If Even Modest Price Cuts Hit Either of Lannett’s Cash Cow Drugs, It Will Violate Its Debt Covenants
$13-$15 Near Term Target
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Equity Worthless Over Long-Term
Over the past year, almost every media outlet in the US has dissected the pharmaceutical industry to expose the culprits of rampant opportunistically driven price gouging. We are now well past that point. The next question investors will have to ask is:
“Which companies will collapse under their debt load from levered acquisitions, based on the assumption of endless unrestrained drug price increases?”
The one company standing out most starkly is Lannett (NYSE:LCI). While Valeant, Mylan, and Horizon have multiple product lines across numerous specialties, Lannett is heavily leveraged, and extremely dependent on the profit windfall from just a few of its drugs to generate enough revenue to service its debt load.
In the past month we have seen a series of lawsuits against Lannett that Wall Street has completely overlooked. These lawsuits, along with the Trump administration’s dedication to confront indiscriminate drug price raises, illuminates a clear path to 0 for the equity of Lannett.
In this story Citron will explain these 4 essential points
1. Explain the dependence of Lannett’s business on only three products (most heavily reliant on just one).
2. Reference NEW COURT DOCUMENTS showing conclusively that Lannett has indeed conspired to fix drug pricing.
3. Illustrate the effect of price competition on generic drugs – through Lannett’s own product mix
4. Provide a sensitivity analysis projecting how Lannett WILL become insolvent if and when it is forced to take modest price reductions
Lannett’s product mix chart is the foundation of this story.
Notice the drugs that this business is based on
- Thyroid Deficiency – Levothyroxine (Levo) (#1 revenues by far)
- Anti Psychosis – Fluphenazine (Fluph) (#2 revenues)
- Cardiovascular (Digoxin) (#3 revenues)
These 3 drugs are responsible for over 43% of Lannett’s gross revenue…and a disproportionate share of its net revenues!
Lannett lives and dies on the price of Levothyroxine (Levo).
Levo is generic Synthroid, which is the second most prescribed generic drug in the United States. Whereas most generic drug prices are destined to drift lower, Levo prices are approximately 200-300% higher than they were in 2013. Although there are some smaller competitors, the two real players for Levo are Lannett and Mylan.
In November of 2016, Bloomberg reported that Lannett, amongst other companies, received a subpoena from the U.S. Department of Justice regarding generic drug pricing collusion:
U.S. Charges in Generic-Drug Probe to Be Filed by Year-End
Wall Street took notice of this Bloomberg news coverage, and sent Lannett stock down to $17.
But what happened in the following two months has gone unnoticed by Wall Street … Until Now…
It’s easy to dismiss Citron coverage as “biased”, but it’s denying reality to dismiss the data from the lawsuits filed against Lannett in the last month. The case for price fixing Levo was presented by not just one but TWO lawsuits … filed in just the past month.
Let’s start here, with a glimpse into the basic pricing charts for Levo over the past 3 years, as presented in one of the lawsuits currently pending against Lannett. Are we to believe that these prices were not fixed?
Just two weeks later, on December 28, the Rochester Drug Co-operative, one of the nation’s fastest growing healthcare distributors, filed a similar lawsuit against Lannett accusing them of price fixing the price of Levo.
Both of these lawsuits (especially the Rochester Drug Co-op suit) do an amazing job detailing the roadmap of what the Department of Justice is undoubtedly finding while investigating Lannett.
Collusion on price hikes is beyond question. These lawsuits are better than a smoking gun: they are DNA evidence and nothing short of a confession.
Lannett’s CEO has actually bragged about raising prices and is now worried about competitors:
“Mylan is one of those rational competitors, so we’re not really expecting anything crazy from them.” — Arthur Bedrosian, Lannett CEO
“You mean after I sent them the thank you note?”
He continued: “So whenever people start acting responsibly and raise prices as opposed to the typical spiral down of generic drug prices, I’m grateful. Because Lannett tends to be active in raising prices.” — Arthur Bedrosian, Lannett CEO
The price of Levo and the future of Lannett will be sealed on of these 4 inevitable events.
1. Competitors lowering pricing amongst current scrutiny
2. Lannett is forced to eliminate the price increases over the past 2 years
3. Another generic enters the Levo market, which is inevitable at these prices
4. Lannett cannot possibly sustain their Levo supply agreement at current terms. This distribution deal, which expires in 2019, will either fall due to price fixing, or be dramatically repriced. The gravy train ends, either way.
Lannett’s second largest drug last quarter was Fluphenazine (Fluph).
In what some would call the ultimate demonstration of “chutzpah” Lannett raised the price on this newly acquired drug schizophrenia drug by 1900% in the middle of 2016 … amidst the middle of the drug pricing scrutiny storm.
Article by Citron Research
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