Business 20 May 2020, 2:38pm

ANALYST VIEW - Jefferies publishes research on Hungary's Richter

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Jefferies said in a research note on Wednesday that Hungary's leading pharmaceutical producer Richter continues to be well-placed strategically and economically with limited disruption to business and a cc. EUR 400 million net cash position. US lockdowns appear to have slowed growth for Vraylar, which Jefferies views as temporary. It includes the recent Relugolix deal which is strategically complimentary according to Jefferies and it forecasts EUR 100 mn peak sales in 2031E. Jefferies also tweaked EPS 2020E-2024E EPS by -1% to +5% and reiterated its HUF 8,000 target price and also its 'Buy' rating.

The latest analysis by Jefferies of IQVIA (formerly Quintiles and IMS Health, Inc.) data suggests that since lockdown the sequential growth in Vraylar prescriptions has stagnated. Jefferies puts this down to reduced physician/psychologist interactions despite telemedicine channels during lock down. It said it would continue to monitor these trends, but expects a return to sequential growth as lock downs in the US ease.

Jefferies thinks that Richter's base business should see little disruption. During March, Richter saw increased demand for some generic products including antivirals and oral contraceptives, which could remain a tailwind during 2Q, according to Jefferies. That said, Richter runs its manufacturing sites at higher capacity which in our view could lead to a drop in productivity given noted longer lead times and increased safety precautions, however, Jefferies expects favourable pricing and strong demand for products should offset this. While 1Q was particularly strong for women's health, Jefferies expects relative weakness near term as fewer fertility clinic visits will directly impact Bemfola in our view and Esmya withdrawal will offset strong demand for oral contraceptives.

Jefferies continues to think that the management guidance is still too conservative, primarily due to Vraylar assumptions. Jefferies interprets guidance changes directionally rather than absolutely. "If we assume our Vraylar estimates in guidance, then sales guidance would increase to 5.4% (JEFe 6.3%) and EBIT margin guidance would increase to 16.5% (JEFe 19.5%). We note that management has consistently been conservative on margin guidance hence are comfortable forecasting 300bps ahead of guidance."

As regards Relugolix, Jefferies believes it could be a long-term replacement for Esmya. Richter acquired the rights to Relugolix Combination Tablet in treatment for uterine fibroids and endometriosis from Myovant on 31 March. The company already has significant experience in this market with Esmya, and Jefferies expects given Esmya withdrawal, that Relugolix could be similar in scale. It thinks the product is largely de-risked having already been filed with EMA. Jefferies forecasts EUR 100 mm peak sales in 2031E.

Hungarian business daily Világgazdaság reported today that Richter expects Relugolix to be applicable in two indications, with marketing projected for the second half of 2021 and for the turn of 2022 and 2023. After sales pick up, Richter expects EUR 80 mn from the two indications annually.

Jefferies noted that the weakness of the forint benefits Richter's share price. It has made minor changes to its underlying forecasts (excluding Relugolix), lowering 2020E EPS 1.2% but increasing 2021E-2024E EPS by 1-2%. "That said, on constant currency, our underlying estimates are 1.4% to 3.3% EPS cuts. As sensitivity, we estimate that every 1% increase in HUF/EUR and HUF/USD has a c.1% benefit to EPS."

Jefferies confirmed its HUF 8,000 target price and 'Buy' rating on the stock. The TP offers a 154% upside potential over Richter's closing price on the Budapest Stock Exchange on Tuesday.