Richter Announces Good Results for First Three Quarters, But Decline Seen in Q3

Hungarian generics major Gedeon Richter has announced impressive results for the first three quarters, with an increase of 15% year-on-year (y/y) in total revenue, to 197.796 billion forint (US$1.087 billion), and an increase in net profit of 35.2% y/y, to 37.426 billion forint. In forint terms, the company's results in the third quarter were generally good, with a 10.6% y/y rise in total revenue to 62.535 billion forint, and a marked increase in revenue from royalties, which was up 237.5% y/y. However, Richter's net profit declined by 31.4% y/y in forint terms in the third quarter, to 9.722 billion forint, and by 38.1% in euro terms, to 36.4 million euro.

Euro-Denominated Results Much Less Impressive

Although Richter's results denominated in forint are impressive, there is a significant difference between these and the euro-denominated results for the first three quarters. The company's revenue in this period declined by 0.2% y/y in euro terms, while its net profit was up by 17.4% y/y, compared with 35.2% y/y in forint terms. In the third quarter, the situation was worse, with a 4.6% decline in Richter's euro-denominated revenue.

U.S. and Russia Continue to Drive Sales

As in the first half, the company's sales were driven by its two largest export markets, the United States and Russia. In the United States, the company's revenue increased by a massive 83.6 %, helped by a considerable increase in the sales of the Plan B contraceptive drug that Richter produces on behalf of Teva (Israel). In Russia, the company reaped the rewards of its co-operation with pharmaceutical wholesalers in the early part of the year, when it compensated them for some of the losses incurred as a result of the wayward currency fluctuations in the early part of the year. Richter enjoyed higher sales levels as the market stabilised and the compensation payments declined. Richter saw sales declines in the majority of its traditional markets of Central and Eastern Europe (CEE), although in some cases this was the result of negative currency effects: for example, in its largest regional market, Poland, Richter's revenue in the first three quarters went down by 23.1% y/y, although when considered in local-currency terms, its revenue in this period increased by 1.6%.

Economic Crisis Hits Expansion Plans—Slow Growth in Contraceptive Sales

In the Commonwealth of Independent States (CIS), the effects of the economic crisis continued to affect Richter's profitability, with revenue in Ukraine falling 33.2% y/y in forint terms in the first three quarters, and in the other CIS republics by 25.9% y/y in this period. The company recorded an increase of just 0.5% y/y in the sale of its contraceptive products in the region during January-September, while these represented some 22% of its total product sales in the region.

Price Erosion, More Generic Competition Hits Western European Sales

In the 15 original member states of the European Union (EU), Richter recorded a drop of 5.2% y/y in euro terms during January-September (an increase of 9.2% in forint terms). The company explained this disappointing performance as the result of greater competition in the generics market, as well as the continued price erosion of generics in these countries.

Outlook and Implications

Richter has presented a mixed set of results, which appear positive from the perspective of the first three quarters, although the third quarter is much less so. However, the considerable pressure on the company in its traditional markets of the CEE region, due to cost-containment measures imposed by the governments in this region, will definitely have begun to have a greater impact towards the latter half of 2009, which explains the deterioration in the results.

Furthermore, Richter's strategic goal of increasing its sales of contraceptives in the CIS and Eastern Europe has been set back by the ongoing effects of the economic crisis in these markets, which has affected discretionary spending patterns.

In terms of its regional performance, the results presented are very much consistent with those from the first half of the year (see Hungary: 5 August 2009: Gedeon Richter's H1 Results Boosted by Russian and U.S. Sales). The increasing importance of the United States for Richter testifies to the success of the company's strategy of diversifying its income streams, a good example of which is its contract manufacturing of the Plan B contraceptive for Teva.