Danish pharmaceutical company H. Lundbeck A/S (OCSE:LUN, Financial) is searching for ways to renew investor optimism. But with the company seemingly priced out of some badly needed acquisitions, it’s going to have to scramble to avoid further erosion in its share price.
On the heels of disappointing first-quarter results, Lundbeck shares dropped below $42 on May 8. That means in the past 10 months, the company has lost more than 40% of its market value. The shares declined 3.6% on Feb. 5 alone when the drugmaker said it would pay 30% to 60% of net profit in dividends instead of 60% to 80%.
The current share price is at the median target of 16 analysts, according to CNN Money. More than half the group has Lundbeck as a hold, with one analyst rating the company a buy and four a sell.
Over the past several years, Lundbeck has aggressively cut costs and made a few small licensing deals to boost profitability. In 2018, the company rode launches of existing products in new markets and price increases to generate 8% growth in revenue (local currencies) and 48% boost in earnings per share.
But that strategy appears to have run its course. It’s unlikely that Lundbeck can continue to count on hefty drug price increases in the U.S.—its biggest market, according to Lisa Urquhart's article on the intelligence gathering website Evaluate. "Additionally, the previous management's strategy of cutting costs to return the group to profitability, and its focus on earlier and therefore cheaper licensing deals, has resulted in few upcoming catalysts that could move the stock before 2020,” Urquhart wrote. Moreover, several of the company’s most promising drugs have fizzled in clinical trials.
To help bulk up a generic-challenged product line, Lundbeck recently paid $250 million to acquire privately held Abide Therapeutics, which is based in San Diego. According to President and CEO Deborah Dunsire, the company hopes Abide’s research and development expertise in brain diseases will yield several “transformative” drugs.
Abide is a good start, but Lundbeck needs more firepower. The concern is the company has only limited funds to snare some bigger fish. According to Urquhart, Lundbeck had only about $5 billion available for acquisitions. It doesn’t appear that kind of cash is going to get the company any game changers.
Urquhart also said Sage Therapeutics (SAGE, Financial) had been lined up as a potential takeover target. But since the stock has been on a run, with a market cap exceeding $8.5 billion, it’s become far too pricey for Lundbeck.
Other targets, according to sell-side analysts, range from Denali Therapeutics (DNLI, Financial), with a market cap of $2.25 billion, to Acadia Pharma (ACAD, Financial), which is worth nearly $3.8 billion.
Lundbeck needs to do something to return the smile to shareholders’ faces, but it doesn’t appear to have many options. At this point, it appears investors ought to take the advice of the investment community and sit on the sidelines until the company gives them some reason to boost their optimism.
Disclosure: The author hold no positions in any of the stocks mentioned in this article.
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