Investeringskommentar, Karen Andersen, Strategist, 11/02/2016
While Lundbeck’s 2015 profitability remained in the red thanks to strong generic erosion of Alzheimer's drug Ebixa and depression drug Cipralex/Lexapro sales, the company surpassed its meager expectations for the year. An aggressive cost-reduction strategy under the leadership of new CEO Kare Schultz, coupled with a strong U.S. dollar, contributed to Lundbeck’s surprising performance. Management expects to reach profitability in 2016, although we remain concerned about the amount of product revenue exposed to generic threats. We plan on raising our $145 fair value estimate to account for higher growth in the firm’s key products, which contribute approximately 32% of current revenue. However, we still see shares as overvalued at recent prices. We see no change to our narrow economic moat and negative trend ratings, as the effect of patent losses and a highly competitive CNS market are likely to weigh on Lundbeck’s pricing power and returns on invested capital.
Total revenue for the year was stagnant compared with 2014 on a constant-currency basis, while the strong U.S. dollar pushed reported revenue growth to 8%. U.S. sales drove Lundbeck’s performance, partially offset by heavy generic declines in European and international markets. Solid uptake of Abilify Maintena, Northera, Brintellix and newly launched Rexulti adds promise to the firm’s turnaround story. The company's restructuring program--with the aim of cutting operational costs by DKK 3 billion by 2017--is ahead of schedule. We believe productivity and margin gains will be crucial in order for Lundbeck to successfully move past the off-patent losses of key products over the next few years. The contraction of low-margin products, namely Azilect (Parkinson’s disease) and Xenazine (Huntington’s disease), owing to generic competition, should support margin expansion as higher-margin pipeline products enter the market.
Bulls Say
- Lundbeck has a number of 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 in the past, and its selling, general, and administrative 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's product portfolio focuses on treatments for depression and other mental diseases, an area where distinction is difficult.
