Lannett Awaits 3 Expected FDA Decisions

May. 4.11 | About: Lannett Company, (LCI)

Below is a summary of generic/specialty pharmaceutical company Lannett’s (AMEX:LCI) current financials and expected upcoming FDA catalysts. I received the following email feedback from the CFO, Mr. Keith Ruck, in mid-April regarding the status of the pending FDA decisions after recently announced conclusion of the FDA pre-approval inspections.

Mr. Ruck noted that the Cody, WY., facility inspection occurred in February, while the Lannett (Philadelphia, PA) facility inspection occurred in March, resulting in five and seven minor observations, respectively. Some of the minor observations have already been resolved by the Company (as stated in the 22-March press release) and LCI has sent a complete response to the FDA for the inspections. The Company believes it is now just waiting for FDA to report inspection results to the division responsible for the final approval decisions (including two generic ANDA product applications and the morphine sulfate oral solution NDA). LCI has no further insight as to the timing of the final FDA decisions, but believes the three product approval decisions are pending on the outcome of the inspections.

Three near-term pending FDA decisions are outlined below in addition to a link to a recent local newspaper article describing expansion of the Cody, WY., facilities using proceeds from the capital raised in December 2010, and the recently completed FDA inspections for pending morphine sulfate 505(b)(2) NDA. "Cody Labs now set to expand," published 4/11/11.

FDA Decision NDA 505(b)(2) and Abbreviated New Drug Applications (ANDAs) – Morphine Sulfate Oral Solution NDA & Two Other Generic Drug Products (one is a first-to-file product w/ no existing generics while other only has a few competing generic products on the market)

On 3/22/11, LCI reported the conclusion of FDA pre-approval inspection (PAI) with a total of 12 minor observations noted and expects the positive inspection will result in FDA approvals for its pending NDA and two generic product ANDAs, but there is no exact timeline for the FDA to make its final decisions. Please note the morphine sulfate NDA was submitted in late February 2010, representing a review period that now exceeds 14 months without any announcement by the FDA of a formal three-month delay and a typical standard review period of 10 months for NDA filings, which include the payment of user fees to ensure a timely review (i.e. the PDUFA action goal date).

This contrasts with generic drug ANDA filings, which do not currently have user fees (although this may change shortly) and have no formal decision deadlines with an average review period of 26 months before a decision is announced and a backlog at the Agency that exceeds 2,300 pending ANDAs as of year-end 2010.

LCI corporate and financial overview, current as of a March 15 Roth Capital investor presentation (the Company is due to report its 3Q Fiscal Year 2011 results for the three months ended 3/31/11 around the second week of May based on historical timelines, although a specific date has not been released):

  • acquired Cody Labs to focus on the controlled substance / narcotic market, which is one of seven US companies licensed to import raw opium for manufacture of narcotic active pharmaceutical ingredients (APIs) as part of a vertically integrated business model for pain drugs, allowing for higher margins on pain drug products since $LCI can purchase the raw materials for these products from its wholly-owned subsidiary at more favorable prices than outside suppliers
  • 28.4 million (NYSE:M) shares of common stock outstanding w/ 90-day average trading volume over the past three months of 125,000 shares per day
  • $3.1M debt and $23.6M cash / equivalents as of year-end 2010
  • trailing 12 month revenue of $120.5M and EBITDA of $16.9M as of year-end 2010
  • 42% insider + 18.25% institutional ownership of common stock w/ approx. 300 full-time employees
  • current stock price of $5.53 per share for market cap of $157M and enterprise value of $136.5M
  • 39 currently marketed generic drug products w/ two top-selling drugs, levothyroxine (thyroid hormone replacement therapy) and digoxin (heart failure treatment)

Specialty brands portfolio and niche market drugs growth strategy, including comments from the CEO. I had the opportunity to speak via telephone with the CEO of LCI, Mr. Arthur Bedrosian, in mid-April regarding some follow-up questions from the March 15 Roth Capital investor presentation and the status of several new products being developed by the Company.

Mr. Bedrosian also confirmed that additional quota was recently allocated by the DEA for continued production and sales of oxycodone oral solution (one of the top-selling drugs from the most recent quarter), which allows for continued sales rather than the previous expectation that sales would end after existing inventory was depleted. In addition, Mr. Bedrosian confirmed that the FDA's decision is expected any day now for two generic product ANDAs, including a first-to-file generic drug w/ no generics currently on the market and the morphine sulfate oral solution NDA – however, there is no way to predict the exact date FDA will make the decisions.

Product Candidate #1) FDA Decision to Reactive Dormant Product -- Chloramphenicol Oral Capsules

As of mid-1Q11, LCI has filed a Citizen’s Petition along with a request for change in manufacturing site and new raw material supplier to re-introduce product for second or third-line use in pts with MRSA bacterial infections (methicillin-resistant Staphylococcus aureus) with an estimated 2H11 reply from FDA but no formal decision deadlines for this request.

MRSA infections killed an estimated 15,000 people in 2008, and chloramphenicol was withdrawn from the market in 1960s due to lack of sales. LCI has filed a Citizen’s Petition (the FDA is not obligated to respond to these petitions in any specific timeline) along with manufacturing and stability data to FDA plus patent filings for additional oral dosage forms to re-introduce the drug to market with the advantage of no bacterial resistance since the drug has not been used for decades.

In addition, LCI has conducted in-house lab tests for both hospital and community-acquired MRSA strains w/ positive results with an estimated annual sales of $5M+. The drug would likely include a black box warning for a potential rare but serious side effect affecting the bone marrow (the blood disorder aplastic anemia or lack of red blood cell production by bone marrow w/ an estimated incidence of about one in every 10,000-80,000 patients who receive the drug).

LCI plans to market chloramphenicol as a drug of last resort for patients w/ MRSA infections that failed treatment w/ other drugs (i.e. second or third-line indication) – such as standard treatments that include vancomycin, ZYVOX (linezolid) and BACTRIM / SEPTRA (Trimethoprim and Sulfamethoxazole or TMP / SMZ). A Miami Herald article from July 2010, summarizes the potential use of chloramphenicol for second or third-line treatment of MRSA infections after the failure of standard treatments.

Product Candidates #2-4) FDA New Filings: 505(b)(2) NDAs -- C-Topical (topical cocaine solution), Oxycodone Oral Spray w/ Delivery Device, and Hydromorphone Nasal Delivery (abuse-deterrent and timed-release capsule formulations)

LCI expects 4Q11 FDA filings for C-Topical (topical vasoconstrictor and pain drug for ear, nose, and throat surgeries) and Hydromorphone for Nasal Delivery (abuse-deterrent opiate pain drug) with an expected mid-2011, filing for Oxycodone Oral Spray w/ Delivery Device (opiate pain drug) and the company plans to seek marketing partners for these products.

During the second week of February, LCI reported its 2Q fiscal year 2011, results and despite a backlog of pending FDA approvals for the Company's morphine sulfate oral solution New Drug Application (NDA) and two other ANDAs, LCI posted top and bottom line growth compared with the year-ago period.

LCI reported net sales of $30M compared with $28.7M in the year-ago period and net income of $2.4M or $0.09 per share compared with break-even results in the year-ago period. Research & development expenses decreased to $1.7M (compared with $2.7M in the year-ago period) while selling, general and administrative (SG&A) expenses decreased to $2.9M vs. $4M in the year-ago period.

In December 2010, LCI completed a secondary offering of its common stock for 3.25M shares at $5 for net proceeds of approximately $14.9M. The public offering of common stock in December 2010, included 2.5M shares sold by the Company (approx. 10% dilution), 2.5M shares sold by the chairman / founder (who still owns 5.7M shares as part of a group of 12 executives and directors that own over 12M shares), and 750,000 shares purchased by underwriters in the deal that exercised in full their over-allotment option.

LCI has been in business since 1942 and acquired Cody Labs in 2006, which is one of just seven US companies with a license to import opiate raw materials used in the production of narcotic / controlled substance pain relievers such as morphine and oxycodone -- providing a vertically integrated business model (from raw materials to market) within the niche pain management segment of the generic drug industry that is expected to lower manufacturing costs and expand profit margins since the Company can purchase the raw materials for opiate pain drugs from its wholly owned subsidiary rather than relying on outside suppliers at a higher cost.

Key products for LCI include digoxin (87.9% market share) Lanoxin, Digitek (heart failure treatment) and levothyroxine (27.4% market share) Synthroid, Levoxyl (thyroid hormone replacement therapy), which have relatively few competitors within the generic drug industry compared with other categories, which may have more than 10 companies producing the same compound. It should also be noted that these two drugs are also subject to periodic shortages in the market, which I have experienced first-hand in my former life as a retail pharmacist. In addition, both of these drugs treat medical conditions in which it is crucial for patients to avoid missed doses.

Looking ahead, LCI plans to expand its facilities (including those acquired with Cody Labs) and the Company currently has $2M in morphine inventory that can be used to re-launch the product quickly if FDA approval occurs as expected in early 2011 following successful facilities inspection. During Q1FY11 quarterly earnings three months ago, Mr. Bedrosian noted that sales and profits were adversely impacted by the loss of $2.8M in quarterly revenue from the FDA's action to force all but one competitor (ROXANOL) to cease distributing morphine sulfate oral solution as of July 2010.

I plan to hold my long position in LCI through the expected approval of morphine sulfate oral solution and the two additional generic drug products (with the potential to buy again ahead of additional expected FDA decision catalyst events), which may provide an upside catalyst in the range of 25-35% to $7-7.50 level (for a valuation of approx. 1.5X EV / sales or 16-18X price / earnings or P / E ratio) as consistent growth is expected to occur in future sales and profits with the approvals - especially given the strong results reported in the last quarter that occurred despite the backlog in FDA product approvals.

Currently, the Company and its investors are at the mercy of the FDA and a NDA review for morphine sulfate oral solution. It has already exceeded 14 months without any announcement by the FDA of a formal three-month delay. There is an expected standard review timeline of 10 months. Beyond the three expected FDA decisions, the vertically integrated niche pain drug growth strategy and future expected 505(b)(2) NDA filings provide additional catalysts, following the completion of pre-approval inspections by the FDA and the response from LCI to the 12 minor observations noted.

Disclosure: I am long LCI.