Summary

  • Belgian biopharma company UCB focuses on neurology and immunology. It has strong portfolio of core products, spends 29% of revenue on R&D and has promising pipeline to support future growth.
  • Through 2020 its sales were up 9%. Profits 8% lower due to multiple acquisitions. Sales growth was high in the past years but is expected to slow in the future.
  • The company’s dividend yield, 1.64%, is low relative to its peers and dividend is safe.
  • The stock price upside potential is not high at current price levels. At the same time downside risks are low as well.

 

UCB SA (UCB) is a 90-year-old global biopharmaceutical company, focusing on neurology and immunology. It leverages scientific advances and skills in generics, biomarkers, human biology. It is headquartered in Belgium and is present in 36 markets. Its main markets are the US with 55% of sales, Japan with 8% and Germany with 7%. The company’s main core products are Cimzia (for treatment of inflammatory TNF mediated diseases), Vimpat and Keppra (epilepsy treatment). It is ranked number 1 on the global epilepsy market and has a market share of 20%.

UCB digitalizes both core business (to simplify and make more efficient existing processes) and new business processes. The digitalization was accelerated by COVID-19. The company has strategic collaboration with Microsoft to discover and develop medicines faster using Microsoft’s AI technology.

In 2020 UCB was active in M&A:

  • Ra Pharmaceuticals was acquired for USD 2 B. It will enhance UCB’s leadership in myasthenia by adding zilucoplan. Zilucoplan will be launched worldwide, contributing to the company growth from 2024 onwards.
  • Belgian gene therapy company Handl Therapeutics was acquired to accelerate UCB’s ambitions in gene therapy.
  • Engage Therapeutics, a clinical stage pharmaceutical company, also was acquired in 2020.

   Dividend

Dividend Dividend Yield 5Y Growth PayOut Ratio Ex-Dividend Date
EUR 1.27 per share 1.64% 2.9% per year 33% 2021 April 23

UCB’s dividend growth has been smooth and consistent over the past 5 years. Dividend has increased almost 3% per annum on average. In 2020 dividend is 2.4% higher than in 2019, roughly in line with long term growth. At the same time dividend yield is quite low, 1.64%. Many of the company’s peers, like Roche and Novartis, have higher dividend yields. With payout ratio 33% the dividend is well covered by earnings. In the future the management intends to increase gradually dividend and as far as possible not to reduce it. So we could assume 3% per year dividend growth in the coming years if sales and profits will grow at least by the same percentage.

   Revenue

Revenue in 2020 Revenue Growth Company Outlook
EUR 5.35 B

 

Over 2020      9%

Over 5 Y         7.7% p. a.

In 2021 total revenue EUR 5.45 – 5.65 B.

For 2025 revenue to be EUR 6 B.

Financial performance was strong in 2020 despite COVID – related challenges. Revenue was 9% higher over year driven by sustained growth of key products.

US net sales were 8% up year – on – year, Europe’s up 3% while international markets were down 2% due to generic competition and divestures.

Over the past 5 years sales have been growing in consistent way, almost 8% each year on average. In the future, as patents expire, the company will have less exclusivity and higher price pressure, primarily from biosimilars. To counter this trend the company invests in new products, new platform and new technologies. UCB has promising pipeline from the beginning of 2021.

So the future growth is based on the expansion of portfolio of products and investments into pipeline. In the coming years UCB expects strong sales from its core products, particularly from Cimzia, Vimpat and Briviact. However revenue target of EUR 6 B in 2025 means moderate sales growth – only 2.3% per year from current level.

   Profitability

Profit in 2020 5Y Growth Net Profit Margin ROE Company Outlook 2021
EPS EUR 3.87 3.5% p. a. 13.7% in 2020 10% in 2020 For 2021 core EPS within EUR 5.6 – 6.1 per share.

Operating profit in 2020 was EUR 0.97 B, 9% lower than in 2019 due to higher one-time expenses, mainly M&A related costs. Over the past 5 years EPS has been up 3.5% per annum on average. In 2020 it is 8% lower than last year. However underlying profitability (adjusted EBITDA) was EUR 1.4 B, 1% higher over year. Net profit was EUR 0.73 B. There were higher investments into product launches and product development.

Looking forward the company has to deal with price pressure from biosimilars as well as from government induced measures. In the managements guidance core EPS is expected to grow from EUR 5.36 in 2020 to EUR 5.6 – 6.1 per share in 2021, i.e. 4.5% – 14% growth next year. In the coming years as revenue growth is expected to be around 2-3% per year and profitability would improve, we assume EPS growth around 4% per year.

   Financial Strength

Capital Structure of Company

In EUR Bln

Year 2019 2020
Equity 7.009 7.272
Cash 1.288 1.303
Debt 1.281 2.749
Net Debt 0 1.411
Debt/Equity 0 37.8%

 

 

 

 

 

 

Total debt is well covered by both operating cash flow (OCF) as OCF is 39% of debt and equity as debt is 37.8% of equity. The company did not have any net debt in 2019 and ended 2020 with the net debt of EUR 1.4 B. This change is mainly related to the acquisition of Ra Pharmaceutical.

   Investment Case

The estimate of future stock price based on P/E ratio

Assumptions – growth over the next 5 years
Dividend

Dividend could grow at 3% per year from EUR 1.27. So the total dividend income over the next 5 years would amount to EUR 6.94.

EPS

We assume EPS growth of 4% p.a. Then EPS in 5 years will be EUR 4.71 per share.

Projected stock price
Average P/E over the last 5 years (17.5) multiplied by EPS in 5 years = 17.5x EUR4.71 = EUR 82.4

Future Returns Based on the Assumptions

Stock price upside potential                              6.3%    from the current price EUR 77.54

Overall return on investment*                          15%

Compound Annual Return on Investment        3%

*- Includes the expected dividend income over the next 5 years and dividends are not reinvested.

Current trends in healthcare industry make it difficult for the company to grow at the same rates as in the past. To sustain and continue growth UCB will continue investing increasingly in R&D, in growth initiatives (like EUR 0.3 B in biotech plant) and M&A activity. The management is committed to long term growth and the improved profitability. However revenue and profit growth rates would be lower than in the past.

There is no high upside in stock price when measured by historic P/E ratio. However it is good expected return for the company, belonging to defensive industry and showing stable growth in revenue and profits.

 

Notes

Data source – the company’s financial reports, presentations and its website. Source of pictures – the company website unless otherwise stated. Dividend and Sales graphs – from the company stockscreen in this website. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article as a starting point for your own due diligence.

 

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