February 13, 2012 - 11:49am EST by
2012 2013
Price: 80.00 EPS $0.00 $0.00
Shares Out. (in M): 1 P/E 0.0x 0.0x
Market Cap (in $M): 1 P/FCF 0.0x 0.0x
Net Debt (in $M): 360 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Undervalued Bond
  • Specialty Pharma


Lantheus Medical Imaging, Inc. (Private)

FYI This is a long Bond writeup, Shares Outstanding and Market Cap are not material to thesis.



Business Description

Lantheus Medical Imaging, Inc. (“Lantheus” or the “Company”) is a leading specialty pharmaceutical company that develops, manufactures, distributes and sells innovative diagnostic medical imaging products on a global basis. The Company’s current imaging agents primarily assist in the diagnosis of heart, vascular and other diseases using nuclear imaging, ultrasound and MRI technologies. The Company’s primary products are injectable agents used in medical imaging procedures, including Cardiolite, DEFINITY and Neurolite.

The Company has operations in the United States, Puerto Rico, Canada and Australia and distribution relationships in Europe, Asia Pacific and Latin America. Lantheus’ products are used by nuclear physicians, cardiologists, radiologists, internal medicine physicians, technologists and sonographers working in a variety of clinical settings, and the Company sells its products to radiopharmacies, hospitals, clinics, group practices, integrated delivery networks, group purchasing organizations and, in certain circumstances, wholesalers.



My apologies in advance, as this is being modified to remove charts, which may make some of the write-up difficult to read.

The Company’s bonds have traded off ~25 points from the highs and currently trade ~80% of par with a ~15.5% YTW. The sell off was mainly due to supply chain issues focused around the shut down of Ben Venue Labs in Ohio. Assuming the supply is back-up and running shortly, the bonds will trade up meaningfully as the company generates substantial FCF. Otherwise, worst case in a bankruptcy, you are creating the company at approximately 1x revenue on a market value basis (assuming no future value to current R&D portfolio), which should be a very conservative valuation if forced to sell the company in a 363 sale. Covenants are very strong which should limit any additional debt coming on that is senior. It’s a classic distressed situation, company performs you win, company files you win and all caused from a one-time supply chain issue that is in the process of being resolved. The bonds currently trade ~5.3x EBITDA, however this includes approximately $70mm in SG&A and R&D spend. If you were to sell this business in a bankruptcy to a strategic, most of these costs could be removed we believe leading to a potential doubling of the underlying EBITDA to a sponsor, helping to again preserve value for the bond holders.



Cardiolite, also known by its generic name “sestamibi”, is a technetium-based radiopharmaceutical used in myocardial perfusion imaging (“MPI”) procedures. Cardiolite is primarily used for detecting coronary artery disease using single photon emission computed tomography (“SPECT”). Cardiolite is sold as a vial of lyophilized powder that is administered by intravenous injection for diagnostic use after reconstitution with radioactive saline in conjunction with the Company’s TechneLite generator. Compared to some alternatives, Cardiolite offers a non-invasive, more efficacious diagnostic approach with potentially less radiation exposure. Cardiolite was approved by the FDA in 1990 and the Company’s patent / market exclusivity expired in July 2008. In September 2008, the first of several competing generic products was launched, subsequent to which the Company has faced significant pricing pressure and has experienced a loss in share.


TechneLite is a technetium-based generator used by radiopharmacies to radiolabel Cardiolite and other Tc-99m radiopharmaceuticals used in nuclear medicine procedures. The generator consists of a glass column with fission-produced Mo-99 adsorbed on alumina powder within the column. The terminally sterilized and sealed column is enclosed in a lead shield which is further sealed in a cylindrical plastic container. Cardiolite and other radiopharmaceuticals are activated by combining them with technetium, a daughter product of radio-decaying Mo-99 which has been eluted from the generator.

The Company produces 13 different sized generators under the name TechneLite. Most are sold to radiopharmacies that prepare and ship unit-doses of Cardiolite and other radiolabeled pharmaceuticals directly to hospitals.

In the United States, the Company currently competes primarily with Covidien for the sale of technetium-based generators. From 2005 to 2008, Covidien experienced manufacturing issues with the Tc-99m product, including safety and regulatory warning letters from the FDA and temporary shutdowns of its manufacturing facilities. As a result, the Company benefited from increased sales during this time. The Company’s share returned to pre-2006 levels in early 2009.  In May 2009, Canadian authorities shut down the NRU reactor in Canada, from which the Company receives a majority of its supply of Mo-99. As a result of this interruption of supply, Lantheus’ market share for TechneLite was reduced. The NRU reactor returned to service in August 2010 and the Company has seen increased sales in both Cardolite and TechneLite. However, TechneLite unit volume has not returned to pre-shortage levels.

TechneLite and Cardiolite both are dependent on Mo-99, or Moly, the initial radioactive isotope created in nuclear reactors. Moly, with a half-life of about 66 hours, requires quick processing and delivery so that TechneLite generators can be produced and shipped to customers. The Company utilizes its just-in-time business model, via commercial carriers, dedicated charter aircraft and ground courier services, to ensure products are delivered to radiopharmacies and hospitals in a timely manner. Because of the 66 hour half-life, radiopharmacies typically purchase TechneLite generators on a weekly basis. Moly that is produced further away from the Company’s facilities decays or “melts” in transit. For instance, approximately one-third of Moly that is produced outside of North America decays before it reaches the Company’s facilities. The Company has historically received a majority of its supply of Moly from the NRU reactor in Chalk River, Canada, from Nordion, allowing for less decay and lower costs to it.

Historically, the Company’s largest supplier of Moly has been Nordion, which relies on the NRU reactor, owned and operated by the Atomic Energy Canada Limited (“AECL”), a Crown corporation of the Government of Canada, located in Chalk River, Ontario. From May 2009 until August 2010, this reactor was off-line on an unscheduled basis due to a “heavy water” leak in the reactor vessel and subsequent extended repairs. Additionally, from February 2010 until September 2010, the HFR main reactor in The Netherlands, another reactor that produces a large scale amount of Moly and the primary provider of Moly for Covidien, a competitor in North America, was shut down for scheduled extended repairs.

The Company has taken several steps in response to the Moly supply challenges, including significantly expanding sourcing from South Africa and Belgium, and pursuing global solutions. In 2009, the Company entered into an agreement with NTP to supply it with

Moly manufactured from the SAFARI reactor in South Africa. NTP, in turn, has partnered with IRE to co-supply it from the BR2, HFR and OSIRIS reactors. While this supply allowed the Company to manufacture and sell reduced numbers of technetium generators during the NRU reactor shutdown, this replacement capacity was not sufficient to replace the quantity of supply that the Company otherwise received from Nordion.


DEFINITY Vial for Injectable Suspension is the leading ultrasound contrast agent used during echocardiographic exams. In the United States, DEFINITY is indicated for use in patients with suboptimal echocardiograms to opacify the left ventricular chamber of the heart and to improve the delineation of the left endocardial border of the heart. In September 2010, the Company filed an application with the U.S. Food and Drug Administration (“FDA”) for label expansion to include DEFINITY’s use in exercise and pharmacological stress as well as rest echocardiographic procedures.

DEFINITY is sold in vials that contain a clear, colorless, sterile, non-pyrogenic hypertonic liquid, which upon activation with the aid of Vialmix, provides a homogenous, opaque, milky white injectable suspension of perflutron lipid microspheres.

DEFINITY primarily competes with Optison, a GE Healthcare product, as well as other imaging modalities. DEFINITY was the leading ultrasound contrast agent used by echo-cardiologists in 2010, with, the Company believes, over 90% of sales in this segment. DEFINITY is an advanced technology, derived from a synthetic lipid based coating, which the Company believe is superior to the alternatives.

In October 2007, following reports of serious cardiopulmonary reactions following the administration of DEFINITY and other drugs in the same class of agents (including Optison), the FDA requested the labels for DEFINITY and its competitor products in this class to include a boxed warning. The label warned that DEFINITY and other similar imaging agents were not suitable in patients who have unstable angina, unstable cardiopulmonary disease or a history of acute heart attacks, and suggested that all patients that use DEFINITY and similar agents should be monitored for 30 minutes following use. When the boxed warning went into effect, most of DEFINITY’s customers placed a hold on new orders to obtain legal approval from the appropriate departments within their hospitals and offices and to update protocols for usage. Sales prior to the issued warning were at a last quarter annualized run-rate of $66.5 million as of September 2007, with an approximate 3% penetration of all echocardiograms. Immediately following the boxed warning in October 2007, sales decreased to an annualized run rate of approximately $11.2 million based on the three months ended January 2008.

The Company initially launched DEFINITY in 2001, with the last patent in the United States currently expiring in 2016 and in numerous foreign jurisdictions in 2019. In June 2008, the Company relaunched DEFINITY. Since the product’s relaunch, U.S. sales of DEFINITY have continued to increase, with an annual growth rate of approximately 40% in the year ended December 31, 2010. Annual revenues from worldwide sales of DEFINITY improved to $60.0 million for the year ended December 31, 2010. The Company is actively engaged in driving consensus on the clinical utility of DEFINITY and the favorable benefit/risk profile through multiple publications and aligning itself with key societies such as the American Society of Echocardiography (ASE), International Contrast Ultrasound Society (ICUS) and Intersocietal Commission for the Accreditation of Echocardiography Laboratories (ICAEL).



In April 2009, the Company purchased from EPIX Pharmaceuticals, Inc. (“EPIX”), its U.S., Canadian and Australian rights to Ablavar, a magnetic resonance angiography (“MRA”) agent recently approved by the FDA to evaluate aortoiliac disease in adult patients with known or suspected peripheral vascular disease. In June 2010, the Company purchased the rest of the world rights to Ablavar. Peripheral vascular disease of the lower extremities affects 8 to 12 million people in the United States. The Company paid an aggregate purchase price of $32.8 million for the rights, which included existing drug product and active pharmaceutical ingredients inventory. The Company launched the product in January 2010. A portion of these rights are in-licensed, including from Bayer Schering Pharma AG. For Ablavar, the Company holds a number of different composition of matter, use, formulation and manufacturing patents which expire as late at 2017, and, assuming the Company is granted its U.S. request for regulatory extension, in the United States until 2020.

Ablavar is a gadolinium-based contrast agent and is the first contrast agent approved for an MRA indication in the United States. Compared to other MRA contrast agents, Ablavar binds to human serum albumin, resulting in prolonged blood retention which facilitates imaging of the arteries, produces improved high-resolution images and assists in the identification of blood flow restrictions. Ablavar provides high resolution MRA images without painful and invasive arterial shunting required for conventional x-ray angiography.

The Company launched Ablavar in January 2010 and the market acceptance of the agent has been slower than the Company initially anticipated.  While the Company believes Ablavar is superior to its competitors based on both safety and efficacy, the blood pool imaging attributes of the agent require extensive customer education and training to facilitate product adoption. In addition, Ablavar faces strong competition from the six other gadolinium-based contrast agents currently approved for use in the United States for MRI.

The Company’s remaining product portfolio consists of:

Neurolite, which is a SPECT brain perfusion agent and used to assist in stroke imaging by accounting for the localization of strokes in patients who have already suffered from a stroke. The Company launched Neurolite in 1995. In 2010, Neurolite represented 5.1% of its total revenues;

Thallium, which is an injectable and used in MPI studies using either planar or SPECT techniques for the diagnosis and localization of myocardial infarction. Thallium does not need to be activated with Tc-99m. The Company was the first to commercialize Thallium-201 in 1977, and it is manufactured in-house using cyclotrons. Thallium constituted an estimated 18% share of total U.S. MPI injections in the year ended December 31, 2010, which was elevated from historical numbers when demand for Thallium rose due to the Moly shortage. In 2010, Thallium represented 5.2% of its total revenues;

Xenon Xe 133 Gas, which is inhaled and used to assess pulmonary function and also for imaging blood flow, particularly in the brain. Xenon is manufactured by a third party and packaged in-house. In 2010, Xenon Xe 133 Gas represented 5.6% of its total revenues;

Gallium, which is an injectable and useful in demonstrating the presence of Hodgkins disease, lymphomas and bronchogenic carcinomas. The Company manufactures Gallium in-house using cyclotrons. In 2010, Gallium represented 1.9% of its total revenues; and

Samarium, which is an injectable and used to treat severe bone pain associated with certain kinds of cancer. The Company receives Samarium from a third party and finishes and packages it in-house. In 2010, Samarium represented 1.6% of its total revenues.


Avista Capital Partners purchased Lantheus from Bristol Myers Squibb in January 2008 for a reported purchase price of $525MM, financed with approximately $230MM in equity and $295MM in debt. While EBITDA for FY’08A came in around $250MM, (down from $330MM the prior year), implying a 2.0x purchase price, we assume this was not the normalized EBITDA upon which the deal was struck as the expiration of the Cardiolite patent in July 2008 was expected to significantly reduce the Company’s revenue and earnings going forward. Adjusted EBITDA was approximately $100MM in FY’09A, which would have resulted in a 5.25x purchase multiple.

From 2005 to present, the Company has experienced a number of abnormal situations that make it difficult to determine what the business should look like on a normalized basis, as follows:

  • 2005 – 2008. Covidien, Lantheus’ primary competitor in the Technelite product line, experienced manufacturing issues with its Tc-99m product, including safety and regulatory warning letters from the FDA and temporary shutdowns of its manufacturing facilities. As a result, the Company benefited from increased sales during this time. The Company’s share returned to pre-2006 levels in early 2009.
  • October 2007. The FDA responded to reports of serious cardiopulmonary reactions following the administration of DEFINITY and other similar competing agents, subsequently requiring a “boxed warning” label. Sales of DEFINITY dropped from a quarterly annualized run-rate of $66.5MM to $11.2MM, or 83%. The FDA revised the box warning to a less severe warning in May 2008. The inclusion of the boxed warning label halted sales in part because customers needed to obtain legal approval from the appropriate departments within their hospitals and offices and to update protocols for usage.
  • July 2008. Expiration of Cardiolite patent and the subsequent introduction of competing products into the market, reducing Cardiolite sales volumes and increasing pricing pressure.
  • May 2009. Canadian authorities shut down the NRU reactor in Canada, from which Lantheus receives a majority of its supply of Moly. As a result of this interruption of supply, the Company’s market share for TechneLite was reduced. The NRU reactor returned to service in August 2010.
  • 2010 – Present. Ben Venue Laboratories, Inc. ("BVL") is Lantheus’ sole source manufacturer of DEFINITY, Neurolite and certain TechneLite accessories, and the Company’s primary provider of Cardiolite products. In July 2010, due to non-compliance with FDA standards and a host of other operational issues, BVL temporarily shut down the Bedford, OH facility where it manufactures products for a number of customers, including the Company, in order to upgrade the facility to meet certain regulatory requirements. The facility was expected to be back up and running by March 2011, but as of early January 2012, the facility is still not operating (during the shutdown, BVL found additional, previously unidentified issues, requiring more remediation). As a result, Lantheus has run out of Neurolite product and is scrambling to find alternative suppliers for its other products manufactured by BVL.

The net effect of these issues is reflected in the Company’s financial performance as shown in the historical financial results summary table on page 1, where sales have fallen from $630MM in FY’07A to $350MM in FY’11E and adjusted EBITDA has fallen from $330MM in FY’07A to $62MM in FY’11E.

However, despite all these issues, the Company has managed to generate over $525MM of levered free cash flow from 2007 through Q3’11. This has allowed the Company to repay a significant portion of the initial debt borrowed for the Avista LBO (from $295MM in January 2008 to $65MM at the end of FY’09), and invest R&D dollars to develop a strong pipeline of new products. It also allowed the Company to complete a $150MM dividend recap in March 2011, taking out a significant portion of Avista’s original investment in the business.

As of September 30, 2011, the Company’s capital structure consisted of a $42.5MM revolver, undrawn, and $400MM of 9.75% senior unsecured notes due May 2017.

The company has approximately $400 mm of debt plus $45 million in cash with an undrawn revolver (42mm capacity). At market these bonds trade around 5.3x EBITDA (4.7x net of cash). Similar to most drug/medical supply companies, the company has VERY light capex leading to very high cash conversion rates which further helps support the multiple (obviously ex interest expense).



The Company’s LTM 9/30/2011 adjusted EBITDA was $92.5MM. However, as the Company will likely report a very weak Q4’11 and Q1’12 as a result of an inventory stock-out of Nerolite and low DEFINITY and Cardiolite inventory as of Q3’11, all as a result of the BVL facility shutdown, we take a conservative approach to forecasting FY’12, and derive a $62MM FY’12E trough EBITDA. At this trough level, gross and net leverage at face value of debt are currently 6.5x and 5.7x, respectively.

Comps in the space on average trade at around 8.0x EBITDA, and Covidien, the Company’s closest public comparable, also trades at approximately 8.0x. Through our proprietary terminal multiple analysis, we derive a 7.5x fair multiple for the Company. At a 7.5x terminal multiple, and with $355.8MM of net debt, the Company’s minimum EBITDA before impairment to the 9.75% notes would be $47.5MM, or a 23.5% decline from our $62MM trough estimate, and a nearly 50% decline from LTM 9/30/2011 EBITDA.

The key risk to our $62MM trough EBITDA is a prolonged shutdown of BVL in combination with an inability to successfully transition technology and processes to other suppliers to offset BVL loss. It should be noted that BVL must not only get its facilities up to standard, but it also must pass ongoing FDA inspections in order for its customers to receive approval to ship product produced by BVL; and given BVL’s current situation, we view this risk as more than just tail. Also, having found such things as a barrel full of human urine in one of the facility’s closets, BVL management had to fire somewhere in the range of 300 employees, for which it currently needs to find, hire and train; with issues like this to contend with, it would seem like a slow, bumpy restart is inevitable.

To some degree, the current price of the Company’s 9.75% notes, in the low-80’s, yielding nearly 15%, reflects this risk and the current operational vulnerability of the Company. However, if the situation turns out to be worse than expected, there is likely room for the 9.75% notes to sell off further. However, the company is currently in the process of looking for and testing alternate suppliers. This can lead to short term bumps as it may take several quarters to fully integrate a new supplier, however we feel you are being compensated for that risk in the bonds, and further that is a mark to market issue more than a long term impairment of the bonds.

Longer-term however, we believe Lantheus is a quality business with strong, defensible niche positions in the markets it serves. For example, post the expiration of its Cardiolite patents in July 2008, the Company maintains an approximate 33% market share, while still charging a premium relative to generics. Similarly, for the Technelite product line, Lantheus and Covidien essentially form a duopoly, with Lantheus maintaining a competitive advantage in North America with its supply agreement with Nordion/the NRU reactor, the only Mo-99 producing reactor in North America. Finally, the Company has several products in its pipeline, including a product in Phase III trials, Flurpiridaz F-18— PET Perfusion Agent—Myocardial Perfusion, which the Company believes has the potential to become a leading next-generation myocardial perfusion agent to work with PET technology.

From a liquidity perspective, the Company has about $40MM in annual cash interest and $8.5MM of annual capex. Over time, working capital has a neutral effect on FCF. The Company had $44MM of cash on its B/S as of Q3’11A and its $42.5MM revolver was undrawn. Given some cash burn from a weak Q4’11E, Ablavar purchase commitments in Q4’11 and small FY’12E cash generation, we think the Company should have ample liquidity over the next 12 months. If a worse-case scenario pans out, the Company could also begin cutting back on sales and marketing and research and development spend, and if needed, it could sell one of its product lines to raise cash. As such, we believe it is unlikely the Company will experience a liquidity crunch.

From a covenant perspective, additional debt is limited to a $15MM general debt basket; additional liens are limited to a $5MM general liens basket and a 0.75x Consolidated Secured Debt Ratio incurrence basket (which would not be available if the revolver was drawn, based on $62MM of EBITDA); and restricted payments are limited to a $5MM general RP basket and a building basket subject to a 2.00x FCCR incurrence test, which the Company would need a minimum $80MM of EBITDA to pass.



  • BVL Up and Running. If BVL gets up and running in January 2012, as is “expected” based on market intelligence, this would take the prolonged shutdown risk off the table, and the 9.75% notes would likely take a pop.
  • Zurich Lawsuit Victory. The Company is currently suing Zurich American Insurance Company (“Zurich”) for $70MM for business interruption insurance proceeds it believes it is owed by Zurich due to the NRU shut down that occurred between May 2009 and August 2010. If the Company wins this suit, the $70MM award would increase the credit profile of the Company, creating a boon for the 9.75% notes.
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