Richter Gedeon: swimming against the tides (HOLD)

In this report, we have a HOLD (from Under Review) on Richter Gedeon (Richter), with a 12M price target (PT) of HUF 8,783, offering upside of 12%. Our neutral view on Richter reflects both the strong performance, to date, of its proprietary drugs, launched over the past six years, and its pipeline of new drugs, launching over the next two-to-three years, but tempered by the tepid performance of its legacy portfolio. The latter, on our estimates, still accounts for c.50% of its total revenues and gross profits, and could still represent c.40% by 2025E. Moreover, we see Richter’s marketing and R&D costs, which, over the past four years, together, have contracted as a share of sales to c.28%, vs. 35%, accelerating on: 1) the rising R&D spend linked to advancing biosimilar trials; 2) the promotional costs for new drug launches; and 3) labour costs, to a lesser extent. Most of these costs, we note, are invoiced in FX, so undermine the advantages of its local production base. Also, while we recognise that the stock’s widening discount to its peers over the past year looks attractive, it is largely justified by the widening discount rate vs. its European peers – the spread between Hungarian and German 10Y rates having exploded to c.8%, vs. c.3% just a year ago.