Equity 3 November 2015, 1:44pm

Hungary Richter Q3 seen weighed down by rouble

Portfolio

Gedeon Richter, Hungary’s leading pharmaceutical producer is set to publish its earnings report for the third quarter of 2015 at dawn on Wednesday. Analysts polled by Portfolio expect mixed results. They project the clean CCS-based operating profit to show significant year-on-year growth, whereas a dramatic decline is expected in net profit. Just like in the past quarters, Russia’s rouble is the reason behind this, as it has depreciated greatly versus the forint both in terms of its quarterly average and the end-quarter closing level.

You find estimates for Richter’s Q2 2015 performance in the table below. The forecasts do not include an expected a Cariprazine-related milestone payment from Richter’s U.S. partner and write-downs related to the termination of a licence agreement with Palatin Technologies as one-off items.

Analysts project USD 20 million milestone payment (median) related to Cariprazine for Q3 that would improve the company’s operating profit.

Based on the consensus, Richter’s consolidated revenues declined 3% year on year in July-September, which appears to be a favourable result considering how key exchange rates shifted. EURHUF is not a problem as its quarterly average was not really different from the base period’s print.

The real headache is Russia’s rouble that depreciated 31% (quarterly average) compared to Q314. The quarterly average was lower than this only once over the last ten years.

Besides a major RUB weakening gross profit is seen slightly up in annual terms and in view of this Richter’s gross margin is expected to come in at around 61% in Q3. This would mark a nearly three percentage point drop over Q2 but a moderate growth over the base period. The rise in gross profit is probably the result of a better performance on markets other than Russia. In Western Europe sales were probably helped by a continued pickup in Esmya sales and analysts may have estimated further revenue increases in the U.S., China and Latin America.

Richter’s operating profit is seen up by more than 50% yr/yr, but we need to highlight that the base period’s EBIT was rather subdued. The company’s operating margin is projected at 13%, which would reflect significant q/q deterioration but a larger improvement over the base period. The 13% operating margin is in line with the current management guidance for this year (13-14%).

Whereas Richter’s operating profit is expected to show robust growth, its net profit is forecast much lower than in the base period, most likely as a result of worse financial results. The RUB took its toll on financial results in Q2 as well, but the loss here is expected to be several times as large, mainly over the 15% q/q weakening of the RUB.