IHS Global Insight Perspective | |
Significance | Gedeon Richter has announced its results for the second quarter of this year, which show a 26.6% y/y increase in revenues. |
Implications | The impressive results were largely down to the depreciation of the Hungarian forint, as well as strong orders from Russia in the second quarter, and increased sales and profit-sharing revenues in the United States. |
Outlook | Richter is likely to continue to benefit from the low value of the forint, and its sales in the United States and Russia are likely to continue to compensate for the temporary downturn in its European markets. |
Hungarian generics major Gedeon Richter has announced its consolidated results for the second quarter and first half of 2009. The second quarter results show a marked improvement on those from the first quarter, with an increase in revenue of 26.6% year-on-year (y/y) in local currency terms, to 73.1 billion forint (US$394 million), while its revenues went up 9.6% y/y in euro terms in the quarter. This compares with a revenue increase of 7.6% in forint terms in the first quarter of 2009, and a decline in euro terms of 6.0% y/y. In terms of net income, there was also an improvement in Richter's performance in the second quarter, with net income in forint terms increasing by 111.7% y/y, to 6.2 billion forint, compared with a 103.3% y/y increase in the first quarter. The reason behind Richter's impressive looking revenue growth is the substantial depreciation in the value of the Hungarian forint, while strong growth in sales in the company's two main export markets—Russia and the United States—was also a large factor in the improvement seen in the second quarter.
Gedeon Richter, Consolidated Results, Q2 2009 | |||
Mil. Forint | % Change (Forint) | % Change (Euro) | |
Total Revenue | 73,201 | 26.6 | 9.6 |
Sales | 73,107 | 26.6 | 9.6 |
Royalties | 94 | 91.8 | 50.0 |
Cost of Sales | 31,080 | 18.0 | 2.3 |
Sales and Marketing Expenses | 14,300 | 13.3 | -2.0 |
Administration and General Expenses | 4,738 | 30.3 | 13.7 |
Research and Development (R&D) Expenses | 7,011 | 46.9 | 27.5 |
R&D Expenses as a Percentage of Revenue | 9.6% | 0.99 pp higher | 1.35pp higher |
Operating Income * | 16,072 | 53.8 | 31.6 |
Operating Margin** | 21.9 | 3.8pp higher | 3.6pp higher |
Net Income | 6,174 | 111.7 | 80.8 |
*Calculated by IHS Global Insight as total revenue minus cost of sales, sales & marketing expenses, administrative & general expenses and R&D expenses ** Calculated by IHS Global as percentage of operating income to total revenue Source: Gedeon Richter | |||
There was a significant increase in the company's administration and general expenses in the quarter, which rose by 30.3% in local currency terms, to 4.7 billion forint, which the company explained as the result of higher consultancy and legal fees over the period. Sales and marketing expenses also increase by 13.3% y/y in local currency terms, to 14.3 billion forint, which the company attributed to higher promotional costs, associated with the launch of new products, as well as the expansion of its sales network. Additionally, there was a large increase in the company's R&D expenses, of 46.9% y/y in local currency terms, to 7.0 billion forint, and this was the result of continuing clinical trials being carried out in association with Forest Laboratories (U.S.).
Russia and U.S. Dominate Sales Growth
Gedeon Richter, Consolidated Results By Region, H1 2009 | |||
Mil. Forint | % Change (forint) | % Change (euro) | |
Hungary | 15.882 | 6.9 | -6.8 |
EU (excluding Hungary) | 51,905 | 6.6 | -7.2 |
CIS | 44,203 | 17.7 | 2.5 |
Russia | 31,990 | 28.6 | 12.0 |
U.S. | 15,814 | 115.9 | 88.2 |
Rest of World | 6,375 | 5.5 | -8.3 |
Total | 134,539 | 17.2 | 2.1 |
Source: Gedeon Richter | |||
In terms of sales by region, the vast majority of Richter’s sales—88.1%—came from outside Hungary, and of particular importance in the first half of 2009 were the company's largest export markets, Russia and the United States. Richter's sales in the United States amounted to 15.8 billion forint, an increase of 115.9% y/y. This was mainly due to a large rise in the sales of the Plan B emergency contraceptive, and a significant contribution from its profit-sharing agreements with Barr Laboratories (U.S.). Richter is expecting its upward trend in the United States to continue, thanks to the recent U.S. FDA approval of Plan B One-Step emergency contraceptive pill, which Teva (Israel), will source from Richter, as was the case with Plan B (see United States - Hungary - Israel: 13 July 2009: Teva Receives FDA Approval for New Plan B Contraceptive Drug).
Russia was Richter's other major success story in the first half of 2009, where its sales went up by 28.6% in forint terms to 31.9 billion forint. The company had made agreements with wholesalers in the first quarter of the year, in order to compensate for their heavy losses, incurred due to the sharp decline in the value of the Russian rouble in the early part of 2009. When the Russian currency stabilised in March, Richter benefitted from a substantial increase in orders from Russian wholesalers Principally, its growth in the Russian market was driven by sales of its oral contraceptives, Novynette (desogestrel + ethinyl + estradiol) and Postinor (levonorgestrel), as well as cardiovascular drugs Panangin (asparaginates) and Diroton (lisinopril).
Richter's sales in the European Union, excluding Hungary, declined by 6.6% y/y in the first half of 2009, to 51.9 billion forint. One of the main reasons for this was the 5.4% decline (in forint terms) in its sales in Poland, its largest market in the EU. This was the result of a sharp depreciation in the value of the Polish zloty against the euro during the period—the invoicing currency for Richter in Poland is the zloty. In local currency terms, the company’s sales went up by 7.3% y/y.
In Hungary, Richter’s sales rose by 6.9% in forint terms to 15.9 billion forint, although in euro terms they were down by 6.8% y/y. Richter's domestic sales were affected by pricing and reimbursement regulation changes in Hungary, which meant that reimbursement of cardiovascular products were reduced by 5% to 80%, and the reimbursement of certain key drugs in its portfolio was also cut. This affected the company’s sales, in particular to more elderly patients.
Outlook and Implications
Richter’s results in this period show that the company’s strategy, announced earlier in 2009, to focus on the expansion of its sales of contraceptive products in central and eastern Europe and the CIS, has been partially successful, with its excellent sales in Russia in this period a good example (see Hungary: 7 April 2009: Richter Focuses on Development of Biological Products and Increased Sales of Contraceptives in CEE and CIS). Meanwhile, its increased administrative and general costs, which included an increase in legal fees, are likely to relate to its ongoing legal battle over the failed takeover of Polish pharmaceutical company Polpharma. It can be expected that when this case is settled, it will not burden Richter with such high legal expenses. Additionally, the company has increased its R&D expenses, which reflect a boost in drug development work, showing Richter’s ongoing commitment to the renewal of its product portfolio.
As the example of Poland demonstrates, the currency devaluations affecting Richter’s results have sometimes masked real underlying sales growth. Faced with the effects of the economic downturn, which has put pressure on payers to reduce reimbursement across the central and eastern European region, Richter has been able to make up for losses in this region, with its increased revenue from its U.S. profit-sharing agreements and its manufacturing deal with Teva for the Plan B emergency contraceptive. This is likely to continue following recent FDA approval for the companies’ Plan B One-Step (levonorgestrel, 1.5 mg).