in, and we're attracted by the business proposition and the diversification that brings with it because, obviously, it's an out-of-pocket business and it diversifies our portfolio from the reimbursed and the state reimbursed business. So yes, it is strategic for us to look for assets in this space.

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Operator [15]

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The next question is from Martino Ambroggi of Equita.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [16]

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I had a follow-up on the guidance because I understood the split between new products and the existing portfolio. But what's the underlying assumption for ForEx, which was negative in Q1? And just a confirmation. IFRS 16 is not involving the revision of the EBITDA for the current year. The second question was related to the full year guidance.

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [17]

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Martino, sorry if I interrupt you, but I think you need -- it's a bad line. Your line is pretty bad. So we're actually having difficulties understanding what you're saying, I apologize. Can you just ...

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [18]

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Absolutely. No problem. I apologize. Sorry. I try once more. So for the guidance, what is the underlying assumption of ForEx, which was negative in the first half? And just the confirmation that IFRS 16 is not part of the revision, it was also included, although the impact is limited, but EBITDA level shouldn't have any impact. And the second question, always on the guidance. If we summarize the full year guidance, the like-for-like growth, I don't know. I give you my estimate is roughly 3%, maybe slightly more in terms of sales and a little bit higher in terms of EBITDA. Just to have an idea of what is the contribution of the acquisition and the like-for-like growth.

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [19]

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Okay. First question was linked essentially to the guidance and the FX effect. We had a negative currency effect, but it is a negative currency effect in terms of revenue approximately EUR 8 million in the first half, but compared to last year. If we compare our target, we -- which is comparable with where our expectation in terms of FX at the beginning of the year, then part of this improvement in our guidance is also linked to the better channel in term of FX that we have had until now, and we expect by the end of the year, in particular, for the Turkish lira, the ruble and U.S. dollar. Then in this year, we have been compared -- let's say compared to our expectation, we have been benefiting from a better channel in term of FX. And this is part of the improvement of our guidance for the existing business. The second question was...

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Marianne Tatschke, Recordati Industria Chimica e Farmaceutica S.p.A. - Director of IR & Corporate Communications [20]

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On the corporate like-for-like (inaudible).

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [21]

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No, then we -- the like-for-like, we will disclose in our actual then we -- today, we had 4.1% in the first half.

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Andrea Recordati, Recordati Industria Chimica e Farmaceutica S.p.A. - CEO & Director [22]

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Revenue-wise.

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [23]

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Revenue-wise. Then we expect this to be substantially in line with what will be the like-for-like by the end of the year. But this is all because in the first quarter was 3.2%, now is 4.1%, and we don't see major changes going forward. Then part of the increase of sales, as I said, is linked to currency effects and other is leads to good performance of some products and as I said, approximately half of this is into the expected consolidation of the new acquired assets as from end of September then for one quarter.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [24]

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Okay. And still on the acquisition side, should we expect focus will remain on rare diseases? Or you are satisfied with the acquisition already finalized?

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [25]

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Like I mentioned, and I answered the question before, no it will obviously, like we stated in our 3-year plan presentation, rare diseases is the main area of focus. But like we also reiterated in the 3-year plan presentation, also the growth and sustainability of our specialty primary care business still remains an objective. And as I said -- as I mentioned, and answered the question before. In this state, the OTC area is an area of particular interest for the reasons I mentioned before.

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [26]

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Okay. Very last on the gross margin in Q2. Last year was exceptionally high, the gross margin, but could you remind us what are the reasons for the 130 bps of lower profitability in Q2?

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [27]

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Last year?

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Martino De Ambroggi, Equita SIM S.p.A., Research Division - Analyst [28]

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Yes, as compared to last year, there are 130 bps of lower gross margin.

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [29]

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This is mainly due to the exceptional performance last year rather than the performance was in 2019. Having in mind that for the full year last year, the -- 2018, the EBIT margin was 32.7%. And then we had based on mix, in particular with a very lower cost of sales in the first half, which is not, let's say, normalized on a yearly basis. Then if we compare the profitability in terms of EBIT in the first half '18 and in the first half '19, the decrease is mainly due to the cost of goods, which was essentially due to a particular favorable yield in the first half last year. And let me also underline that this margin decrease is absolutely less important in term of EBITDA. We have this decrease from 33.3% to 32.6% if we are looking at the operating margin. But if we compare the 2 periods in term of EBITDA, then the margin is similar in the 2 periods, just 0.2% lower if we compare the 2 periods. Then we also view there were the different cost of sales, but we are also increasing our amortization, as I said at the beginning of my presentation.

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Operator [30]

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The next question is a follow-up from Jo Walton of Crédit Suisse.

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Jo Walton, Crédit Suisse AG, Research Division - MD [31]

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I wonder if I could ask both of you about your -- the likely marketing cost as a percentage of sales going forwards, with the mix shift to some of the slightly more primary care type products that you're getting. Or maybe not so much primary care, but less rare disease products that you're getting in your portfolio. Do you think that your current SG&A as a percentage of sales is going to be appropriate going forward as you have a global reach for some of these new products? I'm really trying to get to, if there's any countries where you're going to use these as a means to invest, and therefore, there will be a short-term period where -- because you are aren't involved in these specialty areas in this country, you're going to invest heavily beforehand. And therefore, we might see an increase in SG&A for a short period of time.

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Andrea Recordati, Recordati Industria Chimica e Farmaceutica S.p.A. - CEO & Director [32]

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No, we don't expect this -- we don't expect this, Jo, very directly.

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [33]

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And we continue to increase the organization in the rare disease space, but we are talking about a few -- not few but a limited number of people because, as you know, the activity in the rare disease space requires very limited organization.

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Andrea Recordati, Recordati Industria Chimica e Farmaceutica S.p.A. - CEO & Director [34]

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This applies also to the U.S. So I mean, our assumptions, which is always the result of market research, targeted segmentation of a market and the target that we need to take is -- for the new endocrinology business is bringing us to an increase of the organization in the U.S., however, it remains a very small organization in the context in the bigger picture. So yes, we are obviously investing for the integration and the execution of the business plan of the newly acquired targets, but the numbers do not change the picture in any substantial way, and we are confident that what investments we're putting behind this acquisition are going to suffice to reach our objectives, which are obviously indicating the big sales potential that we gave you. But no, we are not expecting any kind of growth in the selling and in the SG&A kind of line, and it is compared to what we have today in our current P&L.

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Jo Walton, Crédit Suisse AG, Research Division - MD [35]

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Do you believe that Novartis was actively promoting Signifor?

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Andrea Recordati, Recordati Industria Chimica e Farmaceutica S.p.A. - CEO & Director [36]

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No, Signifor was not promoted in the United States for at least 2 years, so we believe there's quite a lot of upside actually based around this, and this is why we are putting a peak sales for the Signifor franchise, which are actually higher than the France sales of 2018 and the expected sales for 2019 going forward, and also promotion in Europe, which was still taking place, and let's say, we believe that it has less focus of promotion that we are going to put on the products and on the franchise, especially once the osilodrostat product arrives to market. Clearly, that is going to be a launch product, and will require investments.

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Operator [37]

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

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Marianne Tatschke, Recordati Industria Chimica e Farmaceutica S.p.A. - Director of IR & Corporate Communications [38]

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Okay.

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [39]

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Okay.

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Andrea Recordati, Recordati Industria Chimica e Farmaceutica S.p.A. - CEO & Director [40]

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Thank you very much.

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Fritz Squindo, Recordati Industria Chimica e Farmaceutica S.p.A. - CFO, MD & Executive Director [41]

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Thank you.

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Andrea Recordati, Recordati Industria Chimica e Farmaceutica S.p.A. - CEO & Director [42]

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Thank you, everybody. Have a good evening.