EUR 850.00 For Business Accounts Only

Morningstar | Lundbeck's Onfi Sales Deteriorate With Generic Entry but 4Q Results Within Expectations

Narrow-moat Lundbeck reported fourth quarter results mostly in line with our expectations, including about DKK 4.1 billion in revenue contributing to full-year revenue of DKK 18.1 billion (up 8% in local currencies from last year). After making a few minor adjustments, we don't expect a material change to our fair value estimate of DKK 290 per share. U.S.-only Onfi for epilepsy lost orphan drug exclusivity in October 2018, resulting in about a 40% decline in fourth-quarter sales. We expect this to have a significant impact on 2019, projecting a 70% decline in Onfi sales due to aggressive generic pricing. Despite strength from Rexulti and other key products, we expect about 9% overall decline in revenue for 2019. We believe the company will be able to keep operating expenditures roughly flat in absolute terms despite the decline in revenue, resulting in 2019 operating income of DKK 4.3 billion, in line with management expectations.

Lundbeck saw a few positive developments in the fourth quarter, including the temporary issue of patient backlog with Northera resolved, with sales rebounding to double digit growth after an 8% decline in the third quarter. Further, Rexulti trials in bipolar mania (Phase 3), agitation in Alzheimer's disease (Phase 3), and post-traumatic stress disorder (progressed to Phase 2) are moving along, and we expect the firm to read out bipolar mania data in the first quarter of 2019 and file for regulatory approval later this year. Finally, after several years of declines in Europe, the company's key products have begun offsetting declines from mature products, and we expect this to continue with the recently begun rollout of Rexulti in Europe.

Lastly, the firm announced an update to its dividend payout policy, bringing target payout down to 30% to 60% of net profits, compared with its previous target of 60% to 80%. We think this is mostly a lever in the event that the firm chooses to allocate capital to a promising acquisition target, and it doesn't have a material impact on valuation. However, with a sparse pipeline and upcoming patent losses, we believe that Lundbeck should take advantage of any promising central nervous system targets.