DB European Pharmaceuticals 2019 Outlook_watermark

Bank Deutsche

Grifols (Hold; PT €25)

Focus still likely on growth vs margins in 2019; shares fairly valued

AG/London

plasma procurement network has continued to weigh on margins. These pressures should finally ease in 2019 (~12 months later than originally

■

Grifols' investment phase should ease in 2019 but yoy margin improvements unlikely before 2020. Plasma manufacturers have experienced

continued strong growth in 2018, helped by continued tightness in supply, positive pricing and robust demand. However, Grifols' investment in its

expected). However, we believe yoy margin improvements are unlikely to materialise before 2020. With the shares trading at 21x '19 EPS we see

the company's growth as fairly reflected. Hold.

■

Potential of albumin Alzheimer's has bouyed the shares but likely to require investment in further trials. Positive data from Grifols' AMBAR trial

investigating the use of plasmapheresis and albumin in the treatment of Alzheimer's disease has led to increased optimism over potential for improved

albumin demand and pricing. The potential implications are di cult to quantify but likely to be substantially positive vs consensus expectations if use

of the technique becomes well established. Further biomarker data from the AMBAR study is expected in 1H19 and it remains possible that American

Society for Apheresis guidelines are updated to reflect this as a treatment option. However, we believe investment in a confirmatory Phase III trial will

be required to capitalise on this opportunity (see notes here and here ) and there remain risks the data cannot be replicated.

■

New launches and strategic access to plasma bode positively for 2019; RAAS Shanghai deal an uncertainty. Grifols’ recent decision to aggressively

secure access to plasma resolves a limitation that dragged on its growth in previous years. This should put it in a strong position to meet ongoing

demand growth. Sales in 2019 should also be helped by annulisation of pressures that dragged on hemophilia sales over the last 12 months. Growth

should also be aided by new launches in 2019 including albumin in bags, its fibrin sealant and its 20% subcut Ig formulation. Conversely, current

negotiations with Shanghai RAAS over a possible merger with Grifols Diagnostic Solutions represents an uncertainty. The deal could give Grifols

greater exposure to the growing China market. However, any deal may be dilutive to near-term earnings.

Figure 109 : Bull/Bear case target price impact (€/share)

Figure 110 : Potential news flow

31

4.0

Timing

Event

Description

2019

IVIG

Results from clinical trials in myasthenia gravis

29

2Q19

Alzheimer's

Possible update to American Society for Aphersis guidelines

1.0

1H19

Alzheimer's

Publication of biomarker data from AMBAR study

27

24.8

1H19

Strategy

Possible conclusion of merger of Grifols Diagnostics Solutions with RAAS Shanghai

€)

2.0

2019

Albumin

Launch of albumin in bags

25

2019

Competitor

UCB to start Phase II trials of rozanolixizumab in CIDP

(

price

23

2.0

2019

Subcut Ig

Planned launch of 20% formulation (similar to CSL's Hizentra)

2019

Fibrin sealant

Launch of new fibrin sealant

Share

21

2019

Competitor

Results from Phase Ib of CSL's CSL730 (Fc multimer) - competition for Ig

2020

Competitor

Phase III data on anti-FcRN drugs in myasthenia gravis and ITP

2H19

Alzheimer's

Final journal publication of AMBAR data

19

2020

IVIG

Potential approval in myasthenia gravis

17

2021

Competitor

Potential approvals of anti-FcRN drugs in myasthenia gravis and ITP

2022

Capacity

Plan to increase fractionation capacity to ~19m litres from ~15m

15

2022

Albumin

Results of PRECIOSA study in cirrhosis with ascitis

2022

Albumin

Results of APACHE study in acute-on-chronic liver failure (ACLF)

13

Lower plasma demand

Bull

Page

Bear

Weak margins

Strong margins

Strong Bioscience

outlook

61

Source: Deutsche Bank, * - current share price

Source: Deutsche Bank

62 Page

Summary model

Figure 111 : Grifols summary P&L

€m (EPS €)

2016A

2017A

2018E

2019E

2020E

2021E

2022E

2023E

Total revenue

4,050

4,318

4,437

4,882

5,156

5,411

5,684

6,002

Growth

3%

7%

3%

10%

6%

5%

5%

6%

Gross profit

1,912

2,152

2,066

2,273

2,417

2,563

2,721

2,903

Gross margin (%)

47%

50%

47%

47%

47%

47%

48%

48%

Operating costs

973

1,149

1,012

1,080

1,126

1,161

1,197

1,237

% sales

24%

27%

23%

22%

22%

21%

21%

21%

Operating profit

939

1,003

1,054

1,193

1,291

1,402

1,524

1,666

Adj. EBITDA

1,141

1,306

1,267

1,407

1,506

1,619

1,742

1,886

Adj. EBITDA margin

28%

30%

29%

29%

29%

30%

31%

31%

Growth yoy

-2%

14%

-3%

11%

7%

7%

8%

8%

Financial expense/(income)

234

288

265

267

267

251

235

218

Profit before taxes

713

696

779

911

1,009

1,136

1,274

1,433

Group net profit

545

663

623

728

806

907

1,017

1,144

Adj. EPS

0.91

0.96

1.03

1.18

1.29

1.44

1.60

1.78

Growth yoy

1%

6%

6%

15%

10%

11%

11%

12%

Source: Deutsche Bank, Company data

Figure 112 : 2019E divisional revenue split

Figure 113 : Sales and EPS growth 2016A-2023E

Biosupply and

Intersegment

other

revenue

7,000

2.0

3%

-1%

Diagnostic

6,000

1.6

15%

(EURm)Revenue

(EUR)EPSAdj.

5,000

Hospital

4,000

1.2

3%

3,000

0.8

2,000

Deutsche

0.4

1,000

Bioscience

-

0.0

Bank

78%

2016A

2017A

2018E

2019E

2020E

2021E

2022E

2023E

Revenue

Adj. EPS

AG/London

Source: Deutsche Bank

Source: Deutsche Bank, Company data

Bank Deutsche

Idorsia (Buy; PT CHF29)

Relatively quiet year but still potential for >2x over 3 years

AG/London

■

Proven track record makes Idorsia a core European holding. We are Buyers of Idorsia as we believe execution on its late-stage pipeline development

could lead to a >2x in its share price over the next 3 years. We believe combined sales of this late-stage pipeline could exceed CHF4bn. Although the

next 12 months is light of major catalysts, the shares recent pullback represents an attractive entry point in our view.

■

Rich pipeline: conviction in aprocitentan's multi-blockbuster potential. Idorsia now has four drugs in late-stage clinical development, with Phase III

data for each in Western markets due over 2020-21. We have highest conviction in the potential of resistant hypertension drug aprocitentan, which we

believe has a profile that makes it an ideal candidate to overcome previously failed attempts to develop endothelin receptor antagonists for this high

unmet need. In addition, our due diligence suggests many investors have been too quick to dismiss the potential of nemorexant (orexin antagonist;

insomnia) and lucerastat (Fabry disease). Both of which we believe have best-in-class or di erentiated potential in $1bn plus markets.

■

Limited major catalysts in 2019: cautiously optimistic on clazosentan readout. Results of Phase III trials of Idorsia's pipeline drugs are expected in

2020 (lucerastat/nemorexant) and 2021 (aprocitentan/clazosentan). As a result, 2019 will be a relatively quite year. Of note, we continue to believe

the upcoming readout of a Phase III trial of clazosentan in Japan (due 1H19) is lower risk than many investors assume given proof-of-concept from

an overlooked Phase II trial in Japan. In addition, even if the trial fails, we believe Idorisa’s global Phase III design (data due in 2022) should have a

higher probability of success by enriching for patients most at risk and using an endpoint that assesses short-term clinical deterioration. This should

more closely correlate with the drug’s proven e ects on vasospasm than endpoints explored in prior failed trials and potentially enable approval.

Figure 114 : Bull/Bear case target price impact (CHF/share)

Figure 115 : Potential news flow

50

Timing

Event

Description

6

47

End'18

Nemorexant (competitor)

Eisai plans to file lemborexant for insomnia

2H18

Nemorexant (competitor)

Presentation of data from Phase III trial of Eisai's lemborexant

1Q19

Clazosentan

Data from registrational studies in vasospasm-related events after aneurysm-securing (Japan)

8

41

2019

ACT-246475 (P2Y12 inhibitor)

Results of Phase II trial in coronary artery disease

40

Mar-19

Lucerastat (competitor)

Primary completion of Protalix's PRX-102 Phase III BALANCE trial (head to head vs Fabrazyme)

Mid-19

Ponesimod

Results of Phase III trial in RRMS

4

2019

Nemorexant (competitor)

Expected completion of seltorexant (Minerva) Phase II studies

(CHF/share)

33

1H20

Lucerastat

Publication of results of MODIFY Phase III trial

4

29

1Q20

Nemorexant

Expected results from Phase III trials in insomnia

30

2020

Clazosentan

Potential launch in Japan

15

25

Feb-21

Aprocitentan

Primary completion of Phase III PRECISION trial

Jan-21

Clazosentan

Primary completion of Phase III REACT study

2Q21

Clazosentan

Expected data from pivotal REACT trial in aSAH

value

20

2Q21

Aprocitentan

Expected data from PRECISION trial

2022

Lucerastat (competitor)

Expected filing of Sanofi's venglustat in Fabry disease

2021

Lucerastat

Expected launch in Fabry disease

2022

Clazosentan

Potential launches in US/EU

Enterprise

10

2022

Nemorexant

Expected launch in insomnia

2022

Aprocitentan

Expected launches in resistant hypertension

10

0

Bear

- Pipeline ve

Downside

Clazosenta fails n

Base

Aprocitenta success n

Upside

Pipeline +ve

case Bull

value Time

value '21

case Bull

Source: Deutsche Bank, * - current share price

Source: Deutsche Bank

64 Page

Summary model

Figure 116 : Idorsia summary P&L

CHFm ex-per share data

2016A

2017A

2018E

2019E

2020E

2021E

2022E

2023E

Total revenue

n/a

158

36

53

152

155

134

345

Growth

n/a

n/a

-77%

50%

185%

2%

-14%

158%

Gross profit

n/a

158

36

53

151

151

126

326

Gross margin (%)

n/a

100%

100%

100%

99%

97%

94%

94%

Non GAAP R&D

n/a

(123)

(342)

(420)

(420)

(350)

(325)

(250)

Non GAAP SG&A

n/a

(27)

(48)

(48)

(56)

(67)

(87)

(93)

Non GAAP operating expenses

n/a

(150)

(390)

(468)

(476)

(417)

(412)

(343)

Operating profit/(loss)

n/a

(8)

(370)

(431)

(341)

(282)

(302)

(32)

Net income

n/a

(14)

(378)

(438)

(348)

(289)

(309)

(40)

EPS (basic)

n/a

(0.13)

(3.02)

(3.34)

(2.66)

(2.21)

(2.36)

(0.30)

Growth (%)

n/a

n/a

n/a

-11%

21%

17%

-7%

87%

Source: Deutsche Bank, Company data

Figure 117 : Non-GAAP operating expenses 2017A-2023E

Figure 118 : Revenue and EPS 2017A-2023E

600

400

0.00

500

350

(0.50)

CHFM

300

(1.00)

200

(CHFEUNEVE M)

EPSSICAB (CHF)

400

250

(1.50)

300

200

(2.00)

150

(2.50)

R

100

(3.00)

100

50

(3.50)

0

0

(4.00)

2017A

2018E

2019E

2020E

2021E

2022E

2023E

2017A

2018E

2019E

2020E

2021E

2022E

2023E

NON GAAP R&D

NON GAAP SG&A

REVENUE

EPS

AG/LondonBankDeutsche

Source: Deutsche Bank, Company data

Source: Deutsche Bank, Company data

Bank Deutsche

Lundbeck (Sell; PT DKK225)

Deep introspection started, solutions going to take time

AG/London

company is in its innovation cycle. In recent times, the company rode on the crest of a wave with revenues beating expectations, and significant cost

■

Earnings on top of a precipice, strategy at the bottom of one: Lundbeck is a specialist in psychiatry and central nervous system drugs. In the past

it has been too small to provide consistent earnings growth and has been subject to significant earnings peaks and troughs depending on where the

control ensuring this made it to the bottom line. Now, the top line is slowing and the new CEO has a significant task to address a shortfall in R&D

investment resulting in almost no material pipeline today. Valuation to capture Lundbeck's earnings cycle is best done on DCF. To us this suggests

the shares are still overvalued despite recent share price depreciation, but ultimately DCF can vary wildly depending how much is assumed for the

company to either innovate or buy growth in the future. As such, much will depend on the new CEO's actions post her strategic review.

■

Near term pain for longer term gain appears the way forward. We expect the CEO to announce the results of her strategic plan at the FY results in

February 2019. While specifics on M&A will be di cult to provide at this timepoint, we expect the flavour to be that cuts have run too deep and the

company needs to reinvest for the future to provide sustainable growth. This likely means increased internal R&D (as well as a repurposing of focus

away from the current variations on a theme of dopamine or serotonin modulation) as well as external collaborations and acquisitions. While unlikely

to greatly impact 2019 earnings (without a deal in hand) this risks a significant drag on ongoing earnings versus the payo for having a business in

15 years time (near term pain for longer term gain). Overall, we feel Lundbeck requires time to refind itself.

Figure 119 : Bull/Bear case target price impact (DKK/share)

Figure 120 : Potential news flow

Timing

Event/Drug

Indication

Description

320

4Q18

Rexulti

PTSD

Phase II data

300

4Q18

Lu AF76432

Schizophrenia

Completion of Ph1 trial

55

1Q19

Rexulti

Bipolar

Completion of Phase III trials

300

Mar-19

Lu AF28996

Parkinson's

Primary completion of Phase I trial

1H19

Foliglurax

Parkinson's

Phase II AMBLED study results

4Q19

Lu AF20513

Alzheimer's (prevention)

Completion of Ph1 trial in patients with mild disease

280

4Q19

Lu AF82422

Parkinson's (disease modifying)

Completion of Ph1 trial

(DKK)

260

price

25

240

Share

0

220

214

6

220

200

Bear

Rexulti Alzheimer's disease fails

Onfi very rapid erosion

Base

Rexulti Bipolar indication stimulates growth (additional $500m)

Rexulti Alzheimer's agitation adds $2bn

Bull

Source: Deutsche Bank, * - current share price

Source: Deutsche Bank, Company data

66 Page

Summary model

Figure 121 : Lundbeck summary P&L

DKKm ex-per share data

2016A

2017A

2018E

2019E

2020E

2021E

2022E

2023E

Revenue

15,634

17,234

18,002

16,388

17,354

17,573

17,333

17,487

Growth

7%

10%

4%

-9%

6%

1%

-1%

1%

Gross profit

11,552

13,353

14,507

13,424

14,454

15,070

14,871

15,033

Gross margin

74%

77%

81%

82%

83%

86%

86%

86%

EBIT

2,292

4,408

5,340

4,441

5,211

5,811

5,633

5,704

Growth

nm

92%

21%

-17%

17%

11%

-3%

1%

EBIT margin

15%

26%

30%

27%

30%

33%

33%

33%

Financials (net)

(135)

(131)

42

57

70

85

97

108

PBT (loss)

2,157

4,277

5,382

4,498

5,282

5,896

5,730

5,812

Tax Rate

44%

-39%

27%

26%

26%

26%

25%

25%

Tax

(946)

(1,653)

(1,453)

(1,169)

(1,373)

(1,503)

(1,432)

(1,424)

Net Profit/Net income

1,211

2,624

3,929

3,329

3,908

4,393

4,297

4,388

Wtd. Average Shares (Basic)

197

198

199

199

200

200

201

201

Basic EPS

6.14

13.28

19.78

16.71

19.57

21.94

21.42

21.81

Source: Deutsche Bank, Company data

Figure 122 : Revenue breakdown (DKKm)

Figure 123 : Revenue and EBIT 2016A-2023E

25,000

25,000

40%

35%

20,000

20,000

30%

15,000

15,000

25%

20%

10,000

10,000

15%

5,000

10%

5,000

Deutsche

5%

0

-

0%

2016A

2017A

2018E

2019E

2020E

2021E

2022E

2023E

2016A

2017A

2018E

2019E

2020E

2021E

2022E

2023E

Bank

Mature products

Pipeline products

Revenue (DKKm)

EBIT (DKKm)

EBIT Margin (rhs)

Source: Deutsche Bank, Company data

Source: Deutsche Bank, Company data

AG/London

Bank Deutsche

Merck (Hold, PT €97)

No longer cheap

AG/London

■

Beginning of growth phase largely discounted. After two years of flattish to slightly declining earnings, we expect Merck to return to potentially

sustainable earnings growth as of 2019. We see little debate about the healthy outlook of Life Science but note that there remain various moving

parts in Performance Materials, while a lot will depend on pharma pipeline progress with visibility set to improve further in the year ahead. However,

trading at 17x P/E 2019E or ~15% premium to their own historical valuation, we believe the shares already discount a fair amount of optimism; Hold.

■

Healthcare – margins set to turn the corner and growth prospects to become clearer. Margins have declined c.500bps since 2016 (mainly on higher

R&D) and management aims for a reversal of the trend next year. Further uptake of Mavenclad in Europe and its US approval decision will be key to

assess the segment’s growth profile for outer years, while potential partnering (TGF-β and/or BTKi), further pipeline read-outs (BTKi, Tepotinib), and

trends in the base portfolio (esp. fertility and Glucophage, which have been very strong of late) will also be of key interest for investors, in our view.

■

Life Science – further modest share gains and margin expansion likely to continue. 2018 is the last year of significant SIAL cost synergies (€95m

guided) and it has become clearer in recent months that these are fully reinvested for growth in outer years. End markets remain healthy and Merck

poised to take further share as aforementioned investments should pay o . Hence, with management’s updated indication for margin expansion of

20-30bps p.a. in the medium-term, we believe the segment is well positioned to deliver continued midto high-single-digit earnings growth.

■

Performance Materials – still many moving parts. Earnings expectations have been reset on material changes to market and competitive dynamics

in liquid crystals. These will need to be closely monitored also going forward as current tailwinds (capacity ramp in China) seem temporary and

structural pressures will likely continue. Other moving parts include the OLED turnaround as well as potential cyclical drags on Surface Solutions and

the segment’s main growth engine Semiconductor Solutions, which could well be strengthened through M&A in due course.

Figure 124 : Growth profile – Revenue (EURm)

Figure 125 : Potential newsflow

20,000

Timing

Event / Description

07-Mar-19

4Q 2018 results and qualitative guidance for 2019

18,000

1H-19

Evobrutinib (BTKi) - PII 48 week data presentation & decision on PIII (MS) design

16,000

1H-19

M7824 (anti-PD-L1/TGF- trap) - Initiation of 2L BTC trial & decision on further NSCL trial settings

14,000

2Q-19

Cladribine tablets - expected FDA decision

12,000

14-May-19

1Q 2019 results and quantitative guidance for 2019

10,000

08-Aug-19

2Q 2019 results

8,000

14-Nov-18

3Q 2019 results

2H-19

Evobrutinib (BTKi) - PII RA data read-out

6,000

2H-19

Tepotinib (METKi) - presentation of advanced interim results

4,000

2,000

0

2013A

2014A

2015A

2016A

2017A

2018E

2019E

2020E

2021E

2022E

Page

HEALTHCARE

LIFE SCIENCES

PERFORMANCE MATERIALS

Source: Deutsche Bank, Company data

Source: Deutsche Bank, Company data

67

68 Page

Summary model

Figure 126 : Merck summary P&L

EURm ex-per share data

2013A

2014A

2015A

2016A

2017A

2018E

2019E

2020E

2021E

2022E

Revenue

10,735

11,363

12,845

15,024

15,327

14,822

15,755

16,423

17,124

17,874

Growth

5.8%

13.0%

17.0%

2.0%

-3.3%

6.3%

4.2%

4.3%

4.4%

Gross profit

8,053

7,836

8,768

9,823

10,007

9,670

10,171

10,611

11,064

11,512

Gross margin

75.0%

69.0%

68.3%

65.4%

65.3%

65.2%

64.6%

64.6%

64.6%

64.4%

SG&A

4,936

4,371

5,216

5,366

5,342

5,344

5,522

5,700

5,889

6,093

R&D

1,507

1,704

1,709

1,976

2,140

2,195

2,221

2,237

2,256

2,275

EBITDA-pre

3,253

3,388

3,630

4,490

4,414

3,812

4,091

4,315

4,543

4,752

EBITDA-pre margin

30.3%

29.8%

28.3%

29.9%

28.8%

25.7%

26.0%

26.3%

26.5%

26.6%

EBIT-pre

2,794

2,847

3,156

3,885

3,836

3,279

3,527

3,728

3,932

4,115

EBIT-pre margin

26.0%

25.1%

24.6%

25.9%

25.0%

22.1%

22.4%

22.7%

23.0%

23.0%

Financial result

-222

-205

-357

-326

-300

-270

-244

-216

-186

-153

Underlying income tax

656

634

672

854

849

752