Market Cap (EUR Mil) 7,191
52-Week High (EUR) 40.00
52-Week Low (EUR) 25.70
52-Week Total Return % 32.6
YTD Total Return % 27.8
Last Fiscal Year End 31 Dec 2011
5-Yr Forward Revenue CAGR % 2.4
5-Yr Forward EPS CAGR % 0.5
Price/Fair Value 1.46
2010 2011
2012(E) 2013(E)Price/Earnings 12.9 17.2 24.4 26.3
EV/EBITDA 8.8 11.2 17.1 17.7
EV/EBIT 13.6 17.5 19.4 20.1
Free Cash Flow Yield % 9.8 3.6 13.3 5.1
Dividend Yield % 3.8 3.0 2.6 2.7
2010 2011
2012(E) 2013(E)Revenue 3,218 3,246 3,077 2,973
Revenue YoY % 3.3 0.9 -5.2 -3.4
EBIT 467 435 462 446
EBIT YoY % -54.9 -6.9 6.1 -3.4
Net Income, Adjusted 367 347 306 285
Net Income YoY % -44.8 -5.5 -11.8 -6.9
Diluted EPS 1.99 1.89 1.67 1.55
Diluted EPS YoY % -44.1 -5.0 -11.8 -6.9
Free Cash Flow 1,436 263 1,074 455
Free Cash Flow YoY % 536.5 -81.7 308.5 -57.7
The Supreme Court Upholds Health-Care Reform; Valuation Impact on the Sector's Stocks Is Minimal
See Page 2 for the full Analyst Note from 28 Jun 2012
Lauren Migliore Stock Analyst
lauren.migliore@morningstar.com +1 (312) 244-7048
Karen Andersen Senior Stock Analyst karen.andersen@morningstar.com +1 (312) 384-4826
Research as of 28 Jun 2012 Estimates as of 11 Jun 2012 Pricing data through 03 Jul 2012 Rating updated as of 03 Jul 2012
Analyst's Perspective 12 Jun 2012
UCB's marketing exclusivity for allergy drug Zyrtec expired in late 2007, and the firm has barely had time to recover before its remaining blockbuster, epilepsy drug Keppra, lost patent protection in the U.S. Although the drug's launch in Japan should help buoy growth abroad, U.S. sales saw double-digit declines last year and generic competition will cause a significant drain on revenue in the near term. As a result, UCB is attempting to transform itself into a more diversified firm through both acquisitions and in-house R&D.
Within its new line of products, we think Cimzia has the most potential to fill Keppra's shoes. Cimzia's ability to achieve sustainable improvement for Crohn's disease and fast response time for rheumatoid arthritis eventually could bring in blockbuster sales. However, a series of setbacks for UCB's new products demonstrate how long-term growth is still highly uncertain.
Key Investment Considerations
UCB is a Belgium-based biopharmaceutical firm focused on developing novel therapies for the treatment of central nervous system and immunological diseases. Historically, revenue was derived from allergy medicine Zyrtec and epilepsy drug Keppra, both of which have recently lost patent protection. The firm has launched Neupro (Parkinson's disease and restless leg syndrome), Vimpat (epilepsy), and Cimzia (rheumatoid arthritis and Crohn's disease) to reinvigorate top-line growth.
Profile Vital Statistics
Valuation Summary and Forecasts
Financial Summary and Forecasts
The primary analyst covering this company does not own its stock.
Currency amounts expressed with "$" are in U.S. dollars (USD) unless otherwise denoted.
Historical/forecast data sources are Morningstar Estimates and may reflect adjustments.
(EUR Mil)
Contents
Analyst's Perspective Key Investment Considerations Morningstar Analysis
Analyst Note Thesis
Valuation, Growth and Profitability Scenario Analysis
Economic Moat Moat Trend Bulls Say/Bears Say Credit Analysis
Financial Health Capital Structure Enterprise Risk Management & Ownership Analyst Note Archive Additional Information Morningstar Analyst Forecasts Comparable Company Analysis Methodology for Valuing Companies
Fiscal Year:
Fiscal Year:
3 The company's financial performance has suffered as UCB grapples with the loss of patent protection for its two blockbuster drugs Zyrtec and Keppra. Generic competition will continue to weigh on sales in the near term.
3 UCB is redefining itself around its new core products Cimzia, Vimpat, and Neupro. These drugs focus on the firm's historical strengths in neurology and immunology and address multibillion dollar markets such as rheumatoid arthritis.
3 While prescription growth for UCB's new products appears promising in some indications, several regulatory and commercial challenges have thwarted the firm's recovery plans.
1 1
2 3 4 4 5 5 6
7 7 7 8 9 - 10 14 16
UCB's days of blockbuster sales may be behind it.
Morningstar Analysis
The Supreme Court Upholds Health-Care Reform;
Valuation Impact on the Sector's Stocks Is Minimal 28 Jun 2012
The U.S. Supreme Court upheld the individual mandate in a narrow ruling Thursday, clearing the main hurdle for health- care reform known as the Patient Protection and Affordable Care Act (PPACA). While it is possible that the battle over the fate of the health-care law will now shift to the legislature, given the low probability of Republicans gaining a filibuster-proof majority in the Senate, we now believe the PPACA isn't likely to be repealed. We've incorporated the anticipated effects of the PPACA in all of our projections, and as a result, the effect of the ruling on our valuations and recommendations across the health-care sector is immaterial.
For the managed-care sector, the ruling is largely a positive, as alternatives were a lot more punitive, particularly for firms operating in the individual marketplace. We factor into our models the more than 30 million individuals that are expected to gain insurance coverage as a result of the law through a combination of expansions to the Medicaid program (although the Court's ruling on this issue may limit the magnitude of this expansion) as well as new subsidies that can be used to buy insurance in the state-based exchanges. Medicaid MCOs like Amerigroup AGP are best positioned to benefit from broader Medicaid eligibility, adding to the already robust growth story from increased outsourcing of Medicaid. We expect most commercial insurers to compete for new individual members in the exchanges, but those with a strong historical position in the individual market and well-known brands, such as WellPoint WLP , seem particularly well positioned. On the other hand, MCOs will continue to face margin pressure from regulatory scrutiny of premium increases, minimum medical cost ratios, and cuts to Medicare Advantage reimbursements.
However, we expected most of these headwinds to remain in place even without the PPACA, and we have incorporated deteriorating margins in our valuations.
The other group most affected by Thursday's ruling is health- service providers, such as hospitals, but our valuations already properly account for the anticipated effects from the law's provisions, particularly the expanded insured population. We consider the law's reduction of uncompensated care combined with an influx of newly insured patients into the health-care system as a positive for the health-services industry, while other components of the law, including lower Medicare payments and greater oversight of insurance premium increases, mostly mitigate such benefits. Overall, hospitals may breathe a sigh of relief as without the mandate, the environment for providers would have been rather dire. Regardless of this ruling, we think reimbursement pressure is here to stay thanks to government incentives to curb health-care spending growth and an industry shift to quality-of-care-based payment methods, and health providers still will face an uphill battle to maintain profitability amid the ongoing uncertainty of reimbursements.
For the Big Pharma group, we expect the increased demand for drugs as a direct result of the mandate largely will offset the increased fees and rebates associated with health-care reform. Our valuations are unchanged. However, since the costs related to health-care reform are front-end loaded (which started in 2010) and the increased demand will not likely begin until 2014 (when the mandate goes into effect), we believe investors' sentiment toward the drug group should improve as the tailwind of increased demand for drugs begins to materialize in 2014.
The generic drug manufacturers are largely unaffected, in our view. Most of the generic manufacturers have broad geographic operations and generic drug pricing was relatively unaffected by the law. We think additional drug volumes from newly insured patients are relatively immaterial to our fair value estimates for the generic firms.
The biosimilars approval pathway should remain intact.
The device side was viewed largely as a relative loser when the reform was passed, and the ruling doesn't change much in terms of our assessments of the industry's prospects going forward. We anticipate the additional insureds in 2014 will not significantly contribute to volume because many devices are concentrated among Medicare recipients.
For example, an estimated 90%-95% of pacemakers in the U.S. are implanted in Medicare patients. However, there are some particular product lines that do skew somewhat younger, such as spine devices, which are split more evenly between Medicare and non-Medicare patients. Firms that are not highly tied to Medicare reimbursement should see the volume boost in some magnitude, but likely not to the extent of other health-care industries. With the law upheld, it also appears that the 2.3% medical device excise tax will stand. We already baked that tax into our valuations two years ago, and at the time we said it would cut into the long-term earnings power of medical device firms by 4%-10%, hardly a devastating impact. We believe the marketplace already baked this into assumptions as well and thus most device firms are currently trading in line with the market. The effect of the tax is being mitigated by several
factors, particularly the sales mix by geography, which has generally been shifting away from the U.S. Medical device companies also have been preparing for this tax and additional pricing pressure (not necessarily only because of the ACA), which led to the restructuring of operations and investments in more manufacturing facilities in tax- advantaged locations outside of the U.S. Overall, we think a number of larger regulatory and customer issues--such as changes in the pathway to market and fiscal budget pressures in the developed world--are changing the competitive landscape for medical device firms, and these changing dynamics should have a more substantial effect on this industry than the ACA in the foreseeable future.
For other sectors, the impact is also fairly muted. With regards to biotech, we are maintaining our view that health reform has an overall net neutral impact on our valuations as expanded coverage offsets new fees and drug rebates.
However, within the spectrum of our biotech coverage, some firms have fared better than others under reform. Companies like Gilead GILD , Amgen AMGN , and Roche RHHBY have seen the largest hits to their businesses due to larger rebates through Medicaid and industry fees from the higher share of drugs reimbursed by Medicare. Conversely, reform has had little impact on companies like Celgene CELG and BioMarin BMRN with heavy exposure to orphan drugs that are exempt from the industry fee.
We expect drug supply-chain companies, including retail pharmacies, pharmacy benefit managers, and distributors, to experience a modest revenue boost due to increased consumption of health care by the newly insured population.
But any positive impact isn't likely to be material to our valuations.
Thesis 12 Jun 2012
With blockbuster drugs Zyrtec and Keppra, UCB has
emerged as a major player in the biopharmaceutical
industry. However, we're skeptical of UCB's ability to meaningfully grow its business given the patent expiry of its flagship products and the mixed clinical and commercial results of its pipeline.
During the last decade, UCB has transformed from a hybrid pharma/chemical firm into a purely biopharmaceutical operation. By shedding noncore assets, such as its chemical peptides manufacturing business sale to Lonza, UCB has slimmed down its targeted product areas to focus on its more profitable health-care segment. This increased investment in pharmaceuticals gave rise to the blockbuster antihistamine Zyrtec and leading epilepsy medication Keppra. However, Zyrtec and Keppra, which historically constituted roughly half of product sales, have since lost patent protection in the United States and Europe, and the firm has seen its growth and profitability deteriorate in the face of generic competition.
To cope with the patent expiry of its former flagship products, UCB has made strategic purchases to bulk up its pipeline. The acquisition of Celltech in 2004 added biologic offerings to UCB's lineup, and the Schwarz Pharma acquisition in 2006 enriched the company's late-stage pipeline. Additionally, the firm has honed its focus on two therapeutic categories: central nervous system and immunology. In CNS, some of the firm's lead products include Neupro (for Parkinson's disease and restless leg syndrome) and Vimpat (for epilepsy). In immunology, we think the firm's novel biologic compound Cimzia (for Crohn's disease and rheumatoid arthritis) holds the most promise and provides UCB with a foothold in the multibillion-dollar rheumatoid arthritis market. Furthermore, Keppra still has the potential to add incremental sales as the firm launches the drug in Japan (the second-largest epilepsy market) and seeks to expand its label into monotherapy and pediatrics.
Despite this full pipeline, UCB has encountered several
clinical and regulatory hurdles on its path to regaining growth. Plans to expand Vimpat's label into diabetic neuropathic pain were put on hold when the firm received a not-approvable letter from the Food and Drug Administration. UCB's development-stage, anti-epileptic brivaracetam failed to meet its primary endpoint in one of its late-stage trials. Distribution issues for Neupro, which led to crystallization of drug, required the company to recall the product from the U.S. market and have limited the uptake of one of the firm's lead products. If the firm is not able to find another winner, UCB's days of blockbuster sales may be behind it.
Valuation, Growth and Profitability 12 Jun 2012 We are maintaining our fair value estimate of EUR 28 per share. We expect Keppra sales should continue to fall in the near term following U.S. and European patent expiry, though expansion in Japan and potential label expansion as a monotherapy and pediatric treatment could lessen revenue declines. Cimzia's quick uptake into the expansive rheumatoid arthritis market should help drive growth, and we think sales have the potential to reach EUR 1 billion by the end of our 10-year explicit forecast period. We also expect Vimpat and Neupro to add important incremental sales, though Neupro's growth may stagnate in the near term because of persistent supply chain issues. Overall, we expect top-line growth to remain in the mid-single digits through 2021, as new product launches replace the firm's declining flagship products. We expect operating margins to remain in the midteens during the next 10 years as restructuring efforts help offset revenue declines from the company's former flagship products.
Scenario Analysis
While we believe UCB's fair value is EUR 28 per share, we
examined two additional scenarios to test our base-case
assumptions and develop a range of potential outcomes. In
our bull case, we assume both label and geographic
Morningstar Analysis
expansion are very successful for Keppra, allowing the firm to hold back the tide of generic competition longer than expected, and that Cimzia captures a greater portion of the expansive rheumatoid arthritis market than we model under our base case. In this case, operating margins likely would reach 20% and our fair value estimate would rise to EUR 38 per share. In our bear case, we assume generic losses for Keppra are more severe and Cimzia is unable to capture a sizable portion of the rheumatoid arthritis market. We think UCB would be unable to see operating margins above 10%, and our fair value estimate would fall to EUR 13 per share.
Economic Moat
UCB has no economic moat, in our opinion. The firm has lost patent protection for its flagship products Zyrtec and Keppra, which has resulted in negative year-over-year revenue and earnings growth. Although the firm has several other ancillary products that add to revenue, none of the drugs make up a meaningful portion of the firm's top line or are leaders in their given indication. The firm has made strategic acquisitions to bulk up its pipeline in the face of the patent expiry, but UCB has encountered several clinical and regulatory hurdles on its path to regaining growth.
While the firm has experienced some success securing approval for subsequent pipeline products, such as Cimzia for the treatment of Crohn's disease and rheumatoid arthritis, we are unconvinced that the firm has come up with a product that will afford it sustainable competitive advantages over the long run.
Moat Trend
We assign UCB a stable no-moat rating based on the uncertainty surrounding the firm's financial performance.
Although UCB is taking steps to diversify its operations, the company's transformation has gone less than smoothly. For example, the firm received a not-approvable letter for its label expansion request for Vimpat, development-stage, anti-epileptic brivaracetam failed to meet its primary
endpoint in one of its late-stage trials, and distribution
issues for Neupro have limited the uptake of one of the
firm's lead products. We would consider assigning the firm
a positive moat trend if we saw evidence that its newly
launched drugs are able to overcome these challenges and
succeed in filling Keppra's shoes.
Bulls Say/Bears Say
Bulls Say Bears Say
3 Geographic and label expansion should ease pressure from generic versions of Keppra in the U.S and Europe.
We expect regulatory approval in Japan (the world's second-largest epilepsy market), the launch of an extended-release formulation, and the potential approval for use as a monotherapy to help stem major revenue loss.
3 Cimzia provides UCB with a foothold in the expansive rheumatoid arthritis market, which is nearly double the size of the epilepsy market where UCB traditionally operated.
3 UCB should be able to leverage its commercial experience with Keppra and position itself as a leader in the epilepsy field toward its new anti-epileptic drug Vimpat and pipeline candidate brivaracetam.
3 Ancillary product approvals, such as its oral solution antihistamine Xyzal and overactive bladder treatment Toviaz (partnered with Pfizer), should help supplement major product launches.
3 Generic competition has created a significant drag on revenue growth following the U.S. patent expiry of Zyrtec and Keppra. UCB's financial performance will continue to deteriorate if the firm is unable to plug this sales drain with new products.
3 Distribution issues with Neupro led to a recall of the drug and an out-of-stock situation in the U.S., severely stunting the sales uptake of one of the firm's most promising new products.
3 Brivaracetam has generated mixed data in trials for epilepsy, and Vimpat was deemed not approvable by the FDA in diabetic neuropathic pain, raising concerns about the firm's ability to replace flagship products.
3 With recent bond offerings, UCB's long-term debt load
has topped EUR 1.7 billion. UCB may have trouble
serving its debt should generic competition intensify
or new product launches falter.
2012(E) 2013(E) 2014(E) 2015(E) 2016(E)
Cash and Equivalents (beginning of period) 305 1,492 1,666 1,816 1,996
Adjusted Available Cash Flow 961 332 307 338 266
Total Cash Available before Debt Service 1,266 1,824 1,973 2,154 2,262
Principal Payments — — — — —
Interest Payments -225 -225 -225 -225 -225
Other Cash Obligations and Commitments — — — — —
Total Cash Obligations and Commitments -225 -225 -225 -225 -225
EUR Millions
% of Commitments
Beginning Cash Balance 305 27.1
Sum of 5-Year Adjusted Free Cash Flow 2,204 195.9
Sum of Cash and 5-Year Cash Generation 2,509 223.0
Revolver Availability — —
Asset Adjusted Borrowings (Repayment) — —
Sum of Cash, 5-Year Cash Generation, Revolver and Adjustments 2,509 223.0
Sum of 5-Year Cash Commitments -1,125 —
UCB Sector Universe
Business Risk 6
Cash Flow Cushion 5 — —
Solvency Score 6 — —
Distance to Default — — —
Credit Rating — — —
Five Year Adjusted Cash Flow Forecast (EUR Mil)
Credit Analysis
Cumulative Annual Cash Flow Cushion
Cash Flow Cushion Possible Liquidity Need
Adjusted Cash Flow Summary
Credit Rating Pillars Peer Group Comparison
Source: Morningstar Estimates
Note: Scoring is on a scale 1-10, 1 being Best, 10 being Worst
Financial Health
UCB had EUR 1.5 billion in net debt on its books at year-end 2011. Although we believe UCB's earnings should more than cover interest expense, we are keeping an eye on its debt load as a potential issue should the firm's financial performance head south.
Capital Structure
UCB historically has financed its operations with cash flows generated internally. However, the firm's former cash cow Keppra has lost patent protection, and UCB is looking to acquisitions to help refill its pipeline. UCB has turned to the debt markets to finance these acquisitions and diversify its loan portfolio. In late 2009, the firm completed three different bond offerings for a total sum of EUR 1.75 billion to refinance its existing bank facility and extend the maturity profile of its debt. As a result of these efforts, the bulk of the firm's loans will not come due before 2014, providing UCB with some breathing room as it deals with the loss of marketing exclusivity for Keppra and ramps up sales of Cimzia, Neupro, and Vimpat. Furthermore, the firm also arranged for a new EUR 1 billion revolving credit facility.
We think debt will comprise 30% of UCB's capital structure over the long run.
Enterprise Risk
UCB's revenue growth has deteriorated since the loss of
marketing exclusivity in the U.S. for Zyrtec and Keppra, and
this trend will persist unless the firm is able to replace its
former flagship products. Despite the firm's full pipeline, a
high degree of clinical and regulatory risk surrounds these
development-stage and newly launched drugs. For example,
the futures of its lead drugs were called into question when
brivaracetam generated mixed data in clinical trials and
Vimpat received a not-approvable letter from the FDA.
Name Position Shares Held Report Date* InsiderActivity
NA NA NA NA NA
Top Owners Morningstar
Rating % of Shares Held % of Fund
Assets Change
(k) Portfolio Date
American Funds EuroPacific Gr A QQQQ 6.77 0.51 — 31 Mar 2012
Vanguard Health Care Inv QQQ 3.31 1.12 2,300 31 Mar 2012
American Funds New Perspective A QQQQ 2.43 0.44 — 31 Mar 2012
American Funds Capital World G/I A QQQ 1.99 0.22 — 31 Mar 2012
CREF Stock QQQ 0.43 0.03 160 30 Apr 2012
Concentrated Holders
Lyxor ETF BEL 20 QQQ 0.03 7.47 3 31 May 2012
KBC Multi Track Belgium Inc QQ 0.06 7.29 — 31 May 2012
iShares MSCI Belgium Investable Mkt Idx QQ 0.02 6.65 — 22 Jun 2012
Dexia Eqs B Belgium C QQQ 0.15 5.11 — 31 May 2012
Top 5 Buyers Morningstar
Rating % of Shares Held % of Fund
Assets Shares Bought/
Sold (k) Portfolio Date
Vanguard Health Care Inv QQQ 3.31 1.12 2,300 31 Mar 2012
Undrly LGIM World (ex-UK) Eq IdxGH G Pen 0.02 0.02 753 31 Mar 2012
Industria A EUR QQ 0.24 1.04 417 31 Mar 2012
UBS (Lux) EF Euro Countrs M-Strat Q Acc 0.23 1.60 412 30 Nov 2011
TIAA-CREF International Eq Instl QQQ 0.17 0.43 292 30 Apr 2012
Top 5 Sellers
Undrly L&G Pen PMC Glb Eq 60:40 Idx 0.01 0.02 -718 31 Mar 2012
Undrly L&G Pen PMC Glb Eq 50:50 Idx 0.02 0.02 -718 31 Mar 2012
Undrly L&G Pen PMC World Ex UK Eq Idx 0.04 0.02 -718 31 Mar 2012
Undrly L&G Pen PMC Glb Eq 70:30 Idx — 0.01 -718 31 Mar 2012
Undrly L&G Pen PMC Consensus Idx 0.01 0.01 -718 31 Mar 2012
Stewardship: 12 Jun 2012
Management & Ownership
Management Activity
Fund Ownership
Institutional Transactions
*Report date represents the date on which the owner's common shares held was audited.
We award UCB standard marks for stewardship. Roch Doliveux has led the firm since 2005 and boasts a long track record in the pharmaceutical sector, including a stint at Schering-Plough (now part of Merck MRK). The board is chaired by independent director Karel Boone. Doliveux's compensation package totaled EUR 3.2 million in 2011, which we believe is reasonable for a company of UCB's size.
Shareholders should be wary of the heavy presence of members of management and minority stakeholders on the board. Over 40% of the voting rights of UCB are controlled by Financiere de Tubize, a Belgian investment group held by the Janssen family. Accordingly, several members of the family serve on the board, limiting the impact that outside shareholders may have on the firm's governance.
Although it remains to be seen whether management's
acquisition and development activities will be sufficient to
offset generic competition for its mature product line, we
generally approve of the firm's strategy to selectively target
in-licensing opportunities that focus on its core therapeutic
strengths of CNS and immunology.
Analyst Notes
UCB Ends 2011 Better Than Expected, but Near-Term Outlook Remains Weak 05 Mar 2012
UCB UCB reported full-year results for 2011 that beat our expectations. Although we may slightly adjust our fair value estimate to account for greater-than-expected cash flows captured by the firm in the second half of last year, we do not anticipate any major changes to our valuation as the firm's near-term outlook remains weak and 2012 guidance for 2012 is in line with our expectations.
Revenue in 2011 totaled EUR 3,246 million, up 1% over 2010 as growth from UCB's new medicines offset declines within its mature product portfolio resulting from patent expirations. Revenue from the firm's new core products was up 51% from the prior-year period as UCB continues to roll out Cimzia, Vimpat, and Neupro to an increasing number of patients worldwide. However, higher spending to support the launch of these products, as well as increased research and development costs to support UCB's late-stage pipeline, caused operating expenses to outpace revenue growth for the year, resulting in a 7% decline in recurring operating earnings.
We expect earnings to continue to slide going into 2012 as generic erosion for anti-epileptic Keppra intensifies and UCB further increases its development spending to try to find a replacement for the drug. Keppra actually witnessed year-over-year growth of 3% in 2011 despite its loss of marketing exclusivity in North America, but the recent entrance of generic competition in Europe should make this growth short lived. UCB is hoping that Cimzia, Vimpat, and Neupro will be able to stem revenue declines from legacy products. However, these three products comprised only EUR 625 million in revenue combined compared to EUR 966 million for Keppra last year. Additional approvals and geographic expansion for Cimzia, Vimpat, and Neupro may eventually allow UCB to regain its historical profit levels, but we expect generic erosion to cause a double-digit drop
in earnings in 2012.
Growth (% YoY)
3-Year
Hist. CAGR 2009 2010 2011
2012 20135-Year Proj. CAGR
Revenue -3.4 -13.5 3.3 0.9 -5.2 -3.4 2.4
EBIT -7.2 90.1 -54.9 -6.9 6.1 -3.4 5.3
EBITDA -2.1 73.2 -42.5 -5.7 -23.2 -3.4 -1.4
Net Income 26.2 284.4 -44.8 -5.5 -11.8 -6.9 0.5
Diluted EPS 26.0 276.5 -44.1 -5.0 -11.8 -6.9 0.5
Earnings Before Interest, after Tax 21.6 71.5 187.2 -63.5 28.5 -22.5 -3.3
Free Cash Flow — -183.3 536.5 -81.7 308.5 -57.7 9.8
Profitability
3-Year
Hist. Avg 2009 2010 2011
2012 20135-Year Proj. Avg
Operating Margin % 20.4 33.3 14.5 13.4 15.0 15.0 15.2
EBITDA Margin % 27.9 40.3 22.4 21.0 17.0 17.0 17.2
Net Margin % 14.5 21.3 11.4 10.7 9.9 9.6 9.6
Free Cash Flow Margin % 20.0 7.2 44.6 8.1 34.9 15.3 18.0
ROIC % 10.7 6.4 18.9 6.7 8.1 6.2 6.3
Adjusted ROIC % 17.9 13.5 27.0 13.1 22.9 17.6 17.5
Return on Assets % 3.1 5.5 1.2 2.6 2.5 2.3 2.6
Return on Equity % 6.5 12.2 2.3 5.0 4.9 4.6 5.2
Leverage
3-Year
Hist. Avg 2009 2010 2011
2012 20135-Year Proj. Avg
Debt/Capital 0.31 0.34 0.31 0.27 0.31 0.31 0.31
Total Debt/EBITDA 2.42 1.79 2.80 2.67 4.21 4.35 3.99
EBITDA/Interest Expense 4.24 5.68 3.72 3.32 2.32 2.25 2.47
2010 2011
2012(E) 2013(E)Price/Fair Value 1.03 1.16 — —
Price/Earnings 12.9 17.2 24.4 26.3
EV/EBITDA 8.8 11.2 17.1 17.7
EV/EBIT 13.6 17.5 19.4 20.1
Free Cash Flow Yield % 9.8 3.6 13.3 5.1
Dividend Yield % 3.8 3.0 2.6 2.7
Cost of Equity % 10.0
Pre-Tax Cost of Debt % 10.4
Weighted Average Cost of Capital % 9.2
Long-Run Tax Rate % 30.0
Stage II EBI Growth Rate % 5.0
Stage II Investment Rate % 54.4
Perpetuity Year 30
EUR Mil Firm Value (%) Per Share
Value
Present Value Stage I 3,612 57.3 19.70
Present Value Stage II 1,464 23.2 7.98
Present Value Stage III 1,233 19.6 6.73
Total Firm Value 6,309 100.0 34.41
Cash and Equivalents 305 — 1.66
Debt -1,817 — -9.91
Preferred Stock — — —
Other Adjustments — — —
Equity Value 4,797 — 26.16
Projected Diluted Shares 183
Fair Value per Share —
Morningstar Analyst Forecasts
Forecast Fiscal Year Ends in December
Financial Summary and Forecasts
Valuation Summary and Forecasts
Key Valuation Drivers
Discounted Cash Flow Valuation
Additional estimates and scenarios available for download at http://select.morningstar.com.
The data in the table above represent base-case forecasts in the company’s reporting currency as of the beginning of the current year. Our fair value estimate may differ from the equity value per share shown above due to our time value of money adjustment and in cases where probability-weighted scenario analysis is performed.
(EUR)
2009 2010 2011
2012 2013Revenue 3,116 3,218 3,246 3,077 2,973
Cost of Goods Sold 1,025 1,053 1,013 985 951
Gross Profit 2,091 2,165 2,233 2,092 2,022
Selling, General & Administrative Expenses 970 991 1,030 954 922
Research & Development 674 705 780 677 654
Other Operating Expense (Income) -589 2 -12 — —
Depreciation & Amortization (if reported separately) — — — — —
Operating Income (ex charges) 1,036 467 435 462 446
Restructuring & Other Cash Charges 73 40 27 — —
Impairment Charges (if reported separately) 126 223 39 — —
Other Non-Cash (Income)/Charges — — 25 — —
Operating Income (incl charges) 837 204 344 462 446
Interest Expense 221 194 205 225 225
Interest Income 59 9 90 100 100
Pre-Tax Income 675 19 229 337 321
Income Tax Expense 168 -86 8 101 96
Other After-Tax Cash Gains (Losses) 7 -1 14 — —
Other After-Tax Non-Cash Gains (Losses) — — — — —
(Minority Interest) — — — — —
(Preferred Dividends) — — — — —
Net Income 514 104 235 236 225
Weighted Average Diluted Shares Outstanding 186 184 183 183 183
Diluted Earnings Per Share 2.76 0.56 1.28 1.28 1.23
Adjusted Net Income 663 367 347 306 285
Diluted Earnings Per Share (Adjusted) 3.56 1.99 1.89 1.67 1.55
Dividends Per Common Share 0.90 0.94 0.97 1.00 1.05
EBITDA 1,057 459 590 523 505
Adjusted EBITDA 1,256 722 681 523 505
Morningstar Analyst Forecasts
Income Statement (EUR Mil)
Fiscal Year Ends in December Forecast
2009 2010 2011
2012 2013Cash and Equivalents 539 555 305 1,492 1,666
Investments — — — — —
Accounts Receivable 819 705 851 674 652
Inventory 405 434 537 405 391
Deferred Tax Assets (Current) — — — — —
Other Short Term Assets 31 37 13 13 13
Current Assets 1,794 1,731 1,706 2,584 2,722
Net Property Plant, and Equipment 534 505 500 493 492
Goodwill 4,552 4,718 4,799 4,799 4,799
Other Intangibles 1,953 1,641 1,525 1,525 1,525
Deferred Tax Assets (Long-Term) 158 217 443 350 200
Other Long-Term Operating Assets — — — — —
Long-Term Non-Operating Assets 129 157 205 205 205
Total Assets 9,120 8,969 9,178 9,956 9,943
Accounts Payable 1,036 1,172 1,294 1,349 1,303
Short-Term Debt 566 308 45 500 500
Deferred Tax Liabilities (Current) — — — — —
Other Short-Term Liabilities 460 373 273 350 350
Current Liabilities 2,062 1,853 1,612 2,199 2,153
Long-Term Debt 1,677 1,715 1,772 1,700 1,700
Deferred Tax Liabilities (Long-Term) 404 316 220 400 400
Other Long-Term Operating Liabilities 115 232 219 250 250
Long-Term Non-Operating Liabilities 445 261 532 532 532
Total Liabilities 4,703 4,377 4,355 5,081 5,035
Preferred Stock — — — — —
Common Stock — — — — —
Additional Paid-in Capital 4,415 4,590 4,821 4,821 4,821
Retained Earnings (Deficit) — — — 52 84
(Treasury Stock) — — — — —
Other Equity — — — — —
Shareholder's Equity 4,415 4,590 4,821 4,873 4,905
Minority Interest 2 2 2 2 2
Total Equity 4,417 4,592 4,823 4,875 4,907
Morningstar Analyst Forecasts
Balance Sheet (EUR Mil)
Fiscal Year Ends in December Forecast
2009 2010 2011
2012 2013Net Income 513 103 235 236 225
Depreciation 78 65 60 62 59
Amortization 142 190 186 — —
Stock-Based Compensation — — — — —
Impairment of Goodwill 126 223 39 — —
Impairment of Other Intangibles — — — — —
Deferred Taxes -378 -288 -164 273 150
Other Non-Cash Adjustments -83 20 57 — —
(Increase) Decrease in Accounts Receivable 58 175 -142 177 23
(Increase) Decrease in Inventory -5 -17 -103 132 14
Change in Other Short-Term Assets — — — — —
Increase (Decrease) in Accounts Payable -21 126 124 55 -46
Change in Other Short-Term Liabilities -135 -91 — 77 —
Cash From Operations 295 506 292 1,011 425
(Capital Expenditures) -38 -54 -82 -55 -58
Net (Acquisitions), Asset Sales, and Disposals -94 — -63 — —
Net Sales (Purchases) of Investments 665 30 9 — —
Other Investing Cash Flows -60 -39 5 31 —
Cash From Investing 473 -63 -131 -24 -58
Common Stock Issuance (or Repurchase) — — -137 — —
Common Stock (Dividends) -167 -174 -177 -183 -193
Short-Term Debt Issuance (or Retirement) — — — 455 —
Long-Term Debt Issuance (or Retirement) -567 -264 46 -72 —
Other Financing Cash Flows -2 -2 -119 — —
Cash From Financing -736 -440 -387 200 -193
Exchange Rates, Discontinued Ops, etc. (net) — 8 2 — —
Net Change in Cash 32 11 -224 1,187 175
Morningstar Analyst Forecasts
Cash Flow (EUR Mil)
Fiscal Year Ends in December Forecast
Company/Ticker Price/Fair
Value 2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)UCB SA UCB BE 1.46 17.2 24.4 26.3 11.2 17.1 17.7 27.8 7.5 19.6 1.2 1.5 1.5 1.8 2.3 2.4
Company/Ticker Total Assets
(Mil) 2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)UCB SA UCB BE 9,178 EUR 6.7 8.1 6.2 13.1 22.9 17.6 5.0 4.9 4.6 2.6 2.5 2.3 3.0 2.6 2.7
Company/Ticker Revenue
(Mil) 2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)UCB SA UCB BE 3,246 EUR 0.9 -5.2 -3.4 -6.9 6.1 -3.4 -5.0 -11.8 -6.9 -81.7 308.5 -57.7 2.2 3.6 5.0
Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Valuation Analysis
Returns Analysis
Growth Analysis
Price/Earnings EV/EBITDA Price/Free Cash Flow Price/Book Price/Sales
ROIC % Adjusted ROIC % Return on Equity % Return on Assets % Dividend Yield %
Revenue Growth % EBIT Growth % EPS Growth % Free Cash Flow Growth % Dividend/Share Growth %
Last Historical Year
Last Historical Year
Company/Ticker Net Income
(Mil) 2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)UCB SA UCB BE 347 EUR 68.8 68.0 68.0 21.0 17.0 17.0 13.4 15.0 15.0 10.7 9.9 9.6 6.5 31.1 12.4
Company/Ticker Total Debt
(Mil) 2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)UCB SA UCB BE 1,817 EUR 37.7 45.1 44.9 27.4 31.1 31.0 3.3 2.3 2.2 2.7 4.2 4.4 1.9 2.0 2.0
Company/Ticker Market Cap
(Mil) 2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)2011
2012(E) 2013(E)UCB SA UCB BE 7,191 EUR 1.66 8.13 9.09 1.06 1.18 1.26 0.73 0.99 1.08 6.78 2.98 3.33 75.3 77.8 85.7
Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Profitability Analysis
Leverage Analysis
Liquidity Analysis
Gross Margin % EBITDA Margin % Operating Margin % Net Margin % Free Cash Flow Margin %
Debt/Equity % Debt/Total Cap % EBITDA/Interest Exp. Total Debt/EBITDA Assets/Equity
Cash per Share Current Ratio Quick Ratio Cash/Short-Term Debt Payout Ratio %
Last Historical Year
Last Historical Year
3 Moat Valuation 3 Three-Stage Discounted Cash Flow 3 Weighted Average Cost of Capital 3 Fair Value Estimate 3 Scenario Analysis 3 Uncertainty Ratings 3 Margin of Safety 3 Consider Buying/Selling 3 Stewardship Rating
their fair value. A number of components drive this rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s intrinsic value based on a discounted cash-flow model, (3) the margin of safety bands we apply to our Fair Value Estimate, and (4) the current stock price relative to our fair value estimate.
The concept of the Morningstar Economic Moat™ Rating plays a vital role not only in our qualitative assessment of a firm’s investment potential, but also in our valuation process.
We assign three moat ratings—none, narrow, or wide—as well as the Morningstar Moat Trend™ Rating—positive, stable, or negative—to each company we cover. There are two major requirements for firms to earn either a narrow or wide moat rating: (1) the prospect of earning above-average returns on capital; and (2) some competitive edge that pre- vents these returns from quickly eroding. The assumptions we make about a firm’s moat determine the length of “eco- nomic outperformance” that we assume in the latter stages
enterprise value and the value of the firm if no future net in- vestment were to occur. Said differently, moat value identi- fies the value generated by the firm as a result of any future net new investment. Our Moat Trend Rating reflects our as- sessment of whether each firm’s competitive advantage is either getting stronger or weaker, since we think of moats as dynamic, rather than static.
At the heart of our valuation system is a detailed projection of a company’s future cash flows. The first stage of our three- stage discounted cash flow model can last from 5 to 10 years and contains numerous detailed assumptions about various financial and operating items. The second stage of our mod- el—where a firm’s return on new invested capital (RONIC) and earnings growth rate implicitly fade until the perpetuity year—can last anywhere from 0 years (for no-moat firms) to 20 years (for wide-moat companies). In our third stage, we assume the firm’s RONIC equals its weighted average cost of capital, and we calculate a continuing value using a standard Morningstar Research Methodology for Valuing Companies
Analyst conducts company and industry research:
Financial statement analysis Channel checks Trade-show visits Industry and company reports and journals Conference calls Management and site visits 3 3
3 3
3 3
Strength of competitive advantage is rated:
None, Narrow, or Wide Advantages that confer an economic moat:
High Switching Costs (Microsoft)
Cost advantage (Wal-Mart) Intangible assets (Johnson & Johnson) Network Effect (Mastercard) Efficient Scale (Lockheed Martin)
Analyst considers past financial results and focuses on competitive position and future prospects to forecast future cash flows.
Assumptions are entered into Morningstar’s proprietary discounted cash-flow model.
The analyst then eval- uates the range of potential intrinsic values for the company and assigns an Uncertainty Rating: Low, Medium, High, Very High, or Extreme.
The Uncertainty Rating determines the margin of safety required before we would rec- ommend the stock.
The higher the uncer- tainty, the wider the margin of safety.
Analyst uses a discounted cash-flow model to develop a Fair Value Estimate, which serves as the foundation for the Morningstar Rating for stocks.
The current stock price relative to Morningstar’s Fair Value Estimate, adjusted for uncertainty, determines the Morningstar Rating for stocks.
The Morningstar Rating for stocks is updated each evening after the market closes.
QQQQQ QQQQ QQQ QQ Q
Fundamental Analysis
Economic Moat
TMRating
Company Valuation
Fair Value Estimate
Uncertainty
Assessment
3 Uncertainty Methodology 3 Cost of Equity Methodology 3 Morningstar DCF Valuation Model 3 Stewardship Rating Methodology
* Please contact a sales representative for more information.
Instead, we rely on a system that measures the estimated volatility of a firm’s underlying future free cash flows, tak- ing into account fundamental factors such as the diversity of revenue sources and the firm’s fixed cost structure.
We also employ a number of other tools to augment our valu- ation process, including scenario analysis, where we assess the likelihood and performance of a business under different economic and firm-specific conditions. Our analysts typically model three to five scenarios for each company we cover, stress-testing the model and examining the distribution of resulting fair values.
The Morningstar Uncertainty Rating captures the range of these potential fair values, based on an assessment of a company’s future sales range, the firm’s operating and fi- nancial leverage, and any other contingent events that may impact the business. Our analysts use this range to assign an appropriate margin of safety—or the discount/premium
prices receive our highest rating of five stars, whereas firms trading above our consider-selling prices receive our lowest rating of one star.
Morningstar Margin of Safety and Star Rating Bands
Price/Fair Value 2.75
2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25
Low Medium High Very High*
* Occasionally a stock’s uncertainty will be too high for us to estimate, in which case we label it Extreme.
• 5 Star
• 4 Star
• 3 Star
• 2 Star
• 1 Star
Uncertainty Rating
— 125%
105% — 80% —
— 95%
— 135%
110% —
70% —
— 90%
— 155%
115% —
60% —
— 85%
— 175%
125% —
50% —
— 80%
New Morningstar Margin of Safety and Star Rating Bands as of August 18th, 2011
Our corporate Stewardship Rating represents our assess- ment of management's stewardship of shareholder capital, with particular emphasis on capital allocation decisions.
Analysts consider companies' investment strategy and
valuation, financial leverage, dividend and share buyback
policies, execution, compensation, related party transac-
tions, and accounting practices. Corporate governance
practices are only considered if they've had a demonstrated
impact on shareholder value. Analysts assign one of three
ratings: "Exemplary," "Standard," and "Poor." Analysts judge
stewardship from an equity holder's perspective. Ratings
are determined on an absolute basis. Most companies will
receive a Standard rating, and this is the default rating in
the absence of evidence that managers have made
exceptionally strong or poor capital allocation decisions.
coverage list.
3 Encapsulates our in-depth modeling and quantitative work in one letter grade.
3 Allows investors to rank companies by each of the four underlying com- ponents of our credit ratings, including both analyst-driven and quantitative measures.
3 Provides access to all the underlying forecasts that go into the rating, available through our insti- tutional service.
different lenses—qualitative and quantitative, as well as fundamental and market-driven. We therefore evaluate each company in four broad categories.
Business Risk
Business Risk captures the fundamental uncertainty around a firm’s business operations and the cash flow generated by those operations. Key components of the Business Risk rating include the Morningstar Economic Moat
™Rating and the Morningstar Uncertainty Rating.
Cash Flow Cushion
™Morningstar’s proprietary Cash Flow Cushion
™ratio is a fundamental indicator of a firm’s future financial health The measure reveals how many times a company’s internal cash generation plus total excess liquid cash will cover its debt-like contractual commitments over the next five years. The Cash Flow Cushion acts as a predictor of financial distress, bringing to light potential refinancing, operational, and liquidity risks inherent to the firm.
3 3 3 3 3
3
The higher the rating, the less likely we think the company is to default on these obligations.
The Morningstar Corporate Credit Rating builds on the modeling expertise of our securities research team. For each company, we publish:
Five years of detailed pro-forma financial statements Annual estimates of free cash flow
Annual forecasts of return on invested capital
Scenario analyses, including upside and downside cases Forecasts of leverage, coverage, and liquidity ratios for five years
Estimates of off balance sheet liabilities
These forecasts are key inputs into the Morningstar Corporate Credit Rating and are available to subscribers at select.morningstar.com.
Morningstar Research Methodology for Determining Corporate Credit Ratings
Competitive Analysis
Cash-Flow Forecasts
Scenario Analysis
Quantitative Checks
Rating Committee
A AA
BBB
C
D
