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Orion 8% Yield Wins No Respect for Finnish Drugmaker Analysts Love to Hate

March 01, 2012

Orion Oyj (ORNBV), one of the most rewarding European drug stocks for investors over the past five years, is the least loved by analysts. Chief Executive Officer Timo Lappalainen aims to prove them wrong.

Orion shares have returned 41 percent, compared with 17 percent for the Bloomberg Europe Pharmaceutical Index, as the Espoo, Finland-based company shoveled cash to shareholders via dividends. The returns are unsustainable because patents begin to expire this year on the Parkinson’s disease drugs that make up almost a third of sales, said Sami Sarkamies of Nordea Bank, one of six analysts who recommend selling the stock.

Lappalainen says the company is adding new products and expanding in generic medicines to replace the sales that will be lost. The approach is starting to win converts -- three analysts have recommended buying the stock in the past seven months, up from zero previously.

“What’s poorly understood in this company historically is that it’s a very long process of losing these patents; it’s not one cliff,” said Lars Hevreng, an analyst at SEB Enskilda who raised the stock to “buy” from “hold” on Feb. 8. “Companies don’t lose 100 percent of the product when they lose the patent. The visibility isn’t very good but what we see in terms of sales growth is fairly strong.”

Orion rose 0.7 percent to 16.28 euros at the close of trading yesterday in Helsinki, giving the company a market value of 2.32 billion euros ($3.1 billion).

Among the 12 analysts covering Orion, three recommend buying, three have “hold” ratings and six recommend selling. That’s the least-bullish consensus of any drug stock in Europe, according to data compiled by Bloomberg.

Generic Competition

Stalevo and two related Parkinson’s drugs, Comtess and Comtan, had sales of 267 million euros last year. Cheap copies will reach the U.S. market starting in April under accords with India’s Sun Pharmaceutical Industries Ltd. and Wockhardt Ltd. Patent protection on the medicines will expire in the U.S. and Europe in October 2013.

“The floodgates will open in the U.S. starting in November 2013,” said Lappalainen, the CEO. “We’ve been planning for several years. Pushing our proprietary pipeline, focusing on the generic side, and we’ve been able to increase volumes and created flexibility in our cost base.”

Patented drugs make up 45 percent of sales. Generic medicines account for 35 percent, with the rest coming from contract manufacturing, veterinary products, diagnostics and other areas.

Asthma Drug

Orion is awaiting late-stage data on new formulations for its Easyhaler inhaled drug for asthma and smoker’s cough, potential competitors to GlaxoSmithKline Plc’s Advair and AstraZeneca Plc’s Symbicort. Advair and Symbicort brought in 7 billion pounds ($11.2 billion) in 2011. The company in July also won approval in some European markets to sell its Dexdor sedative, already sold outside Europe with partner Hospira Inc. under the name Precedex.

In the meantime, the company has tried to keep shareholders happy with cash. The 1.30 euro-a-share dividend that Orion will pay April 4 is equal to 8 percent of the stock price, the highest yield in Europe. The company also is returning 12 cents a share in capital to investors.

The dividend attracts shareholders that include pension funds and individual investors. About two-thirds are based in Finland and some are second- or third-generation individual holders, said Lappalainen. Those investors are focused on the cash payout, meaning management must limit long-term investments or acquisitions of drugs in early stages of development, he said.

‘Tight Leash’

“You need to steer this company with a very tight leash, you have to earn that dividend so that’s how we’ve been driving this,” he said. “We can’t broaden the early-stage pipeline just so we have a nicer-looking slide. It has to make sense right away financially.”

Shareholders may come to regret that strategy, because it has deprived the company of money to spend on new products, said Sarkamies. The dividend amounts to 87 percent of last year’s earnings, more than twice the average payout ratio for competitors.

“They have been chronically underinvesting in R&D and acquisitions,” he said in an interview from Helsinki. “I think of this as a generic player with this one blockbuster that’s at the end of its life cycle. It’s just not sustainable. The company is not even trying to make it sustainable.”

A year’s delay on the Easyhaler trial, combined with slower than expected sales so far of Dexdor, makes it unlikely the company can maintain that dividend, said James Vane-Tempest, an analyst at Jefferies International in London with an “underperform” rating on the shares.

Question on Dividend

“Much to their credit they haven’t wasted cash on someone else’s goodwill -- others would go and buy an Alcon or a Wyeth,” said Vane-Tempest, referring to megamergers by Novartis AG and Pfizer Inc. “The flip to that is the longevity is questioned. How long can they afford to pay that dividend with these patent expiries coming?”

The arrival of generic competition for the Parkinson’s drugs will push 2012 sales and operating profit to their levels in 2011 and 2010, respectively, said Lappalainen. Still, he’s used to being underestimated.

“If one looks at the investment case with a huge exciting news flow to appreciate the stock, maybe this isn’t the investment for you,” Lappalainen said. “We don’t make the big headlines. We’ve been a steady-as-we-go type of stock. But it’s good for investors. They’ve made money.”

To contact the reporter on this story: Trista Kelley in London at tkelley2@bloomberg.net

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net


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