The Hungarian Finance Ministry has released a detailed breakdown of the 2007 drug subsidy budget target. This reveals that the HUF 364bn widely reported in the press over the last week is incorrect and the actual budgeted amount is just HUF 319bn (HUF 301bn on simple subsidies, plus HUF 18bn on drugs with special procurement). The HUF 364bn figure arose as it adds an assumed HUF 45bn contribution from the drugmakers in respect of the 14-16% tax levied on drug subsidies.
Our view: The above is entirely in line with our current forecasts, which incorporate an assumed HUF 320bn budget for drugs subsidies in 2007. However, the news is certainly negative from a market perspective as we estimate that reduction in the budgeted amount from a reported HUF 364bn to an actual HUF 319bn would lower 2007 net earnings by HUF 3.1bn (or 6% of consensus estimates) for Richter and HUF 2.5bn lower (or 14.6% of consensus estimates) for Egis. More importantly, we strongly suspect that the market, faced with a rapidly changing situation, has yet to factor in any clawback from the pharmas to the State in respect of budgetary overspend; our 2007 forecasts for Richter are c.20% below consensus (HUF 40.9bn vs. HUF 51.1bn), and those for Egis c. 15% below consensus (HUF 14.5bn vs. HUF 17.0bn). We currently rate Richter at a Hold and Egis as a Buy.