Ipsen : Feedback from the credit lunch meeting

We met on Friday Ipsen's CFO Aymeric Le Chatelier at a credit lunch in Paris. The group has solid operating and financial profiles (shadow rating estimated at BBB+) but we recapped on the potential credit topics: strong focus on certain drugs (Somatuline), risks linked to expansion towards new franchises chiefly via debt1efinanced acquisitions. - >Strong focus on Somatuline but generic risk remains limited - Somatuline has driven the recent earnings growth. It now represents 37% of sales and probably well over half of EBITDA. This drug is indicated for acromegaly and neuroendocrine tumours and is particularly profitable as it has been developed in-house (no royalties/fees to partners) and marketed by Ipsen directly in the US (much higher prices vs. Europe). Somatuline's share is likely to grow further thanks to strong momentum in the US: it is snatching market share from Sandostatin (Novartis) as it is more efficient and more convenient for patients.The generic risk, which could in theory lead to a plunge in sales, appears to be quite under control. In the US, the drug benefits from exclusivity out to 2021 in neuroendocrine tumours, by far its leading indication, and is also protected by a patent out to March 2020. Entry barriers for a generic drug maker are high (complex hybrid chemical and biological formulation, the need for an entire factory and not just a production line). Prices could drop sooner if a generic version of Sandostatin arrives, but one year after its patent expired, no generic version has yet been developed. Cautious and controlled diversification strategy - Ipsen is seeking to diversify its product range as it is illustrated by the recent acquisition of Onivyde and Cabometyx. These drugs each account for a mere 3% of sales, but their contribution is likely to grow quite significantly. The group no longer has fundamental research and relies primarily on partnerships to develop the pipeline. The group plans to dedicate € 1bn for acquisitions in oncology, neuroscience and rare diseases. We continue to believe Ipsen will remain cautious in its strategic choices: it is targeting maximum net leverage of 2x and is sticking to its historic franchises, namely Decapeptyl (18% of sales), Dysport (17%) and consumer healthcare (17%), which all offer limited growth potential but a recurring performance.A likely bond issue to finance acquisitions - The group is mainly financed through bank facilities and commercial paper, which are extremely cheap and very flexible, in line with Ipsen's cash generation profile. A fresh bond issue is in the offing to refinance a future acquisition. The group also seems to be open to a rating despite its operating profile being hurt by some negative factors (limited size vs. sector giants and product concentration). Based on a BBB+/BBB rating, the cost of a seven1eyear issue could range between 1.2% (with a rating) and 1.5% (without a rating) on our estimates.We are maintaining our Buy recommendation (pick-up on non1erated papers with equivalent profile).