For a small European country, Denmark punches well above its weight in the pharma world thanks to the ability of companies based there to specialise in niche areas that face little real competition from the rest of the industry. In addition to specialisation, the Danish industry has proved to be remarkably resilient in the face of the lost patent protection on key products, which is probably why Lundbeck (DK:LUN) has started to attract interest as it looks to new products to offset a major patent blow. If the company succeeds in turning around its declining revenues - and the odds so far this year have moved appreciably in its favour - then it not only offers a solid recovery opportunity, but will also prove to be an interesting case study in how to cope with the onset of generic competition.
- Pipeline starting to deliver
- CNS deal with Otsuka
- Targeting specialist niche
- Net cash
- Sales depressed by major patent lapse
- Currency risk
It was the loss of patent protection for best-selling anti-depressant product Lexapro, combined with a lack of newsflow from the company's drug development pipeline, that caused Lundbeck's shares to fall to a 10-year low at the end of 2012. The advent of generic competition to Lexapro means US sales, which stood at $2.5bn in 2011 and $575m last year, look set to slip away almost entirely by 2014. Therefore, the productivity of Lundbeck's product pipeline is the key to turning sentiment around, and signs are that new products are coming through to provide both a direct replacement for Lexapro, as well as targeting new markets with new types of medicines.
The most significant pipeline development is a slew of recent late-stage data for new anti-depressant Brintellix, which is the third generation of anti-depressants. Lundbeck has been bolstering its case for the drug with positive results from several late-stage trials after the US regulator, the Food & Drug Administration (FDA), accepted the product as a new drug candidate at the end of 2012. The FDA must review and will then either approve, or reject, the drug by October. If approved, the drug will go a long way to filling the hole left by Lexapro, with analysts at Deutsche Bank predicting revenues of $1.5bn by 2017.
The company already has two successful approvals in the bag so far this year. There is schizophrenia medicine Abilify Maintena, in partnership with Otsuka, where sales of $800m are forecast by 2017. And alcohol addiction treatment Selincro also gained approval in Europe, although it is difficult to predict how large the addressable market will be. But Deutsche put a value of $500m on 2017 sales and everything will help fill the Lexapro gap.
LUNDBECK | ||||
|---|---|---|---|---|
| ORD PRICE: | 111 | MARKET VALUE: | DKK 21.8bn | |
| TOUCH: | DK110-112 | 12M HIGH: | DKK129 | LOW:DKK78 |
| DIVIDEND YIELD: | 1.3% | PE RATIO: | 26 | |
| NET ASSET VALUE: | DKK71 | NET CASH: | DKK2.03bn | |
| Year to 31 Dec | Turnover (DKKBN) | Pre-tax profit (DKKBN) | Earnings per share (DKK) | Dividend per share (DKK) |
|---|---|---|---|---|
| 2010 | 14.8 | 3.29 | 12.6 | 3.77 |
| 2011 | 16.0 | 3.30 | 11.6 | 3.49 |
| 2012 | 14.8 | 1.58 | 5.65 | 2.00 |
| 2013* | 15.0 | 2.17 | 7.75 | 2.71 |
| 2014* | 14.5 | 1.17 | 4.21 | 1.47 |
| % change | -3 | -46 | -46 | -46 |
Normal market size: na Matched bargain trading Beta:0.58 *Deutsche Bank forecasts £1=DKK8.82 | ||||
Lundbeck's partnership with Japanese company Otsuka has proved to be particularly fruitful in the specialist central nervous system (CNS) niche. After recent first-quarter results, the two companies signed a $825m deal, with Lundbeck receiving $150m upfront, to co-develop an interesting new Alzheimer's drug Lu AE58054, with both companies sharing the cost of Phase III trials. Alzheimer's is hard to treat and regulators have lowered the bar for new products in order to encourage drug development so Lundbeck has a slightly better chance of success. Also by sticking with CNS, it has the advantage of producing products that most major pharma companies have given up trying to develop or have reduced their focus on. The development programme with Otsuka is fully funded and Lundbeck has the cushion of a net cash position of DKK2.03bn, or about £230m.
The bear case for the shares hinges on how well the company manages the decline of Lexapro over the next 12 months with its timing of new products. Earnings are expected to trough next year followed by a return to growth in 2015 as products receiving regulatory approval this year enter its marketing network and gain sales traction. That is a test of management's competence, but so far it has achieved all that was promised to the market. Access to the shares should be relatively easy through online trading platforms but there is a risk to capital from currency fluctuations which has to be factored into any investment decision.
