Report from Hungary

Analysts have recently downgraded the short- to medium-term outlook of the $3.5-billion pharmaceuticals market in Hungary because of slow domestic economic growth, high unemployment, and, above all, government plans for a 30% cut in state-subsidized drug reimbursements. Prospects for the country as a center for pharmaceutical research and production, however, remain bright.

PHOTO CREDIT, STUART WESTMORLAND/GETTY IMAGES

As Eastern Europe's most advanced pharmaceuticals industry, the Hungarian market has been able to take advantage of relatively high economic growth rates and a strong demand for medicines throughout most of the region, particularly in Russia, which is enjoying the benefits of high oil prices. Hungary began manufacturing drugs more than 100 years ago, and by the time World War II began, the country had created a large drug-manufacturing capacity. During 40 years of Communist rule, leading up to the late 1980s, the country formed a nucleus of pharmaceutical production for the entire Comecon trade bloc in Eastern Europe. (Comecon stood for the Council for Mutual Economic Assistance and existed from 1949 to 1991.)

Hungary's infrastructure and science base has since attracted multinational drug manufacturers, which have been investing heavily in the expansion of the country's production facilities, particularly in the areas of active pharmaceutical ingredients (APIs) and generic drugs. Among the global players with production facilities in the country are Roche, AstraZeneca, GlaxoSmithKline, Pfizer, Teva, and Novartis.

Around 75% of the turnover of the industry stems from exports, much of it from generic products. In 2010, total pharmaceutical exports amounted to €2.9 billion ($4.2 billion), that's a 250% increase from 2005. During the same five-year period, imports rose 188% percent to €2.6 billion ($3.7 billion).

Today, the sector is shifting more toward biopharmaceuticals and other higher value products, particularly follow-on biologics. The strategic change, and resulting innovative products, should help Hungary to be less reliant on Eastern European sales by enabling it to make inroads into the wealthier Western European market.

Gedeon Richter, which is by far the largest Hungarian-owned pharmaceuticals company and the biggest domestically-owned drug manufacturer in Eastern Europe, has been setting the pace for the sector overall. The company has made acquisitions in Switzerland and Germany, with a focus on gynecology products and oral contraceptives.

Gideon Richter is also building a follow-on biologics plant in Debrecen in eastern Hungary with the aim of marketing biosimilars in Europe in two years. In late 2010, the company entered into a collaboration agreement with Mochida of Japan on the development and marketing of Richter's follow-on biologics in Japan.

Approximately 90% of Richter's €992 million ($1.4 billion) sales in 2010 came from abroad, mainly from Russia (22%), Poland, and Romania. The company's approach for remaining competitive in the long term is to maintain a portfolio of high-added value products.

"We are able to adopt this new strategy because we have the freedom of being an independent company without being owned by an international pharmaceutical company," says Zouzsa Beke, Richter's communications director. "We are also doing it without the backing of a strong government industrial policy like that in other EU countries. There are R&D incentives from the government but they are not significant, and capital allowances only apply to large investments."

Some of the Hungarian subsidiaries of international companies, such as Egis, which is majority-owned by Servier of France, are also planning to enter the follow-on biologics sector, although not necessarily as producers initially.

Hungary's National Economy Minister Gyorgy Matolcsy stated last month that the government wants the country to be one of the top 10 leading biotechnology centers in the European Union by 2020–2025.

However, small biopharmaceutical companies, which make up most of the fledgling biotech sector outside the multinational firms, complain about lack of funds from Hungarian financiers.

"The few venture capitalists are not interested in biotechnology because they don't understand it, and the banks are even more reluctant to invest in what they see as high risk innovations," explains Zsolt Lisziewicz, chief operating officer of Genetic Immunity, Budapest, a biopharmaceuticals start-up in nanomedicine immunotherapies. "We would like to build a plant in Hungary once we have a commercial product, but we may have to do a NASDAQ floatation to get the funds."

Hungary, which is outside the euro zone, is still gripped by a credit squeeze after having to be rescued by the International Monetary Fund (IMF) four years ago. With easier access to funds, its pharmaceuticals sector might be performing even better in the European markets.

Sean Milmo is a freelance writer based in Essex, UK.