BUSINESS
Hungarian Drug Industry Struggles To Compete In Domestic, Global Markets • Companies are pursuing a number of strategies, including privatization and joint ventures, to ensure financial survival Joseph Haggin, C&EN Chicago
T
he Hungarian drug industry has been a superior economic performer before, during, and following the reestablishment of the Republic of Hungary in 1990. One reason for this success was state ownership that integrated the industry into the national health care system. In a sense, this arrangement guaranteed a domestic market. It also rather closely prescribed the form and extent of exports, mostly to the former U.S.S.R. and other Central European countries in the Soviet-dominated Comecon trade group. With the demise of the U.S.S.R. and the forthcoming privatization of many state-owned industries, the Hungarian drug industry faces a transformation that may be more difficult than that of the republic itself. The next two or three years will be crucial in the evolution of the new freemarket industries of Hungary. They must reestablish their place within Hungary and face stiff international competition from the East and the West. In 1993, total sales of the Hungarian pharmaceutical industry were estimated by the industry itself at almost $900 million, based on the average exchange rate for that year. Most of the production comes from five major companies; about 20% comes from smaller producers with local trade. A look at some of the major companies provides insights into today's pharmaceutical industry there. One of the smaller major drug companies is Biogal Pharmaceutical Works Ltd. near
Biogal Pharmaceutical Works complex is located outside Debrecen. Debrecen, with 1993 sales of about $104 million. According to Sandor Arany, Biogal president, the company develops some new generic products but maintains a research organization that is concentrating on cardiovascular, antifungal, and antiviral agents. There is keen awareness at Biogal that R&D will show the way in the future, but staying afloat in the present is of more immediate concern. "Our intention," says Arany, "is to expand internationally, partly into Eastern Europe and the West as well. The big competitors at the present time are from the Western countries." An immediate need is a marketing system to sell products at stable prices. The anticipated ISO QA (quality assurance) certificates are due to be obtained by the company shortly and should assist Biogal in reestablishing itself in the Commonwealth of Independent States and Eastern Europe. The Eastern and Central European markets are critical. But they are difficult to penetrate— primarily because of the economic chaos in Russia but also because of the necessi-
ty to start from "ground zero" in any marketing program in that country. Arany says: "Some of Biogal's operations have been suspended because of low prices in world markets. Currently, a modern ethyl acetate plant at the Biogal works is shut down for this reason. Even worse is a state-of-the-art production plant [for a range of pharmaceutical products] that is ready to go [onstream] but awaits more favorable market conditions."
Hungarian pharmaceutical firms rely on exports $ Millions8
Gedeon Richter Chinoin Egis Biogal Alkaloida
Total sales
Exports
Domestic sales
$195.8
$133.8
$62.0
176.5 139.2 104.4 87.0
119.2 66.6 42.1 66.0
57.3 72.6 62.3 21.0
a Data for 1993; converted at average 1993 rate of $1.00 = 91.93forints.
JANUARY 23,1995 C&EN
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BUSINESS
Privatization in Hungary means both opportunities and pitfalls Economic reconstruction in Central and Eastern Europe invariably means privatization of government enterprises. In Hungary, about 1,800 stateowned or -controlled enterprises will be sold to private ownership. In September, a Parliamentary order formed the State Privatization Agency (SPA) from two state-owned holding companies: the State Property Agency and the State Asset Holding Co. SPA will probably be headed by its temporary director, Ferenc Bartha. Bartha and SPA plan to divide the 1,800 companies into two groups. One would consist of those firms intended for acquisition by large institutional investors with available cash. The other group would consist of companies, probably the smaller ones, more suitable for individual investors with small amounts of cash and/or compensation certificates. The plan may be altered to include a third group of large companies, specifically the state-owned utilities. These include the state oil company (MOD, electrical works (MVM), and a number of small natural gas companies scattered about the country. This third group would also be offered to institutional investors. Small- and medium-sized enterprises present a problem for SPA. Not all of them may be profitable in the future market economy. The un-
And what of the privatization struggle? Arany believes that about 25% of the company's stock will remain with the Hungarian government when privatization is completed. He anticipates that most of the rest may be sold to international firms, but there is no commitment yet from any of them. This scenario may change, however, because Biogal has entered into some favorable licensing agreements with several Western companies. Biogal expects that its profitable operation—despite the problems of converting the economy—will be too attractive to resist. In 1993, Biogal posted a pretax profit of $9.4 million, an increase of about 65% over 1992. This is eloquent testimony to the efforts of the management, but some skeptics believe that profitability will drop sharply in a free market. One reason is the delay by the Parliament in enacting new health care laws that could deeply affect domestic drug producers. 14
JANUARY 23,1995 C&EN
profitable ones would probably disappear. Others would be accumulated, merged, and rebuilt as new companies. Some would survive as they are, although with new business identities. In most cases, the smaller companies will be handed over to the present management, who would be charged with finding buyers. If none were available, the company would be liquidated. A continuing puzzle in the privatization program is the unknown power of "compensation coupons." These are redeemable notes issued by the government to reimburse victims of political, economic, and physical persecution during the Soviet era. The notes have a face value of 1,000 Hungarian forints (about $8.88 at current exchange rates) and are sometimes traded on the Budapest Stock Exchange. Currently, they routinely trade at less than half of face value. A brokers' association in Budapest estimates that about 150 billion forints ($1.33 billion) in compensation coupons have been issued to date, with another 50 billion ($443.8 million) scheduled to be issued by the end of 1995. By the end of September, the government had redeemed about 42 billion forints ($373 million) in coupons, but, according to the brokers, there has been no great rush to trade the coupons on the ex-
Alkaloida Chemical, in Tiszavasvari, northeast of Budapest, is the smallest of the five major Hungarian drugmakers, with about $87 million in 1993 sales. Its origins date back to producing morphine from poppy skins and subsequently to producing morphine derivatives such as codeine. Vilmos Galamb, manager of R&D for the company, believes that "Alkaloida's strength will remain in morphine derivatives, but there is also the generic problem [obtaining wider use of generic drugs]. This would be of great benefit to Alkaloida." The use of generic drugs would permit a more robust competition in the international markets and would ease the firm's immediate problem of survival until privatization is completed. Since 1976, Alkaloida has been producing, with a proprietary process, glyphosphate herbicides for agriculture. The firm intends to expand sales of both
change. The compensation coupons are being accepted by SPA at face value in payment for shares of companies in the privatization program. However, their low convertible value among traders may cause problems in deciding how many shares the coupons will actually purchase. In the privatization program, drug companies remain one of the more attractive segments of Hungarian industry for international investors. Another is the gas and oil industry. Last year, on Aug. 15, the oil and gas fields were opened to exploration and exploitation by firms other than MOL. That company has about 1,000 oil wells and 300 gas wells in addition to three refineries and a 5,400-km pipeline system. The only refinery of modern vintage is the 150,000-barrel-perday complex near Budapest. It provides about 90% of the Hungarian requirement for refined products. Oil and gas reserves are now being recompiled as a modest exploration effort gets under way. Foreign firms polled expect no major discoveries; the peak production of the Hungarian fields has probably passed. If the industrial expansion proceeds as hoped, Hungary will become a bigger energy importer. The current 20day national oil reserve will be increased to 90 days at the end of 1995 by the successors to MOL.
pharmaceuticals and agrochemicals into the international markets. However, Gabriella Fodor, Alkaloida's marketing manager, says, "The principal market will probably be domestic for some time—until things get straightened out in the Central and Eastern European countries." The company's interest in international expansion is emphasized by Alkaloida's 25% ownership of Medimpex Trading Co., which markets products around the world. Currently, great efforts are being made to register and promote the various products in as many countries as possible. Quite a different company is Chinoin Pharmaceutical & Chemical Works of Budapest, the second largest of Hungary's drug firms, with 1993 sales of about $177 million. According to Chinoin's chief executive officer, Miklos Gyorgy, the main "pillar in the [operating] strategy of Chinoin is close cooperation with Elf Sanofi." The large French company
bought 51% of Chinoin's stock in 1993. Another 41% of the stock is held by the Hungarian government, and the rest is owned by employees or retained by the company. Chinoin's director of R&D, Peter Aranyi, says that because of Elf Sanofi's majority ownership, "the Chinoin R&D effort will probably contract by about 10%, but this will be more than offset by input from the parent company." Five years ago, the major markets for Chinoin were in Hungary itself and in Eastern Europe. Today, one-third of its sales are outside these areas, with the r e mainder about evenly split between Hungary and Eastern Europe. Thus, exports have grown considerably, probably because of the association with Elf Sanofi. The company has also seen a shift in its product line. Over the past five years, the portion of income from pharmaceuticals has increased dramatically, with corresponding decreases in veterinary drugs, agrochemicals, and other products. "Chinoin's major products," says Aranyi, "include Selegiline, for the treatment of Parkinson's disease. This has been marketed successfully in Western Europe and is the first East European drug to be registered in the U.S." Most of the preparations marketed in Russia, he adds, seem to be those that combat digestive ailments. Aranyi also notes that "marketing in Russia is very difficult, mostly because of the problems in collecting payments." In the future, Chinoin's R&D effort
Galamb: his firm would gain from generics
Alkaloida Chemical's complex, in liszavasvari, makes pharmaceuticals, agrochemicals.
will be concentrated in respiratory drugs, cardiovascular drugs, and drugs for neurological diseases. Furthermore, veterinary drugs will be phased out, and income from agrochemicals will be reduced to about 20% of the total." Gyorgy notes that, like other drug companies in Hungary, Chinoin believes it is appropriate to speak of an economic "big bang" when describing current Hungarian economics. Several things have happened simultaneously. The government liberalized pharmaceutical imports, especially from the West. At the same time, the previous form of health insurance was closed down. This action resulted in a sharp increase in prices and caused an insurance deficit. Because of the deficit, Hungarian drug prices lagged behind those of other countries for a prolonged period. In addition, the demand for products from former markets such as the U.S.S.R. has severely contracted. Yet, despite all of that, Chinoin posted a profit in 1993. The largest drug company in Hungary is Gedeon Richter (GR) of Budapest, with 1993 sales of about $196 million. Adam Vas, GR's director of research, says, "While the patent system helped the company flourish in the Comecon days, the collapse of the Eastern markets nearly killed the company." However, it has rebounded with amazing vitality. GR now has about 4,600 employees; during 1993, the R&D staff was reduced about 10%. Production of cosmetics, veterinary products, and agrochemicals has ceased, and the company is concentrating strictly on health care pharmaceuticals for hu-
mans. About 8.6% of gross revenue for 1993 was spent on R&D. "A company delegation has recently completed a successful tour of Western European financial centers to raise capital for the privatization effort that is already in progress. The state holding company now controls 87% of GR stock and is planning to sell 36%," says Vas. Before that is done, GR will try to increase its capital to attract more international investors. Present laws require that the state holding company retain 50% of the stock plus one share, but this limitation may be reduced to 25% plus one share. In any event, GR is proving to be an attractive investment, and its privatization is expected to go quickly. GR would prefer to be independent from other companies, so it's not seeking an arrangement like that of Elf Sanofi with Chinoin. Following privatization, however it occurs, the government has made some major financial concessions to attract investors. The tax concessions include dispensing with all corporate taxes for five years and a major reduction for another five years. Vas believes that "the R&D department will have to come up with a lot of new products to keep things moving in the near future." As is evident in the cases of these four companies, the severe limitations on capital in the Central and Eastern European countries and the great use of generic drugs in national health care plans have made it difficult for the drug companies to adjust to free markets. No one doubts that the transition will be made, but success will depend on what happens in the next two or three years. • JANUARY 23,1995 C&EN
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