Recordati Industria Chimica e Farmaceutica S.p.A. (RCDTF) Q1 2023 Earnings Call Transcript
Good afternoon. This is the Chorus Call operator. Welcome and thank you for joining Recordati Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
At this time, I would like to turn the conference over to Ms. Federica De Medici. Please go ahead, madam.
Federica De Medici
Thank you, Georgia. Good afternoon or good morning, everyone, and thank you for attending the Recordati conference call today. I’m pleased to be here with our CEO, Rob Koremans; and Luigi La Corte, our CFO, who will be presenting the 2023 first quarter results. They will be running you to the presentation. As usual, the second slide is available on our website in the Investors section. After that, we will open up for Q&A.
Please, I now give the floor to Robert. Please go ahead.
Thank you, Federica, and good afternoon, ladies and gentleman. Welcome on our call. It’s – this year’s first quarter confirmed Recordati’s ability to consistently deliver outstanding performance and showed an excellent start of the year and with revenues at €551.4 million, up 31.5% versus previous year or 21% on a like-for-like at constant exchange rate, with strong underlying momentum across both business units and across all key markets. I’m extremely encouraged by our group performance. SPC grew double-digit ahead of the relevant markets, thanks to continuous improvement in competitiveness. And I’m also extremely happy with endo’s growth of 44.7% on a year-to-year basis and a really successful onco franchise integration, but that business showed 24.2% growth on a year-on-year pro forma basis.
In the first quarter, we also benefited from strong metabolic performance, which was resilient and so far, very low and slow penetration of the generics in the first quarter. It is really worth highlighting some phasing, some real one-offs and some seasonal shifts, but we are still able and very happy to upgrade our full year guidance. The strong underlying revenue performance enhanced by channel movements in Turkey and Russia and phasing of shipments to international distributors with a total Q1 benefit of roughly €15 million to €20 million, the largest part of which was in our SPC unit.
It was also quite exceptional in Q1 was a strong cough and cold. The season, the flu season was very strong, and we were able to benefit from that in most of our markets. And also in Turkey, we’ve seen throughout the year and again also at the beginning of Q1, multiple price increases as a reaction to the constant devaluation and inflation that we see in Turkey. The high volume also gave us a high operating leverage, and this allowed us to really deliver strong operating and bottom line results with an EBITDA of €220.8 million. Operating margins benefit from fixed cost absorption level in COGS and a gradual ramp-up of the R&D spend related to also a gradual ramp-up of R&D activities, very much in line with our plan.
Adjusted net income of €155 million or up 33.3% versus previous year, driven by the positive operating performance partially offset by higher finance expenses – financial expenses due to higher net debt and increased interest rates. Our net debt of €1,339.6 million were leveraged at 1.8x LTM EBITDA, with strong free cash flow of €103.4 million, absorbing working capital increase, which was in inventories and receivables from high business growth. So we raised also we’re very happy with the key R&D pipeline projects progressing to plan, and Luigi will expound on that a little bit more. And we’re very happy to raise our full year targets for 2023, which are now expected to exceed the top end of the guidance range that we said in February, both on revenue and on bottom line.
And with that, I’m handing over to Luigi.
Luigi La Corte
Thank you, Rob, and good morning, good afternoon, everyone. I’m always happy to provide more color on our financial performance and even more so on days like this when the performance of Q1 was so strong. As usual, I will start by providing a little bit more perspective on our revenue growth drivers. I will do it by giving a little bit more color on the core therapeutic areas of each of our two business units, which I think is hopefully have a more helpful way to go through the numbers. You will find our usual disclosure on key corporate products in appendix.
But starting with the specialty and primary care on Slide 3 you will see that SPC was really a key contributor to growth in the first quarter with all our therapeutic areas growing at double-digit and with growth really broad-based, driven both by corporate and local products, both RX and OTC, clearly supported by strong underlying market growth. But fair to say we grew ahead of competition, benefited, as Rob has said, also some phasing benefits and obviously, the impact of various high price increases achieved in Turkey over the course of the last 12 months and a really exceptional cough and cold season, and I will try and unpick those effects as I go along.
But you’ll see strong growth of our core legacy cardiovascular franchise, which is still our biggest franchise in SPC growing by 12.6%, driven lercanidipine franchise, which benefited to the tune of around €6 million from timing of shipments to some of our international partners but grew in most of our direct markets as well and particularly in the UK. We had broadly stable sales of metoprolol and Pitavastatin and a little bit of erosion in some of our local cardiovascular portfolio and saw a little bit the effect of tenders in Germany.
Urology franchise grew by 29%, led obviously by a continued strong performance of Eligard that not only grew but gained market share in a number of our markets, and that’s ahead of the rollout of the new device. So obviously, strong performance there. Robust sales of Silodosin and also some of our key local brands, Tergynan in Russia, Mictonorm, in Turkey, an initial contribution from TELEFIL in Italy of $0.8 million.
GI and also the long sale of other therapeutic areas grew by over 10%, driven by products like Procto-Glyvenol, our probiotics franchise, Magnesio Supremo and Eumill in Italy, just to name a few. Once again, across both our RX and OTC products – but really, the standout, obviously, here on the page is cough and cold with growth of close to 67% year-on-year.
And we see we’ve added on Slide 4, a little bit more perspective on the evolution of cough and cold that has been such a big driver of fluctuations over the last year. And you will see that the chart compares quarterly revenues of 22% and now Q1 2023 to pre-pandemic levels to 2019. And you will see from the blue bar that Q1 last year was still quite a bit below pre-pandemic levels, but started recovering and progressively grew ahead of 2019 over the course of Q3 and Q4.
Q1 this year was clearly an exceptionally strong season, well above pre-pandemic levels. Once again, this was on the back of – and you will have heard this from other companies as well, a very strong underlying market, which we were able to respond to and benefited from it. There was also a little bit of effect here from restocking in Russia on the back of strong sellout in the market at the end of last year all of which contributed to a really standout quarter for cough and cold. We don’t expect these kind of rates to be sustainable. And in fact, we expect the remainder of the year to be closer to the levels achieved in Q2 or Q4 of last year as some of those phasing benefits unwind and factoring in also headwinds, which we expect based on consensus on the ruble.
Turning over to rare disease on Slide 5. Rob has already called it out. All of our key franchises and future growth drivers are absolutely tracking in line with the targets that we have set. In endocrinology, we continue to see a strong uptake of Isturisa, both in the U.S. and in EU, particularly in those markets where we recently achieved reimbursement, but also continuing to enjoy double-digit growth of Signifor. Isturisa was up over 70% in the quarter, Signifor by just over 20%.
We also had a very strong start of the year on the oncology franchise with Qarziba growing outside of Europe mostly, and Sylvant really growing across geographies. And as Rob has commented, metabolic performance was also very resilient and ahead of expectations, thanks to the continued growth of Panhematin and Cystadrops, particularly in the U.S., But also in particular, thanks to more gradual erosion from recent generic entries in U.S. which we have, however, started to see impacting in Q2.
And finally, on the disease to note, we are continuing to progress on the various opportunities, which we talked about in Feb. I’ll call out the work that we’re doing to prepare for developing Signifor, a new indication, at PBH. We had positive feedback from the FDA on our proposed development plan, and are on track to start that off in Q3, and of course, look forward to providing more update on that and the other programs over the course of this year.
On Slide 6, you will see our usual chart with revenue by geography. In brief terms, as growth was solid across all of the areas that clearly reflecting the strong performance of the two business units and the addition of EUSA. I’ll focus maybe on the outliers, which really showed exceptional growth and that are the key ones behind those 15 million to 20 million benefits of one option phasing that we’ve called out.
First one on the chart is Turkey, which you will see as in local currency terms, more than trouble sales versus Q1 of 2022. And that’s really down to two things, one, a very significant level of price increases, that were both awarded by the authorities to the sector, but also achieved by our team in Turkey on some of our key products, which drive a significant portion of the growth. We do see a continued good underlying volume growth in Turkey as well. But in this case, in Q1, this has also been distorted by the phasing, in fact, the timing of those price increases as you can expect, when they happen. There’s always a little bit of tug of war with the wholesalers around the quantity they shipped. I think that probably led to a somewhat soft Q1 2022 and now somewhat strong Q1 of 2023 in Turkey.
The pricing clearly has more than offset the valuation, in this period of the Turkish lira, but don’t forget that under hyperinflation, what will count in the end will be the exchange rate at the end of the year, Russia, the CIS and Ukraine, obviously also growing significantly by 87.3% that benefits from around 5 million years of tax, particularly in Russia, you recall last year, the Ruble moved a little bit widely over the course of the year, the growth they are driven by the strength, obviously of the cough and cold portfolio. And also in Russia, some of the pricing actions that were taken over the course of 2022.
We are starting to see in Russia a bit of softening of volume growth in the market, as a result of the impact of the economic sanctions. And finally, other international sales, also posting a strong growth of 48% driven by around the 6 million benefit, which I’ve already mentioned phasing of shipments of lercanidipine in particular to our international customers. And the addition of the oncology portfolio, which and the international markets was particularly relevant, and which is also behind a large part of the growth, which we are seeing in other Western European markets.
And finally, on this slide, the only other thing, I’ll highlight is obviously the continued strong growth in U.S., behind the rare disease franchise, with U.S. now accounting for just over 14% of revenue and getting very close to becoming our number one market.
Turning to the P&L on Slide 7, hopefully you all as delighted as me to see that the strong revenue performance is flowing through nicely to the bottom line. Margins obviously reflect both the effect of the higher revenue and hence, operating leverage. But also you will see a strong and very resilient gross profit margin which on an adjusted basis, adjusting for the unwind of the EUSA fair value step up of inventory is holding up very closely aligned with last year.
We are seeing the impact of inflation, but so far we’ve proven able to offset that through the mix of things that we said, we would do last year. A bit of the pricing, obviously, the high volumes also help absorb the fixed cost base of our manufacturing sites, and we do have a benefit from a good mix this quarter as well.
SG&A expenses at €150.4 million are very much in line in terms of run rate with where we were post the EUSA integration, starting Q2 of last year, reflecting the benefit of some of the efficiency initiatives which we kicked off and announced already last year, namely the SPC right-sizing, the synergies we’re extracting from the EUSA integration. Within that selling cost at around 21.8% and G&A cost around 5.5%.
R&D expenses at €60.5 million, 38.4% increase are a step up versus last year, of course, as expected, obviously, reflecting the integration of EUSA an additional roughly €8 million incremental amortization. But also the gradual step up of activities that we planned over the course of this year, and which we expect that will gradually increase as we progress our key development programs.
And the one negative line on the P&L, I think Rob called it out, of course, no surprises. There are financial expenses ahead of last year at €12.6 million, there’s a €1.5 million benefit in there from FX and the benefit of in – of net monetary gains from IAS 29. We will see financial expenses step up further in the remainder of the year as variable rate loans reset on the back of, as you all have seen, reference rates which continue creeping up. But all that consider leads to very strong margins EBITDA of 40% for the quarter, adjusted net income of 28% with high margins across both business units and both growing by over 30 – by 30%.
And that translates also in continued solid cash flow generation for the group on Slide 8. Cash flow – free cash flow of €103.4 million clearly reflects the strong EBITDA, but also on the other hand, the increase in working capital purely driven by the increase in the volume of the business, in fact inventory days decreased nicely since the end of December to mitigate a little bit the impact always strictly on a quarter-by-quarter basis to call this one, but not expect very substantial further increases in the remainder of the year.
And the cash flow combined with our operating performance. And to finish off on my side leads as you have seen on Slide 9 to us showing still a very solid balance sheet with leverage at just over 1.8 times last 12 months EBITDA and very much in line with our planning guidance.
And with that, I’ll hand over back to Rob to provide the perspective on our full year outlook. Rob?
Thank you, Luigi. And as you can see on Slide 10, we are increasing now on the back of our really good first quarter, the excellent performance that we are achieving, and the view that we have for full year 2023, we do expect to exceed the top end of – both the top and the bottom line guidance that we gave earlier. Revenue expected to be between €2.50 billion and €2.90 billion with top line outlook for s SPC to deliver mid-single-digit growth. And our rare disease business to expect to continue to deliver double-digit revenue growth, so very good revenue development going forward. EBITDA above the original range, except in February, now between €750 million and €770 million and the margins that also Luigi already alluded to, we set them originally around plus or minus 36%, we now see them creeping closer to the 37%.
We expect lower quarterly revenue run rate and increased inflation that will creep through on our COGS. And the step up in R&D activities that was planned and we’re executing on, we’ll also have a slight increase in the expenses. And then quarter four, historically, has always been the lower quarter. And I don’t expect this to change in this year.
And despite the fact that we see a financial expenses step up as we alluded to before, we are now also raising the target for the – an upgrades of the adjusted net income target for between €490 million and €500 million. Momentum being really, really good. And I’m very confident for the outlook for our business and the ability for us to continue to deliver and to continue to thrive.
And with that, I would like to hand over to you and allow for questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Isacco Brambilla from Mediobanca. Please go ahead, sir.
Hi, good afternoon, everybody. Three questions from my side. This first one is on Eligard. Could you please confirm if there is anything say non-recurring, supporting first quarter performance or if we should expect this base, of course, even for the rest of the year? Second question is on R&D, you mentioned some sort of facing is pending. Could you please give us some color on the incident, some stage of R&D embedded in your guidance for this year? Last question is on external growth with such a strong organic momentum this year? Should we expect plants of external growth to be set aside in the coming quarters? Thanks.
Sorry, acoustically, the third question was very difficult for us to hear. Could you repeat the third question?
Yes. Last question is on your M&A strategy, since you are experiencing a very strong momentum on inorganic basis, should we expect some sort of say delay in terms of urgency of your external growth in the coming quarter?
All right. Thanks for the question. So let me maybe address the last question and the R&D question, and I hand to Luigi to address the first question. Our strategy on M&A hasn’t changed. We will take the opportunities. We have a very clear defined strategy on the sort of targets we’re looking at, both in terms of partnering and acquisitions with use that fully integrated and that work being done. We are really happy and able and as you said, we are generating good performance out of our business that enables us to really do the deals we want to do. And this is absolutely on our agenda and this is actively being pursued. So that hasn’t changed for both the SPC and the rare disease business as is our strategy.
What you see on the R&D is a step up, I think the two programs that I would like – and this was planned, one, is the continued development on REC 0559, where we are in Phase 2. And enrollment is going really well. I mean, we expect to be able to finish and report results on that in line with our plan, but that also comes with increasing cost. And the same is true for the plan studies that we now have aligned with the FDA on the so-called PBH indication, which we believe is very important. And we shared with you when we did three year outlook, and that is also fully in line with plan.
So all the things that we were planning to do are actually happening, and with that can be the cost. And these are strongly focused on our rare disease portfolio where we have opportunities to expand the indications. So there’s no risk, fairly affordable, but it’ll creep up slowly. And as we indicated before, we’re talking about in total at year-end throughout the period not even 1% increase in R&D expenses. So it’s quite moderate. And notwithstanding that we’re very able and confident to be able to keep our margins, in fact, even increase the guidance for this year.
Luigi La Corte
Yes. Hi, Isacco. Your first question short answer is, no. There’s no real one off effects on Eligard. That said, I’d always caution people to taking a single quarter and extrapolating. Just to be absolutely clear for everyone on the call, where we saw the one-off was really in three areas: one on the Canadian, two, in Turkey, driven by sort of different timing across the years of price increases and channel dynamics that drive, and three in Russia. And you can assume that €15 million to €20 million to be split pretty much equally across those three. And in Russia, it was mostly on the cough and cold portfolio. So hopefully that addresses your question and helps untick those numbers.
The next question comes from Martino De Ambroggi from Equita. Please go ahead, sir.
Martino De Ambroggi
Thank you. Good afternoon and good morning, everybody. I’m focusing on the guidance, because if I look the change at midpoint, your implicit incremental EBITDA is 70-plus-percent. So I understand during your speech, you mentioned there is a higher absorption of peaks costs. But could you elaborate on what else had such an important impact on profitability for your changing guidance? This is my first question.
Luigi La Corte
Martino, hi. Luigi here. I’m not sure I captured the percentage that you quoted in terms of – I thought I heard you say 70%, but I don’t recognize that number?
Martino De Ambroggi
Is that 60% plus, the change at the midpoint EBITDA from current – from previous to current guidance midpoint and compared to the change in sales always midpoint? So in any case, it’s much higher than the 37% that you performed in Q1.
Luigi La Corte
Yes. So just to be clear in terms of the drivers of the overperform – the drivers of upgrade to the guidance are essentially really two. Number one, it’s revenue growth and operating leverage that comes from that. And you know of course within that there is an assumption of potentially some of those benefits that we had in Q1 are sticking for the year and some unwinding. And then on the margin, slightly we were able to offset inflation in the first quarter. We won’t be able to, to do that for the year, but we did have a benefit in Q1 that we would seek to repay. So apologies, maybe, I’ll see if I can sort of reconcile the numbers that you quoted and come back if you need more on the specific question. But the drivers of the upgrade are those.
Martino De Ambroggi
Okay. My figure was very, very roughly. The second question is still on the guidance, because if I look at full year 2025 guidance, you are just – at the midpoint of EBITDA, you are just 6% below the low end of the guidance. So I perfectly know you will not discuss 2025. But it’s too early for sure. But is there any reason why you shouldn’t state that are easily achievable or maybe potentially could be revised upwards? Because it seems to be that the new recurring event are not justifying the big portion of the upwards revision this year.
And Martino, you are absolutely, right. We will not discuss 2025. That’s really a little too early. Thank you. So the business is doing well. We’re happy we have increased our 2023 guidance. We’re confident that we’re doing not only in terms of financial performance, but also in preparing our company for the future, the right things, like the R&D investments, like the commercial excellence, all those things that we’re not going to discuss or change for that matter now the outlook for next year or the year thereafter. There will be – we will definitely do this at some point in time, but I think at the moment for us it’s suffice to really stick to 2023.
Martino De Ambroggi
Okay. And the last question on EUSA, because you guided €185 million to €200 million, I was wondering if you confirm this or probably considering the trend in Q1 could be even higher, and I don’t know if you can share with us the contribution of profitability from EUSA.
So in line with what we just said on looking forward, we just confirm so far everything by not explicitly mention it. I think we confirmed these things. And business of what we now call our oncology franchise in rare disease is really performing extremely well. And we’re happy with it a little ahead of the plan that we had when we announced the deal, and we continue to do better, but I would like to leave it at that.
Luigi La Corte
I’m adding on that applies also to end of both of the franchises. As I said, we are tracking in line with the guidance that we provided early in the year to be changing that. I think you were comparing that, if I understood now correctly, you’re comparing the $70 million implied increase in the mid of the range of revenue to the $45 million on EBITDA. And of course, the difference between the two is the operating leverage. The $70 million comes at a gross margin, which is much higher than the – our average EBITDA margin. And as I said, we’ve – our initial guidance for the margin of plus or minus 36%. And as Robert said, that we now see it moving closer to 37%. So that’s why you see that higher, let’s say, relative upgrade on EBITDA level, hopefully that makes sense.
Martino De Ambroggi
Yes. Makes sense. Thank you.
The next question comes from Jo Walton from Credit Suisse. Please go ahead.
Thank you. A few questions, please. Just to start with, can you tell us what impact of foreign exchange you are including in your guidance, presumably at the net level for the year, not very significant.
My second question is just a clarification. You’ve changed some of the way that you give us detail. It’s nice and simple in big chunks. Are you going to be able to do that? Is that how we should be thinking of modeling going forward in terms of cardiovascular, urology, et cetera? Or is this just a one-off illustration? And then my main– associated with that, in terms of cough and cold, how much of that is prescription and how much of that is OTC because at the moment, we model those two separately?
And then my main questions, if I could, please, just thinking about a couple of products. You’ve got – you talk about your Qarziba, your Type C meeting with the FDA and the outcome of that in 3Q. Just are there any issues that the FDA has brought up, anything we should be aware of. I think we all assume that, that’s going to be a fairly simple move forward. And you talk also about Carbaglu, getting ready for a potential launch in China. Would you try and do that yourself? Is that with a partner? Just a little bit of your broader geographic ambitions, whether you would like to have more of a footprint in some of these other markets? Many thanks.
Okay. So maybe, Luigi, do you want to answer the first couple of questions.
Luigi La Corte
Yes, happy to do that. Hi Jo, so in terms of FX, we’ve modeled as usual, what suggested also by consensus. It was fairly benign this first part of the year, but ruble has moved against us. And as the Turkish lira has continued to creep up. I didn’t check, by the way, we’re announcing these results today on the day of the elections in Turkey. So, we’re going to – we are seeing at the moment, FX for the full year, close to around 2% in terms of handling closer to minus 2% in than minus 1% for sure. Q1 to date was very small because if you recall, the ruble as it’s a very funny movement beginning of last year.
For modeling purposes, Jo, to ensure that you had all the details, we did keep in the back, you will find all of the details that we’ve disclosed in the past on corporate products, local products, OTC. I don’t believe we ever gave a split of cough and cold between Rx OTC but we can come back to you on that. And so you have all the details there. We believe – and it’s a little bit in line with where we presented the plan that looking at these categories is probably a better way of looking at the business, corporate products, Andrea was really speaking to SPC. And some of them are probably going to be flat or thereabouts for the coming years. But now we’ve given visibility on both.
Yes. And maybe Jo on the Type C meeting plan for Q3 this year of Qarziba with the FDA, as you well know, these meetings are never walk in the back. They’re really prepared for the best possible outcome. Data analysis tool going – we are confident that we actually really well prepared. So it’s not a given that this will just automatically follow. But we’re well on track and happy with where we are. And that hasn’t changed. On Carbaglu in China, we do plan to do that ourselves. In the past we’ve worked with a distributor for [indiscernible]. We’ve also has a partner in our onco business for China. And we’re very happy with that because we really believe that’s a super competent partner in the oncology space. But in endocrinology, in metabolic, we want to build our own presence, and we’re doing that gradually during this year to be able to launch early next year, which is the plan. And so far, everything is in line with that plan.
And can I just follow-up, please with a broader question. Is part of the reason that you are able to have a small upgrade in sales, the fact that the market environment has just been a bit more benign? I know in the UK, we’ve had some nasty rebates and things, but that’s not a market that you are particularly involved with. Would it be fair to say that in general, former market, particularly in the countries that you are operating in, we’ve not seen any extra austerity measures and things are relatively benign and that you are just a little bit more confident about things? Or is it something whereby you have outperformed the market more?
It’s more than average, Jo. We have outperformed the markets in just about every of the markets where we compete. The parts of the portfolio that we do not promote, obviously benefit from a good market. That’s right. But all the areas where we do promote and all our focus products are outperforming the market without exception. So it’s a bit of a combination of both. And of course, a thing like the cough and cold season is not something you can ever predict. And as Luigi share this one was exceptionally good. So that’s not something we wanted to budget for or share with you at the – before the year start as a target. And we have benefited from that.
But you also have to be able to benefit from it, right? We’ve seen with some of our competitors that they were not able to react fast and deliver, and we’ve been able to really do that and very confident that our organization can continue to do make use of opportunities as they come. But what makes me very optimistic and confident is the fact that we’re outperforming the market and that we’ve increased our competitiveness with a much more focused and smaller team. We have significantly improved through commercial exercises and we are doing really well on that.
And then if you look – and that is mostly on the SPC site where we’ve done that exercise. If I look what we’ve done in the U.S. where really a fantastic momentum which is a really important market going forward, as you well know, for rare diseases, and the key market, I would say, and the way that our endo franchise, our onco franchise, and in fact, even our metabolic franchise have held up or at growing, that is very encouraging. So that’s also part of the reason why we’re able to increase the guidance for this year. These are things that we will continue or expect to continue and make us very happy and confident.
Luigi La Corte
And maybe Jo, if I can add to – some of your this question in earlier one, we’re not immune now from effects that also others are seeing. In Germany, we called out already this quarter, and I’m sure we will continue to see for the remainder of the year, pressures from tenders in France. We have seen increase in clawbacks. They don’t impact us very materially in France, but what they do. We have seen people avoid most concerned is, as you said, UK, MedTech in Italy. But we don’t – we’re not really exposed to those.
Finally, on the way of looking at the business and the numbers, you’ll recall on SPC when we went through the plan with Alberto Martinez went through the plan. We spoke of the three therapeutic areas cardio, urology and GI is really being our core, and that’s how we look at the business and how we drive it. We think a little bit less in terms of core product versus local. So that’s why we’ve decided to sort of present and hopefully provide a bit more color in the way we’ve just done.
The next question comes from Niccolo Storer from Kepler. Please go ahead.
Good afternoon. Thanks for taking my question. The first one is just a clarification. Is it right to say that the increase in your guidance has come entirely from especially primary care with targets set-out during business presentation for rare disease business broadly unchanged?
The second question is on gross margin, which as you highlighted before, net of inventory uplift, we are flat year-on-year. So my question here is, why should we expect things to worsen over the coming quarters if we have to?
And last question is on the evolution of lercanidipine and silodosin. I think that also if we take out the pre-buying effect under Canada, you mentioned the performance of the two Zanidip and Zanipress was not very strong. Urorec was very strong, so maybe if you can give – shed more light on why that? Thank you.
Thanks for your question, Niccolo. So to answer your first question, no, the increase in guidance is on the back of both businesses, rare disease and specialty primary care performing really well. In terms of market shares, in terms of everything and it makes us confident to increase the guidance for both. Like I just said also in answering Jo’s question, if I look at our rare disease performance for instance, in the U.S., but also in Latin America, in Asia and across the Board, it’s really doing extremely well, and that allows us to increase the guidance.
Maybe, Luigi, do you want to take the question more on the margin in the remainder of the year.
Luigi La Corte
Yes, sure. And no, thanks, it’s an obvious question, Niccolo, on gross margin. So gross margin in Q1, as I said is benefiting from a number of things that are helping offset inflation impact, which we are seeing and we’ll continue to see.
Number one, we have the benefit of pricing that we took, particularly last year. If you take Turkey aside, it’s a little bit of an outlier. Remember, I said last year, over the course of the year, we took a bit more pricing than we’ve done historically. So far this year, excluding Turkey, we’re only marginally positive. So we’ve taken some price actions, but we also see the impact of erosion in Germany. So that if you like that pricing benefit and offset to inflation will become a little bit lower.
In other source of benefit in Q1 is the fact that we had extremely high volumes. And you’ll recall, 60% of our products are manufactured internally. We have – that comes with a portion of costs, which are fixed, which in Q1 will absorb and amortized over great volume. So that provides a benefit. If you recall, we also said that in the planned presentation that we benefited last year and would benefit in the first half of 2023 still from some of the hedges and energy costs, which were taken out in 2020.
Now energy costs have been coming down versus the peak they achieved, but still they’re higher than certainly significantly higher than where they were in 2020. These things do take a little bit of time to then creep through inventory. But we do still expect what we said at the start of the year to hold true, and that is that we expect to see gross margin for this year below the level of 2022. However, that impact to a large extent offset by the operating leverage benefit from higher sales on SG&A and the benefit, obviously of the other efficiency initiatives that we’ve been placing.
I don’t think…
Luigi La Corte
So hopefully, Niccolo that addresses your question. That’s really why we’re…
And then maybe the last on the base products like lercanidipine, that has benefited the sales in Q1 were higher in the international division, where we export, for instance, to Russia or to China, and there was a very good benefit. In general, for these products, like we have indicated, we are really seeing good stabilization. We’re well after loss of exclusivity for these products.
There is a low single-digit volume growth that is basically on the back of the increased prevalence and incidents and a number of cases that required treatments for diseases like hypertension, which is what we expected. And we’re able to really hold our shares there really well. So going forward, we expect this to stabilize or continue to stabilize, and allow for growth through the products that really drive our growth, which are not in this – which are not the lercanidipine and products like that.
Luigi La Corte
And maybe I just add on silodosin, Niccolo. I think number one, this is one of the products where actually in Turkey. Our colleagues were able to negotiate a level of pricing over and above what was generally awarded to the market. And that was, on the back of also the fact that we source the cost of goods in our currency. And on the – and also on the sorry, there’s a bit of background noise someone is not – doesn’t have the line…
Let me put in mute.
Luigi La Corte
No. And also, I’d say there’s a little bit of a positive halo effect, when you’re out in urology with a field force excited by the positive performance on Eligard, obviously, you’ll see a little bit of benefit on the other products in that same franchise that those same reps promote, which again, why we think looking at things by category makes sense from our point view.
The next question comes from Charles Pitman from Barclays. Please go ahead.
Hi, thanks very much for taking my questions. Sorry, if there’s a bit of background noise here as well. And if my questions repeat and anything, I joined – for a little late. But my questions relate to first just on M&A and kind of your intentions for debt obviously you had good free cash flow. You’re like paying down, so kind of 1.8 times now. I’m just wondering if you can give an update on kind of how you’re thinking about kind of covenants and maybe what level you want to bring that leverage down to before you thought about kind of M&A in kind of more holistic sense.
And maybe just one – a little bit more kind of theoretical. Obviously, we recently saw the EU proposals for reform that highlighted that companies have needed to launch their products in all markets, given you have a very good geographic reach. I was wondering if there’s any implications for Recordati with the longer term as a result of those proposals? Thanks very much.
Thanks, Charles. To start off with the latter now, we don’t really see a good, an implication of these reforms. Of course, we monitor this carefully. And like you said, we have a really good coverage of all of our European markets. And now as far as we can judge now, this is not going to be something that is going to impact us too much. As to M&A, our strategy hasn’t changed, neither has our willingness to take home that we have – the governance hasn’t changed either. So we keep with, at the moment, we’re at 1.8, and that is something that we’re quite happy with, but of course, aim to bring that down for the right deals will go up and we’ll go for the best deals in class will go as high as three. And that’s it, nothing changed.
Luigi La Corte
Yes, we’re now working to a specific sort of target leverage before we would do a deal. It really also depends on the opportunities. We feel we’re in a good place right now is within the guidance that we set, and we look at opportunities all the time, as we’ve always said.
Now, I think if there are no more questions and everyone having full agendas. Thank you for joining. We were very happy to share this, what we believe, very good base for the remainder of the year. We’re happy with the results, very happy with what my colleagues are delivering all over the world and confident about the future and our ability to continue to deliver. So thank you for joining us today and looking forward to interact with you and keep you updated. Bye.