During an interview with French business newspaper Les Echos, published yesterday, UCB’s CEO said he wanted to move the REBITDA margin from 21% in 2011 to 25-30% in the coming 3-5 years, which would be at par with industry peers. This is higher than our current expectation, triggering a target price increase to € 40/sh (from € 38) and maintain our Accumulate rating.
Our View:
The one-page interview contained several items which were already known but also a few elements of which the new profitability guidance is of most importance. In combination with some statements from management made during the group meeting at our recent road show, these are the highlights:
- 2012 is the last transition year, as of 2013 there will be top-line growth for a long period
- Patent expiration of older drug is behind them, whereby Keppra will lose 50% in Europe this year, but the company feels comfortable with the consensus that the Keppra franchise should maintain a level of ~€ 400m going forward;
- The CVN drugs will only see patent expiration in the period 2023-2027
- UCB is a world leader in epilepsy, with good chances that they become the leader in neurology and goal is to be the world leader in immunology (eg via JV, etc.)
- The company has a strong pipeline with potentially several blockbuster drugs whereby the new bone drug anti-sclerostin could reach peak sales of as much as € 3bn (recently started p3).
- Emerging Markets will be key (now 15% of sales and will grow eg. Latin America)
- expenses on sales&marketing should, as a percentage of product sales (29% in 2011), decrease as CVN products have been launched in most countries and the remainder S&M will be as ‘maintenance’ expenses and to launch them for other labels.
- All these items combined will enable UCB to reach a REBITDA of 25-30% (vs 21% in 2011)
Conclusion:
We banked before on 24% REBITDA margin by 2015, and a rather linear improvement versus current levels. Following the new guidance, we now arrive at a 25% REBITDA margin by 2015 and see possibility for 23% already by 2013. Beyond 2015, we maintain the 25% margin, leaving room for upwards adjustments if the company indeed proofs to achieve its goals. This adjustment increases our valuation by € 2/sh, such that our new target price arrives now at € 40/sh, allowing us to maintain our Accumulate rating.