“We have to put this question to the government: Do they want a pharma industry in Hungary that has a very good international reputation?” Erik Bogsch said in a November 17 interview at Richter‘s Budapest headquarters. “If the government is not going to listen to this, then it’s going to have consequences on the whole industry.” Health Minister Lajos Molnár’s “drug thrift” bill, scheduled for a final vote today, brings the country’s government and drugmakers into conflict. The pharmaceutical industry is attempting to increase competitiveness, while the government is trying to tamp down the widest budget deficit in the European Union. Hungary won’t be allowed to adopt the euro as its currency until the country improves its finances. Molnár’s proposal would force drugmakers to pay duties as high as 19% on government medicine subsidies and to compensate the state-monopoly health insurer should it overspend its drug budget. Richter estimates the bill, along with new taxes and subsidy cuts, will pull down 2007 profit by at least Ft 7 billion ($34.8 million). Bogsch, who also serves as president of the Hungarian Pharmaceutical Manufacturers Association, said he might take legal action to stop the legislation from becoming law. He declined to reveal what legal arguments he might use. The plan could give foreign-based pharmaceutical companies a long-term advantage over Richter, eastern Europe’s biggest drugmaker.

Richter specializes in inexpensive generic copies of brand-name drugs, whereas multinationals sell high-margin products that make it easier for them to deal with Hungary’s new burdens, Bogsch said. “The government talks about “patriotic economic policy,”” he said. “This is contrary to all that’s being said.” Hungary’s socialist-liberal government, battling a budget shortfall expected to reach 10.1% of gross domestic product this year, has no choice but to impose such measures, Economics Minister János Kóka said. “We need to be stubbornly insistent on making these steps, even if they may result in certain political-social conflicts, or they may deteriorate the positions of certain economic interests,” he said in an interview November 18. Bogsch argues that the bill may actually make it harder for the government to achieve its long-term fiscal goals because companies will reduce spending in the country. “There will be less capital expenditure, less R&D, and less employment. And that will mean, of course, they will also collect less taxes,” he said. “We feel that in the final view, the government is shooting its own foot.” Richter devoted Ft 12.2 billion to research and development in 2005, or 9% of its revenue, according to company documents. Hungary plans to create more targeted incentives for investments in innovation, Kóka said. Richter has yet to see any concrete proposals on incentives, spokeswoman Zsuzsa Beke said.

Molnár’s bill forces drugmakers to pay an 11% rebate on subsidies for drugs with producer prices of Ft 1,000 or less, 17% on drugs that cost Ft 1,001 to 2,000, and 19% on drugs priced higher than Ft 2,000. It would also make drugmakers pay down the majority of any state overspending on drugs. “I was disappointed that the minister of health had not contacted us, which I think in every country is a quite normal procedure, to have a dialogue with the most important partners,” Bogsch said. Hungary risks losing foreign investment as well, said former Health Minister Jenő Rácz in an interview last month. “You take a company like Sanofi-Aventis. Its budget is about as big as Hungary’s — maybe a little bigger,” he said. “What are they going to do? They’re going to get fed up and go to Romania or Slovakia.” Following negotiations with Richter and the local unit of Sanofi, the ministry submitted a change that would have drugmakers pay a flat duty of 12% on subsidies. “I think the compromise, which is now on the table of the Parliament, is the right one,” he said.

Molnár became health minister last June promising to rein in what he deems excessive spending on drugs. The average Hungarian will consume about $233 in drugs this year, compared with $163 for the average Czech and $138 per capita in Poland, according to estimates by Citigroup Investment Research. The National Health Insurance Fund, the state-monopoly health insurer, spent Ft 348.9 billion on medicine subsidies last year, up from Ft 150.7 billion in 2000. Part of the problem is that Hungary spends too much on generics, Rácz said. Under Hungarian law, the minimum price difference between generics and their brand-name equivalents is only 30%, less than in other European countries. Bogsch disputes such arguments. The problem is that Hungarian specialists prescribe far too many brand-name drugs, which receive too large a share of the subsidies. “The prescription habits of the specialists – that’s the key problem,” Bogsch said. (Bloomberg)