What happened

In response to announcing the loss of a key customer and sharing preliminary numbers for its fiscal fourth quarter, Lannett (NYSE:LCI), a manufacturer of generic pharmaceuticals, saw its shares drop 58% as of 11:03 a.m. EDT on Monday.

So what

Lannett learned on Friday afternoon that its distribution agreement with Jerome Stevens Pharmaceuticals (JSP) will not be renewed. The contract is set to expire on March 23, 2019.

This represents a huge blow to Lannett's business because JSP was the exclusive U.S. distributor of three drugs that collectively accounted for about 29% of Lannett's total sales in 2017.

BUsiness woman tearing up a piece of paper

Image source: Getty Images.

If that weren't bad enough, management also shared preliminary numbers for the fiscal 2018 fourth quarter and full year, and the news wasn't great:

  • Fourth-quarter sales are expected to be about $171 million. That's short of the $173.5 million in revenue that Wall Street was expecting.
  • Fourth-quarter GAAP earnings per share are expected to land between negative $0.30 and negative $0.32. On an adjusted basis, EPS is expected to land between $0.62 and $0.64. This figure is also behind the $0.66 in adjusted earnings that market watchers had expected.
  • Fiscal 2018 revenue is expected to be about $685 million, or $2.1 million behind estimates.
  • Fiscal 2018 GAAP earnings per diluted share are expected to be between $0.73 and $0.75. Adjusted earnings per diluted share are expected to land between $3.08 and $3.10. The pros expected $3.12 in adjusted EPS. 

Management also stated that it is "evaluating the impact of this contract ending in March 2019 on our goodwill." In other words, investors should be bracing themselves for the possibility of a substantial writedown in the coming quarters. 

Given the major customer loss and worse-than-expected results, it isn't surprising that shares are being mauled today.

Now what

As you'd expect with an announcement like this, CEO Tim Crew did his best to reassure investors about the company's future:

While we are disappointed, and intend to redouble our continuing efforts to explore options for addressing our capital structure, we have been preparing for this contingency, knowing that this outcome was a possibility. Accordingly, we have been focused on improving our already strong base commercial business of more than 100 currently marketed products. Since the beginning of this year, we added new products to our offering and expanded our customer base. We continued to streamline our operations.  

Crew also noted that the company has launched eight new products since January, which are expected to add more than $50 million in sales in the coming year. He also noted that the company still has a big pipeline of products in place. However, Wall Street is looking straight past those encouraging words and remains squarely focused on the near- and long-term challenges facing the business.

Lannett's huge plunge today should serve as yet another reminder to investors about just how dangerous it can be to buy shares of a business that relies on just a few customers for the bulk of its revenue.  

Given the huge challenges facing this business, I do not consider today's drop to represent a buying opportunity.