Lundbeck's Late Stage Pipeline Keeps Looking Thinner

Lundbeck (HLUKY.PK) yesterday announced yet another setback to its late-stage pipeline, with the news that it and partner Solvay (SVYSY.PK) would be discontinuing development of anti-psychotic drug bifeprunox. While the news itself was not a massive surprise following an earlier failure of the drug as a treatment for acute schizophrenia, what it does do is leave the Danish company with fewer and fewer options to help it overcome the yawning revenue chasm that the patent expiry of its top selling drug, Cipralex, will cause in 2012.

The news comes after the group saw its stock punished last month when it announced that there would be a big delay for its phase III depression treatment, LU AA21004. Shares fell by 17% on that occasion as the market digested news that the drug, the only pipeline candidate that analysts had assigned any value to, could be delayed by 18 to 24 months, pushing the launch date out as far as 2013. This led some to speculate that the LU AA21004 was effectively finished (Lundbeck disappointment highlights absence of value , June 8, 2009).

Lack of value

Yesterday, the share price reaction was much more muted, down 3% at €101.75, indicating the lack of value that analysts had prescribed to the drug; a lack of interest which unfortunately for Lundbeck carries through to the rest of its late-stage pipeline. Of the increasingly limited options it has to help it replace an estimated 78% in lost revenues from patent expiries over the next five years, according to EvaluatePharma, Lundbeck only has desmoteplase, which has itself failed in a phase III stroke trial, nalmefene, an alcohol dependency drug and IV carbamazepine for epilepsy.

Lundbeck has also notched up an impressive number of suspended or abandoned products over the last five years with three products abandoned in phase III including Flurizan, which was discontinued only six weeks after the group paid $100m to in-license it from Myriad Genetics (MYGN) (Lundbeck punished for expensive gamble , June 30, 2008). A further two products have either been suspended or abandoned in phase II. The number is perhaps a reflection on the fact that the group predominantly operates in the notoriously difficult CNS space, which is highly risky.

Medium term growth

What has been a saving grace is that in February Lundbeck took the sensible decision to de-risk its medium term earnings with the acquisition of US company Ovation for $900m, a price tag dependent on the approval of Sabril, a treatment for refractory complex partial seizures and infantile spasms (Lundbeck gets its own Ovation from the market , February 9, 2009).

By adding Ovation, which had 16 marketed products and a 68 person US sales force Lunbeck went a some way to putting a sticky plaster over the gaping wound in revenues that will be left following the patent expiry of Cipralex and Ebixa in 2012. Between them the two drugs accounted for almost 60% of sales last year.

Acquisitions needed

There is no doubt that Ovation was a sensible deal and one that is set to be earnings enhancing by 2010, helping the company in the medium term, but with its late-stage pipeline increasingly suffering set backs and the contribution from Ovation nowhere near the amount needed to offset the longer term loss of Lexapro, Lundbeck needs to look at more acquisitions.

Such a move will become even more pertinent in the next year or so because the crown jewels that were behind Lundbeck’s purchase, Sabril, and Huntington’s chorea treatment, Xenazine, expire in 2014 and 2015 respectively, which will impact significantly on group profits.