Hungary Richter Tests Diabetic Pain Drug Ineffective

Zsuzsa Beke, PR director for Richter told Portfolio.hu that the therapeutic area for RGH-896 is very complex and also risky. Richter and Forest launched their original research in this area because the market for RGH-896 is massive, worth some HUF 2 billion. There is also a huge unsatisfied demand for the product by the medical sector, she added. Beke emphasised that while the outcome of the Phase II trial is definitely negative, this was only the top-line results, the evaluation of which could last months therefore the results are not final.

Richter’s original research portfolio has several products in either pre-clinical or Phase I clinical trial, so the pipeline is not empty at all. The long-term potential is still there and the company rests on several legs when it comes to original research.

Richter’s key pipeline asset RGH-188 (schizophrenia and bipolar disorder) is in Phase III development, as a result of which Richter can expect another milestone payment from Forest this year.

Gergely Pálffy, KBC Securities, Budapest

"Richter would have received a milestone payment if the tests had showed positive results. At this point it is not known whether the two companies will continue with additional phase 2 tests. We expect negative trading impact as the news came out after yesterday’s trading hour."

Morgan Stanley

"Richter’s key pipeline asset RGH-188 (schizophrenia and bipolar disorder) is in Phase III development, and needs to demonstrate improved efficacy and safety versus the many existing atypical antipsychotics currently on the market."

"Our physician checks suggest the level of differentiation is low. While we forecast the R&D ratio rising from 9% to >12%, our base case scenario assumes no profit contribution from RGH-188. To justify the current share price one has to assume peak sales of $500m, we calculate, suggesting limited upside. 2011e P/E of 17x, with a 3-year EPS CAGR of 0% (EMEA generic trade on 14x with comparable growth of 9%)."

"Short term, we concede Richter’s defensive qualities appear attractive vs. Hungarian macro issues."

"Richter’s conservative management has financial flexibility (2010e net cash HUF133bn) to focus on its strategy to deliver a sustainable business with growth longer term. To turn positive at current valuations we would need to see strong Phase III RGH-188 data (2011e), and better visibility with respect to: i) the outlook for the profitable US business; and ii) Europe (50% of sales) in the context of increasing pricing pressure."

Gergely Várkonyi, Deutsche Bank, Budapest

"As the compound showed no statistically significant or clinically meaningful efficacy vs. placebo in any of the dosage strengths, we believe that radiprodil development will be terminated here. Radiprodil was Richter's second most advanced innovative compound to cariprazine and was considered as high risk both by the market and management - we believe its failure should not affect the stock price. Potential stock catalysts from cariprazine include finding a European partner and clinical data release (phase II depression 1Q11, phase III schizophrenia 3Q11)."

Várkonyi reiterated his 'Buy’ rating on Richter.

1) Having fallen by 9% since mid-June, the stock is now back to the pre-Yaz launch level, "hence those missing out on the generic Yaz opportunity are given another chance."
2) The analyst expects the US launch of generic Yaz oral contraceptive to have a "meaningful effect" on Richter's financial performance as he projects that it may account for as much as 29% and 38% of EBITDA this year and next, the main driver of Várkonyi’s 22% EBITDA and 31% EPS growth projection for 2010-11.

"Thanks to our recent estimate upgrades, we are considerably (35%-plus) ahead of consensus."

3) On top of growth, Richter also has defensive features as, among others, a 1% blended HUF/US$ and HUF/EUR weakness may lift EBIT by 2% (as per co. estimates based on 2009 data)."

Várkonyi also noted that Richter had its best year ever in 2009, a year of deep global recession.

4) "All this attractive combination of growth and downside protection comes at an attractive price: on our estimates, the stock trades at 6.8x and 5.0x 2010 and 2011 EBITDA and 10.4x and 8.1x earnings, making it one of the cheapest stocks in DB's generic universe."

Jefferies International

Jefferies did not have any Radiprodil forecasts in its model, as it views the drug as "too early stage and high risk."

"However, it represents one of only a few innovative later stage clinical candidates in Richter's portfolio," Jefferies added.

It reminded that Richter's 2009 annual report states the company has only three products in Phase I, two in Phase II and one in Phase III.

"Richter is striving to become an established player in innovative CNS research, spending c.10% sales on R&D of which we estimate approximately half is spent on innovative not generics R&D."

"With the Radiprodil setback negatively impacting sentiment in the near-term, the only other later stage clinical product in Richter's pipeline is Cariprazine (Antipsychotic disorders), for which the key Phase III data for Schizophrenia and Bipolar Mania are expected mid-2011E."

Phase II data for Bipolar Depression is anticipated 3Q 2010E.

"Specific risks surrounding Gedeon Richter's innovative R&D strategy are now higher in our view, as any setback to Cariprazine is likely to raise additional questions about the future direction of the company, as it has been focusing on its innovative portfolio at the expense of its generics business."

"Although the stock trades at a 3% sector P/E premium in 2011 of 14.3x, this equates to a 24% premium in 2014 which is unjustified in our view due to: (1) five-year EPS growth of 3% vs. sector 11%; (2) Future competition to drosperinone in the US impacting income received from Teva; and (3) development risks surrounding Cariprazine."

Source: Portfolio Online Financial Journal