Download presentation
Presentation is loading. Please wait.
1
Lannett Company, Inc. Andrew (Drew) Szilagyi Qiang (Cindy) Fu Vedvati (Vedu) Shrotre Vishal Shah March 12, 2015
2
Agenda Introduction Macroeconomic Overview Industry Overview
Business Overview Financial Analysis Financial Projection Valuation Recommendation
3
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 K , Page3 Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
4
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 Recommendation
5
Macroeconomics Increase in demand considering
Increasing aging population Increasing health expenditure GDP outlook of 2.6% Source: World Bank Congressional Budget Office Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
6
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, Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
7
Relatively few alternatives to drugs
Porter’s Five Forces Low Relatively few alternatives to drugs Moderate High concentration amongst suppliers Entered into exclusive agreements High Face intense competition from branded generic products 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 Recommendation
8
Supply Chain Suppliers Customers AmerisoruceBergen – 19%
Walgreens – 17% Manufacturers of Generic drugs Cardinal Health – 9% Mckesson -8% Manufacturing generics & API with expired patents 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 Business Financial Analysis Financial Projection Valuation Recommendation
9
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 Recommendation
10
Peers Analysis Product Competitor wise Business Model wise
Mylan – Thyroid, Blood Pressure, Gallstone Mallinckrodt – Pain Management & Migraine Pfizer, Abbvie & Novartis - Thyroid Business Model wise Teva – Generic drug maker, similar business model Sagent – Very similar operation mode & small cap company Pernix & Cumberland – Similar business model & market caps Impax - Cardiovascular Actavis – Migraines & Other Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
11
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 % 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 K , Page 42,50 Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
12
Company Overview – Key Events
Cleared subpoena Listed on S&P 600 Earnings release Listed on NYSE from AMEX Received subpoena for Digoxin Source: Bloomberg Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
13
R&D Process Formulation and analytical method development
Scale-up and transfer tech Bioequivalency and clinical testing Submission of Abbreviated New Drug Application (ANDA) to the FDA Source: CME Group K, Team analysis Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
14
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 K, Team analysis Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
15
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 Year ANDAs under Review ANDAs in Development 2012 19 37 2013 18 35 2014 24 45 Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
16
ANDA Status of Competitors
Impax ANDAs under Review ANDAs Approved 2012 50 1 2013 35 2014 21 Sagent ANDAs under Review ANDAs Approved 2012 63 13 2013 62 6 2014 75 9 Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
17
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 Digoxin update Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
18
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 $20.1 million expense recorded Minimum purchase requirement = $31.0 million in products annually Renewal option in 2019 Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
19
SWOT ANALYSIS Strengths - Highly diversified product portfolio - High number of ANDA approvals Strengths - Highly diversified product portfolio - High number of ANDA approvals Weaknesses - Thin supplier base - Too dependent on price increases for revenue growth Opportunities Diversify into specialty pharmacy Mergers and exclusive agreements with upcoming pharma companies Threats Losing contract with JSP Consolidation amongst competitors Price ceilings Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
20
Financial Analysis - Revenues
Revenue structure 2014 Past growth in Revenue – CAGR 27% Source: K, Team analysis Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
21
Financial Analysis - Ratios
Growing and High Profitability Ratios Historical June 2011 June 2012 June 2013 June 2014 Profitability Gross Margin 21.8% 31.7% 38.0% 63.7% Operating profit margin -1.1% 5.6% 12.4% 32.2% EBITDA margin 3.6% 10.3% 16.5% 34.4% Net profit margin -0.3% 3.2% 8.8% 20.9% Return on asset -0.2% 2.7% 8.6% 22.4% Return on equity 11.1% 27.0% Source: K, Team analysis Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
22
Financial Analysis - Ratios
ROE driven by profit margins Ratios Historical June 2011 June 2012 June 2013 June 2014 Dupont analysis Return on Equity = -0.3% 3.6% 11.1% 27.0% = Tax burden (NI/Pretax Income) 40% 60% 64% 63% x Interest burden (Pretax income/EBIT) 59% 96% 110% 102% x Operating margin(EBIT/Sales) -1.1% 5.6% 12.4% 32.2% x Asset turnover (Sales/asset) 0.72 0.85 0.97 1.07 x Leverage (Asset/Equity) 1.40 1.34 1.29 1.21 Source: K, Team analysis Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
23
Financial Analysis - Ratios
High Liquidity Ratios Historical June 2011 June 2012 June 2013 June 2014 Liquidity Current ratio 2.70 3.67 3.51 5.65 Quick Ratio 1.93 2.58 2.53 4.70 Improving Activity Ratios Ratios Historical June 2011 June 2012 June 2013 June 2014 Activity Total asset turnover 0.72 0.85 0.97 1.07 Fixed asset turnover 2.57 2.96 3.59 5.20 AR turnover 3.19 4.10 5.70 6.24 Inventory turnover 3.97 4.56 5.07 7.08 AP turnover 4.27 4.31 4.30 Cash Conversion Cycle DIO 51.58 DSO 58.49 DPO 85.40 Cash Conversion Cycle 24.67 Source: K, Team analysis Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
24
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% Liquidity Current ratio 5.65 2.91 Quick Ratio 4.70 2.16 Activity 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 Long-term debt to asset 0.3% 43.5% Source: Capital IQ, Team analysis Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
25
Greenblatt Ratios and Piotroski Score
Greenblatt Score – 136.6% Piotroski Score – 7/9 Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
26
Realized Return Analysis
Valuation WACC = 13.02% Variable Value 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% 13.03% Weights Price per share 63.36 Shares Outstanding 35,634 Market Capitalization 2,257,765 Long Term Debt 942 % Equity 99.96% % Debt 0.04% Cost of Debt Weighted average cost of debt 4.50% Marginal Tax Rate 40% After tax cost of debt 2.70% Realized Return Analysis 2014 30% 2015 (ttm) 5% Average 18% Source: Team analysis Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
27
Valuation: Revenue Growth across segments
Segment wise Revenue Growth Rates Historical Projections June 2013 June 2014 December 2014 June 2015 June 2016 June 2017 June 2018 Thyroid Deficiency 37% 14% 76% 68% 52% 35% 15% 10% Cardiovascular 23% 43% 140% 74% 30% 20% Pain Management 2% 28% 18% 12% Antibiotic 5% 36% 48% -18% 15.0% Migraine -9% 168% 151% 40% 30.0% 25% Glaucoma 4% 51% 87% 248% 50% 40.0% Gout 952% 113% 20.0% Gallstone 8% 1038% 800% Obesity 1% 26% -15% -5% Other 129% Segment wise Total Revenue Growth Historical Projections June 2013 June 2014 December 2014 June 2015 June 2016 June 2017 June 2018 Thyroid Deficiency 37% 57,978 102,248 77,881 155,762 210,279 241,821 266,003 Cardiovascular 23% 25,876 62,121 37,272 80,757 96,909 111,445 122,590 Pain Management 10% 21,232 27,174 14,222 32,609 37,500 42,000 46,200 Antibiotic 5% 9,167 13,572 6,349 16,286 19,544 22,475 25,847 Migraine 5,418 14,527 12,733 20,338 28,473 37,015 46,268 Glaucoma 4% 6,410 11,987 10,207 17,981 26,971 37,759 45,311 Gout 5,092 10,822 5289 15,151 21,211 25,453 27,999 Gallstone 2% 6,114 6,578 28,480 59,202 74,003 88,803 97,683 Obesity 1% 4,721 4,032 1868 4,234 4,445 4,668 4,901 Other 8% 9,046 20,710 13,908 28,994 37,692 49,000 63,700 151,054 273,771 208,209 431,313 557,026 660,439 746,501 Growth 81% 84% 58% 29% 19% 13% Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
28
Net Income Growth Intro Macro Industry Business Financial Analysis
(in thousands) Historical Projections June 2011 June 2012 June 2013 June 2014 June 2015 June 2016 June 2017 June 2018 Net sales 106,835 122,990 151,054 273,771 431,313 557,026 660,439 746,501 Cost of sales 27% 78,539 78,308 87,436 93,279 116,455 150,397 191,527 216,485 Depreciation and Amortization 4,976 5,735 6,198 5,984 8,087 8,355 8,806 9,530 JSP contract renewal cost - 20,100 Gross profit 23,320 38,947 57,420 154,408 306,772 398,274 460,106 520,486 Operating expenses: 29% Research and development 9% 8,587 11,844 16,253 27,713 38,818 50,132 59,439 67,185 Selling, general, and administrative 15% 15,912 20,193 22,410 38,606 64,697 83,554 99,066 111,975 Total operating expenses 24,499 32,037 38,663 66,319 103,515 133,686 158,505 179,160 Operating income (1,179) 6,910 18,757 88,089 203,256 264,587 301,600 341,326 Other income (expense): Interest expense 4.5% (214) (273) (251) (130) (45) (39) (33) (26) Total other income (expense) 478 (292) 1,928 1,931 767 Income before income taxes (701) 6,618 20,685 90,020 264,548 301,567 341,299 Income tax expense 35.0% (461) 2,600 7,303 32,857 71,140 92,592 105,549 119,455 Net income (240) 4,018 13,382 57,163 132,117 171,956 196,019 221,845 Less: Net income attributable to noncontrolling interest 37 70 65 62 Net income attributable to Lannett Company, Inc. (277) 3,948 13,317 57,101 132,055 171,894 195,957 221,783 Basic -0.01 0.14 0.47 1.7 3.71 4.82 5.50 6.22 Growth % 236% 262% 65% 30% 14% 13% Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
29
Valuation: Free Cash Flow
(in thousands) Projections June 30, 2015 June 30, 2016 June 30, 2017 June 30, 2018 FCF Caluation EBIT 203,256 264,587 301,600 341,326 EBIT, net tax 132,117 171,996 196,052 221,871 Add: Non cash charges 8,087 8,355 8,806 9,530 Less: Increasing in Net Working Capital 16,570 25,068 28,366 10,340 Capital Expenditure 37,583 4,471 7,508 12,066 Free cash flow 86,050 150,812 168,984 208,995 0.5 1.5 2.5 3.5 PV of Free cash flow 80,942.0 125,516.0 124,437.1 136,170.5 Terminal Value Valuation Implied Terminal Value Normalized FCF (last projection yr) 211,531 High growth rate 10% Mature growth rate 3% Period for High growth 5 2,543,685 Valuation using H- Model Sum of PV of FCF 467,066 PV of TV 1,657,335 Enterprise value 2,124,401 Less: Debt 942 Equity Value 2,123,459 # of shares outstanding (thousands) 35,634 Implied share price (USD) $59.59 Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
30
Comparable Analysis Intro Macro Industry Business Financial Analysis
Company Comp Set Company Name TEV/Total Revenues LTM - Latest TEV/EBITDA LTM - Latest TEV/EBIT LTM - Latest P/Diluted EPS Before Extra LTM - Latest Weights Mylan N.V. (NasdaqGS:MYL) 3.8x 14.7x 20.1x 23.7x 14% Mallinckrodt public limited company (NYSE:MNK) 6.0x 22.3x 45.3x NM Pfizer Inc. (NYSE:PFE) 4.2x 10.0x 13.3x 24.0x 13% Novartis AG (SWX:NOVN) 4.5x 13.1x 17.3x 22.5x 10% Impax Laboratories Inc. (NasdaqGS:IPXL) 4.0x 17.8x 23.9x 48.2x 9% Sagent Pharmaceuticals, Inc. (NasdaqGS:SGNT) 2.7x 26.1x 35.9x 22.2x AbbVie Inc. (NYSE:ABBV) 4.8x 14.2x 16.1x 50.6x 8% Cumberland Pharmaceuticals, Inc. (NasdaqGS:CPIX) 1.7x 11.6x 18.1x 50.5x 7% Pernix Therapeutics Holdings, Inc. (NasdaqGM:PTX) 5.8x 40.1x Teva Pharmaceutical Industries Limited (NYSE:TEVA) 2.8x 9.4x 12.5x 15.8x 5% Perrigo Company Public Limited Company (NYSE:PRGO) 5.6x 19.8x 30.5x 61.1x Lannett Company, Inc. (NYSE:LCI) 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 Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
31
Technical Analysis Intro Macro Industry Business Financial Analysis
Financial Projection Valuation Recommendation
32
Buy 200 @ mkt Recommendation USD 71.29 Target price 11.7% discount
Excellent operating margins Low P/E Ratio in comparison to peers Target price DCF H-Model $59.59 50% Comparable Valuation $82.99 50% USD 71.29 11.7% discount Buy mkt Continuous Diversification of Product Portfolio “Excess” returns – ROE vs Cost of capital Intro Macro Industry Business Financial Analysis Financial Projection Valuation Recommendation
Similar presentations
