Lannett Downgraded By Raymond James After Loss Of Drug Distribution Deal

Lannett Company, Inc. LCI shares lost about 60 percent of their market value after the company announced Monday before the market open that Jerome Stevens Pharma has opted not to renew a distribution agreement for three of its products. The deal between the two companies expires in March 2019.

The Analyst

Raymond James analyst Elliot Wilbur downgraded Lannett from Outperform to Market Perform.

The Thesis

The products impacted from the termination of the distribution deal include the thyroid drug levothyroxine, which is likely to have accounted for 35 percent of Lannett's fiscal 2018 sales and 44 percent of gross profit, Wilbur said in the downgrade note. (See the analyst's track record here.) 

Lannett issued preliminary fiscal fourth-quarter results and said it expects revenue of $171 million against a $173-million consensus estimate and adjusted EPS of 62-64 cents, below the 66-cent consensus estimate.

The pharmaceutical company's 2018 guidance was slightly below estimates.

Although Lannett said it's launched eight new products year-to-date, likely contributing over $50 million to fiscal 2019 sales, Wilbur said he sees only limited near-term options to fill the gap left by levothyroxine. 

Despite the slump in shares and the near-term support offered by the unwinding of large short positions, Raymond James said Lannett's enterprise value will trade at multiples equivalent to other debt-loaded and specialty pharma names.

"Absent more confidence in a more rapid, sustained and durable growth trajectory off of rebased EBITDA, we are lowering our rating to Market Perform from Outperform," Wilbur said. 

The Price Action

Following Monday's battering, Lannett shares were trading up 7.94 percent Tuesday afternoon to $5.78. 

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