The valuation on Lannett

Base on previous discussion, let's focus on the bear case valuation first.

Key Takeaways:
- Stronger financial performance from the cash flow perspective 
- Bear case valuation at $20 per share

My bear case counts in all the negative scenarios that could happen to LCI. Assumptions include:

1. FDA requires LCI to stop marketing C-topical in 2016
2. After JSP renew contract with LCI in 2019, the gross profit margin of related products will drop to 50%
3. Generic segment sales decrease at 9.2% run rate for year 2016-2020
4. Conservative product launches for ANDAs

This projection is ~10% discount of management guidance on $555 million - $565 million revenues in FY2016; projected 50%-55% gross margin is well below 60.5%-61.5% gross margin in the guidance.

Furthermore, due to the step-up in asset from 338(h)(10) tax benefit, amortization of KUPI's product rights and deferred financing cost, we see stronger performance in terms of Free Cash Flow per share.

(KUPI's product rights amortization schedule. Source: LCI's 8K on Nov. '15)

(LCI's deferred financing costs. Source: LCI management presentation on Mar. '16)

I believe a 7x FCF forward multiple (based on 12.8x median P/ LTM FCF for its peers) is appropriate to value LCI in the bear case, which concludes a risk-adjusted valuation of $20 per share.