India Commercial Banking Report Q4 2009

In BMI's Business Environment Ratings (BER) for Q409, Hungary remains ranked 11th, out of the 20 major markets within Central and Eastern Europe (CEE), its position having worsened in recent months.

Despite stronger dynamics than in previous times, a negative regulatory environment and consequent poor market performance are leading to an increasingly poor outlook for multinationals. Such factors, in addition to the deteriorating macroeconomic climate have led BMI to further adjust its forecast for Hungary's pharmaceutical market. From being valued at HUF613.9bn (US$3.57bn) in 2008, the market is expected to rise by a negligible compound annual growth rate (CAGR) of 0.9% in local currency terms through to 2013, when its value will reach just HUF642.2bn (US$3.20bn).

In fact, market recovery is not expected until 2011 at the earliest, although even this time period is in question, given the deficit accrued by the country's national health insurance body (OEP). In July 2009 local press announced that the OEP's deficit in H109 topped HUF52.8bn (US$307mn), some HUF48.4bn over its original target. The revenue achieved in H109 fell short of expectations by 4.5%, with reimbursement spending overshooting the target by some 10%. The only positive result was achieved through the much-contested 12% tax contribution collected from pharmaceutical companies and distributors, which topped the target by 28.8%.

Around the same time, the government debated amendments to the controversial 12% tax - applicable to company revenues from state-subsidised drugs - which has already severely hampered foreign direct investment (FDI) in Hungary. The potential changes would allow drugmakers to deduct up to 20% of research and development (R&D) costs from the tax, rising to 100% in 2010. BMI believes that if approved, the legislation may have some positive effect on pharmaceutical FDI, but we note that much more would need to be done in order to result in a major influx of investment into the country, given the drastic effects of reimbursement cuts in recent years.

In the meantime, the news from the pharmaceutical industry was of a mixed nature. One of the leading local companies, Egis, unveiled that its revenue growth in 2010 should increase as a result of focusing on exports, particularly to Turkey, as Hungarian companies increasingly prioritise foreign markets. The other major Hungarian drugmaker, Gedeon Richter, announced that it expects flat domestic and Romanian sales, and lower sales in all of its other markets, bar Poland and the US. The state has recently secured a 25% plus one share stake in Richter after the government chose to pay off EUR639mn (US$886mn) worth of convertible bonds at expiry, instead of converting them into shares. The move will considerably limit the chances for a takeover of Richter, which could have been viewed as a possible target for Big Pharma, although potential foreign backing during the current challenging times could have been seen as beneficial to the local stalwart.