Gedeon Richter: A tale of two portfolios ( stays HOLD)

We maintain our HOLD recommendation, with an updated price target (PT) of HUF 5,788/share (from HUF 5,280/share), mainly on de-risking our Vraylar forecasts for bipolar depression to 80% from 50% (HUF 430/share). In this update, we highlight the different earnings contributions of Richter’s proprietary drugs (e.g., cariprazine, Esmya) compared to its legacy businesses. In short, though, despite the strong contribution from its proprietary drugs, it is hard to get excited at current levels when Richter’s core generics business – which still generates c.75% of the group’s gross profit – continues to lag, with sales growth in Russia and now, apparently, China in the low- or mid-single digits. Granted, Richter is good at maximising cash generation from its ageing generic portfolio and, now boosted by Vraylar royalties, has the funds to remake itself as a speciality pharma. Continued value creation for the shareholders, however, should come mostly through acquisitions, we believe, versus the current R&D projects or from the generics space, which is why we see the business as it stands today as fairly valued.