Shares of Lannett Company (NYSE:LCI) fell nearly 15% today and have now dropped 65% in the last five days. Earlier this week the company announced it will soon lose its single most important supply contract, an agreement with Jerome Stevens Pharmaceuticals (JSP) for a basket of pharmaceutical ingredients that generated $253 million in net product sales in fiscal 2018. The contract will expire in March 2019.
Today, the company disclosed through an SEC filing that it was re-evaluating the value of goodwill and certain long-lived assets reported on its balance sheet in connection with the JSP contract. While a final decision hasn't been made about the size of the impairment charge that will be taken in the fiscal first quarter of 2019, Lannett Company reported $339.6 million goodwill on its balance sheet at the end of June (the end of fiscal 2018). Wall Street is preparing for this to hurt.
As of 11:55 a.m. EDT, the stock had settled to a 10% loss.
The need to take a large impairment charge isn't surprising, but it wasn't the only material information announced today. While the company won't report full-year fiscal 2018 results until Aug. 28, it provided some details about the last full year of operations in today's SEC filing. The extra information is just adding salt to the very fresh wounds of investors reeling from the upcoming breakup with JSP.
Lannett Company reported that the value of products from the contract with JSP was $253 million in fiscal 2018, including $245.9 million from levothyroxine sodium tablets. It also disclosed that the thyroid medication's gross margin is approximately 60%.
That's up markedly from the $174 million in total net revenue reported for levothyroxine sodium tablets in fiscal 2017. This also appears to be the first time the company has disclosed profitability metrics related to the thyroid medication, which is helping Wall Street to determine just how big a drop to expect once the JSP agreement expires. Now investors have their answer: pretty big.
Unfortunately for individual investors caught in the volatility, Mr. Market might be right to run away from this generic pharma stock given the sudden surge in uncertainty. The soon-to-be-lost thyroid medication sees over 122 million prescriptions each year in the United States, making it the most prescribed medication in the country. The JSP contract -- to be scooped up by Amneal Pharmaceuticals in March 2019 -- represents about 10% of the total market for the drug.
The lost sales and (more important) earnings will be difficult to replace. That's going to make the $784 million in outstanding debt a much-bigger obstacle for the business from here, especially with the company valued at just $190 million now. While shares might seem like a bargain, I think investors should wait for more details before jumping into Lannett Company stock. The first batch of new information will be reported on the fiscal full-year 2018 earnings conference call on Aug. 28.