Saturday, April 4, 2020

A Current AIM International Equity Holding: H. Lundbeck A/S (HLUYY, $28.96): “Danish Pharma in a Dangerous World”

H. Lundbeck A/S (HLUYY, $28.96): “Danish Pharma in a Dangerous World”
Vince Park, Applied Investment Management (AIM) Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
H. Lundbeck A/S is an international pharmaceuticals company focused on the research, development, and marketing of drugs specific for the treatment of psychiatric and neurological disorders. The firm operates in one segment, pharmaceuticals, and offers treatments in depression, schizophrenia, Alzheimer’s, Parkinson’s, and other brain disease areas. Lundbeck was founded in 1915 and is headquartered in Copenhagen, Denmark.
• Since the addition of Lundbeck to the AIM International Equity Fund in November 2019, the stock has slightly underperformed most benchmarks, including the iShares MSCI ACWI ex U.S. ETF and relevant pharmaceutical indices, despite hitting its price target of $43.95 early February 2020 ahead of the mass selloff catalyzed by the Covid-19 pandemic. The stock was purchased at $34.91 and has a 52-week price range of $26.79 to 46.05 and is down 22.4% YTD.
• Unfortunately, while the company beat both quarterly consensus earnings and revenue estimates by a significant amount (actual EPS $0.17 versus $0.05 estimate and actual sales $649 mil vs $628 mil est.), the earnings release coincided with widespread loss in confidence in equity markets, overwhelming the earnings beat with fears of global recession amid the threat of the nascent coronavirus.
• Consistent with analyst expectations, Lundbeck received FDA approval in February 2020 for eptinezumab, a first-of-its-kind breakthrough migraine treatment with a bioavailability of 100%. This is expected to a major driver for the company––yet markets reacted unfavorably as this information was widely expected and already priced in.
• The firm’s annual report for FY 2019 revealed a YoY sales decline of 6%, which was expected due to loss of exclusivity of the firm’s lead product Onfi, while the firm’s four strategic brands grew 28%. Meanwhile, the firm had a decrease in operating income of 19% and shrinking operating margin from nearly 30% in 2018 to 21.2% in 2019.
• Management expects revenue growth of 2-6% throughout 2020.
Key points
Since the stock’s addition to the AIM International Equity Fund, H. Lundbeck has largely nailed two of its key investment drivers: (1) approval of eptinezumab, its proprietary migraine treatment drug, and (2) expansion of Trintellix, its major depression disorder treatment drug. However, despite these hits, the stock has underperformed major indices across a variety of time horizons: its three-month relative return versus the ACWI ex-U.S. ETF is a meager -1.08% while its one-year relative performance is -17.28%.
This is likely to be attributable to the drag on growth by products inundated by the loss of exclusivity and generics competition. While Lundbeck’s four strategic brands experienced a combined growth of 28% from FY18 to FY19, the sales of four out of five of firm’s remaining segments are dwindling, with Onfi leading the pack at -69% YoY revenue growth. Overall, firm aggregate revenues are down 6% on the year. With only two phase III pharmaceutical products remaining in the firm’s pipeline, regulatory approval and clinical trial success will be increasingly important as generics continue to eat away at revenues and shelf space. However, Lundbeck expects its most recently approved drug, eptinezumab to emerge quickly as a new strategic brand, given it is the first of its kind for the treatment of migraines and its 100% bioavailability––overall, management expects sales to increase between 2 and 6% for FY20.
While the prospect of Lundbeck’s newest approved drug lifting firm revenues is promising, 2020 certainly presents significant challenges unique to the company and the pharmaceutical industry. As global efforts mobilize to combat Covid-19, much of regulatory focus, pharmaceutical development, and precious healthcare resources will be directed toward developing a vaccine and a treatment for the novel coronavirus. Already, just a few weeks beyond the World Health Organization’s official characterization of the disease as a pandemic, nearly 40 pharmaceutical companies––small and large, across a variety of disease areas and geographies––as of the end of Q1 2020 have reported disruptions or delays to clinical trials, a list that will continue to grow as developers and regulators direct attention to the insidious coronavirus disease. While Lundbeck has yet to report any obstructions to clinical trials or supply chains, the firm is sure to take a hit as Denmark, where the company’s headquarters are located, continues practice social distancing with the rest of Europe and much of the world.
What has the stock done lately?
For the month of March 2020, the stock is down 13.36% and is down 22.4% in the YTD. Both figures are lower than that of the iShares MSCI ACWI ex U.S. ETF, the Russell 2000, and relevant pharmaceutical benchmarks.
Past Year Performance
In the past year, the stock is down 34.3% while the iShares MSCI ACWI ex U.S. ETF is down 19.7%
HLUYY Past Year Performance

Source: FactSet
My Takeaway
While the investment thesis for H. Lundbeck was certainly strong and accurate, it is now in question whether the investment drivers will continue to advance sustainable growth, especially considering the context of the Covid-19 pandemic. However, given the price inelasticity of pharmaceutical drugs, it is unlikely that the coronavirus will detract significantly from the firm’s proprietary strategic brands, which contribute a majority of the firm’s revenues. Moreover, uptake of eptinezumab will continue to accelerate throughout the United States and other domiciles in which the product is current in clinical trials. Given these developments and factors, the recommendation for HLUYY is Hold.

HLUYY Past Month (March) Performance

Source: FactSet