Lundbeck has spent around 50% of its 15 year life (approx.) as a public company trading below DKK133 per share. To see its share price rally 50% to DKK200 since the appointment of a new CEO in May 2015 surely says something about investor expectations of that CEO. Lundbeck is a small company with a market capitalization of just $6bn of which only 30% is owned by investors other than the Lundbeck Foundation. With a relatively small free float, share price volatility is expected and the 20% rise in share price on May 6 with the announcement that Kaare Schultz would be the new CEO amply demonstrates that point.
Concrete evidence of changes that the new CEO would implement was provided with the Q2 results on 19 August when a DKK 3bn cost-base reduction (approx. 25% of total costs) exercise was announced. The share price rose 17% on the day, suggesting that investors’ trust in the new CEO’s strategy was worth around $800m. So far so good.
The full impact of this cost base reduction is expected to benefit 2017 results.
At this stage publically available data on the changes that will be made are limited but they are expected to impact 1000 employees (out of 6000 total today) and will involve HQ and affiliate staff including the European commercial organization. Having been through a significant downsizing not so long ago to reflect the patent expiry of Cipralex this commercial organization, in reality a mixture of small primary and specialty care field forces throughout Europe, must face another round of cuts and resource re-allocations. Investors are entitled to ask how this is being achieved since Sales and distribution expenses are running at twice Research and Development expense (before reclassification of product rights).
Lundbeck has no monopoly on this clash between top down needs and bottom up requirements but is simply the most recent example in the pharmaceutical industry. This constant need for reconciliation between corporate and affiliate strategies begs the question as to why promotional resources cannot be better aligned to the shifting demands of the marketplace and the product portfolio? Why should companies lurch from overspend to underspend, hiring and firing sales people from one year to the next? Most sales data is available monthly and many promotional cycles can be adjusted after 4 months, so why is promotional mix and resource allocation not being fine tuned rather than coarsely cut?
Could it be that current audits and models of promotional resource allocation are not fit for purpose and that companies consistently spend up to their corporate budget rather than zero budgeting each year within a clearly articulated mechanism of promotional activity? If correct this suggests that companies persistently and cumulatively waste money. When the consequent strategic drift eventually manifests itself as below-forecast market shares and revenue growth, the standard response is restructuring. So why do investors let companies get away with this repetitive cycle of over and under-investment in promotion, damaging morale, wasting cash on redundancies and retraining and suppressing long term growth and valuation?
Let us hope that Lundbeck, with its highly admired new CEO, establishes a new path based on zero budgeting, rational resource allocation and regular adjustments to avoid strategic drift. If so then a share price of DKK200 may be the platform for a more substantial re-rating in future.
The author was a Pharmaceutical Analyst at Lehman Brothers for 23 years as well as being involved with the PharmaFutures projects www.pharmafutures.org but is now writing independently. Stewart Adkins is a Director of Pharmaforensic Limited www.pharmaforensic.co.uk
Stewart Adkins was a Pharmaceutical Analyst at Lehman Brothers for 23 years and was involved with the Pharmafutures projects.