Lannett Company, Inc.
Andrew (Drew) Szilagyi
Qiang (Cindy) Fu
Vedvati (Vedu) Shrotre
Vishal Shah
March 12, 2015
Agenda
Introduction
Macroeconomic Overview
Industry Overview
Business Overview
Financial Analysis
Financial Projection
Valuation
Recommendation
Introduction

Lannett Company, Inc. (Ticker: LCI, NYSE)

Incorporated in 1942 in Pennsylvania,
reincorporated in 1991 in Delaware

Acquired Cody Laboratories, Inc. in 2007

Develops, manufactures and distributes generic prescription
pharmaceutical products throughout the United States

Markets products primarily to drug wholesalers, retail drug
chains, distributors, and government agencies

Net sales grew at a compounded annual growth rate of more
than 22% from 2002 to 2014
Source: LCI 2014 10-K , Page3
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
3
Current Performance

Stock Price: $63.82

Market Cap: 2.28 B

P/E (ttm): 19.6

EPS: 3.26

Beta: 1.21
Stock Price Source: Yahoo Finance
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
4
Macroeconomics
GDP (current US$ trillion)
18
Increase in demand considering
• Increasing aging population
• Increasing health expenditure
• GDP outlook of 2.6%
16
14
12
10
8
6
4
2
0
Health expenditure, total
(% of GDP)
20
18
16
14
12
10
8
6
4
2
0
Source: World Bank http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS/countries/1W-US?display=graph;
Congressional Budget Office http://www.cbo.gov/publication/45543
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
5
Industry Overview
•
8/10 prescriptions are filled for generic
drugs
•
U.S. health care system to focus on
cost saving increasing demand for
cheaper generic drugs
•
When Medicare and Medicaid receive
more funding from the US government,
more consumers gain prescription drug
coverage
Source: U.S. Food and Drug Administration; IBISWorld, http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=488#KED
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
6
Porter’s Five Forces
Low
Relatively few
alternatives to drugs
High
• Face intense
competition from
branded generic
products
Moderate
• High concentration
amongst suppliers
• Entered into exclusive
agreements
Threat of
Substitutes
5
4
3
2
Rivalry
Bargaining Power
of Suppliers
1
0
Barriers to Entry
Bargaining Power
of Customers
High
• Strictly regulated by FDA
• High production and
setup costs
High
• High concentration
amongst customers
Source: Team analysis
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
7
Supply Chain
Suppliers
Customers
AmerisoruceBergen –
19%
Walgreens – 17%
Manufacturers of
Generic drugs
Cardinal Health – 9%
Mckesson -8%
Domestic – JSP, Cerovene,
and Summit Bioscience
International – Azad Pharma
AG, Swiss Caps of Switzerland,
Pharma 2B, GC Group and HEC
Pharm Group
Intro
Macro
Industry
Manufacturing generics
& API with expired
patents
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
8
Key Products
Levothyroxine Sodium
- This a generic Thyroid medication drug
- Synthroid, Levoxyl are its biggest competitors and brand
counterparts produced by Abbvie & Pfizer.
- This is Lannett’s most revenue generating product.
- Contributes to 37% of revenue
Digoxin
- Used to treat congestive heart failure
- Supplied by JSP
- Impax is the biggest competitor
- Contributes to 23% of revenue
Butalbital
- It is an ingredient for three pain management medicines
(Asprin, Caffeine etc)
- Used to treat migraines & headaches
- Actavis and Mallinckrodt are the biggest competitors
- Contributes to 10-15% of revenue.
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
9
Peers Analysis
Product Competitor wise
Business Model wise
Mylan – Thyroid, Blood Pressure,
Gallstone
Teva – Generic drug maker, similar
business model
Mallinckrodt – Pain Management &
Migraine
Sagent – Very similar operation
mode & small cap company
Pfizer, Abbvie & Novartis - Thyroid
Pernix & Cumberland – Similar
business model & market caps
Impax - Cardiovascular
Actavis – Migraines & Other
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
10
Management Overview


Arthur P. Bedrosian, J.D

President since May 2002

CEO since January 2006

Over 40 years experience in generic
pharmaceutical industry
Compensation highly related to management performance

Annual Bonus :25% based on operational results and
75% based on individual results

Stock Option: 269,000 granted

Restricted Stocks: 72,850 granted (0.20% of shares outstanding)

Special Recognition Award: 48,900 granted (one-time compensation
for record-setting results; 0.14% of shares outstanding)
Source: LCI 2014 10-K , Page 42,50
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
11
Company Overview – Key Events
Listed on
S&P 600
Cleared
subpoena
Earnings
release
Listed on
NYSE from
AMEX
Source: Bloomberg
Intro
Macro
Industry
Business
Financial
Analysis
Received
subpoena for
Digoxin
Financial
Projection
Valuation
Recomm
endation
12
R&D Process
1.
Formulation and analytical method development
2.
Scale-up and transfer tech
3.
Bioequivalency and clinical testing
4.
Submission of Abbreviated New Drug Application (ANDA) to
the FDA
Source: CME Group 2013 10-K, Team analysis
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
13
Abbreviated New Drug Application (ANDA)

Hatch-Waxman Act – permits FDA review and approval for
generic equivalents without requiring the company to conduct
costly clinical trials

Median Review time = 31 months

LCI has experienced = 14 to 36 months

FDA Safety and Innovation Act – FDA commits to reviewing
90% of complete electronic ANDAs within 10 months of the
submission, effective for submissions made after October
2014

LCI only submits electronic ANDAs
Source: CME Group 2013 10-K, Team analysis
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
14
ANDA Status

During 2012-Present, LCI has received 15 ANDA approvals,
four of them have occurred in the past six months and six
approvals total in the past year

Increasing number of ANDAs are in Review

Five ANDAs are paragraph IV
Intro
Macro
Year
ANDAs under
Review
ANDAs in
Development
2012
19
37
2013
18
35
2014
24
45
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
15
ANDA Status of Competitors
Intro
Impax
ANDAs under
Review
ANDAs
Approved
2012
50
1
2013
35
0
2014
21
1
Sagent
ANDAs under
Review
ANDAs
Approved
2012
63
13
2013
62
6
2014
75
9
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
16
Other Notable Regulatory Considerations

DEA – periodic and ongoing inspections for compliance with
Controlled Substance Act (CSA)

FDA – Manufacturing cGMP Requirements for quality control,
documentation and assurance

Medicare/Medicaid – because the end users often pay for the
finished product with health insurance, drug pricing can be
under scrutiny

Intro
Digoxin update
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
17
Jerome Stevens Pharmaceuticals (JSP) –
Exclusivity Rights

JSP products accounted for 62%, 60% and 64% of LCI’s
inventory purchases in 2014, 2013 and 2012 respectively

LCI is the exclusive United States distributor of JSP’s three
main products

Original agreement – March of 2004; 10 years of exclusivity in
exchange for 4.0 million shares of common stock

Contract renewed in 2014 for an additional five years in
exchange for 1.5 million shares

Intro

$20.1 million expense recorded

Minimum purchase requirement = $31.0 million in products
annually
Renewal option in 2019
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
18
SWOT ANALYSIS
Strengths
-Strengths
Highly diversified product
portfolio
- Highly diversified product
-portfolio
High number of ANDA
approvals
- High number of ANDA
approvals
Opportunities
- Diversify into specialty
pharmacy
- Mergers and exclusive
agreements with upcoming
pharma companies
Intro
Macro
Industry
Business
Weaknesses
- Thin supplier base
- Too dependent on price
increases for revenue growth
Threats
- Losing contract with JSP
- Consolidation amongst
competitors
- Price ceilings
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
19
Financial Analysis - Revenues
Past growth in Revenue –
CAGR 27%
Revenue structure 2014
Obesity
Gallstone
2%
2% Gout
300,000
Other
8%
4%
250,000
Glaucoma
4%
Thyroid
Deficiency
37%
Migraine
5%
200,000
150,000
Antibiotic
5%
100,000
Pain
Management
10%
50,000
Cardiova
scular
23%
0
June 2012
June 2013
June 2014
December 2014
Thyroid Deficiency
Cardiovascular
Pain Management
Antibiotic
Migraine
Glaucoma
Gout
Gallstone
Obesity
Other
Source: 2014 10-K, Team analysis
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
20
Financial Analysis - Ratios
Growing and High Profitability
Ratios
June 2011
Profitability
Gross Margin
Operating profit margin
EBITDA margin
Net profit margin
Return on asset
Return on equity
21.8%
-1.1%
3.6%
-0.3%
-0.2%
-0.3%
Historical
June 2012
June 2013
31.7%
5.6%
10.3%
3.2%
2.7%
3.6%
63.7%
32.2%
34.4%
20.9%
22.4%
27.0%
Operating Income
Net Income
140000
90000
80000
120000
70000
100000
60000
50000
80000
40000
60000
30000
40000
20000
20000
10000
0
-10000
38.0%
12.4%
16.5%
8.8%
8.6%
11.1%
June 2014
June 2011
June 2012
June 2013
June 2014
December
2014
Source: 2014 10-K, Team analysis
Intro
Macro
Industry
Business
0
-20000
Financial
Analysis
June 2011 June 2012 June 2013 June 2014 December
2014
Financial
Projection
Valuation
Recomm
endation
21
Financial Analysis - Ratios
ROE driven by profit margins
Ratios
June 2011
Dupont analysis
Return on Equity =
=
Tax burden (NI/Pretax Income)
x Interest burden (Pretax
income/EBIT)
x Operating margin(EBIT/Sales)
x Asset turnover (Sales/asset)
x Leverage (Asset/Equity)
Macro
Industry
June 2014
-0.3%
3.6%
11.1%
27.0%
40%
60%
64%
63%
59%
-1.1%
0.72
1.40
96%
5.6%
0.85
1.34
110%
12.4%
0.97
1.29
102%
32.2%
1.07
1.21
Source: 2014 10-K, Team analysis
Intro
Historical
June 2012
June 2013
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
22
Financial Analysis - Ratios
High Liquidity
Historical
Ratios
Liquidity
Current ratio
Quick Ratio
June 2011
June 2012
2.70
1.93
3.67
2.58
June 2013 June 2014
3.51
2.53
5.65
4.70
Improving Activity Ratios
Ratios
Activity
Total asset turnover
Fixed asset turnover
AR turnover
Inventory turnover
AP turnover
June 2011
0.72
2.57
3.19
3.97
4.27
Historical
June 2012 June 2013
0.85
2.96
4.10
4.56
4.31
0.97
3.59
5.70
5.07
4.30
Cash Conversion Cycle
June 2014
1.07
5.20
6.24
7.08
4.27
DIO
51.58
DSO
58.49
DPO
85.40
Cash Conversion Cycle
24.67
Source: 2014 10-K, Team analysis
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
23
Financial Analysis – Peer Comparison
Profitability
LCI
Peer
Gross Margin
63.7%
57.7%
Operating profit margin
32.2%
13.0%
EBITDA margin
34.4%
19.9%
Net profit margin
20.9%
5.7%
Return on asset
22.4%
4.4%
Return on equity
27.0%
13.5%
LCI
Peer
Current ratio
5.65
2.91
Quick Ratio
4.70
2.16
LCI
Peer
Total asset turnover
1.07
0.50
Fixed asset turnover
5.20
15.28
Sales turnover
6.24
5.53
Inventory turnover
7.08
2.83
Financial leverage
LCI
Peer
Long-term debt to asset
0.3%
43.5%
Liquidity
Activity
Source: Capital IQ, Team analysis
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
24
Greenblatt Ratios and Piotroski Score
Greenblatt Score – 136.6%
Greenblatt
Piotroski Score
Greenblatt ratio 1 (EBIT/Tangible Assets)
2014
131%
Year end price (USD)
Shares outstanding (thousands)
Debt
Cash
EV
Greenblatt ratio 2 (EBIT/EV)
49.62
33,664
1,009
105,587
1,565,809
5.6%
Intro
Macro
Piotroski Score – 7/9
Industry
Business
Value
ROA
22.40%
Cash Flow ROA
17.67%
Change in ROA
160.70%
Quality of Earnings
CFROA<ROA
Change in Leverage
-91.55%
Change in Current Ratio
61.04%
Change in Shares in Issue
6,250,443
Change in Gross Margin
48.37%
Change in Asset Turnover
10.00%
Total Score
Financial
Analysis
Financial
Projection
Valuation
Score
Recomm
endation
1
1
1
0
1
1
0
1
1
7
25
Valuation
WACC = 13.02%
Variable
Value
Weights
Cost of Equity
Risk Free rate
2.50%
Equity Risk premium
5.00%
Adjusted Beta
1.21
Cost of equity CAPM - 50%
9%
Realized Return – 50%
18%
Cost of Equity
63.36
Shares Outstanding
35,634
Market Capitalization
2,257,765
Long Term Debt
% Equity
% Debt
13.03%
Cost of Debt
Weighted average cost of debt
Marginal Tax Rate
After tax cost of debt
Price per share
942
99.96%
0.04%
Realized Return Analysis
2014
30%
2015 (ttm)
5%
Average
18%
4.50%
40%
2.70%
Source: Team analysis
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
26
Valuation: Revenue Growth across segments
Segment wise Revenue Growth Rates
Historical
Thyroid Deficiency
Cardiovascular
Pain Management
Antibiotic
Migraine
Glaucoma
Gout
Gallstone
Obesity
Other
37%
23%
10%
5%
5%
4%
4%
2%
1%
8%
June 2013
14%
43%
2%
36%
-9%
51%
952%
2%
26%
52%
June 2014
76%
140%
28%
48%
168%
87%
113%
8%
-15%
129%
Projections
December 2014
68%
74%
18%
-18%
151%
248%
30%
1038%
-5%
51%
June 2015
52%
30%
20%
20%
40%
50%
40%
800%
5%
40%
June 2016
35%
20%
15%
20%
40%
50%
40%
25%
5%
30%
June 2017
15%
15%
12%
15.0%
30.0%
40.0%
20.0%
20%
5%
30%
June 2018
10%
10%
10%
15%
25%
20%
10%
10%
5%
30%
Segment wise Total Revenue Growth
Historical
Thyroid Deficiency
Cardiovascular
Pain Management
Antibiotic
Migraine
Glaucoma
Gout
Gallstone
Obesity
Other
37%
23%
10%
5%
5%
4%
4%
2%
1%
8%
June 2013
57,978
25,876
21,232
9,167
5,418
6,410
5,092
6,114
4,721
9,046
151,054
Growth
Intro
Macro
Industry
Projections
June 2014
December 2014
102,248
77,881
62,121
37,272
27,174
14,222
13,572
6,349
14,527
12,733
11,987
10,207
10,822
5289
6,578
28,480
4,032
1868
20,710
13,908
273,771
208,209
81%
84%
Business
Financial
Analysis
June 2015
June 2016
June 2017
June 2018
155,762
210,279
241,821
266,003
80,757
96,909
111,445
122,590
32,609
37,500
42,000
46,200
16,286
19,544
22,475
25,847
20,338
28,473
37,015
46,268
17,981
26,971
37,759
45,311
15,151
21,211
25,453
27,999
59,202
74,003
88,803
97,683
4,234
4,445
4,668
4,901
28,994
37,692
49,000
63,700
431,313
557,026
660,439
746,501
58%
29%
19%
13%
Financial
Projection
Valuation
Recomm
endation
27
Net Income Growth
Historical
June 2011
(in thousands)
Net sales
Cost of sales
27%
Depreciation and Amortization
June 2012
Selling, general, and
administrative
Total operating expenses
June 2015
June 2016
June 2017
June 2018
151,054
273,771
431,313
557,026
660,439
746,501
78,539
78,308
87,436
93,279
116,455
150,397
191,527
216,485
4,976
5,735
6,198
5,984
8,087
8,355
8,806
9,530
-
-
20,100
-
-
-
-
38,947
57,420
154,408
306,772
398,274
460,106
520,486
27%
29%
29%
9%
8,587
15%
15,912
Operating income
June 2014
122,990
23,320
Operating expenses:
Research and development
June 2013
106,835
JSP contract renewal cost
Gross profit
Projections
11,844
16,253
27,713
38,818
50,132
59,439
67,185
20,193
22,410
38,606
64,697
83,554
99,066
111,975
24,499
32,037
38,663
66,319
103,515
133,686
158,505
179,160
(1,179)
6,910
18,757
88,089
203,256
264,587
301,600
341,326
(214)
(273)
(251)
(130)
(45)
(39)
(33)
(26)
478
(292)
1,928
1,931
767
(39)
(33)
(26)
(701)
(461)
6,618
20,685
90,020
203,256
264,548
301,567
341,299
2,600
7,303
32,857
71,140
92,592
105,549
119,455
(240)
4,018
13,382
57,163
132,117
171,956
196,019
221,845
70
65
62
62
62
62
62
(277)
3,948
13,317
57,101
132,055
171,894
195,957
221,783
-0.01
0.14
0.47
1.7
3.71
4.82
5.50
6.22
236%
262%
65%
30%
14%
13%
Other income (expense):
Interest expense
4.5%
Total other income (expense)
Income before income taxes
Income tax expense
35.0%
Net income
Less: Net income attributable to
noncontrolling interest
Net income attributable to Lannett
Company, Inc.
37
Basic
Growth %
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
28
Valuation: Free Cash Flow
June 30, 2015
(in thousands)
FCF Caluation
EBIT
EBIT, net tax
Add: Non cash charges
Less: Increasing in Net Working
Capital
Capital Expenditure
Free cash flow
PV of Free cash flow
Projections
June 30, 2016 June 30, 2017
203,256
132,117
8,087
264,587
171,996
8,355
301,600
196,052
8,806
341,326
221,871
9,530
16,570
25,068
28,366
10,340
37,583
86,050
0.5
80,942.0
4,471
150,812
1.5
125,516.0
7,508
168,984
2.5
124,437.1
12,066
208,995
3.5
136,170.5
Valuation
Terminal Value
Implied Terminal Value
Normalized FCF (last projection
yr)
211,531
High growth rate
10%
Mature growth rate
3%
Period for High growth
5
Implied Terminal Value
2,543,685
Intro
Macro
Industry
June 30, 2018
Business
Valuation using H- Model
Sum of PV of FCF
PV of TV
Enterprise value
Less: Debt
Equity Value
# of shares outstanding (thousands)
Implied share price (USD)
Financial
Analysis
Financial
Projection
Valuation
467,066
1,657,335
2,124,401
942
2,123,459
35,634
$59.59
Recomm
endation
29
Comparable Analysis
Company Comp Set
TEV/Total
Revenues LTM Latest
Company Name
TEV/EBITDA TEV/EBIT LTM
LTM - Latest
- Latest
P/Diluted EPS
Before Extra
LTM - Latest
Weights
14%
14%
13%
10%
9%
9%
8%
7%
7%
5%
5%
Mylan N.V. (NasdaqGS:MYL)
Mallinckrodt public limited company (NYSE:MNK)
Pfizer Inc. (NYSE:PFE)
Novartis AG (SWX:NOVN)
Impax Laboratories Inc. (NasdaqGS:IPXL)
Sagent Pharmaceuticals, Inc. (NasdaqGS:SGNT)
AbbVie Inc. (NYSE:ABBV)
Cumberland Pharmaceuticals, Inc. (NasdaqGS:CPIX)
Pernix Therapeutics Holdings, Inc. (NasdaqGM:PTX)
Teva Pharmaceutical Industries Limited (NYSE:TEVA)
Perrigo Company Public Limited Company (NYSE:PRGO)
3.8x
6.0x
4.2x
4.5x
4.0x
2.7x
4.8x
1.7x
5.8x
2.8x
5.6x
14.7x
22.3x
10.0x
13.1x
17.8x
26.1x
14.2x
11.6x
40.1x
9.4x
19.8x
20.1x
45.3x
13.3x
17.3x
23.9x
35.9x
16.1x
18.1x
NM
12.5x
30.5x
23.7x
NM
24.0x
22.5x
48.2x
22.2x
50.6x
50.5x
NM
15.8x
61.1x
Lannett Company, Inc. (NYSE:LCI)
5.6x
10.3x
10.6x
19.6x
Summary Statistics
TEV/Total Revenues
TEV/EBITDA
TEV/EBIT
P/Diluted EPS
Before Extra
Distributed Mean
4.25x
17.81x
22.51x
26.19x
Share Price using Comps valuation (LTM)
Average Valuation
Valuation
TEV/Revenues
Valuation
TEV/EBITDA
Valuation
TEV/EBIT
40.56
92.11
114.03
$82.99
Valuation P/Diluted EPS
EPS (LTM)
3.3
Share Price
85.3
30
Technical Analysis
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
31
Recommendation
Excellent operating
margins
Low P/E Ratio in
comparison to peers
Target price
Comparable
Valuation
$82.99
50%
DCF H-Model
$59.59
50%
11.7% discount
“Excess” returns –
ROE vs Cost of
capital
Continuous
Diversification of
Product Portfolio
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
32