October 23, 2018 - 1:33pm EST by
2018 2019
Price: 3.63 EPS 0.86 2.04
Shares Out. (in M): 39 P/E 1.2 1.8
Market Cap (in $M): 144 P/FCF 1.2 1.8
Net Debt (in $M): 741 EBIT 225 164
TEV ($): 885 TEV/EBIT 3.9 5.4
Borrow Cost: Tight 15-50% cost

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  • Differentiated Research ALERT: Short a stock -90% YTD with 50% SI
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The story of Lannett has been well publicized over the last couple of years and was written up by bigvic in early 2017. However, because he/she has exited the position, we thought we'd bring up the idea again given the recent catalysts. For those who are not familiar with the story, there are some good pieces by Nathan Vardi and some slides from a SOHN contest that can be found with a simple google search. 

Regardless, I will try and summarize the situation. I'm going to keep this short and to the point because the thesis is quite simple:

LCI is a generic only pharmaceutical company which sells hundreds of different generic products. The Company rose to prominence when they increased their market cap ~20x in 2014 primarily by increasing the price of three generic drugs in their portfolio. With their newfound earnings, they levered up to 3.5x and bought Kremers Urban.

The acquisition eventually contributed little-to-no profits to the business due to some FDA sanctions on Kremers’ products. Over the last few years, the prices of 2/3 of those aggressively priced drugs have reverted to the mean and LCI's value has plunged. They have stayed alive and avoided bankruptcy because their remaining "aggressively priced drug" - Levothyroxine has been able to maintain pricing power (and we believe is contributing almost all the profits of the Company). That is correct. We think the Company will barely cover their overhead if they stop selling Levothyroxine.

Here is our simple math: The Company run-rated $200m of EBIT last quarter with ~$750m in net debt. Levo revenue last quarter run-rated at $240m. We think that Levo is above 90% margin, so you do the math…

LCI will argue that they have all these cost cuts, new unapproved drugs and pricing power on their other products which will boost earnings …we think all those comments are negligible to the broader story. It is hard to see a world where the Company isn’t severely over-levered, or even unprofitable without Levo, and would then be likely headed for bankruptcy.

‘Lo and behold, the Company was stripped of their ability to sell Levo just a month ago when the manufacturer ended their exclusive distribution relationship with LCI. No guidance has been given to what LCI looks like without the distribution agreement, but earlier this month they engaged Lazard to "explore capital structure options". We take this to mean that the lenders see the writing on the wall and are preparing the Company for a bankruptcy process. 

The stock is cheap today, but we don't see a world in which LCI avoids bankruptcy. 


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.


Levo Distrubution agreement ends in Q1 2019


Company files for BK

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