Page 22 - bne magazine March 2017 issue

22 I Companies & Markets bne March 2017
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 wel- comed by the government. The Hungarian state holds a little more than 25% of the company’s shares. Listed on the Buda- pest 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.
“For a sector that has contributed so much to Hungary’s evolution this has been pretty difficult to stomach”
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 Competi- tiveness 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 con- tribution 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 eco- nomic performance and competitiveness. Richter carries out joint research programmes with more than 30 university
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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 contribut- ing 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 busi- ness 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 indus- try as it seeks to sort out the mess that is the healthcare sys- tem. 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 Hun- gary’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 manufac- turers, “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.