Bryan, Garnier & Co publishes a new Research Report on UCB
(Buy vs. Neutral)
The EBITDA margin improvement is the key
We have upgraded our recommendation on UCB to BUY and increased our Fair Value from EUR42 to EUR59 primarily in view of 1/ a prospective improvement in the group's medium-term EBITDA margin from 19% in 2012 to 28% in 2017 (vs. 30% hoped for by UCB and 25.6% previously factored into our models), 2/ a better probability of success rate for Vimpat in monotherapy (75% vs. 50%) and 3/a change in the company's valuation model. In the short term, the main challenge concerns growth of Cimzia in rheumatoid arthritis compared with new oral treatments such as Xeljanz.
- The group's very high P/E compared with peers stems primarily from its excellent medium-term visibility (2012-16 CAGR of 6% in sales and 13% in EPS) accompanied by dense clinical newsflow between 2013 and 2015. Margins are also set to improve significantly over time with a genuine trend reversal after 2015 when the most expensive clinical studies provide their conclusions (romosozumab in particular) and on the back of a better SG&A and marketing spend mix. UCB expects EBITDA margin to widen from 19% in 2012 to 30% in 2017, which remains higher than our forecast.
- Following the positive results from Vimpat in monotherapy in the US, we have adjusted our probability of success rate from 50% to 75% pending results from the indication in Europe for 2014. At this stage, we are expecting overall peak sales of EUR1bn. The other factor to watch out for is change in the rheumatoid arthritis market with the entry of oral treatments and the multiplication of anti-IL6 agents, which are in direct competition with anti-TNFs such as Cimzia.
- We have changed our valuation model for UCB by switching from a sum-of-the-parts valuation distinguishing between the existing businesses and sources of fresh growth (Cimzia, Vimpat and Neupro - CVN) to the average between a global DCF valuation of UCB and the EVA method. Although CVN is still considered to be the group's main growth platform, the three drugs are now no longer in the launch phase but in a phase of embedded growth.
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