Generic-drug firm Lannett has small role in pharma's M&A boom

The recent boom in health-care mergers and acquisitions, which resounded loudly with Monday's $160 billion Pfizer-Allergan deal, already involves a small Philadelphia generic-drug company that has spent most of its 73-year existence trying to stay under the radar.

Lannett Co. might be a takeover target or a buyer in the future, but now it is trying to digest a complicated acquisition of its own from September and a smaller one from May.

Lannett, with 502 employees and five Philadelphia properties, was formed by two pharmacist brothers in 1942, before there was a distinct generic-drug industry. Today, with only one brand-name product, Lannett is among a declining number of generic-drug companies.

That decline undercuts the basic hope of some U.S. lawmakers since at least the 1980s: that lower prices would result from competition between many manufacturers of drugs no longer protected by patents. Lannett - whose revenue increased from $12.1 million in 2001 to $406.8 million in the fiscal year ending June 30 - is among the companies subpoenaed by federal investigators examining large increases in generic-drug prices.

Last week, Jeffries financial analyst David Steinberg introduced Lannett CEO Arthur Bedrosian to other analysts at the investment firm's health-care conference in London. Steinberg noted that by his count, only eight publicly traded generic companies are left after consolidation.

"If we want to be in the top 10, I guess we made it," Bedrosian said in response. "All the others got acquired. So I guess we have to wait our turn. Either that or nobody loves us, no one wants to acquire our company. In any event, we are a great little company."

Bedrosian declined requests for an interview. Spokesman Robert Jaffe wrote by email, "Management is focused on the transaction announced in early September and not available for an interview at this time."

On Sept. 2, Lannett said it would pay $1.23 billion to acquire Princeton-based Kremers Urban Pharmaceuticals Inc., the U.S. specialty-generic subsidiary of Belgium-based drugmaker UCB S.A. On Nov. 4, however, Lannett filed a notice with the Securities and Exchange Commission that Kremers said it would soon lose a key customer that accounts for $87 million in yearly revenue.

The next day, Bedrosian told financial analysts that the Kremers revenue would be made up elsewhere, including by cost-cutting, but that he was still looking to complete the deal and buy other companies.

"We continue to evaluate potential acquisitions that are a strategic fit and accretive to our business," Bedrosian told analysts.

That follows the June closing of the $42 million purchase of Silarx Pharmaceuticals and the December 2013 purchase for $9 million of two buildings on Roosevelt Boulevard previously used by the IRS.

Lannett now operates, in some places with two shifts, out of facilities on Townsend Road, State Road, and Torresdale Avenue in Philadelphia. Bedrosian told the Jeffries audience that the plan was to shift much of the company's research and development to the Silarx plant in Carmel, N.Y., then move other operations to the much larger buildings on the Boulevard to increase production.

But that will cost money and, Bedrosian's confidence notwithstanding, the shifting economic landscape sometimes has negatively affected Lannett. Bloomberg News reported the big banks underwriting the Lannett debt for buying Kremers were having to offer unusually large discounts to investors.

Moody's said it might downgrade Lannett's bond rating, saying its recent "rapid growth . . . has been driven largely by opportunistic price increases. Moody's believes that, given significant recent scrutiny on generic drug prices, these types of price increases will be harder to achieve going forward."

This is not the first challenging moment in Lannett's history. In 1991, co-founder Samuel Gratz was ousted by the company's board. A year later, a jury convicted him of felony charges related to storing hazardous waste on company property without permits and of dumping toxic chemicals into a storm drain that emptied into the Delaware River.

U.S. District Judge Norma L. Shapiro sentenced Gratz to six months of house arrest, and ordered him to pay a $10,000 fine and forfeit to the government 10,000 shares of company stock. The stock was worth about $220,000 in January 1993, when he was sentenced.

Ten thousand shares would be worth $385,500 today, based on Lannett's closing price Tuesday of $38.55.

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