Hungarian government decided to cut state subsidy on more than 1,100 prescription drugs from July, business daily Világgazdaság reports. The move is part of 40bn savings plan of the government in the drug budget. In case of 700 drugs subsidy decreases by average 7.5%, while 400 other drugs would be reclassified to the therapeutic-fixed subsidy system, which will lower subsidies and raise prices.
The move is certainly positive for Hungarian pharmas, since it increases the consumers’ contribution to the total drug market, instead of our original thought that government is going to save the 40bn exclusively on pharmaceutical companies.
Yesterday, we have already factored into our Richter and Egis model that the two companies would be forced to pay back to the subsidy system roughly triple amount of money than last year. Now it seems that we were overly pessimistic with this: the price sensitivity of demand on drugs is very low, therefore the measure will result in minor turnover decrease for the pharmas, while their subsidy budget contribution would be substantially lower.
However, until having more details about the new system, we conservatively keep our earnings forecast unchanged. We rate both Richter and Egis to Buy (Richter price target is HUF 43,000, 21% upside; Egis’ price target is HUF 33,803, 41% upside).