Why Did Lundbeck A/s Want to Go Public in 1999? What Do You Think About the Firm Specific and Market Specific Timing of the Ipo?

Question 1 - Why did Lundbeck A/S want to go public in 1999? What do you think about the firm specific and market specific timing of the IPO?

Lundbeck could raise capital needed for its operations, expand its capacity, and improve international recognition (marketing effect) and outreach through the IPO.

On the IPO timing, from market perspective,

• The world market for drugs to treat central nervous system (CNS) disorders had been growing at a healthy 12% p.a. over the past 10 years. It’s a good market timing to ride on this momentum to obtain capital.

From company perspective,  

• Lundbeck Foundation, the sole shareholder prior to IPO could cash out through the global offering with its holding of 7.1 million of new shares (70%).  
• The IPO will be launched before the patent of the company’s main cash generating product (citalophram) expires. As the product patent expires, the company will have difficulty raising capital to finance its future operations, e.g. expanding its capacity over the following two to three years which requires DKK300 million.
• Given that the company does not expect to have any major new product launch over the next few years, without the capital inflow, they will not be able to support its R&D effort to meet intense competition from other market players.
• The company has been under pressure from governments and other entities for the price reduction and regulatory intervention. This resulted in withdrawal of some drug from the market and has partly affected their sales in 1998.  
• The fierce price competition with generic producers is anticipated in the near future and the company may face challenge for the continuous growth.

In summary, despite the positive market momentum to go public the company timing does not seem to be ideal for an initial public offering.

Question 2 - Price for the IPO

Our valuation range based on multiples and DCF is between DKK158 and DKK303. While the offer price of DKK175 is on the lower end of our valuation, we feel that DCF and P/E ratio, both of which result in lower valuations, should be given higher weight.    

a) Multiples

• We selected comparable companies based on three factors:

• niche players with similar product range to Lundbeck (drugs for the treatment of psychological and neurological diseases and disorders)
• similar geographies, i.e. headquartered in Europe
• global players mentioned in the case as Lundbeck’s director competitors                

• We chose P/E ratio, Market to book ratio and Market to Sales Ratio for comparable analysis

• Generally, P/E ratio reflects the market's expectation of the company's profitability. However, it may reflect the effects of one-off events on the company’s earnings, such as the withdrawal due to side effect, which may create noises in the pattern. In addition, companies with high level of excess cash might be undervalued.
• Considering the above, we also looked at book value and sales, since they are more relevant to operating activities, and thus less likely to be affected by one-off events.

• Using P/E ratio, the equity price is DKK 191.11, using market to book ratio, the price is DKK 294.04, using market to sales ratio, the price is DKK 303.44. Detailed calculation is shown in Appendix 1.

b) DCF Method

1. Unlevered beta

• We assumed that the levered Beta given in the exhibit as the unlevered beta of the companies.

[pic 1]

1. WACC

• Our WACC = 9.12%. The detailed WACC calculation is in Appendix 2.

• We assume that: the target debt to equity ratio (market value) is the same as Sanofi, which is 8.7%
• Given the company has more cash than debt, we assume the risk of default is very low, and a high bond rating should be assigned. Accounting for its small size, we assume its bond rating to be A, and accordingly we assume beta of debt to be 0.  

1. FCF

• Using DCF, the equity price is DKK 157.94. The detailed calculation is shown in Appendix 3.

Question 3 - Sensitivity Analysis (Long)

We conducted sensitivity for multiples method and DCF method bekow. In the multiples method, share prices after IPO have fair probability to surpass DKK 175 using P/E ratio and more likely to be above the level using market-to-book ratio or market-to-sales ratio. However, as the multiples are calculated based on the average of those of comparable companies with wide range among each other, the calculations are less accurate than DFC method.