Richter held a conference call yesterday on which the CEO, Mr Erik Bogsch spoke about the Russian sales and the R&D and S&M spending outlook of the company.
- The CEO said, that the weak performance (up 11.5% y/y) of the Russian private market sales in the 3Q06 was attributable to seasonality, and a lower sales growth trend should not be extrapolated. He said, this seasonality did not show up last year, but it appeared in the 2006 third quarter Russian private market sales. He also provided guidance on the 4Q06 DLO sales: it is going to be negatively affected by the stockpiling in 3Q06, and DLO-list changes effective from 1 November, thus he sees it at US$ 3-4m.
- The company told that the low the R&D to sales ratio (5.3%, down 183 bps y/y and 467bps q/q) was attributable to postponed original researches in the 3Q06. Mr Bogsch said, Richter will start clinical trials of a molecule in 4Q06 (and is expected to receive royalty payments for it from Forest in 4Q06), and as a result he sees FY 2006 R&D to sales ratio at 9%. He indicated that Richter plans to start further clinical trials next year, and depending on the start of these projects he sees the R&D to sales ratio in a range of 9-12%.
- The Sales&Marketing to sales ratio is seen at 20%, and 21-22% for 2007 by the company.
Our view: We see the conf call comments to have mixed impact. We view positively that the weak Russian private market sales was attributable to a seasonality factor only, as we see the growth on the private market to be a key growth driver, when the company will face with c. 50% y/y declining DLO sales next year. At the same time we view negatively, that one-off factors contributed to the low R&D spending in the quarter, as we saw the company will be able to counterbalance some part of profitability decline here. Finally, we see the guidance on S&M to sales ratio as neutral, as we see registration fee booked on Hungarian sales representatives and higher sales support of the export sales will increase this ratio in 2007 by roughly 150bps y/y.