Recordati Industria Chimica e Farmaceutica SpA

MIL:REC

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Recordati 2020 First Quarter Results Conference Call. [Operator Instructions]

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

[Marianne Tatschke, executive]

Good afternoon or good morning to everyone. And thank you for attending the Recordati conference call today. Our CEO, Andrea Recordati; and our CFO, Luigi La Corte, will be presenting and commenting upon our first quarter 2020 results.

For a better understanding of this presentation, please access the set of slides available on our website, www.recordati.com, under the Investor section and Presentations tab. At the end of the presentation, we will answer any questions you may have.

Andrea, please go ahead. Thank you.

[Andrea Recordati, executive]

Okay. Good afternoon, ladies and gentlemen. And welcome to our first quarter results conference call.

So if you turn please to Slide 2 of the presentation, which is clearly the slide with the title first quarter 2020 highlights. As you know, the first quarter of 2020 saw the onset of the COVID-19 pandemic in all geographical areas in which the group operates. As we all know, restrictions were imposed on the movement of people, transport, production, commerce, most of which are still in place. I can confirm that there was exceptional organizational responsiveness at Recordati to deal with the effect of an unrepresented crisis. Despite the medical emergency and the restrictions implemented in all countries, the financial results obtained in the first quarter are very positive and confirmed the continued growth of the group.

Revenues grow significantly, but please let me remind you that they include a EUR 20 million stockpiling effect, which we expect to lead to a destocking in the second quarter. And also, these revenues include EUR 14.7 million revenues from the sales of Signifor. EBITDA, which excludes EUR 2 million of nonrecurring costs related to the COVID-19 emergency, mostly donations to hospitals in the most affected areas, is EUR 172.9 million or 40.3% of sales growing on previous -- on previous year by 20.1%.

Net income also grew by more than 20%, with both profitability measures leading to a fiscal margin improvement. Adjusted net income, which is net income excluding amortization and impairment of intangible assets except software and goodwill as well as nonrecurring items net of tax effects, is EUR 125.2 million or 29.2% of sales with a growth versus the previous year of 23.5%. Luigi will touch and give more information on this additional measure we have introduced during the presentation.

Net debt at the end of March is EUR 880.8 million compared to net debt of EUR 902.7 million at the 31st of December 2019. During the period, a milestone of EUR 20 million was paid to Novartis following the European approval of Isturisa, and own shares were of course purchased for a total outlay, net of disposables -- of disposal for the of stock options of EUR 44 million. We're also very pleased to have obtained the early approval for Isturisa, both in Europe and in the U.S., and I shall discuss launch planning further on in the presentation.

You can please turn to Slide 3 of the presentation. Just a few more words on how Recordati has been dealing with this unprecedented crisis. Clearly, the group's primary objective was to safeguard our employees and the assurance of continuity to supply and distribution of our products. As you all know, with regards to the pharmaceutical industry, operations were allowed to continue in order to ensure the availability of drugs for patients. While complying with global measures necessary to ensure the health and safety of its employees, Recordati did not interrupt its production and distribution activities and adopted all necessary measures to guarantee the continuous availability in the market of its products.

I take this chance to really wish -- I really sincerely would like to thank all the group employees for the great effort and excellent job done in this difficult situation. Especially in the Lombardy region that, as you know, was one of the most heavily affected areas in Europe with the COVID pandemic. The professionalism, dedication and sense of responsibility, in particular, our manufacturing distribution employees, allowed our activities to continue in the best possible way, ensuring the uninterrupted availability of our products, many of which are for the treatment of severe chronic diseases. We are proud of the contribution we have been able to provide in this emergency, also for the donations we have made to support health care institutions with tireless and courageously committed to fighting the COVID-19 epidemic in the most affected areas.

Just to give you a bit more detail on this, looking at the slide, when it comes to safe environment for our employees, we implemented measures to protect, obviously, individuals and to prevent infection diffusion in our facilities. Clearly, all the personnel that could work from home was left home and work from home. And I can confirm that the organization reacted very well, like I mentioned before. And people are working indeed.

New working models in all manufacturing plants were introduced to support distancing measures. As for example, revision of working time and redistribution of personnel in our facilities in Turkey, Italy and Tunisia; a 2-shift model in France in our Nanterre rare disease facility, and weekend shifts introduction in our specialty primary care facility in France in Montluçon and in our facility in Spain.

Turning to supply chain and continuity for all our businesses in all markets. We introduced alternative supply flow for starting materials and intermediates to feed Recordati's API plants, both for captive and merchant portfolios, stock management tuning both for APIs and finished drug forms. We introduced stock delocalization for finished drug forms in the different countries, creating more hubs, alternative FDF supply flows, planning and production programs revision for FDFs, both in Recordati and our CMO plants, and alternative logistic and distribution models.

Turning to Slide 4. I would like to say a few words on Signifor before I pass on to Luigi to for -- who will take you through on the first quarter results. So we are very pleased with the performance of Signifor in the first quarter, with an estimated 6% growth versus 2019 on a like-for-like in market sales basis, especially given the current situation and the fact that we are just starting to promote the product ourselves in the U.S., while the transfer of the marketing authorizations in Europe is still to be completed. What is probably of most interest for all of you and of course for us as well is the launch of Isturisa. Launch in the U.S. is on track and is slated for June, July, and in the EU starting from Q3 2020. We have decided not to postpone the launch in the interest of patients. We are aware of the value of this new treatment option for patients suffering from Cushing's disease and are committed to making it available as soon as possible.

Launch activities that are one time would have been carried out by being actively present in medical congresses and visiting key opinion leaders and specialists are, of course, not possible at the moment. Given the current COVID-19 environment to which we're all adjusting, we have invested in a set of tools and technology infrastructure that allows us to conduct remote detailing and enable virtual data conferences with the health care providers. Notwithstanding the challenging situation, our organization is committed to implement the launch plan as effectively as possible.

So if you can please turn to Slide 5. And at this point, I'm going to pass to Luigi who will take you through the results in detail for the first quarter. Thank you.

[Luigi Felice Corte, executive]

So thank you, Andrea. And good afternoon and good morning, everyone. I'm pleased to have this opportunity to comment what was clearly a strong set of results for Q1. Flattered, as has been highlighted by what we estimate has been a EUR 20 million stocking effect ahead of the start of the COVID crisis. As I go through the presentation, I'm not going to try and unpick that by product or by market. But what I will say is that it primarily affected our specialty and primary care business, in particular, in Western Europe and Central and Eastern Europe. Rare disease business was only marginally affected.

So with that said, starting with sales by product. Corporate product, therefore, products which are sold in more than one market, continued to grow and now account for close to 70% of total revenue. Our lercanidipine franchise continued to grow nicely. The model grew by 8.7% in the quarter, driven by Germany, Poland, Turkey and Benelux. And the combination product with enalapril also continued on the growth trajectory that it started back on in the later part of 2019.

Urorec or silodosin faced -- started to face as of Q1, as anticipated, generic competition. Generics entered the market over the course of the quarter, and we now have more multiple generics in all of the major European markets with price reductions as anticipated, which range between 25% and 40%, depending on the country. But so far, our strategy to continue to support products at the point of loss of exclusivity has successfully sustained volume and managed to contain the level of erosion in the first 2 months. We obviously expect that they'll continue in the coming months. Pitavastatin continued to grow well, driven by strong underlying growth in Russia and Turkey, but also continued growth in Spain, Portugal and Greece.

We had an exceptionally strong quarter on our metoprolol franchise, driven both by those markets where we established operations to promote products directly over the course of 2019, but also growth in Germany and Poland, growth, which was in part also benefiting from some temporary shortage of generic products in some of the markets. Other corporate product growth of 15% was fairly broad-based with a particularly strong contribution from our seasonal flu and allergy portfolio, Isofra and Polydexa in Russia and Ukraine, Hexaspray in France. But also strong growth of Procto-Glyvenol and Reagila, which was up over 60% relative to Q1 in the previous year.

Drug for rare diseases grew by almost 38%. Obviously, Signifor and Signifor LAR making a significant contribution to that with EUR 14.7 million in the quarter. Juxtapid and Ledaga also contributed roughly EUR 2 million each in the quarter. But beyond that, we also saw good growth from Carbaglu and Cystadane in the U.S. and from Cystadrops in Europe, alongside continued growth in some of our international markets.

As you will see from Page 6, the share of business, which comes from rare diseases and OTC has continued to grow, with rare diseases now accounting for 18% of total net revenue. And local product portfolios, they're still important, but below 16%.

Moving to Slide 7 and looking at revenue by geography. Once again, very broad-based growth with several markets off to a solid good start in January and February already and, obviously, with the growth further enhanced in March by stock movements. The one outlier, if you like, on the slide, is Italy, with minus 2% growth. That's driven by multiple factors. Italy, you may recall, faced generic entries and price reductions on pantoprazole and lovastatin in the later part of 2019 and obviously, has a significant business in silodosin, which faced generic entry in the quarter. Italy is also the one market within specialty and primary care where the stocking effect at the end of the quarter was less pronounced. And in fact, it's close to nil we estimate, given that the crisis broke out earlier and we saw stocking already taking place in February and unwound in March.

France revenue is up 8.9%, with the strong growth of Methadone, Hexaspray and Ginkor, plus obviously a good contribution from rare disease and Signifor. There is also some stocking in France alongside the other European markets, as I've mentioned, which does, in part, offset pressures that we're seeing in France on lercanidipine and silodosin from new legislation, which was introduced at the start of the year, which promotes dispensing of generic alternatives.

Germany was off to a very strong start with growth in the quarter of 8.4%, driven by the metoprolol, Claversal and, obviously, once again, the contribution of Signifor. Very strong growth in Russia, CIS and Ukraine of 24.7%, with Russia growing by 20.5% in the quarter with a mix of volume and price growth really driven, as I said earlier, by our seasonal flu portfolio and Procto-Glyvenol.

U.S., which is predominantly was effective, obviously, relates to our rare disease business is up by 21.1%, with some tailwind in terms of FX. On a local currency basis, U.S. grows by 17.6% with the growth clearly driven by Signifor but also Carbaglu and Cystadane, which more than offset what we expected to be a low single-digit decline for the quarter on PANHEMATIN.

Turkey grew by 25%, which reflects foreign exchange headwinds of close to 12% in the quarter. Growth was driven from the overall portfolio, but obviously, particularly strong on leading products in the market, Mictonorm, Cabral and Livazo. There was in Turkey as well even though the impact of COVID in the quarter was less pronounced, there was a little bit of stocking ahead of expected price increases in the quarter. And we do expect growth to soften somewhat in Turkey in the coming months as a result.

Spain and Portugal both grew with growth, driven by Livazo and Reagila, which was launched in both markets at the end of 2019. Once again, the contribution of Signifor. Other Central Eastern European markets and other markets in Western Europe, all grew exceptionally well. Thanks to metoprolol, particularly in those markets, as I said earlier, where we started to establish the direct selling organization, but also thanks to the continued growth of Procto-Glyvenol, Reagila and Zanidip. And also, again, the contribution of rare diseases, which almost doubled sales in Central and Eastern European markets.

North Africa is up by 5.4%, with growth driven by our business in Tunisia, which is up double digit, 10% growth there. And other international sales growth of 4.4% really reflects the growth of our rare disease business in international markets, particularly in Colombia and Japan, in addition to additional revenue in the quarter from Signifor.

So again, all in all, a strong Q1 in terms of revenue. Thanks to a good start of the year, enhanced in March, and obviously an expectation that, that will also mean a somewhat softer Q1 to adapt stocking unwind and as we face a stronger headwind in terms of foreign exchange, particularly on the Turkish lira and the ruble.

On Slide 8, in terms of revenue composition by geography. The picture is fairly unchanged. The only thing that I'll sort of emphasize here is the fact that really the diversified footprint of the group has been a key strength as we've gone through this turbulent period, with the group not being over-reliant on any one geography.

Switching to Slide 9 and looking at the other lines of the P&L. Beyond the 12% growth in revenue, we also, obviously saw a strong growth in underlying profit. Gross profit margin grew to 70.8%, really driven by mix and the additional contribution from the rare disease portfolio. SG&A expenses of 27.6% of sales are made up of 23.3% of sales of selling expenses and 4.3% of sales of G&A. The increase -- the single-digit increase versus last year really driven by the additional investments and resources that we put in place over the second part of 2019 to upgrade our resources and capabilities to maximize the opportunity on our endocrinology franchise and obviously start to reflect, also cost to prepare for the launch of Isturisa in the U.S., partially offset by a level of deferral of activity on the primary specialty care side from March into later part in the year, again, due to the disruption.

R&D expenses grow to 8.1% of revenue, really reflecting both the increase in amortization charges arising from the acquisitions that we made last year, but also reflecting the initial costs from the clinical trials behind Signifor and Isturisa, which we inherited from Novartis. EUR 2.1 million of other expenses are really the nonrecurring costs incurred as a result of the COVID-19 crisis, mostly being -- and in fact the majority of this are the donations, which the group decided to put in place to help those hospitals in the most affected areas. We expect the total amount of, let's say, nonrecurring costs driven by COVID for the full year to be in the range of EUR 6 million to EUR 8 million, and once again, primarily being the EUR 5 million of donations that we have set out to make.

Operating income as a result is EUR 148.4 million, up 17.8% versus 2019 or 34.6%. And EBITDA is EUR 172.9 million, up 40.3% of sales or 20% increase versus last year. Obviously, these figures also benefit from the higher sales in the quarter. But I would emphasize that even adjusting for that and we estimate the incremental EUR 20 million revenue being worth roughly EUR 13 million and at EBITDA level, you will see that the EBITDA margin still is ahead of last year and in line with the improvement that we have set out to achieve the 2020 target.

Net income of EUR 111.2 million is 20.7% up on 2019, reflecting both the higher operating results, but also reduced financial expenses, driven by a positive effect on 2 cross-currency swaps, which are no longer treated as hedges since the start of 2019, and a lower tax rate of around 23.5%, which benefits from the ongoing benefit of the patent box, which we have agreed with the Italian tax authorities at the end of 2019.

As Andrea mentioned, as of this quarter, given the increased level of intangibles on our balance sheet and to facilitate comparability of our financial results with those of our peers in the sector, we've decided to provide an additional measure as of this quarter, being adjusted net income, which adjusts net income for amortization and write-down of intangibles, excluding software and goodwill and nonrecurring items, net of the tax effect. On this basis, adjusted net income for Q1 was EUR 125.2 million, which is up 23.5% versus 2019. We've also fine-tuned the definition of EBITDA to exclude the nonrecurring items. And once again, in Q1, this solely relates to the COVID-related expenses of around EUR 2 million, which we expect to grow to only EUR 6 million to EUR 8 million for the full year. We have included for reference on Slide 10 a clear reconciliation of between net income and adjusted net income both for Q1 2020 and Q1 2019 and also provide a reconciliation for the full year 2019 and a reconciliation of what would have been a target on an adjusted net income basis consistent with the target net income guidance that we provided for the full year. And again, I won't go through the details of that, but you'll have that in the presentation.

Slide 11 illustrates the growing relevance of the rare disease business on our total results. As we commented already, rare disease representing 18% of revenue in the first quarter and 23% of EBIT and EBITDA. But nice also to see, on a margin basis, EBITDA for both rare diseases and specialty primary care growing in the quarter relative to the same period of last year.

And finally, from my side, on Slide 12. Q1 was also a strong quarter in terms of cash flow generation. As Andrea mentioned, our net debt at the end of March was EUR 880.8 million, a decrease of close to EUR 22 million versus December of 2019, which reflects also net cash outflow for share repurchases of around EUR 44 million in the quarter and USD 20 million milestone payment, which was made to Novartis for the Isturisa approval in the EU, with liquidity at the end of the quarter, a very robust EUR 200 million.

And with that, I will hand over to Andrea. He'll talk about the outlook for the remainder of the year.

[Andrea Recordati, executive]

Okay. Thank you very much, Luigi. So regarding -- if you turn to Slide 13, please. So regarding the full year outlook for 2020. So despite a level of uncertainty from the environment in which we operate due to the COVID-19 crisis, we would like to provide you this outlook for the year. Given the situation, we expect net revenue to be slightly below our original forecast due to FX winds -- headwinds, in particular in Turkey and Russia and obviously, the impact of the COVID-19 lockdowns on demand in Q2 and Q3.

Signifor and Isturisa targets are unchanged at around EUR 70 million, notwithstanding the slight delay in the EU MA transfer for Signifor, which implies only booking the net margin and not full sales for a few more months than we expected initially in our objectives. And clearly also because of the launch of Isturisa in the context we all know about.

EUR 5 million to EUR 6 million incremental investments for the earlier-than-expected launch of Isturisa. And also, please let me remind you that this launch also triggered EUR 3 million of additional amortization charges.

EBITDA margin improvement, excluding COVID-19-related nonrecurring costs is basically on track. As I said before, they were mainly donations. And we therefore expect EBITDA and adjusted net income to be near the lower end of the range announced in February.

This leads me to basically the end of the presentation, at which point, I'd say -- I'd pass the word to Marianne.

[Marianne Tatschke, executive]

Yes. Thank you, Andrea. Operator, could you please open the question-and-answer period?

[Operator]

[Operator Instructions] The first question is from Martino De Ambroggi of Equita.

[Martino De Ambroggi, analyst]

The first question is on the M&A activity that I suppose is totally frozen. But I was wondering what you're feeling on the potential new opportunities, which may arise such a brand-new environment, first. The second, do you stick to your 2021 guidance, which were supposed to include additional acquisitions or this becomes more and more difficult. And still on 2021, just to be sure, the adjusted net profit guidance should be EUR 50 million higher than the EUR 400 million nonadjusted net profit?

[Andrea Recordati, executive]

Okay. Let me just answer the first question, and I'll let Luigi answer the second question. Regarding M&A activity being frozen, we don't actually see this freeze of M&A activity. We have plenty of dossiers on our table, which are progressing. And as you know and we believe that this dossier can progress even in the context we're operating at this moment in time. We don't really see why this should slow down or be frozen at this time. So this is still and always will be an integral part of our strategy going forward, and we will press on this front, obviously, also in view of the 2021 objective. Okay.

So maybe Luigi, you can answer the second question regarding guidance '21?

[Luigi Felice Corte, executive]

Yes. So we're clearly -- we're not providing, at this point, a sort of detailed update on 2021 guidance. So the one that we provided and which we reiterated at the beginning of the year still holds. And yes, I think the ballpark, the rough estimate, which you quoted in terms of adjustment for 2021 to go from net income target to adjusted net income is correct.

[Martino De Ambroggi, analyst]

Okay. And if I may, a follow-up on sales for the current year, but because you mentioned the negative ForEx effect for Turkey and Russia, just magnitude of this effect. And if you confirm Urorec minus EUR 40 million and Livazo minus EUR 7 million for the current year due to patent expiry.

[Luigi Felice Corte, executive]

Okay. Yes. So I think I've -- I'm not sure I heard correctly the first part of the question. In terms of the second part of the question, are we still expecting the level of generic erosion on silodosin and pitavastatin that we had expected, I think the answer is, yes, absolutely.

And in terms of foreign exchange, I mean you will have seen, obviously, since the beginning of the year, both the ruble and the Turkish lira have weakened, and that's what we are referencing and seeing. Our guidance is provided on a -- sort of based on consensus exchange rates, not current exchange rates. And obviously, we will see the impact of that on revenue. And we think -- the impact of that is roughly 1 percentage point in terms of additional FX that we see over the coming months.

[Operator]

The next question is from Jo Walton of Crédit Suisse.

[Jo Walton, analyst]

I wonder if you could tell us a little bit more about Isturisa and Signifor. Just starting, you've given us the IQVIA sales number at EUR 17.4 million. Can we just check exactly what you booked so that we can get some sense of how much there would be an uplift when you take the full responsibility for the product? Perhaps you could tell us a little bit about the U.S. and European split for Signifor?

And now that you are going to be launching in Europe and the U.S., just want to check your original guidance for the EUR 70 million, excluded any U.S. site launch. Now are you adjusting the -- your target? Or should we still assume that, that is excluding the U.S.? And can you tell us a bit about pricing? Now that you've got approval in Europe, presumably, you've been able to have some discussions about pricing ahead of launch. And perhaps you could tell us where you think that, that is shaking out? And on the COVID effect, you talked about specialty and primary care. You didn't mention OTC. For most companies, OTC has been an area of significant stocking. Is that not an issue for you?

[Luigi Felice Corte, executive]

Okay. Thank you, Jo. A lot of questions there. I think I've noted them all. I'll give it a shot. So in terms of Signifor and Isturisa and clarity, so first of all, just to be clear, as noted on the slide, those are not IQVIA sales. These are for 2019, the sales which were reported to us by Novartis as having been sold into the market. And for 2020, this is a gross-up of the EUR 14.7 million net revenue, which we book, which is for the period before marketing authorization transfer a net margin and then following marketing authorization transfer, which has obviously occurred already in the U.S., a sort of gross, the net sales number as the rest of their portfolio. So we've tried to sort of to help the read of the -- our estimate of in-market performance. We have grossed up our revenue number to make it comparable to a sort of net sales number, which would have been recorded by Novartis last year. So that's number one.

I think number two, I think you were looking for a U.S.-Europe split. We've not provided that in the past other than saying that more than 50% of Signifor sales is outside of the U.S. And I think we will leave it at that for the time being.

On the EUR 70 million guidance for the product, there are 2 effects there, which offset each other. So on one hand, we have made an estimate and we built into the forecast now initial sales of Isturisa in the U.S. for the year. However, we have also -- there is a small delay of 1 to 2 months in the timing of the marketing authorization transfer of Isturisa -- sorry, of Signifor in the European Union. And again, as explained, before the market authorization takes place, the revenue that we book is only the net margin. So there's a discount to the full amount. That's why we're sticking with -- for the time being, with the guidance that we've provided, which obviously is also reflective of the fact that we will be launching Isturisa in a somewhat unprecedented environment where we think we've put in place everything that is necessary to still maximize the opportunity. But obviously, the level of accuracy that we can provide in the forecast I'm sure you appreciate is reduced.

On pricing, we're not going to provide detailed commentary on pricing. I think Isturisa has a very compelling clinical profile, and rest assured, it will have also a compelling value proposition. And we'll not comment more than that being in launch phase. And I think hopefully with the last question on COVID, yes, you're absolutely right. When I comment on specialty and primary care, that obviously includes the OTC portfolio within that as well. As you may recall, whenever we report our numbers, OTC is part of specialty and primary care. And yes, OTC as well was affected by the stocking and will be affected in Q2 by destocking and what we expect to be a temporary softness of demand. Hopefully, I've cleared all the questions.

[Operator]

The next question is from K.C. Arikatla of Goldman Sachs.

[Krishna Arikatla, analyst]

I have 2. The first one on PANHEMATIN. Can I confirm that the product sales in the U.S. were down low single-digit percentage? And if that is true, can you give us an idea about whether this has been a growth product in the last few quarters? So is it down low single digit after growing quite a bit in the last few quarters? And also, is that all currency driven? Or are you seeing any initial impact from the recently launched competitor product here? That's my first one.

The second question, a few Spanish pharma companies have been talking about potential price cuts proposed by the government for prescription products in the country. Can you give us an idea about how big your prescription sales are in Spain? And would love to hear any thoughts that you might have on these potential price reforms.

[Luigi Felice Corte, executive]

KC, I'm sorry. I think perhaps it was the line, but we're not sure we caught the product. I think your first question was on PANHEMATIN. Is that correct?

[Krishna Arikatla, analyst]

Yes, PANHEMATIN historical growth. And are you seeing any impact from GIVLAARI?

[Luigi Felice Corte, executive]

Yes. So short answer is the impact so far is in line with what we expected. I think we commented at the end of the year that the erosion would happen over time. It would be more of a 2021 effect as opposed to a 2020 effect. And I think I mentioned during my presentation, that we've seen a sort of single-digit decline in Q1 on PANHEMATIN, which, to be honest, is part GIVLAARI, part just general impact where patients need to go to infusion centers and clearly have not been able to do that in certain circumstances because of the crisis.

Yes. And I think your second question was around Spain and the level of prescription sales, I'm not sure.

[Marianne Tatschke, executive]

On the price cut.

[Luigi Felice Corte, executive]

Sorry?

[Marianne Tatschke, executive]

Price cuts apparently has been announced by some government.

[Luigi Felice Corte, executive]

To be honest, we've not seen sort of price reductions as being sort of a major factor in Spain in the quarter. The prescription pharmaceutical sales in Spain roughly just over 80% of the total sales.

[Operator]

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

[James Vane-Tempest, analyst]

I've got a couple on guidance and then I a couple on the business, if I may. So just on guidance, just to be clear, at least in terms of looking at the alternative performance measures, so thank you for providing that.

Going forward, are you going to be providing guidance on that metric? Is that going to be the preferred metric with guidance? Or is this just given the period we're in terms of the one-offs, how we should think about it? And then which number is really what we should be focusing on for the year?

And then second question related to guidance. R&D, I mean you flagged anyway that we should see an increase as you're investing in your portfolio. But trying to look at what you delivered in the top line stocking seems as if you might be running at an underlying level of around 8.5% of revenue. So I'm just wondering if that's sort of the right place to be in.

And then just questions on the business. You've given us a sense of the overall impact from COVID to the business this year, but can you give us a flavor perhaps of the top 3 countries in Europe? How it's had a various impact on the different pieces of the business and how you've responded? And then finally, on M&A. I know, Andrea, you touched on that earlier into the Q&A. But just curious if you can give some more details around the M&A environment and some of the discussions that are happening, in what areas we could potentially see the company go into next?

[Andrea Recordati, executive]

I'll start with answering the last one. I mean, I cannot give you that kind of information. Clearly, M&A is a very sensitive subject. And as we said, we have a lot of dossiers that we're looking, both in SPC and in rare disease, okay? We're looking at portfolios of products being divested, and we're looking also at opportunities of in-licensing products in late-stage development. And this is really the kind of color I can give you around this, for obvious competitive reasons, James. I hope you can appreciate that. But as I said that there is a lot of movement. There is a lot of opportunities out there. So we're pretty confident that we will be able to kind of pursue and progress with our M&A strategy [ as we advance ] even in this context we're operating in.

[Luigi Felice Corte, executive]

And I guess, James, going back to your first question with regards to guidance. As you said, first of all, just to be clear, as we said, we are going to continue to report on a sort of full IFRS basis and, therefore, provide visibility, not just on an adjusted net income basis, but net income as well.

In terms of the focus on guidance, I do think, as I said, particularly given we can't second guess the type of acquisitions that we will make and whether or not they will come with value being ascribed to goodwill, as you know, is not amortized versus intangible assets. So we believe that in terms of providing guidance, the focus ought to be on revenue, EBITDA and adjusted net income, but again, as we've done now, we'll provide a bridge so that you're able to reconcile.

And in terms of the nonrecurring items, as I said in my presentation, the intent here for circa 2020 is to simply isolate really the donations and any truly exceptional nonrecurring costs arising from COVID. For 2019, there were no such costs. There was -- and I think we highlighted this clearly at the end of last year, the one-off benefit relating to prior years of the patent box of EUR 27 million in Q4. So yes, the focus of guidance will likely be revenue, EBITDA and adjusted net income going forward, which also believes puts us more on sort of on par with many in our sector.

[Operator]

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

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

[Jo Walton, analyst]

I don't think you actually answered the last question on R&D. If we strip out amortization, 8.5% of those sales is clearly very low by your peer group standards. I wonder if you could talk a little bit about how you see that developing.

And if we look again through to 2021 and perhaps beyond, I'm interested in your views as to how governments are going to respond to the extra debt that they're taking on board? Now traditionally, we like to see our pharmaceuticals sort of pretty much free at the point of delivery and governments are very generous, but do you expect to see incremental price pressures coming in as all of the COVID situation has to be paid for? And if so, are there any particular countries where you would point to a potential pricing risk for you?

And could I also ask for the sales number for Reagila? I think you may have given it and I may have missed it.

[Luigi Felice Corte, executive]

Okay. Yes. So I think on R&D, Jo, if anything, honestly, R&D, I don't think there's sort of any sort of major change in terms of I think amortization numbers that we've always commented on. If anything, R&D has been increasing over the few last years, both as a result of the increased amortization and as a result of new studies. In particular, going forward, we will see an increase being driven by costs, which are coming through the -- to support ongoing trials of Signifor and Isturisa. The fact that it's below the sort of the levels of other companies in the sector, yes, it is a different sort of, if you like, the product portfolio and approach. I think the group has always been consistent in seeing BD as an integral part of its strategy and, if you like, complementing the in-house research, which is done.

[Andrea Recordati, executive]

It also depends on what stage the difficult trials that we're carrying through are. So going forward, there might be fluctuations, but, yes, you're not going to see our R&D line down to 15% of net revenues. I mean this is not what we expect and envisage going forward.

[Luigi Felice Corte, executive]

I think this percentage, I think, is in fact in line with the guidance, which was provided as part of the 3-year plan.

And I think you had a question on pricing pressure.

[Andrea Recordati, executive]

Pricing pressure linked, Jo, to the current crisis and other works with the government in order to kind of mitigate this extreme cost that we're putting on the balance sheet are going to come to us as an industry to regain part some savings. Honestly, it's a very uncertain time. It's very difficult to give you any kind of answer on that. We're obviously monitoring the situation. At this moment in time, we don't have an answer to this question. It is always a possibility, but we haven't seen any movement of the sort per se which are directly linked to the COVID-19 crisis.

[Luigi Felice Corte, executive]

Sorry, I just realized that I had missed one of the questions from James at Jefferies, who was sort of unpacking the growth rate. Now just to be clear, so with 12% overall growth, we said EUR 20 million of that is really exceptional stocking. Now EUR 14.7 million is contributed by Signifor. If I was to subtract both the sort of, if you like, new revenue from Signifor and the stocking impact, we should be looking at a figure, which is closer to 3%, which is consistent with -- in fact, it's very much in line with our expectations for the start of the year, once again, a year where we know we will be losing exclusivity of both silodosin and pitavastatin and facing the entry of a new competitor on PANHEMATIN in the U.S. So apologies for that. And please, if you're going to be asking multiple questions, if you just go a little bit slowly because it's hard sometimes maybe to just note them all. Thank you.

[Marianne Tatschke, executive]

Jo wanted to know about the sales of Reagila.

[Luigi Felice Corte, executive]

Yes. Sorry, Jo. Sales of Reagila were just over EUR 3 million and 60% plus increase versus Q1 of last year. I hope we have not missed any other questions from anyone so far. Operator?

[Operator]

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

[Christopher Ryan, analyst]

Sorry, my questions have been answered.

[Operator]

So the next question is a follow-up from James Vane-Tempest from Jefferies.

[James Vane-Tempest, analyst]

And just to qualify my earlier question, I was looking at it more from the point of view of R&D as a proportion of revenue and curious in terms of what the underlying spend is. Is sort of 8.5% really what the underlying run rate is for the year? And then just for my -- another one of my prior questions, just curious what's the impact in terms of the sort of top 3 countries in Europe, how the business has adapted to the COVID challenges, and what kind of processes you maybe have in place? Just some color in terms of the top 3 countries outside of Italy would be really, really helpful to understand the business well.

[Andrea Recordati, executive]

I'm sorry. Right. I think we missed the second part -- the second question. Regarding R&D, the run rate, I think you can predict around 10%, okay, for full year.

[Marianne Tatschke, executive]

But what is the underlying without the amortization?

[Andrea Recordati, executive]

Underlying without amortization?

[Luigi Felice Corte, executive]

Yes, it's roughly 50%. I mean, no change versus what we've seen in Q1.

[James Vane-Tempest, analyst]

Okay. And just to clarify my second question. You've given an impact of the overall -- you've given the overall impact from COVID to the business. But can you give us a flavor how this has happened in some of the various countries you operated in?

[Luigi Felice Corte, executive]

James, it's difficult because it's been really difficult market-by-market in terms of also of products since the -- every market was different in terms of the kind of measures that were taken in place -- that were put in place. It is different in terms of the logistic structures that were delivered fully. And again, it's not an exact science in terms of estimating the extra stocking impact. We've obviously done this on a country-by-country basis with the team. The EUR 20 million is our estimate. And in some cases, we have seen, as I said, maybe metoprolol, certainly, was to an extent, affected where market participants were slightly worried that generic options, which were sourced out of China would be low in terms of availability. It's really difficult to give you a short answer. We'd really have to go market by market. The only thing that I think stood out is, obviously, as I said, in Italy, we saw that happen in February and unwind in March. And we'll see now in the next month, but we have seen most of that already reverse in the month of April actually and continuing on in May. So I'm confident by the time we get to Q2, we should have a more clean picture, if you like, in terms of underlying sales.

Of course, what neither we nor I think anyone right now can predict is whether or not there will be second waves of lockdown in any of the markets, which clearly we've not built into our thinking at the moment. The expectation is that gradually over the course of Q2 and Q3, things will start going back to a new normal.

[Andrea Recordati, executive]

I say that at the end of Q2, when we will announce our Q2 results, first 6 months results, I think we'll be in a better position to give you a cleaner kind of view on the outlook for the rest of the year, okay?

[Operator]

[Operator Instructions] There is a follow-up from Jo Walton of Crédit Suisse.

[Jo Walton, analyst]

I wonder if you could just tell us a little bit more about your launch plans in such a tough time for Isturisa. Is it -- and whether you feel you've got all the right sort of digital tools in place. A number of companies have told us that they will be delaying their launches or it seems not strange, clearly, but it seems ambitious to be launching a brand-new product. Is this because you feel that you've already got very good traction with the doctors because you know them because they're selling -- they're already involved with Signifor so that you can speak to them? Just give us some sort of -- a little bit more sense on your plans for the launch, please.

[Andrea Recordati, executive]

Jo, I think you answered your question. Obviously, we have good traction with the physicians because they're already obviously utilizing and endocrinologists, in particular, since they're already utilizing Signifor. So our targeting a segmentation of physicians is in place. We have already started promoting to them in the U.S. for Signifor, as you know. And the organization that we set up specifically for the launch of Signifor specific business unit, endocrinology business unit in the U.S. to cater for this product portfolio is already calling for Signifor and obviously doing pre-marketing activities for Isturisa. Isturisa is a product that is, let's say, highly anticipated by target -- by the endocrinologists. So this should definitely help us, even though obviously, the face-to-face interactions are, by definition, limited, if not, in most cases, nearly impossible.

We have invested, obviously, in digital tools in order to compensate this lack of face-to-face human interaction, which -- and this has been going on both at the U.S. level and also the European level. But yes, I mean, so I think you partly answered your question. I hope I kind of you know added a bit more. But let's say that we are confident that we should launch. I mean, we don't think -- we think it would be, let's say, unethical not to launch a product because of this crisis. This is a serious disease, okay? And this product has an extremely interesting profile, efficacy and safety profile. As I said, it's highly anticipated by physicians and by patients. And so I think it would be totally unethical not to launch it just because of the launch, let's say, context is not ideal from a promotional perspective. But as I said, this is going to be compensated by the fact that there's a big anticipation for the stock by the physicians and also the fact that we know exactly who are the physicians and targets that we need to go and visit and detail to and promote to are really our clients basically for Signifor. So we are quite, let's say, confident that we should deliver as expected, okay, even in this difficult and challenging situation.

[Jo Walton, analyst]

And can I ask you also if you have any idea of when you might give us your Capital Markets Day with a sort of a broader strategic update?

[Andrea Recordati, executive]

This as well I think we already mentioned. It's going to take place. Honestly, Jo, I think it would be -- it will take still some months before to really understand the impact of this crisis. So as I said, we will give you a 2020 outlook, new outlook for 2020, sometime during the first half results kind of investor call. And the plan, as already communicated, is to present...

[Marianne Tatschke, executive]

Not communicated.

[Andrea Recordati, executive]

We haven't communicated, sorry. But the plan is to present with the new Board of Directors, is to update our 3-year plan in February of 2021; 2021 and the next obviously 2 years.

[Operator]

[Operator Instructions] The next question is from Isacco Brambilla of Mediobanca.

[Isacco Brambilla, analyst]

First one is on your top line guidance for full year '20. You are mentioning an expectation to be slightly below the original guidance of mid-single-digit revenue growth. I was wondering, is this mid-single-digit target purely organic or it takes into account also some kind of further contribution from M&A? This is the [indiscernible]

[Andrea Recordati, executive]

Organic.

[Isacco Brambilla, analyst]

Okay. Okay. And the second one is on Zanidip and Zanipress products are now posting -- are again posting a quarter of sales growth. Should we continue to stick with original expectations of flattish trends through 2021? Or you feel confident we can assume some kind of growth going forward?

And basically, the same question also for Seloken, for which sales were very strong this quarter. I acknowledge there was some kind of one-off effects in this quarter, but 30% [ year-on-year growth ] is a lot. And I was wondering whether the underlying trend you see for Seloken is still flat is your top line trend or some kind of growth may come also from this product?

[Luigi Felice Corte, executive]

Yes. Thank you, and this is -- to answer the -- just to be precise on the first question, the bullet point on the mid-single-digit growth as the total is from our February presentation, which was referencing our total sales. So that's total sales growth expectation, which is -- and just again, just to be really precise, it is organically sort of existing base business plus Signifor and Isturisa. So that's what -- that was the guidance that was provided at the beginning of the year, and that's the reference point against which we're saying as a result of the combination of slightly adverse FX and the softer demand, which we expect to see, particularly in Q2, in addition to the destocking will be likely slightly below. So again, it's total -- that's on total revenue, consistent with the target that was defined at the beginning of the year, which includes what we would call typically organic plus the contribution from Signifor and Isturisa.

With regards to longer-term expectations on Zanidip, Zanipress and Seloken growth, we said that we will come back with a fuller update for 2021 and beyond. We're not going to try and do that on a product-by-product basis. But I think, certainly on Seloken, we're happy with what we're seeing on the product, yes, some of the growth in the quarter was one-off, but we would expect that product, now that we put resources in place in a number of markets, where we used to operate through distributors in the past, as we show growth for the year, Zanidip and Zanipress also continue to grow on an underlying basis. But I think there we'll need to obviously watch closely the impact in the coming months in France, which is a high-volume market for these products. And the impact of these measures which were introduced earlier this year, which force patients to pay for products where they are dispensed, say branded and only afterwards claim reimbursement for the difference with generic. We have to see the impact that, that has on the business, and that may dampen the growth on Zanidip and Zanipress in the coming months.

[Operator]

The next question is from Giorgio Tavolini of Intermonte.

[Giorgio Tavolini, analyst]

I was wondering if you expect any additional cash out in the second quarter for the payment for the Isturisa launch since you already booked in the full year '19, EUR 89 million [ higher ] payables for future payments due to Novartis. So I was wondering since you paid EUR 20 million if you expected to pay the rest between Q2 and Q3 or in another moment?

[Luigi Felice Corte, executive]

Yes. Thank you for the question. Short answer is yes. We have paid $60 million milestone to Novartis which, as you rightly pointed out, was amongst those milestones that we had already articulated in the December 2019 final results, once we knew that the product had gained approval in the U.S.

[Operator]

[Operator Instructions] Ms. Tatschke, gentlemen, there are no more questions registered at this time.

[Marianne Tatschke, executive]

Okay. Thank you. Thank you, operator. Thank you, everyone, for attending the call. Goodbye.

[Operator]

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