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Why Lannett Is Running

Lannett Co. Inc. (NYSE: LCI) climbed high on Thursday despite the broad markets taking a slight downturn toward the end of the session. One key analyst explained why. The company pulled off a significant coup, in Oppenheimer’s view, with its announced acquisition of UCB’s generics unit, Kremers Urban.

The company announced the signing of a definitive agreement to purchase UCB’s generics unit, Kremers Urban, for $1.23 billion. Lannett will borrow $1.16 billion in a term loan (at about 5% to 6%) and pay the remainder with cash on hand. Management expects the transaction to close by the end of October and anticipates eight months of Kremers contribution in fiscal 2016.

Management estimates Kremers’ revenues to add $235 million to $245 million to Lannett’s fiscal 2016 at a roughly 40% gross margin. Further, the company anticipates $70 million of contribution from methylphenidate XR. Reported financials from Kremers imply about $350 million in annualized revenues.

Lannett expects EPS accretion of mid to high single digits in fiscal 2016. Applying an about 15-times multiple to guidance accretion would imply around 10% share price appreciation. However, this assumes about $240 million in added fiscal 2016 revenues at about 40% gross margin, no tax benefit and even modest synergies of $5 million.

The brokerage firm’s understanding is that there were other larger players at the table, but yet Lannett was able to win out. The price tag on the deal also seems reasonable. Using Kremers’ first-half reported results implies a three- to four-times sales multiple and 10- to 12-times EBITDA multiple as the price paid.

The bears will point to the uncertainty surrounding methylphenidate XR, as well as recently issued FDA draft guidance implying that the product could be removed from the market if bioequivalent studies do not pass agency thresholds. However, in part because of the lack of safety concerns with UCB’s product, the firm’s preliminary checks indicate that methylphenidate revenues might be safe.

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Oppenheimer capped off its report saying:

We are not changing estimates at this time and instead await further details from management on some of the key drivers from Kremers. Our proforma model implies significant accretion for fiscal 2016, almost double the amount outlined by Lannett. However, we note that estimate is highly dependent upon the revenue contribution (i.e. stable methylphenidate sales) and assumed synergies.

Shares of Lannett were up 12% at $55.41 on Thursday afternoon. The stock has a consensus analyst price target of $64.60 and a 52-week trading range of $37.19 to $72.44.

By Chris Lange