Investeringskommentar, Karen Andersen, CFA, 19/08/2015
Lundbeck's new CEO, Kare Schultz, wasted little time flexing his operational expertise with the announcement of several cost-reduction initiatives. Management
updated its modest full-year guidance to reflect a promising uptick in sales, driven by Onfi (epilepsy) and Xenazine (Huntington's disease) in the United States,
increasing estimates for core revenue to DKK 14 billion from DKK 13.2 billion-13.7 billion and core EBIT to DKK 500 million from break-even levels. We plan on adjusting our model forecasts, which may affect our current DKK 120 fair value estimate. Schultz has laid an aggressive blueprint for Lundbeck's future, and evidence of successful implementation will buoy our outlook on the firm's competitive advantage. In the meantime, we reaffirm our narrow moat rating as the firm attempts to make a turnaround amid the harsh generic erosion on its former
lead drug, Cipralex.
Generic competition to Xenazine and Onfi weighed on product sales, and recent sales traction with Abilify Maintena (schizophrenia) and Brintellix (depression) in key markets only partly countered this headwind. As a result, Lundbeck's core revenue declined 5% in local currencies, and currency tailwinds led to 5.2% growth to DKK 3.63 billion as reported.
Costs remain a major concern for Lundbeck. Selling, general, and administrative expense increased to 50% of total revenue, compared with 43% in 2014. Management announced its intention to restructure the company and eventually lay off 1,000 employees, more than 15% of the current workforce. We expect volatile profitability over the next two years as cost-reduction strategies play out, but we believe these initiatives will help stabilize earnings in the long term and revamp Lundbeck as a more nimble operation.
Bulls Say
- Lundbeck has nearly a dozen recently approved, filed, or Phase III drugs that could reach the market in the near-term.
- Though it has reached the end of its patent life in the U.S. and Europe, the firm's lead drug, Lexapro, has recently launched in Japan and China, both of which offer a sizable market opportunity.
- Lundbeck has a strong balance sheet with a net cash position and significant capacity to make additional acquisitions.
Bears Say
- Lundbeck has shown little concern about its bottom line, and its SG&A spending is the highest in the industry for a company of its size.
- The launch of numerous generic treatment options has weighed on sales of branded CNS products.
- Lundbeck is overly reliant on Europe, a region with limited growth potential.
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With entrenchments in the declining CNS space and the no-growth European market, Lundbeck is in a challenging position. In order to grow, the firm likely needs to move outside of its areas of expertise and into new regions and therapeutic areas with better growth prospects and less generic competition, but the firm has been slow to adjust its strategy. Our concerns with the CNS space surround products’ marketability, rather than approvability. The firm has done an admirable job progressing its candidates and gaining regulatory approval for many new products, but we are concerned about the commercial potential of the new treatments. Lundbeck continues to focus on the overly genericized areas of the CNS market, specifically antidepressants and antipsychotics. These markets are seeing increased generic utilization every year, and cost-conscious payers will do everything in their power to encourage patients to seek cheap generic treatment
options before paying for branded products with similar efficacy. - See more at: http://eurc.morningstar.com/dk/news/0/article.aspx?lang=da-DK&NoPageCache=1&_=44386857#sthash.YMXGh8Cp.dpuf
With entrenchments in the declining CNS space and the no-growth European market, Lundbeck is in a challenging position. In order to grow, the firm likely needs to move outside of its areas of expertise and into new regions and therapeutic areas with better growth prospects and less generic competition, but the firm has been slow to adjust its strategy. Our concerns with the CNS space surround products’ marketability, rather than approvability. The firm has done an admirable job progressing its candidates and gaining regulatory approval for many new products, but we are concerned about the commercial potential of the new treatments. Lundbeck continues to focus on the overly genericized areas of the CNS market, specifically antidepressants and antipsychotics. These markets are seeing increased generic utilization every year, and cost-conscious payers will do everything in their power to encourage patients to seek cheap generic treatment
options before paying for branded products with similar efficacy. - See more at: http://eurc.morningstar.com/dk/news/0/article.aspx?lang=da-DK&NoPageCache=1&_=44386857#sthash.YMXGh8Cp.dpuf
With entrenchments in the declining CNS space and the no-growth European market, Lundbeck is in a challenging position. In order to grow, the firm likely needs to move outside of its areas of expertise and into new regions and therapeutic areas with better growth prospects and less generic competition, but the firm has been slow to adjust its strategy. Our concerns with the CNS space surround products’ marketability, rather than approvability. The firm has done an admirable job progressing its candidates and gaining regulatory approval for many new products, but we are concerned about the commercial potential of the new treatments. Lundbeck continues to focus on the overly genericized areas of the CNS market, specifically antidepressants and antipsychotics. These markets are seeing increased generic utilization every year, and cost-conscious payers will do everything in their power to encourage patients to seek cheap generic treatment
options before paying for branded products with similar efficacy. - See more at: http://eurc.morningstar.com/dk/news/0/article.aspx?lang=da-DK&NoPageCache=1&_=44386857#sthash.YMXGh8Cp.dpuf
