LANNETT CO INC LCI S
February 07, 2017 - 10:49am EST by
bigvic
2017 2018
Price: 20.60 EPS 3.46 3.45
Shares Out. (in M): 37 P/E 5.92 6.29
Market Cap (in $M): 766 P/FCF 0 0
Net Debt (in $M): 800 EBIT 0 0
TEV ($): 1,552 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

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Description

LCI, a generic drug company that stamps out pills, is a name that's been dragged through the mud by Andrew Left.  Here's his article: http://www.citronresearch.com/wp-content/uploads/2017/01/LCI-final-a.pdf

Some Forbes writer named Nathan Vardi also did an article on LCI a while back that is ok: http://www.forbes.com/sites/nathanvardi/2016/10/06/another-drug-company-that-raises-prices-like-crazy/#64674f83740f 

Just to be clear: LCI is focused on stampling out pills, which is the lowest barrier to entry generic drug manufacturer; making generic creams, injectables, ointments are much, much harder to make.  In short, making a pill is as easy as it gets in generic drug-land.  If you don't trust me, maybe you'll trust KKR: as an example, Ali Satvat and his team at KKR invested in a generic drug company but, smartly, this generic drug company is not stamping out pills but making hard-to-make generic drugs: http://ir.kkr.com/kkr_ir/kkr_releasedetail.cfm?ReleaseID=1006565 

Things that I'd like you to think about.  All very simple.  All likely known but if not, I'll break it down into 3 simple things to think about:

1. Levothyroxine, a thyroid drug and their biggest revenue item (>25%+ of revenue), will face competition (volume and price will go down) at any time.  There are only 3 generic players in this little generic niche drug market and it is worth $1B+ market.  Name another generic market that is worth $1B+ with only 3 players making the drug.  There are multiple generic players who have filed and awaiting FDA approval.  Another player may show up tonight.  Next week.  Next month.  It's a matter of time...and the tailwind is that generic approvals will only get easier over time thanks to Trump.

2.  Fluphenazine, an antipsychotic drug and their #2 biggest revenue item (~10% of revenue), will see pricing pressure.  This is another when not if: who can raise drug prices 1950% in our day and age?  LCI.  https://twitter.com/search?vertical=default&q=%24lci&src=typd

The question is can they continue to do this?  Definitely not.  More likely: they'll be dragged in front of the government for doing this.  More likely: Trump tweets.  Most likely: LCI is rational to recognize they can't do this and voluntarily keeps prices flat-to-down...but then again, we're talking about LCI's CEO who got a "fake" JD from a diploma mill: this is according to the Forbes article and not my own research so I can't attest to the validity of the CEO's purported educational shenanigans.  Ask the Forbes author nvardi@forbes.com 

3.  With LCI's #1 and #2 biggest revenue and earnings driver at risk, LCI can be a $0 due to its debt (4x levered).

One final thought I'd like to leave you with if you plan on doing some digging here.  Look into LCI's biggggest drug, levothyroxine.  Does LCI own it?  What happens if levothyroxine's owner decides to change the economics with LCI or, even worse, not work with LCI?  Is this a big risk?

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

1. levo: competition; also look into the ownership of levo and this will be a catalyst once you put your arms around what that means going forward in terms of LCI's true future earnings power

2. fluphenazine: LCI gets dragged in front of Congress, Trump tweets, or LCI voluntarily takes away their own pricing power

3. Debt covenants: LCI is over-earning and once its earnings normalizes, debt covenants will likely be broken and equity will be close to $0

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