Danish pharmaceuticals giant Alk Abello upset some investors this morning by telling the market it would be investing USD 150 million in its North American business. This will mean that it will temporarily have to suspend its dividend. Alk Abello stock was down nearly 10pct in early trading in Copenhagen as a result.
Alk Abello is recognised as a leader in the manufacturer of drugs that combat allergies. The US market is regarded as an important one in this respect. Revenues from its North American business were up 17 pct year on year, so the decision does look like a sensible one from the perspective of expanding the company’s business. Alk Abello said this morning it expected that the expansion plans would be good for annual revenue growth, estimated this would be around 10 pct after 2018.
Alk Abello stock: should you invest?
Nobody likes seeing a solid pharmaceutical stock like Alk Abello suspending its dividend, although in this case for good reasons – investment in a market which the senior management team thinks could play a key role in corporate growth. The US could in fact play a key role in Alk Abello’s future growth: vaccines used to reduce or eliminate allergic reactions are unregistered. This is in direct contrast to the EU, where such medicines have been more heavily regulated since 2008. A danger of anaphylaxis if a patient is given the wrong dose has kept many pharmaceutical companies out of the market. Add to that the fact that the market has been quite small.
However a new generation of drugs could see that market expand, particularly as the occurrence of allergies seems to be on the rise in the developed world population.
Alk Abello has been active in the US market for a while – for example teaming up with Merck to launch an oral pollen vaccine in 2007. Merck returned the rights to three anti-pollen drugs to Alk Abello midway through a trial in July 2016 which left the Danish firm without a partner in the US and saw an 18 pct decline in Alk Abello stock.
This market is not considered to be huge, compared with some other areas of the drugs market. But there were 200,000 visits to US emergency rooms alone in 2016 due to reactions to peanuts.
The Armchair Trader says:
Alk Abello stock has not been doing well recently. The share price had been drifting down from 1074 on 5 October, and was then trading in the 900 range in the second half of November. This morning’s news has seen Alk Abello stock fall off a cliff, hitting 800 at time of writing. Our view: wait and see on this one. Yes, there is a good argument for investing more in the US business, and this is part of a more carefully thought out strategic expansion plan which has won the support of Alk Abello’s largest shareholder, Lundbeckfonden, but suspending the dividend has not done the company any favours. It could become more interesting if it gets a little cheaper.