Investeringskommentar, Kelsey Tsai, Eq. Analyst, 25 August 2016
After a period of sliding profitability due to the company’s entrenchments in the declining central nervous system space and no-growth European market, Lundbeck is repositioning itself for future growth. The company was slow to derisk its portfolio against its European exposure, where drug reimbursement pressure and key patent losses on Cipralex/Lexapro (depression/anxiety) and Ebixa (Alzheimer’s disease) eroded its performance. The company has since shifted into the higher-margin U.S. drug market, which now accounts for over 50% of sales. We still view Lundbeck’s CNS focus with trepidation, as the space faces steep generic competition and increasing pressure from payers. However, a more diversified portfolio and pipeline, along with promising areas of product differentiation, give us confidence in management’s ability to reorient the ship.
Our concern with the CNS space lies with the products’ marketability, rather than approvability. Lundbeck has done an admirable job progressing candidates and gaining regulatory approval, but we worry about the commercial potential of the new treatments. We believe the antidepressant and antipsychotic markets face increased generic utilization, but the firm has recently started to build out its Alzheimer’s franchise, in addition to making strides to differentiate its products. Lundbeck's phase 3 candidate Idalopirdine (selective 5-HT6 receptor antagonist for Alzheimer’s) seems highly promising, although market approval is equally uncertain.
Kare Schultz took over as CEO in 2015, introducing an aggressive strategy to reduce costs and accelerate the firm’s return to an upward growth trajectory. Given the company's subpar operational efficiency in the past, we think there is a large opportunity to expand margins despite the increased number of key products. We believe Lundbeck's current portfolio and modest expectations for revenue growth could return the firm back to pre-patent-loss sales by 2018. Despite small steps to enter the Latin American and Chinese markets, emerging markets still make up a small portion of sales.
Bulls Say
- Lundbeck's cost-reduction program has a large opportunity to significantly expand margins.
- Though it has reached the end of its patent life in the U.S. and Europe, the firm's lead drug, Cipralex/ Lexapro, has recently launched in Japan and China, both of which offer a sizable market opportunity.
- Lundbeck is actively pursuing new indications for its key products, which should augment their life cycle management, if successful.
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.
