December 19, 2012 4:34 pm

H Lundbeck – future imperfect

Danish drugmaker discovers perils of giving guidance too far out

There are profit warnings, and then there are profit warnings. The one from Danish pharmaceuticals group H Lundbeck on Wednesday fell resoundingly into the second category. Its shares tumbled 16 per cent in response (exacerbated a little by a 30 per cent free float). That is a justified reaction to some materially relevant downward revisions. But like many profit warnings, it should not have come entirely out of the blue. The steep patent cliff problems Lundbeck faces – two-thirds of its 2011 revenue is at risk by 2016 – coupled with the restructuring of its European operations in June and difficult trading conditions had left its existing guidance exposed.

Lundbeck’s announcement raises – not for the first time – the perils of giving guidance too far into the future. In late 2010, it said it would deliver “minimum” annual revenue and earnings before interest and tax of DKr14bn and DKr2bn, respectively, in the period from 2012 to 2014. Now it says that ebit for 2014 will be DKr500m to DKr1bn because of high investment in products after they have been approved, and spending on research and development. Costs associated with two of its big new products – Selincro, a drug for treating alcohol dependency, and an Alzheimer’s drug in development – were not part of the equation in its 2010 guidance.

The profit warning is a reminder of how disappointing Lundbeck has been since listing in 1999. It is 70 per cent owned by the Lundbeck Foundation, so has a protective shareholder behind which it can sort out its patent issues. Its shares trade at a third of their all-time high, and are nearly 40 per cent down from their 2012 high. Its forward price-to-earnings multiple is 10, compared with 15 for a speciality group such as Shire Pharmaceuticals. That looks right: there is ample justification for a discount at Lundbeck until there is visibility on its future earnings.

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