The Lundbeck case study describes the initial public offering (IPO) that the company made in the summer of 1999. The focus of the case is about valuation, but a number of other issues arise for discussion: The company's strategy in deciding to make the IPO What the considerations were for the management and shareholder in agreeing on the issuing price and timing The number of shares to be sold, where they would be sold, and how the after-market should be developed and maintained Lundbeck is a medium-sized pharmaceutical company based in Denmark. It is specialized in the research and development, manufacture, marketing and sale of drugs for the treatment of psychological and neurological diseases and disorders. Group sales for 1998 were DKK 3.2 billion of which its principal product, citalopram accounted for DKK 2.1 billion or two-thirds of the total. The company has production facilities in Denmark and the U.K. Most R&D is carried out by the company itself, or through licensing, and from strategic alliances with others having expertise in a specific area. Some 475 scientists and technicians are employed in R&D out of a total 2,286 full-time employees in the company. Until the IPO, the Lundbeck Foundation was the sole shareholder. The IPO would put about 20% of the shares on the market in a so-called Global Offering. A listing of the shares would be made on the Copenhagen stock market.
The shares were put on the market at DKK175. Students are asked to look at the offering from the point of view of an investor: at the offering price, were the shares correctly valued? This is very subjective ex ante because until the shares are actively traded for some time, we cannot say. Even after they do trade on the market for a period of time, it is still possible that the market will incorrectly value the shares. What information is required in order to assess and place an appropriate value on the shares? Students will be asked to compare Lundbeck to other companies in the industry that are as similar as possible and value the shares on the basis of price-to-earnings, price-to-cashflow, or price-to-book ratios. The difficulty with this approach in this case is finding appropriate comparative companies since most firms in the industry are larger and traded on other markets. The case provides enough data to make a valuation based on the future cash flows of Lundbeck, requiring many assumptions and the use of a spreadsheet. Therefore, a number of values will be generated; in the end, the pricing decision will be based on the judgement of informed parties to the transaction. This part of the case discussion will replicate (very much summarized) what takes place in practice.
- Global offering
- Company risk