LANNETT CO. $23.60
Write June $25 PUT @ $4.50
Across the globe more people than ever are taking prescription drugs, contributing to the rising costs of health care. Consumers, insurance companies, and governments are helping to fuel the growth of the generic drug industry as it often provides them with a lower cost alternative to brand name pharmaceuticals. Generics account for 88% of all prescriptions in the U.S., 55% in the EU, and 47% in Japan.
Lannett Co. is a generic pharmaceutical company commercializing and developing products for the treatment of thyroid and cardiovascular disorders and pain management. They have delivered in the areas of hypothyroidism, heart failure, and migraine therapies.
Their edge comes from being vertically integrated in narcotics where they can ramp up and compete thru cost savings. The recent acquisition of Kremers Urban is also expected to improve the bottom line.
Part of the recent slide in stock price was due to the loss of a key KU customer. In order to complete the transaction, Lannett was forced to pay above market rates on $250MM bonds. Total financing costs of the $1.2B are 7.5% and expected to refinance. Even with this bump in the road, the KU deal will be accretive.
With 15% average earnings growth over the past 5 years and forward P/E at 6.5, this is a great entry point into a classic midcap GARP.
We are recommending the cash secured put write based on elevated market volatility (VIX @ 27), lack of any immediate catalyst in the pipeline, and negative relative strength.