Lannett: Digoxin Is A Risk, But Long-Term Growth Potential Is Still Significant

| About: Lannett Company, (LCI)


Digoxin concerns were the primary cause of the recent selloff.

Oxycodone approval and the acquisition of two new products should help offset the potential decline in Digoxin sales.

I am reiterating my price target; potential upside is significant.

Lannett (NYSEMKT:LCI) has been on a rollercoaster ride this year. The stock ran up more than 500% in 2013 but the company is facing issues this year that were both external and internal. The first selloff from March highs was market related as the majority of momentum stocks went down significantly in the next two months. Part of the reason for the selloff was due to the fact that the company lowered fiscal 2014 revenue guidance as some of the revenue is going to be recognized in 2015. The stock once again sold off in July, after the company disclosed that it received an inquiry and subpoena from the Connecticut Attorney General regarding potential violations of the state's antitrust laws related to Digoxin sales. Lannett will report fiscal Q4 2014 earnings on August 27, but there is little uncertainty about the results, since the company preannounced the results last week, but the fiscal 2015 guidance has the potential to move the share price significantly.

Recent developments

The biggest concern for Lannett is the inquiry and subpoena from the Connecticut Attorney General, regarding potential violations of the state's antitrust law. The Attorney General is investigating possible price fixing and/or customer allocating behavior pertaining to the sale of Digoxin. Lannett stated that it complies with all laws and regulations and it intends to cooperate fully. I believe that Lannett was not involved in violations of any kind and the company has a long history of working with regulators without any problems. However, the issue is significant, since it caused a sharp selloff, and Lannett is now more than 20% off its early July highs. The other concern is also related to Digoxin. The recently published abstract in the Journal of the American College of Cardiology suggested a potential increased risk of mortality in patients with newly diagnosed atrial fibrillation. Lannett's CEO Arthur Bedrosian said that the company does not expect a significant impact on the company's financials, as Digoxin should represent less than 10% of the company's net revenues in fiscal 2015. So, Digoxin is the main risk factor for the company's growth in the future.

On the positive side, the company finally received approval for Oxycodone in early August. According to IMS, sales of Oxycodone capsules at Average Wholesale Price were approximately $7.1 million for the year ended June 2014. Lannett also announced last week that it has agreed to purchase ANDAs for Estradiol Tablets and Selegiline Hydrochloride Capsules. The seller and the financial terms were not disclosed. The company expects to launch Estradiol Tablets within the next several months and Selegiline Hydrochloride Capsules sometime thereafter. According to IMS, sales of Estradiol Tablets in 2013 at Average Wholesale Price were approximately $31 million, while sales of Selegiline Capsules were approximately $8.5 million. The acquisitions of the two products and the Oxycodone approval further expand the company's product portfolio and complement the vertical integration process, and should boost the company's revenue growth in fiscal 2015 and beyond. These products should help offset the potential decline of Digoxin sales going forward.

Valuation and price target

My previous price target on Lannett was $66, based on the 2015 EV/EBITDA ratio of 15. Lannett is currently trading at an EV/EBITDA ratio of 18.6, and my price target represents a 20% discount from the current valuation. The company is still expected to grow revenue and earnings significantly in the next couple of years, and the price target still seems reachable, despite the current issues with Digoxin. I believe that the three new products and a very solid pipeline will more than make up a potential decline in Digoxin sales in the future. I am reiterating my $66 price target, which translates into approximately 70% upside from the current price. I do not believe that Lannett will trade lower than 15x its fiscal 2014 EPS, which translates into 25% downside from the current price. But the downside is also dependent on Digoxin news, and additional downside might be possible if the news is bad.


There are two potential catalysts that might push Lannett's share price higher in the following months:

- Fiscal Q4 report. The fiscal Q4 results will not be a surprise, since the company preannounced the results last week. Fiscal 2015 guidance will be the key metric to watch when the company reports on Wednesday. Higher guidance would be very significant and might move the share price higher in the following weeks.

- If the Digoxin inquiry and subpoena is resolved favorably, it should move the share price significantly higher. And if it is unfavorable, there is room for additional downside from the current price.


Lannett is executing its growth strategy very well, but the Digoxin issues are a cause for concern. However, new approvals and the two product acquisitions should help offset the potential weakness in Digoxin sales going forward. I am still bullish on Lannett long-term, and believe that the issues will be resolved favorably for Lannett. The risks are evident, but the potential reward is quite significant, since my price target offers 70% upside from the current price.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.