The Hungarian National Health Fund (OEP) announced yesterday the reimbursed drug prices effective from 1 July until 30 September 2007. In the last two weeks there was an auction among drugmakers, when they had to make offers for how much they are willing to sell their drugs in the next quarter. In the first part of the auction, price offers are public and indicative prices are released after this part. However, in the in the second part of the auction, in the last three working days, aution is done without drugmakers seeing each other's reaction. A game theory-like rule forces drugmakers to cut prices, as their drugs will fall out of the reimbursed category if they sell for more than 20% above the reference drug's price in a certain therapeutic category. This auction process of reimbursed drug prices is repeated every quarter.
Our view: We expect neutral to positive price reaction to the release of the Hungarian reimbursement prices effective for 3Q07, as we see additional gross margin pressure on Richter and Egis's domestic sales will be minimal q/q from 2Q07. We believe a positive reaction could be triggered by the fact that Hungarian reimbursed drug prices are seemingly very close to a bottom after several regulatory changes. Also, the published 3Q07 reimbursement drug prices equal the indicative auction prices published a week ago for Richter and Egis major drugs. Reference prices fell substantially three months ago mainly on the back of changes in the reference drug price calculation (when market share minimum requirement was lowered). For this reason, we expect Richter and Egis' 2Q07 domestic sales and gross margins to be hit q/q by substantial reference price cuts three months ago. However, we expect the 3Q07 data to bring flat q/q domestic gross margins for the two drugmakers.