Market Place
In August, when Fortune magazine published its latest ranking of the fastest-growing companies in the US, topping the list wasn’t a ‘sexy Silicon Valley startup’, but a little known, 73-year-old Philadelphia-based generic drug-maker – Lannett Company Inc.
Last week, Lannett announced it would buy Kremers Urban Pharmaceuticals Inc – the US generic business of Belgian drug-maker UCB SA – for US $ 1.23 billion.
With the growth demonstrated by Lannett, coupled with the combined revenues of more than US $ 800 million for the 12 months ended June 30, 2015, the company seems to be on track to become the next billion-dollar generic pharmaceutical company.
However, back in 2002, Lannett’s sales were only US $ 25.1 million. This week, we focus on the secret recipe that has driven Lannett’s business success.
Focus on a few old products
Lannett’s net sales in 2014 were US $ 274 million, an increase of 81 percent over the previous year. However, unlike most companies that generate sales growth through global scale and multiple products, Lannett’s results are an outcome of their extremely strong focus on a few key products sold in the United States.
Lannett’s top five products accounted for 74 percent of the total 2014 sales and two products – Levothyroxine Sodium and Digoxin – generated combined sales of almost US $ 157 million in 2014 (higher than Lannett’s 2013 sales, which were US $ 151 million).
Lannett’s two-trick pony
Levothyroxine Sodium tablets remain one of the most prescribed drugs in the US and are used by patients of various ages and demographic backgrounds for the treatment of thyroid deficiency. Although an old drug, it is also a narrow therapeutic index drug that saw serious and continuing recalls in the 1990s. In 1997, the FDA mandated New Drug Applications (NDA) for this previously ‘grandfathered’ drug (a drug approved before 1938).
A year later, Jerome Stevens Pharmaceuticals (JSP) filed and received the first NDA approval by the statutory deadline; beating out the innovators (Abbott Laboratories and King Pharmaceuticals).
In 2004, Lannett entered into an agreement with JSP for the exclusive distribution rights of three product lines in the United States, which included Digoxin and Levothyroxine Sodium tablets.
Today, Levothyroxine Sodium tablets are produced and marketed with 12 varying potencies and are the single-largest revenue contributor for Lannett. The franchise still enjoys limited generic competition, witnesses year-over-year growth in total prescriptions and most notably has “dollar sales” gains generated by improved product pricing.
The second-largest revenue contributor for Lannett is Digoxin, another drug used in a narrow therapeutic index to treat congestive heart failure in patients. Lannett held only 14 percent of the market until a few years ago and the brand leader, with 61 percent market share was Mylan.
The production of Digoxin tablets was outsourced by Mylan to Amide, a company which ran into such severe product quality and cGMP (Current Good Manufacturing Practices) problems that Mylan not only had to recall their “obese” Digoxin tablets from the market but also had their market share completely wiped out. A few months later, Sun Pharmaceutical’s US subsidiary – Caraco – had a similar issue of obese tablets which made Lannett the undisputed market leader in this niche segment.
Realizing substantial price hikes
Recently, Digoxin also witnessed a price increase by as much as 884 percent from October 2012 to June 2014, which increased its contribution to US $ 54.7 million of Lannett’s total sales of US $ 274 million in 2014.
Lannett’s ability to operate in niches where competition is limited and the realization of substantial price hikes possibly led to ‘interrogatories and subpoena from the State of Connecticut Office of the Attorney General’ in July 2014, questioning the Digoxin price hikes.
A firm commitment to partnerships
Price increases aside, Lannett’s growth has also been an outcome of a stable supply chain partnership with JSP, combined with a strong historical record of regulatory compliance. JSP has accounted for more than 60 percent of Lannett’s overall finished goods inventory purchases in the last few years.
However, unlike others in the industry, who have reduced their focus on manufacturing viewing it as a cost, rather than a value, Lannett extended their original agreement with JSP. The agreement – scheduled to expire in 2014 – was renewed by not only giving written assurances of a minimum purchase commitment of US $ 31 million annually until 2019, but also issuing 1.5 million shares of Lannett common stock to JSP.
“Our distribution agreement with JSP has been highly successful and mutually rewarding,” said Arthur Bedrosian, Chief Executive Officer, at the time of the agreement renewal.
Lannett’s commitment to partnerships is also mentioned in its annual reports where it mentions partnerships with “Azad Pharma AG, Swiss Caps of Switzerland, Pharma 2B (formerly Pharmaseed), The GC Group of Israel and HEC Pharm Group, as well as domestic companies, including JSP, Cerovene, and Summit Bioscience LLC”.
The joker in the pack
Lannett’s ambitions to grow have been made clear, given that the Kremers Urban buyout was valued at almost five times Lannett’s current revenues. In addition, they beat out the China Grand group, India’s Cipla Ltd and several other private-equity firms who were among the potential bidders for Kremers Urban.
Kremers Urban was almost sold late last year to private-equity firms Advent International and Avista Capital Partners for US $ 1.53 billion. The deal was called off when one of Kremers Urban’s main products – a generic version of the drug Concerta (methylphenidate hydrochloride) – underwent a change of classification at the FDA.
Under the new classification rating, its methylphenidate hydrochloride extended-release tablets can be prescribed but may not be automatically substituted for Concerta at pharmacy counters.
Kremers Urban was requested to provide additional information showing bio-equivalency to Concerta for which the final results of new bioequivalence studies were submitted this June.
The contingency payments in the Lannett deal are tied to the FDA restoring the rating and should this happen, the landscape would once again be familiar territory for what Lannett has experienced, and capitalized on previously with Levothyroxine and Digoxin!
Our view
Lannett has grown using old-fashioned rules of doing business but also adapted to the evolving environment.
They focused on essential products, obsessed over quality, treated their suppliers as partners, while also ensuring that the company seizes maximum possible returns out of an opportunity.
Undoubtedly, there are several learnings in Lannett’s story for other pharma companies to emulate.
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