Sunday, April 24, 2016

Will Lannett lose another customer?


In my previous articles, I've talked about the generic pharmaceutical market and Lannett's (NYSE: LCI) growth strategy.
Let's move on to Kremers Urban's story.

A major selling pressure on LCI came from the bad new that Kremers Urban Pharmaceuticals Inc ("KUPI"), LCI's newly acquired subsidiary, had lost a key customer. Up to now, LCI's recovered 30% of this loss by multiple clients. However, will LCI lose another customer? Is the other shoe gonna drop? Let's look closely.

Key Takeaways:
- LCI faces strong and consolidated wholesaler clients
- KUPI lost its key customer because of product downgrade
- LCI is unlikely to lose another customer for another product downgrade


#1) Who are Kremers Urban's customers?



As discussed in the generic pharmaceutical market article, the downstream of the generic pharmaceutical industry is quite consolidated. In other words, every generic pharmaceutical company probably has the same top five clients... Let's double check about KUPI.

Unfortunately, we didn't find KUPI's top client list from LCI's SEC filing. However we did find following descriptions from LCI's 8K on Oct. '15:

"For the years ended December 31, 2014, 2013 and 2012, the Company's (KUPI's) four largest customers accounted for approximately 65%, 54% and 44% of its net revenues, respectively."

(Source: LCI's 8K on Oct.'15)

For now, let's assume KUPI has the typical client profile as other generic pharmaceutical companies.

#2) Who is the lost customer? Why did it leave?
This is a difficult question. LCI's Investor Relationship guy won't tell you the answer.

From my educated guess, KUPI has lost its key customer because of the rating change of its methylphenidate hydrochloride extended-release (“Methylphenidate ER”, also called Concerta) tablets.

In Nov. 2014, FDA raised concern on KUPI’s generic Methylphenidate ER may note produce the same therapeutic benefices for some patients as the brand-name product. Until additional data is provided, FDA has changed the therapeutic rating of KUPI’s Methylphenidate ER products from AB to BX, which means the product is still approved and can be prescribed, but is not recommended as automatically substitutable at the pharmacy for the brand-name drugs.

From the 8K of LCI, it mentioned that “There is a possibility that in May 2015, or subsequently, KUPI's Methylphenidate ER product will be withdrawn from the market, depending on the results of the requested additional BE study, FDA actions and/or other factors. ”

Let's check with the almighty sell-side research analysts.
It seems the the case. According to the Dec. '15 research report from Susquehanna Financial Group, the key lost customer is Red Oak. Red Oak is the largest buying group in the US.

To put it simple, KUPI lost its key customer because of product downgrade.

#3) What's the possibility that LCI lose another customer? 
How often does FDA downgrade a drug? We didn't have the statistics, but it seems a one-in-one-hundred chance.
One interesting phenomena is that long before the downgrade, lots of patients had been complaining about Concerta in online forums.

How about LCI's other drugs? Let's search for the negative voices.

It's interesting to find that although every drug has some side effects, for instance, Levo made some people gain weight, there are not many complaints targeting LCI's other generic drugs.

As a result, it's unlikely that LCI will get another drug downgrade. Or in other words, it's unlikely that LCI will lose another customer, similar to what happened to KUPI.

That being said, LCI have some other troubles, such as it's C-Topical specialty drugJSP partnership for LCI's top two products and etc. Let's keep digging.


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