Lundbeck 1Q

Lundbeck's Q1 Results In-Line With Light 2015 Guidance, But New CEO Could Bring Cost Discipline

Karen Andersen, CFA 08/05/2015

Lundbeck’s solid performance in the U.S. was offset by generic competition in Europe and heavy product launch costs, resulting in first-quarter results in line with our expectations. However, the announcement of Kare Schultz as the new CEO effective mid-May buoys the outlook for the firm. Schultz brings an excellent track record as COO for Novo Nordisk, a company with exemplary operational performance and commitment to generating shareholder value. We plan to maintain our fair value estimate of DKK 120, but will closely monitor the strategy and execution as the new CEO steps up to the helm. Our narrow moat and negative trend ratings remain intact.

Core revenue dropped slightly from last year’s first-quarter results to DKK 3.56 billion from DDK 3.59 billion. Cipralex revenue, once a key driver for the firm, experienced a 47% decline in Europe, a trend expected to endure as generic drugs overtake the marketplace. Lundbeck continues with its strategy to shake dependence on the no-growth European market by shifting focus to the U.S., where the firm’s neurology portfolio sales showed strong performance this quarter. Europe accounted for 28% of first-quarter revenue while the U.S. share was 39%, compared to 46% and 21%, respectively, a year ago.

The expansion of drug launches in 2015 will increase portfolio diversification, but high operating costs are likely to hinder any new product revenue from positively impacting the bottom line. The firm reiterated forecasted core EBIT at break-even levels for the year, highlighting a challenging road ahead for Schultz. SG&A was 47% of sales for the quarter, which is in-line with previous guidance citing anticipated increased launch and amortization costs but still uniquely high compared to industry peers. We believe the firm will need to reevaluate its cost structure in order to reap the full benefits of its efforts to diversify across products and geographies.

Fair Value Estimate 

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Karen Andersen, CFA  Karen Andersen, CFA, is a senior stock analyst with Morningstar.

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