|Written by GSCR Staff|
|Tuesday, 12 November 2013 07:02|
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!
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.
This Market Monitor blog was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces research via two formats: Goldman Select Research, which typically highlights small cap companies, and Goldman Opportunity Research, which features micro cap companies in a sponsored research format. Thus, the Select product reflects the Firm’s internally generated stock ideas while the Opportunity product reflects sponsored research reports.
Goldman Small Cap Research is not affiliated in any way with Goldman Sachs & Co.
It is important to note that while we may track performance separately, we utilize the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company’s individual disclosures for each engagement, which can be found in each company-specific report. All information contained in this blog, newsletter and in our reports were provided by the Companies or generated from our own due diligence. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence. Analysts are compensated on a per report basis and not on the basis of his/her recommendations.
The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, or other firms. Goldman Small Cap Research relied solely upon information provided by the Company through its filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research blog, report, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed.
This blog does not take into account the investment objectives, financial situation, or particular needs of any particular person. This blog does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with FINRA or with any state securities regulatory authority.
ALL INFORMATION IN THIS BLOG, REPORT OR NEWSLETTER IS PROVIDED “AS IS” WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.
For more information, visit our Disclaimer: www.goldmanresearch.com