Hungary Richter posts record revenue in Q1 2020

Results achieved in this quarter were favourably impacted by royalty proceeds from Vraylar, which remains to date the fastest growing oral antipsychotic in the USA. Steady growth in royalty income offset the one-off sales milestone in the base period, so overall income from Vraylar came in broadly flat. Revenues from the rest of the specialty business also grew above average. Sales growth was generally supported by manufacturing capacity upgrades in our sites and also by early signs of increased stockpiling toward the end of the reported period. At the same time currency movements also had an overall positive contribution to our topline and margins. These benign forces more than offset the substantial drag from the carryover effects of unfavourable market developments in China and Russia in the second half of 2019. Richter posted HUF 8.2 bn exchange rate gains at consolidated sales level.

Pharma sales grow sharply in Europe

Pharmaceutical sales in Hungary rose 0.9% yr/yr to HUF 10.78 bn in Q1. The underlying market experienced a high growth rate of 20.1% primarily as a consequence of excess purchase of certain OTC products in preparation for the commercial lockdown. Retail sales of Richter products achieved a significant increase of 15.3% according to the latest available IQVIA (successor of IMS) data. The Company is now ranked No. 4 amongst players in the Hungarian pharmaceutical market with a market share of 5.0%. Taking into account the prescription drugs retail market alone, Richter qualifies for second place with a market share of 7.6%.

EU12 sales went up 31.5% yr/yr to HUF 39.42 billion in January-March. The EU12 region sales represented 53% of total EU sales of the Group’s pharmaceutical segment. The substantial increase recorded in Poland was primarily due to higher sales of our antiviral product, Groprinosin. In Romania sales of Cavinton and Mydocalm materially increased during the reported period. Turnover in the EU15 region increased by 26.2%. Growth recorded in Spain, Italy and Germany contributed the most to the sales level achieved during the reported period. As far as the product portfolio is concerned the increase was primarily due to higher turnover of the range of oral contraceptives, Terrosa and Bemfola This region contributed 47%, to total EU pharmaceutical sales.

Sales in the Commonwealth of Independent States (CIS) rose in forint terms by 18.9% to HUF 34.39 bn. Currency exchange rate fluctuations, primarily the appreciation of USD and the depreciation of the HUF impacted positively the turnover in this region. Sales to Russia at HUF 22,157m (RUB 4,848.3m) grew by 7.3% mostly due to exchange rate movements. A volatile market environment and an exceptionally low base period turnover combined with deteriorating purchasing power experienced in the reported period resulted in flat performance in RUB terms. Prices of drugs included in the Essential Drug List will be reviewed by the Authority and they are expected to come into effect no later than 1 January 2021. A slight price adjustment of approximately 1% on average impacted positively our overall portfolio during the first quarter 2020. Sales levels during the reported period at EUR 65.1m remained virtually flat when compared with the turnover reported in the same period 2019. As a result of the ongoing restructuring of the Russian wholesaling market and deteriorating liquidity at pharmacy chains Richter continues to place special emphasis on conducting a cautious credit policy.

Turnover in Ukraine at USD 13.3m increased primarily due to a more than threefold increase in sales levels of antiviral Groprinosin together with an overall low base figure reported for the base period. Sales to Other CIS markets also reported growth partly due a good performance of the oral contraceptives and as a result of higher Groprinosin sales levels. Worsening exchange rates experienced in certain countries of this group were broadly offset by limited price increases applied across the region.

Sales in the United States went up 5.9% in forint terms in Q1. A significant year-on-year growth recorded primarily due to accelerating royalty income earned in the current period based on turnover achieved by our partner, Allergan was almost entirely offset by a lack of sales related milestones in the reported period. In contrast, first quarter 2019 included a milestone amounting to HUF 7,154m. Higher API sales also contributed to the sales growth achieved during the reported period.

Sales to China dropped by 5.9%. Delisting of Cavinton injectable announced in the second half of 2019 by Chinese authorities came into effect from 1 January 2020 and resulted in a significant loss of sales of this product.

Pharma sales in Latin America jumped by 28.5% in forint terms. Increasing sales of the oral contraceptives when reported in HUF terms contributed to higher turnover achieved in the reported period.

Sales in the rest of the world leaped by 58.2% yr/yr in HUF terms. Vietnam with oral contraceptives, Australia with Bemfola and Japan with teriparatide contributed materially to the sales performance achieved during the reported period. Certain one-off oral contraceptives shipments also impacted positively the sales growth achieved in this region.

Vraylar excels

Vraylar fared well in the first quarter, and the relating royalty income amounted to EUR 43.8 billion in Q1. Reagila sales reached EUR 2.3 mn. Vraylar remains to date the fastest growing oral antipsychotic in the USA. Steady growth in royalty income offset the one-off sales milestone in the base period, so overall income from Vraylar came in broadly flat.

Bemfola sales reached EUR 14 mn in Q1, and Richter said higher turnover resulted primarily from increased sales levels recorded in France, Spain and Australia.

An investigation into Esmya was concluded in the third quarter of 2018 and then the European Commission let the productd back on the market with restrictions, and Esmya sales resumed. In mid-March this year Richter announced that the Pharmacovigilance Risk Assessment Committee (PRAC) of European Medicines Agency (EMA) has started a review of Esmya, which resulted in a suspension of sales of the product. Richter has said it cannot exclude the possibility that no further sales will be recorded during the remainder of 2020. An impairment on stocks intended for sales in EU15 amounting to HUF 202 million was accounted for in respect of Esmya sales.

Gross margin improves

Richter’s gross margin edged up to 57.8% in Q1 from 57.5% a year earlier. Gross margin increased during the reported quarter when compared to that achieved in the first three months to March 2019 as a result of the previously detailed contradictory items. In addition, higher turnover achieved by the core Pharmaceutical segment exceeded the sales growth rate of the low margin Wholesale and retail business.

Gross profit was positively impacted by a higher demand linked to our branded generic portfolio, such as cardiovascular products and antiviral Groprinosin, partly due to pandemic related forestalling was successfully addressed by reinforced manufacturing and packaging capacities, an overall favourable FX environment with a strengthening USD and RUB together with a weakening HUF and other currencies of the CEE region where we own manufacturing capacities which impacted on gross profit by increasing HUF denominated turnover an increasing share of the turnover of certain higher margin oral contraceptives, emergency contraceptives and Bemfola was complemented by a lower level of CoGS incurred with the manufacturing of the latter, while it was negatively impacted by the following: a decline in sales experienced by a number of our traditional products which includes delisting of Cavinton in China and compulsory price adjustment initiated in Russia, considerable increases of wages in Central and Eastern Europe and price erosion experienced on our traditional markets.

Sales and marketing expenses edged 1.5% higher in annual terms in Q1. The proportion of sales and marketing expenses to sales declined significantly during the reported period mainly as a result of the robust sales growth. A slight increase in the amount of Sales and marketing expenses when reported in HUF terms was due to exchange rate volatility experienced during the reported period. Such expenses when reported in EUR declined primarily as a reduction in promotional spending and sales staff in China related to the adverse market environment.

Research & Development expenses jumped 29.2% yr/yr in January-March and their proportion to sales went up to 10.7% from 9.6%. These expenses include the ongoing clinical trials being carried out in co-operation with Allergan together with development programs executed in the field of biotechnology and women’s healthcare. In addition certain CNS projects have moved into the clinical phase. Other income and other expenses net was HUF -2.3 bn in Q1.

Profit from operations leaped 46.5% yr/yr to HUF 25.2 bn.

After-tax profit jumps

Net financial income amounted to HUF 5.7 bn in the first quarter, up 9.1% over the base period. Richter’s after-tax profit jumped 31.7% to HUF 29 bn, exceeding the median estimate in a Portfolio poll by 24.2%. The profit also marks a new all-time high.

COVID 19 pandemic – crisis management

Highlights of Richter’s remarks and measures in relation to the coronavirus pandemic:

• Although the tightness in the labour market might have eased due to the pandemic, attendance rates also worsened somewhat, and therefore securing the necessary headcount remains challenging.
• The lockdown has clearly had a negative impact on supply chains and logistical routes globally. Richter’s vertically integrated operating model is adding significantly to our resilience, yet we are also faced with longer lead times and increased risks when it comes to ensuring the continuous availability of starting materials, protective gear and other supplies. Measures aimed at ensuring social distancing have temporarily contributed to lower productivity at our manufacturing sites. The management team is redoubling efforts to ensure the efficient and continuous manufacturing activity of the Company.
• In many of our traditional markets we experienced in March a higher demand for generic therapies addressing chronic conditions (cardiovascular, central nervous system, etc.) as people were preparing for the imminent introduction of quarantine measures. Our antiviral product, Groprinosin saw outstanding demand during the first quarter 2020 in Poland, Ukraine, Other CIS and Russia. In addition, oral contraceptives recorded higher turnover in most of the key EU15 countries.
• While in person promotional activities have had to be discontinued in practically all of our markets in an effort to reduce physical contact, we have successfully redirected these activities to online channels.
• A strong balance sheet without any debt to date together with a sustained positive cashflow ensures that Richter is in a good financial position during the crisis and also expects to continue to be in the aftermath when the anticipated economic slowdown occurs.
• Amidst the current volatile economic environment, we maintain our tight credit policy with the financial management of the Group performing close customer credit monitoring. No disruption to the usual payment procedures has occurred neither in the reported period nor in the period following the end of the quarter and the publication of the quarterly report.

Chief Executive Officer Gábor Orbán’s comment:

“Although the pharmaceutical sector is commonly better shielded from crisis shockwaves, all economic sectors, including our own, were hit by the global COVID pandemic. I am extremely proud of the resilience of our business operations in the face of the disruption caused by the virus. We managed to stand our ground thanks to our organisational culture of trust and cooperation, our vertically integrated business model, our geographic and therapeutic diversification and a strong balance sheet – all of them core values that continue to define our approach to steering the ship of Richter.”

Cover photo by MTVA/on commission by Imre Faludi

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