What: Despite delivering top- and bottom-line fiscal first quarter results after the bell yesterday that were ahead of industry watchers' projections, revelations of a loss of a key customer at a company that Lannett Company (NYSE:LCI) is acquiring caused Lannett Company's shares to slump by 17.7% earlier today.
So what: The generic drugmaker announced that third quarter sales grew 13.9% from a year ago to $106.4 million and that its adjusted earnings improved to $0.99 from $0.94 last year.
Offsetting the solid sales and earnings numbers, however, was a downtick in gross profit to 73% of sales from 77% of sales a year ago. SG&A expenses climbed to $13.9 million in the quarter from $10.5 million last year, and adjusted operating income dipped to 53.8% of sales from 58.5% of sales in Q3 2014.
The company also indicated that its acquisition of Kremers Urban Pharmaceuticals that was announced in September is on track to close shortly, but that Kremers Urban had also lost a key customer that accounts for $87 million of its revenue.
The customer loss occurring so close to the deal's closing raises questions regarding any expected impact from the lost revenue on Lannett's prior guidance for the deal to be immediately accretive to earnings in fiscal 2016 and significantly accretive to earnings in fiscal 2017.
Additionally, Lannett disclosed on its earnings conference call that recent media and political scrutiny of pricing practices at other drugmakers leads it to expect that the interest rate it will have to pay on money it's borrowing to finance the Kremers Urban deal will be higher than it initially thought.
Now what: Although investors will need to keep an eye on the dip in margin, it's Kremers Urban's customer loss and the resulting uncertainty surrounding the benefits of buying the company that is of greater concern.
Initially, Lannett Company had said that acquiring Kremers Urban would net it 18 products generating $800 million in trailing 12-month revenue and 11 ANDA's that are pending FDA approval. Additionally, Lannett Company had reported that cost-savings tied to integrating Kremers Urban would boost its earnings by a mid to high single digit percentage this year and by 20% to 25% in fiscal 2017.
In its conference call, Lannett Company did say that it still expects the deal to be accretive in year one, but management is holding off on giving insight into how accretive it will be this year and next year until after the acquisition closes.
Management also indicated that it expects that cost savings associated with the deal will be greater than it initially projected and that it's comfortable with the likelihood of being able to replace the revenue lost by this customer leaving.
Because today's drop reduces Lannett Company's forward P/E ratio to less than 8 and management remains comfortable with the benefits from this acquisition, it would seem to me that investors are pricing in any potential downward revision to EPS guidance and that it might be a good idea to give Lannett Company the benefit of the doubt and pick up some shares on sale.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.