Gedeon Richter: Headwinds and Acquisition Targets

Interview

Gábor Orbán

Gedeon Richter, one of the biggest pharmaceutical companies in Central and Eastern Europe, continues to seek acquisition targets mostly in women’s health and biosimilars, CEO Gábor Orbán tells the Budapest Business Journal. He sees some headwind caused by the pandemic and his expectations for turnover are more moderate.

BBJ: The board proposes a HUF 225 per share dividend on last year’s profits. Why is there such a big jump in dividends compared to previous years?

Gábor Orbán: Given the strong free cash flow expected from our specialty business including Vraylar, as well as the strength of our balance sheet even after the Evra closing in January, the board decided to propose to the AGM a pay-out ratio at the higher end of the 25-40% range announced in 2018. The increase in HUF terms is also driven by the significant rise in after-tax profits.

BBJ: What does the management expect for 2021?

GO: I can only cite here what was said in the 2020 Q4 earnings call. On the revenue side we intend to signal consolidated revenue expectations with a focus on the performance of our specialty drugs, while on the cost side we will continue to update investors and analysts as we move forward in the year.

BBJ: What are the main challenges and plans for this year?

GO: Last year we experienced sharp variations in orders because of the pandemic, which was difficult to accommodate. In 2021, at least for the first half of the year, we expect to have some headwind caused by the pandemic, i.e. more uncertainty, and our expectations for turnover are more moderate.

One of the main focus areas this year will be to continue to expand our portfolio in gynecology. Related to this will be the launch of two innovative products this year. One of them is an oral contraceptive containing oestetrol and drospirenone, which will be marketed under the brand name Drovelis® and for which the European Medicines Agency (EMA) Committee for Medicinal Products for Human Use (CHMP) issued a favorable opinion on March 26. Subject to the decision of the European Commission, the product is expected to receive a marketing license valid for all EU member states by the end of the second quarter of 2021. The other drug that could get a license this year is relugolix, for the treatment of uterine fibroids. In gynecology, maximizing the market potential of the newly acquired Evra patch is also an important task.

In addition, several of our important clinical trials will begin this year both in biosimilars and small molecule original CNS [central nervous system drugs].

BBJ: AbbVie said that it expects Vraylar peak sales to approach USD 4 billion within its currently approved indications of schizophrenia, bipolar I disorder, and bipolar depression. How realistic are these expectations?

GO: The product has proved its worth on the market, by now a substantial body of real-world evidence supports the value it brings to patients, with a very clean side effect profile compared to competitors. Abbvie’s professionalism and the resources it dedicates to the commercialization effort are strong signals that the product’s success story will continue.

BBJ: What are your expectations regarding Evra?

GO: Evra’s sales will already appear in Richter’s revenue this year in a transitional arrangement, with approximately 50% (estimated at USD 40 million) of revenues recorded in our top line. In this interim period, lasting until about the end of 2022, Janssen will be paying a “re-license fee”, while still providing the supply services (manufacturing and distribution). During this time we will gradually integrate the brand into our operations.

BBJ: How will COVID affect the company’s sales/operations this year?

GO: We see headwinds in many parts of the world as patient-doctor contacts fell, the flu season was by and large skipped, and we have constraints on our promotional activities. This is a limiting factor, particularly in the case of recently launched specialty brands.

BBJ: Are there any planned acquisitions?

GO: The strength of our balance sheet as well as our manufacturing and commercial capabilities make us well-placed to take advantage of inorganic growth opportunities, mostly in women’s health and biosimilars. We continue to screen the market for divestments or partnering opportunities.

Analyst Opinion

“The current stock price level indicates that Richter’s management has successfully turned the negative market sentiment following the Esmya fallout into a positive,” KBC Securities head of research Norbert Cinkotai says. The decision by European authorities to restrict the use of uterine fibroid treatment Esmya due to side effects was a blow the Hungarian drug maker, which saw its share price plummet.

The stock price recovered from HUF 4,800 levels to more than HUF 9,000, driven primarily by improving sentiment rather than fundamentals, Cinkotai says. He thinks that the stock is no longer cheap for the company’s fundamentals. KBC’s fair value estimate is at HUF 8,400, although he doesn’t rule out a five-digit price in case of an optimistic scenario.

The higher dividends do not impact the stock’s valuation, according to Cinkotai. “Richter has not been and will not be priced as a dividend stock,” he says. The dividend yield is still not too high at the current price level, he adds.

“Richter has to consolidate its latest big acquisition, Evra, first, before chasing new targets,” Cinkotai says. “After the Esmya fallout, it was forced to make a move to strengthen its women’s health portfolio,” he adds. “Now there’s no such pressure, especially not with the current growth rate.”

Richter bought Janssen Pharmaceutical’s Evra assets outside the United States for USD 263.5 mln last year. With the acquisition, Richter added a patch to its existing contraceptive solutions, which includes oral and emergency contraceptives as well as an intra-uterine device.

This article was first published in the Budapest Business Journal print issue of  April 9, 2021.

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