Gedeon Richter: Q4 Loss and Competitive Disadvantage

The Hungarian pharmaceutical company Gedeon Richter Plc. presented its results for the year 2022 this Tuesday. The report caused a price drop on the stock market, as it turned out that the always massively profitable company turned loss-making in the last quarter of the year (due to the special tax and the exchange rate change). The company's management pointed out that the special tax imposed at the end of December last year put Gedeon Richter at a competitive disadvantage in the Hungarian market.

CEO Gábor Orbán said that last year Richter achieved healthy, broad-based growth across regions and product categories. Net cash flow from the business, which better reflects underlying trends and strips out one-off effects, rose to HUF 184.927 billion last year from HUF 139.904 billion in 2021.

The favorable exchange rate environment during the year reversed towards the end of the year, with unrealized exchange rate losses of HUF 44 billion in the last quarter, which absorbed the financial gains made in the first three quarters of the year.

In the final quarter of the year, a further HUF 25 billion of impairment losses were recognized on two R&D projects, and a HUF 28 billion special tax on pharmaceutical manufacturers also weighed on the fourth quarter result, he said.

Erik Bogsch, chairman of the board, said the special tax announced on December 23 to cover 40% of R&D spending had caught the sector and Richter by surprise.

The man who has run the pharmaceutical company for 25 years said they would continue negotiations with the government after previous talks had failed.

The progressive special tax on the pharmaceutical sector, which was imposed retroactively in December, is based on total sales. The tax is 3% on the part of turnover below HUF 150 billion and 8% on the part above that.

He pointed out that the extra burden would put high value-added companies with a manufacturing base in Hungary, such as Richter, at a competitive disadvantage, as the tax would not apply to OTC market players. Gábor Orbán added that the company's baseline scenario is that the financial burden will be removed next year. Should it still remain after 2023, Richter may consider not fulfilling its tax obligation in Hungary. He added that this is only a hypothetical scenario and they are confident of a settlement.

Asked about a possible change in dividend policy, Gábor Orbán said that the board was also divided on the issue, with several conflicting influences in the business process, so no decision has been made yet.

According to a flash report published early Tuesday morning, Richter's revenue grew in line with expectations in 2022, but net profit after tax fell short of analysts' expectations due to one-off items in the fourth quarter.