EUR 850.00 For Business Accounts Only

Morningstar | Lundbeck's CNS Portfolio Supports Narrow Moat, but Generic Competition Imminent; Shares Overvalued

Lundbeck reported another solid quarter, with second-quarter revenue up nearly 10% from last year, and we are maintaining our fair value estimate of DKK 290 per share for the Danish pharmaceutical company. Management narrowed full-year guidance toward the higher end of prior guidance, and our full-year forecast is unchanged at the upper bound of management guidance. Although we project a robust 2018, we expect top-line and bottom-line declines in 2019 due to generic competition before the company's pipeline candidates come into play. Even with the stock price dropping over 10% as of the morning of Aug. 8, the shares remain significantly overvalued; we believe the current valuation is underestimating the impact of generics on revenue and profitability in the next few years.

Onfi for epilepsy saw its first sequential decline in several quarters, and we expect further declines next year after patent loss at the end of this year and the entry of generic competition. We expect the firm's drugs for depression, anxiety, and psychosis to tide the firm over through patent losses in Onfi and Northera (loss of exclusivity beginning in 2021), so we were pleased to see Abilify post 17% growth year over year, Brintellix 29%, and Rexulti 25%. We expect double-digit growth for these key drugs until at least 2021, with Abilify and Rexulti growing at single digits thereafter. The firm has several early-stage therapies in the pipeline for psychotic disorders, Parkinson's, and Alzheimer's, but with the complexity of central nervous system diseases, we continue to believe the pipeline is sparse compared with the forthcoming patent losses. Lu AF35700 for treatment-resistant schizophrenia is in pivotal trials, and while it does not play a significant role in our valuation yet, positive data from the readout (expected in the fourth quarter) would reinforce our narrow moat rating, which is based on the firm's expertise and intellectual property related to CNS therapies.