The 400% Biotech Mover

Written by GSCR Staff   
Tuesday, 12 November 2013 08:02

M&A activity is really heating up in the biotech space.

On the heels of a multi-billion deal announced on Friday, yesterday, the U.K. drug giant Shire PLC (NASDAQ – SHPG) announced it was acquiring ViroPharma, Inc. (NASDAQ – VPHM) for a cool $4.2 billion as the firm looks to expand its rare-disease portfolio. VPHM moved from just slightly out of the small cap space at a $2.6 billion market cap, to well outside at $3.25 billion market cap intraday going up over $10 in price level. It would have been nice to own that one at the start of the day! Clearly the M&A and IPO activity is heating up. The link below is from the WSJ and highlights the IPO deals for this week of which we counted 4 in biotech alone!

http://online.wsj.com/mdc/public/page/2_3022-newoffer.html?mod=topnav_2_3063


With all of the excitement of late, we decided it was time review our big biotech winner, Lannett Company, Inc. (AMEX – LCI - $26.91) which is up 380% since our highlight in the Market Monitor in mid January. We originally set a price target of $6.50, which seems hilarious now.

There are two questions to ask about the stock going forward. Do we think it is in play as an acquisition target? And, as a caveat, is it time to sell, hold, take some profits, or buy more? The first question is somewhat easy to answer, but we will not claim to be infallible here.

The Company was founded in 1942, making it almost a dinosaur in the space in relative terms. As a refresher Lannett develops, produces, and distributes generic prescription drugs related to glaucoma, Parkinson’s disease, migraine headache, antibiotic, anesthetic, endometriosis, irritable bowels, obesity, congestive heart failure, antipsychotic, diuretic, pain management, thyroid deficiency, dryness of the mouth, epilepsy, gout, bronchospasms, hypertension, and gallstone. In 2012, the Company received FDA approval for its high blood pressure product and is in the process of seeking partnerships and research contracts for developing ophthalmic, nasal, and injection products.

We do not view LCI as an acquisition target for the simple reason it is a mature, profitable biotech company not seeking or requiring a larger dance partner to get to the next level. Usually the marriage between the mega drug company and a small biotech is one related to value, i.e. small market cap and several discovery drugs in the pipeline from the large firm’s perspective and one of heavy R&D funding needed on the small firm’s side. Besides, the stock has already run and with over $42 million in cash as of June 30, there appears to be no need from either side here.

The next question about what to do with the stock is a little trickier. One’s gut reaction would be to at least skim a little off the top.

Nonetheless, LCI still appears attractive as a buy with our three-tiered approach right now. The technical analysis is very bullish related to 5-day all the way to 50-day DMA, and on the momentum front, has averaged close to 350,000 shares traded per day over the latest 3-month period while effectually doubling in price. The trailing 12-month P/E is close to 59, but the forward 12-month P/E is attractive, as it stands under 19. The forecast for revenue for FY15 is set to increase nearly 15% from $235 million in FY 2014. Finally, the Company just reported record revenue for 1Q14 of $45.8 million.

Separately, the engine keeps running at Lannett. The Company announced in early October that it had completed the New Drug Application (NDA) required for approval from the FDA its Thalidomide Capsules which are used in the treatments of certain melanoma. The market for this drug is currently $66 million.

For all the factors listed above, we would not take money off the table just yet and would consider buying more as it the valuation indicates the stock has more room to run. A new target of $29 sometime early 1Q14 is achievable.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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