Analyst Note, David Krempa, 24/11/2014
We do not plan any changes to Lundbeck’s fair value estimate or moat rating on the news that CEO Ulf Wiinberg has resigned. While it is disturbing to see the CEO failing to disclose ownership in a company Lundbeck was in investing in, Lundbeck’s investment in that business was small (DKK 19 million/$3.2 million), and we do not believe it has any impact on Lundbeck’s intrinsic value.
We have been unimpressed with Wiinberg’s tenure at Lundbeck, so a new CEO could be a positive development for shareholders. Lundbeck shares are largely unchanged from where they traded when Wiinberg was appointed CEO in 2008 (up 8% versus 210% for the iShares Pharmaceutical Index). While we think his intention to diversify the firm’s revenue away from pending patent losses of Cipralex and Ebixa was the correct one, we were not encouraged by the strategy he pursued to accomplish it. The firm has purchased numerous precommercial stage products, which has provided very little new revenue, and Lundbeck has failed to cut costs to the degree we have seen from rivals facing similarly large patent cliffs. With these precommercial products providing the potential hope for near-term approvals and drug launches, Lundbeck has maintained a large commercial infrastructure in hopes that it will eventually be utilized. This has led to an industry high and excessive SG&A ratio of 45% of sales. A new CEO could leverage Lundbeck’s clean balance sheet and historically low interest rates to pursue acquisitions of products that are already on the market that can immediately add to revenue and allow Lundbeck to leverage its sales force and bring its cost structure back in line with the industry.
Læs den fulde analyse af Lundbeck her.
Bull and Bear scenarier
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
-Escitalopram (Lexapro/Cipralex), which makes up 40% of the firm's sales and an even greater portion of profit, now faces generic competition in the U.S. and in Europe in 2014.
- The launch of numerous generic treatment options has weighed on sales of branded CNS products.
- Over half of the firm's revenue comes from Europe, a region with limited growth potential.
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