Drug maker Richter sets innovative example for Hungary’s economy

Drug maker Richter sets innovative example for Hungary’s economy
Richter HQ in Budapest.
By Blanka Zoldi in Brussels February 10, 2017

In 2016 Hungary’s Gedeon Richter launched a new medicine in the US that could help around 2.6mn Americans suffering from schizophrenia, making it the first drug discovered by an Emerging European pharmaceutical company that has received approval from the US’ notoriously tough Food and Drug Administration.

With innovation at the forefront of its strategy, backed by a robust business performance over the last few years, the Budapest-based Richter illustrates the potential of Hungary’s first-rate pharmaceutical sector, which many in the industry, including Richter’s CEO, expect to become the key driver of the Hungarian economy. However, the burdens that the government has placed on companies like Richter, including a 20% special tax and the introduction of the so-called blind-bidding system, where products offered at the lowest price receive preferential treatment from the state health service, are forcing pharma companies to increasingly look at export markets like the US to stay afloat.

The antipsychotic drug Cariprazine, licensed to Allergan in the US and sold under the trademark name of Vraylar, was discovered 15 years ago by Richter scientists and is the first drug to effectively treat the ‘negative symptoms’ of people suffering from schizophrenia and bipolar disorder. While previous antipsychotics could treat the so-called ‘positive symptoms’ of these disorders, such as hallucinations, delusions and movement disorders, Cariprazine is the first drug that has proved to be effective in treating ‘negative symptoms’ like apathy and social withdrawal.

Researching original drug molecules has played a key role in Richter’s strategy since its founding in 1901. In the 1970s, the company’s first global success was Cavinton, an original drug that improves circulation within the brain. In the 1980s, Richter developed three more original drugs, including an antihypertensive drug, a hepatoprotective – which has a protective effect on liver cells – and a muscle relaxant. In 1996, Richter also discovered Curiosin, currently sold as a gel that speeds up the healing of skin lesions.

While Richter’s original research activity focused on disorders of the central nervous system, its Swiss subsidiary PregLem – acquired in 2010 – carries out original R&D work concentrating on gynaecological therapy. Esmya, the leading molecule developed by the subsidiary, treats the symptoms of uterine fibroids, the most common benign tumours affecting 20-25% of women. It was launched in Europe in 2012, and is now sold in 33 countries worldwide.

This year Richter will continue to carry out original research and biosimilar product development. “Several of our projects are in preclinical and early clinical phases [and] these focus on the treatment of obesity, cognitive disorder and autism,” Zsuzsa Beke, head of public relations, tells bne IntelliNews.

Richter’s business is expected to remain strong in 2017, but its performance is highly dependent on the performance and authorizations of the company’s two main drugs, Marton Medveczky, an analyst at the Budapest brokerage Equilor, tells bne. “Cariprazine might be launched in Europe in 2018 as the earliest, while Esmya might enter the American market next year,” Medveczky predicts.

Richter’s reliance on foreign markets is plain to see in the figures. Currently present in almost 40 countries, it makes more than 90% of revenues in foreign markets, with just a 5.4% market share at home, making it the third biggest player. Having booked €305mn in sales from Russia and €60.4mn from the US in 2016, the company’s 2017 results will be highly dependent on the performance of the Russian currency, as well as the outcome of US President Donald Trump’s negotiations with pharma companies on lowering drug prices. Richter expects the Commonwealth of Independent States region – including Russia – to remain its key market, while also further expanding into new markets such as China and Latin America. CEO Erik Bogsch has said that Richter must be “much more aggressive” in female healthcare product acquisitions to widen its franchise worldwide.

In 2016, sales grew by 6.1% to €1.25bn, though profit from operations fell by 16.5% to €179.8mn as a result of higher sales and marketing expenses, lower milestone income when compared with the level reported in the base period, together with certain one-off expenses. Basic earnings per share totalled HUF340 per share, an increase of 16.8%.

Little wonder, then, that the innovation-driven Richter’s strong results in recent years are so enthusiastically welcomed by the government. The Hungarian state holds a little more than 25% of the company’s shares. Listed on the Budapest Stock Exchange with a market capitalisation of €3.7bn, Richter’s shares have gained 18.5% in the past year to trade at HUF6,337 (€20.5) in mid-February.

The company’s contribution to the national economy in 2015 was HUF90bn in the form of taxes and contributions, investment and R&D, Beke tells bne. “Besides this, Richter is the most significant innovation base in the region, thus it substantially boosts Hungary’s competitiveness,” she adds. The company employs over 1,000 researchers and in 2016 spent HUF35bn (€113mn) – 9% of its annual revenue – on R&D, which is expected to increase to 12% this year.

Brain drain

Fostering more innovation and R&D spending is a key goal of the Hungarian government. Alarmed by the poor Hungarian results on the World Economic Forum’s latest Global Competitiveness Index – the country slumped six places to 69th on the list of 138 countries – the government increasingly seems to realise the risks of growing too dependent on the country’s automotive sector, whose development has not done much to move Hungary up the value chain. Currently, the average contribution to the end-product is only 42% in the country – the lowest in Central Europe – and only 1.5% of Hungarian GDP is spent on R&D.

Pointing to the necessity of diversifying the country’s economy, Hungary’s latest EU Convergence Programme assigns a major role for the capital-intensive pharma industry, whose R&D spending per employee is 2.5 higher than the national average.

Pharma companies also play a major role in mitigating the brain drain that has long been dragging on the country’s economic performance and competitiveness. Richter carries out joint research programmes with more than 30 university departments and academic research institutes in Hungary. “Our company is proud of giving the opportunity for talented people to carry out their activities in Hungary, thus contributing to the economic development of the country. Our R&D colleagues can work under the same conditions as in a Western European laboratory,” CEO Erik Bogsch said as he picked up the award for Hungary’s “Person of the Year 2016” from business news weekly Figyelo.

“We have received support from Hungarian governments to stay in the country,” Bogsch said. According to the country’s tax regulations, the base of Richter’s corporate tax is reduced by the amount of direct costs incurred on R&D activities.

According to Dr Livia Ilku, director of MAGYOSZ, the main association representing domestic pharma manufacturers, the sector employs over 14,000 people and delivers a full 5% of the nation’s GDP, with her own members exporting as much as HUF900bn worth of products each year.

That said, the Hungarian government is leaning on the industry as it seeks to sort out the mess that is the healthcare system. In February, the Euro Health Consumer Index (EHCI), which compares the healthcare systems in 35 countries on the continent, ranked Hungary in 30th place in its 2016 survey, below even that of Greece. The report suggests Hungary’s health service needs radical reforms and investment in order to become a modern, patient-focused system.

The pharma industry in 2011 faced a 30% decrease in pharmaceutical spending, coupled with competitive taxation methods and the blind-bidding mechanism to collectively decrease the price of medicines. Other measures such as pay-for-performance, negative incentives of various therapies, and joint national procurements were also used to promote savings and reduce frivolous consumption of drugs.

Compounded by the Russia-Ukraine conflict, which has damaged two major export markets for domestic manufacturers, “many companies have been compelled to implement cost-cutting initiatives to stay competitive and truly come to terms with a new reality”, laments Ilku. “For a sector that has contributed so much to Hungary’s evolution – particularly in terms of innovation, job creation, and improving health outcomes – this has been pretty difficult to stomach.”

Richter is also soon to face a challenge on the managerial level: the 69-year-old Bogsch, CEO since 1992, will need to find his successor. “A potential candidate might be Gabor Orban, who recently has been appointed as Richter’s deputy CEO,” says Equilor’s Medveczky.

Having served as a state secretary at the economy ministry for over two years, Orban has good relations with the current government, Medveczky adds. Given the current challenges the pharma industry faces at home with a sometimes-capricious government, such ties will come in very handy.