If we have learned anything from the COVID-19 pandemic of 2020 it is the past is not a predictor of the future and that the only certainty is uncertainty. Yet, for businesses, the effort to forecast the future remains a much sought-after goal and often pursued through data from the past that is expected to point to a certain “prescribed” future, one that allows businesses to plan their strategies. But the past is not always prologue and, although business executives love hard numbers, we should recognize that they often and willingly employ a simple form of strategic analysis, usually devoid of numbers, known as SWOT analysis.
I am certain many readers are familiar with SWOT and its use, so it is not my intention to offer a primer on the topic. However, a note of caution. A simple web search that offers less than a half-dozen minimally worded talking points is, decidedly, not the level of in-depth SWOT analysis that businesses and their management seek when trying to better understand their competitors, partners, customers; and evaluate competitive possibilities, assess a company as a prospective vendor or supplier, evaluate M&A opportunities, learn about its competitors strengths or weaknesses, and attempt to stay up-to-date on their company’s business strategy in order to assess its competitive markets and determine its future prospects. As such, a thorough SWOT analysis helps analyze the competition and develop a plan to improve an organization’s strategic advantage.
In particular, SWOT analysis can help overcome subconscious blind spots and biases that an organization and its management may have but not recognize. Also, SWOT may prevent the mistake of underestimating the strengths of the competition – which can be costly, as it is the strengths of a company that are the basis for the competitive benefits it will use to take advantage of market opportunities.
While SWOT analysis does not seek to be an exhaustive capture of any and all factors within the internal and external environments, a thorough SWOT analysis usually takes 20-50 pages. When done well, SWOT will provide an in-depth objective assessment that will aid in the development of a more comprehensive, realistic and strategic action plan, without which goals are merely aspirations.
A Fundamental Understanding
Simply to ensure we are all on the same page, let me be clear – SWOT analysis is a specific point-in-time, situational business analysis that involves a strategic evaluation of key internal factors (Strengths & Weaknesses) and key external factors (Opportunities & Threats) that can affect a business.
An effective analysis should provide a clearer understanding of what factors may help achieve success or might lead to failure. It should also create clarity within the context we are analyzing by providing a framework for organizing the data in ways that provides a group or individual with a fresh and current perspective of the environments. Ultimately, this helps decision makers draw conclusions about the organization’s situation and its implications for creating strategy to achieve the stated goals.
But be advised – while SWOT seeks to be an objective analysis, as any process involving individual input – SWOT relies on a process affected by the capabilities as well as the biases of the individuals involved in the identification and their assessment of the relevant factors presented in the four S-W-O-T categories. It is not about being perfect.
To be transparent, while this article seeks to employ a SWOT analysis of Lannett (LCI), it is no less threatened by my potential biases and decisions related to what to include and what to leave out.
Applying SWOT to Lannett
More is not always better. An effective SWOT analysis does not have to be exhaustive. However, to be effective SWOT has to be timely, relevant, and essential to understanding the company as a business capable of competing in today’s competitive climate. Consequently, a SWOT analysis done 18 months ago on Lannett would be very different than that of today, as LCI still had its Jerome Stevens agreement for distributing Levothyroxine that contributed some 48 percent of LCI’s total revenues, and the 18 products the company has recently rolled out were not as yet commercialized.
With that, here is a SWOT analysis for Lannett based on this current point in time.
Strengths
Brand Reputation
Lannett is a seventy-five year old firm that has, over time, created fundamental core competencies in drug development and commercialization that have enabled it to produce high-quality, affordable generic pharmaceutical products to patients who depend on them.
It is not merely the passing of time but accomplishments that establish brand reputation. While management capabilities and their decisions will vary over time, it remains that the relatively new senior management team offers an opportunity to overcome past mistakes, certainly as seen in the shareholders litigation against the former CEO and CFO.
Operational Strategy
Although generic drug companies generally focus on low value chain costs as the means to achieve low prices, Lannett employs a “best cost” strategy. Best-cost provider strategies can be tricky because they seek to stake out a middle ground between pursuing a low-cost advantage and a differentiation advantage.
As to that type of operational strategy, Thompson-Strickland noted in “Crafting & Executing Strategy”…
This is a risky attempt to counter-balance its generics and novel drug development, as it seeks that “in-between” fit – between achieving the lowest system costs possible to produce its generic drugs, while ensuring quality is projected that allows for premium pricing for its novel drugs. This bifurcated effort is designed to appeal to the sometimes great mass of value-conscious buyers looking for lower priced generics or a “better product” at an economical price. For novel drugs, this “hybrid” approach balances a strategic emphasis on a low-cost value chain but with the corresponding ability to deliver desirable, if not highly differentiated, quality for their unique drugs at a comparatively low price.
Nonetheless, for a company that has long been involved in the commercialization of generics while pursuing new drug development, it can be valuable with the requisite low-cost value chain.
Business Development and Product Launches
Business development for Lannett consists of both external and internal capabilities.
By its own admission, LCI has performed well with its partnerships that are of a varied nature. They have partnerships with large scale distributors – Cardinal Health (NYSE:CAH), AmerisourceBergen (NYSE:ABC) and McKesson (NYSE:MCK), and Walgreens Boots (NASDAQ:WBA) – that is of great value when considering the development of commercialization partnerships with other generic drug producers, as LCI does not differentiate between an internal product and external product in terms of how its R&D, supply chain, or commercial teams interact with those opportunities. This is a critical distinction that promises greater reach for companies seeking a commercialization partner with scale. This approach clearly resonates with partners, as evident by the recent and notable partnerships that are enabling LCI to close the revenue gap created by the loss of the Jerome Stevens Pharma account.
As to that effort, in the first half of fiscal year 2020, LCI launched 8 products and, since January 1st, the company has launched 6 additional products, including propranolol ER, nizatidine oral solution, valproic oral solution, generic Amphetamine XR, lactulose oral solution, and Numbrino – a total of 14 products fiscal year-to-date.
Specific examples include:
Lannett’s partnership with Neolpharma Pharmaceutical Group unit Cediprof enabled it to launch FDA approved Levothyroxine Sodium Tablets USP, under an amended agreement, two years earlier than the 10-year exclusive supply and distribution agreement that is to commence in 2022. This is a product LCI is familiar with and had effectively commercialized with its Jerome Stevens partnership, and for which efficient market penetration through previous distribution channels should be readily available. The partnership was made possible by LCI having prevailed in separate legal challenges by Cediprof’s previous distributor of the product.
Another notable partnership is with Elite Pharma (OTCQB:ELTP) a small pharma company, that resulted in the 2019 commercialization of generic Amphetamine IR and, in March 2020, the launch of Amphetamine XR. Combined, the products have a projected IQVIA market of about $2 billion – early evidence shows LCI’s effective market penetration through distribution into some of the big drug store chains. That penetration will also aid in the commercialization of a smaller drug – Dantrolene – that is also part of the Elite alliance.
As to the CNS drug category, YOY 2020 v. 2019 CNS drugs were Lannett’s second-largest revenue producing category and had the second-largest sales volume increase among its drug categories. Specifically, LCI experienced a 31 percent increase in CNS drug sales in 2020 v. 2019 before the commercialization of Amphetamine XR. LCI also has an agreement with Andor Pharma to distribute generic Concerta (Methylphenidate ER), which is a CNS drug with an IQVIA U.S. market of about $1.5 billion and was launched in May 2019.
On the EOY conference call, LCI CEO added that, as it looks into 2021, the company expects the CNS category to grow starting in Q1 2021, where it will be getting a full quarter from XR, which has an IQVIA market size projection of roughly $1.5 Billion, and another quarter of growth from IR, which has yet to reach peak projections and has a roughly $400 Million market size. Moreover, the CNS drug market has a CAGR of roughly 10.8 percent.
Additional agreements and launches include the following:
In July 2020, Lannett entered into an exclusive U.S. distribution agreement for Levorphanol Tablets with privately-held Novitium Pharma, a U.S. based pharmaceutical company. Under the agreement, Lannett will primarily provide sales, marketing and distribution support for the product, for which it will receive a share of the profits. Total U.S. sales for the 12 months ended May 2020 of Levorphanol Tablets 2 mg were approximately $60.9 Million, according to IQVIA.
In July 2020, LCI also launched Mexiletine Hydrochloride Capsules 150 mg, 200 mg and 250 mg, a product with privately-held Rivopharm. Mexiletine Hydrochloride Capsules is the AB-rated generic equivalent to Mexitil Capsules of Boehringer Ingelheim. According to IQVIA, the U.S. market is approximately $16 million.
In August 2020, Lannett completed an agreement with privately-held Respirent Pharmaceuticals Co., Ltd. for the exclusive U.S. distribution rights to the latter’s generic version of GlaxoSmithKline’s (GSK) asthma medication Flovent Diskus (Fluticasone Propionate Powder Inhaler). Per IQVIA, the U.S. market is $94 million. LCI also has exclusive U.S. distribution rights to Respirent’s generic version of GSK’s Advair Diskus (Fluticasone Propionate – Salmeterol Xinafoate Powder Inhaler), the term of which has been extended to 12 years from 10 years.
Regarding its own internal business development, LCI says its efforts have added a flow of internally developed products that will improve its financial health and move the company toward achieving its aspirational goal of being a $1 billion revenue producer by 2025. On that, CEO Timothy Crew commented:
We have a few things we’re working on that we hope will make additional impact for us this year and beyond. And we don’t see any real material challenges to what that looks like going forward.
The vast majority are products it is either developing or have in-house relative to business development relationships. This does not include any acquisitions that might be considered at some point in the future. Though, it would be wise for LCI to recognize that it had two expensive acquisitions (Kremers Urban and Silarx) that nearly tipped it into bankruptcy. However, it is fair to consider that was under different management, and if there is anything we can say with certainty, it is that a change in senior executive leadership brings with it a different competitive view that alters the strategic vision, expectations, and execution of a company. It should be no less so for Lannett.
On the strength of its current product launches, LCI added that the new product launch goal is 20 or so products a year, with $70 million–75 million in value by launching numerous single-digit million dollar products, as well as products that have the potential for notable, multiple-digit contributions over the course of a 12-month time horizon – as with Amphetamine XR.
Geographic Location
Lannett has its headquarters and all of its own R&D and finished dose manufacturing based in the U.S. It also has access to U.S. based API manufacturers that insures against supply disruption by the COVID-19 pandemic or any other external risk event. Further, with U.S. based value chain activities like manufacturing, LCI reduces logistic complexities and costs.
Effective Manufacturing Capacity Utilization
LCI has manufacturing capacity it describes as a “bit fungible,” indicating it has the ability to “improve output and grow capacity by adding machines” at the appropriate process point. Correspondingly, a number of LCI’s products come from partners who have their own supply chain and manufacturing capabilities. So, as it relates to the overall ambitions to grow its businesses, beyond relying on capable partners, it does not see capacity as a constraint.
Weaknesses
Best cost strategy
Yes, a seeming strength can also be a potential weakness, when a company with a “best-cost” approach finds itself being squeezed by competitors with a low-cost proposition supported by a low-cost value chain that enables the competition to offer increasingly lower prices to grab market share – even to the point of temporarily subsidizing market capture. On the other side of “best-cost” are the high-end differentiators who may be able to steal customers away with the appeal of better product attributes – even if at a higher price.
Cost Containment and Debt
In July 2020, LCI announced a restructuring and cost savings plan. The initiatives included consolidating the research and development (R&D) function into a single location in Philadelphia and lowering operating costs. The company’s workforce will be reduced by approximately 80 positions, equal to approximately 8.5 percent of the company’s total number of employees. The company said it expects these actions to result in cost savings in excess of $15 Million annually.
Relatedly, LCI said it expects some reduced costs for travel and the reduction of other discretionary expenses. Further, it said it is always looking for efficiencies in its plants, as it finds ways to make products faster at less expense, on an ongoing basis.
As to debt, LCI completed a $86.3 million offering of convertible notes, the net proceeds of which were used to pay down half of the outstanding balance of its Term A loans. After the pay down, the remaining balance of the Term A loans was approximately $69.5 million, an amount that is lower than its cash position of $101 million.
As of June 30, 2020, the company said it was in compliance with the financial and other covenants included in the debt agreements. Based on its current projections, LCI expects to have sufficient liquidity and cash flows to be able to meet its debt service requirements through June 30, 2021, and expects to be in compliance with its financial covenants through maturity of the Term Loan A in November 2020. If actual results for the year ending June 30, 2021, are less than the company’s current projections and/or if management’s plans to offset the loss of the revenues and cash flows from the products distributed under the Jerome Stevens Pharma Distribution Agreement are not successful, the company could be in violation of its covenants, which may require significant accelerated payments of debt.
Current competitive environment
Over the next several months, LCI will have several more products in the queue for launch. However, given the current competitive environment and uncertainty of the COVID-19 pandemic, this could affect the timing of operational readiness and with new entrants to current markets or moves on pricing by competitors.
Portfolio Management
While it might be argued by LCI management this is a strength, when a company takes a $19 million asset impairment, as LCI did in the 4th Quarter 2020, for both the Kremers Urban and Silarx acquisitions, it may be viewed as portfolio rationalization regarding the IP and R&D gained for just a few products from those acquisitions. This should be recognized as a past decisional weakness in assessing M&A potential. However, as the CEO stated:
As we talk about having more quality and less worried about the quantity of our launches, we’ve done some reshuffling of that portfolio, taking advantage of the pause in the ability to do clinical trials or bio studies for our products with the COVID crisis, to kind of reset where we wanted to go. And as a result of that ongoing portfolio review, we backed away from some of the earlier products where we saw less ongoing market value.
Opportunities
Current Broad Market Generic Opportunities
Over time, average selling prices are impacted by product mix and price decreases in certain key products due to competitive pricing pressures. As such, LCI needs to maintain a continued and effective commercial execution of its newly approved products for markets in demand and/or those with shortages. With just under 79 percent of LCI total revenues generated through wholesalers, there is an opportunity to extend the reach of its ten drug therapeutic categories through other established customer distribution channels – retail chains (~15 percent), mail-order pharmacy (~2 percent), and contract manufacturing (~5 percent).
Specific drug market opportunities
LCI sees market opportunities for products it believes are important for patients and customers, even if the margins are low. Over time, however, LCI believes it will continue to review opportunities to optimize its portfolio offerings.
Following a fruitful meeting with the FDA on its potential progress, new product LCI has under development, with a notable market, is insulin glargine – a long-acting insulin used to treat adults with Type 2 diabetes, as well as adults and pediatric patients with Type 1 diabetes, for the control of high blood sugar. Total U.S. sales of the glargine related products, according to IQVIA, were approximately $9.5 billion for the 12 months ending April 2020. However, the earliest commercialization would be somewhere in 2022.
Restructuring
As previously noted, LCI’s Board of Directors authorized a restructuring and cost savings plan (2020 Restructuring Plan). The purpose of the 2020 Restructuring Plan is to enhance manufacturing efficiencies, streamline operations and reduce the company’s cost structure, and is being implemented, in part, as a result of LCI’s previously anticipated near-term competition and pricing pressure with respect to certain key products. The company plans to continue evaluating ways to improve its capital structure.
Industry Consolidation
The COVID-19 pandemic has caused 202 American businesses to file for bankruptcy through August. Given the pricing pressures on generics and the pandemic related economic downturn, there are considerable pressures on generic drug companies that could provide opportunities to acquire well priced businesses or products at bargain prices. While acknowledging its current debt position, LCI has indicated it is open to considering any potential M&A opportunities and/or product acquisitions that offer strategic benefits including expanded manufacturing capacity, a diversified product portfolio and pipeline, or complementary R&D expertise, as long as they are a strategic fit and accretive to the business.
Threats
Litigation
LCI has noted that any litigation or legal claim, even those without merit, may cause the company to incur substantial costs and could place a significant strain on its financial resources, divert the attention of management from its core business and harm the company’s reputation. With that, there are various cases in which the company is engaged in litigation, to some greater or lesser extent:
- Pain medication/opioid abuse litigation: There are a number of complaints that have been filed with respect to sales and distribution of various types of pain management medications against various pharmaceutical companies, as well as investigations into sales and marketing practices of various pharmaceutical companies selling pain meds, but Lannett says it is not currently an identified target.
- Sandoz, Inc.: On July 20, 2020, Sandoz, Inc. (a division of Novartis (NVS)) filed a complaint in federal court in Philadelphia, alleging claims for tortious interference with contract, unfair competition and conversion of confidential information, arising out of Cediprof, Inc.’s (“Cediprof”) termination of Sandoz’ contract to distribute levothyroxine tablets in the United States and certain territories.
- Genus Life Sciences: In December 2018, Genus Lifesciences, Inc. (“Genus”) sued the Company, Cody Labs, and others in California federal court, alleging violations of the Lanham Act, Sherman Act, and California false advertising law.
- Shareholder Litigation: Filed in 2016, it charges that the former CEO and CFO violated their fiduciary responsibilities. The matter has ground on over time; however, in January 2020, the parties reached an agreement in principle to resolve the consolidated cases, subject to the execution of a mutually agreeable settlement document and Court approval. The settlement of the two consolidated cases, if approved by the Court, will require Lannett to implement certain new corporate policies and pay the plaintiffs’ counsel in the consolidated cases, collectively, the sum of $600,000 in exchange for a release of all liability with respect to both of the consolidated cases.
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Private Antitrust and Consumer Protection Litigation: In 2016 and 2017, the company and certain competitors were named as defendants in a number of lawsuits alleging that LCI and certain other generic pharmaceutical manufacturers conspired to fix generic prices for certain products. These cases are part of a larger group of more than 100 lawsuits generally alleging that over 30 generic pharmaceutical manufacturers and distributors conspired to fix prices for multiple different generic drugs, in violation of the federal Sherman Act, various state antitrust laws, and various state consumer protection statutes. In July 2020, the court overseeing the consolidated case overruled the objections of LCI and various other defendants to dismiss the overarching generics price-fixing conspiracy case. Relatedly, the U.S. Department of Justice has formally charged Teva Pharmaceutical Industries (TEVA) with conspiring to fix prices, rig bids and allocate customers for generic drugs. Further, the additional counts charge Teva with conspiring with Glenmark Pharmaceuticals (OTC:GLKQY), privately-held Apotex, Taro Pharmaceutical (TARO), and Novartis’ generic unit, Sandoz. Teva is the seventh company to be charged in the case. Five have been resolved via deferred prosecution agreements while one, Glenmark, is awaiting trial. Apotex agreed to pay $24.1M, Taro agreed to pay $205.7M (including a settlement related to another antitrust conspiracy), and Sandoz agreed to pay $195M. All pleaded guilty to their roles in the malfeasance.
Government Regulatory Oversight
- Food & Drug Administration: Manufacturing operations of LCI, its suppliers, and partners are subject to registration and periodic inspections by the FDA to assure compliance regarding the manufacturing of all products.
Further, the consistency and timely approval of generic ANDAs over time by the FDA can be an issue, as it can delay commercialization and, thus, revenue generation. While the FDA process for approvals has improved in the past couple of years, it is notable that the U.S. Government Accountability Office released a report indicating that only 12 percent of the 2,030 generic drug applications reviewed from FY2015 to FY2017 were approved in the first review cycle, and called on the FDA to take additional steps to address factors that may affect approval rates in the first review cycle. Of late, the GAO noted that the FDA has taken steps to increase first review cycle generic drug approvals, but it should also provide recommendations for additional steps the FDA could implement to speed approval. For instance, the FDA could improve “the clarity and content of its comments to applications.”
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Drug Enforcement Administration: Lannett is subject to an allocation of a national quota for several products in its drug portfolio. Quota requests require DEA approval in full for LCI to meet forecasted customer demands. The DEA may or may not approve the quota requests in full based on factors that the company does not control.
- Medicare-Medicaid: Changing Medicare reimbursement or Medicaid rebate calculations may create limits on drug coverage and reimbursement in the United States that may cause reduced payments for drugs in the future.
Insurance costs
Rising costs as well as the inability to obtain certain insurance coverage are risks faced by LCI and could negatively impact profitability.
Competitors and pricing
The growing CNS drug market includes such competitors as Pfizer Inc. (PFE); Teva Pharmaceutical Industries Ltd.; Biogen Inc. (BIIB); Johnson & Johnson (JNJ); Eli Lilly and Company (LLY); and Novartis AG. Combined, they hold a majority of the market share.
In July 2020, Amneal Pharmaceuticals (AMRX) received FDA approval for a generic form of fluphenazine for schizophrenia and, as LCI acknowledged, is expected to impact its market share in 2021.
Currently, the launch for Numbrino, a drug used when performing diagnostic and surgical procedures on the nasal cavities in adults, has been delayed by the pandemic. The drug market has a 5 percent growth projection and four other competitors, with one, Mallinckrodt (MNK), engaged in the ongoing opioid litigation and, due to existing debts, is exploring a range of options that include the possibility of a filing for bankruptcy under Chapter 11, or of pursuing M&A possibilities.
Competitors with effective value chains that enable the development of low-cost products, aimed at markets with growth opportunities and few competitors, may offer increasingly lower prices as they seek to offset the appeal to buyers of current LCI products. This is a threat, as it lowers consumer switching costs and can affect market share capture and profitability.
Concluding Thoughts
The challenges for LCI, as for all generic commercialization efforts, include the following:
Speed to market. For the development and launch of a new generic, this is essential once the novel drug goes off-patent. It means an efficient value chain process is critical, including access to quality API. Also, an effective generic product launch requires market reach to quickly communicate the benefits and effectiveness of the generic product.
Giving the generic a new spin. The generic drug manufacturer must ensure that the drug it is producing contains the same active pharmaceutical ingredients (APIs) as the brand-name product, in the same dosage form, at the same dose or concentration – as evidenced by an effective bioequivalency trial. The generic drug, however, may differ in color, shape, taste, inactive ingredients, preservatives and packaging – and this is where generics can add a new twist to an old drug. This is often accomplished by providing different delivery mechanisms, such as intravenous-delivered medications or a controlled release dosage form.
Beating the competition in cost. According to a MarketWatch article, most generic drugs, when they first hit the market, are priced at around 60 percent of the brand-name drug; yet, as competitors enter the market, prices decrease even further, to about 20 percent of the brand price. The purpose of generics is to provide a less expensive, yet equally as effective alternative to brand-name drugs. Even so, it can be a challenge to provide affordable, quality drugs while remaining profitable. Access to less costly API is critical and requires strong partnerships with suppliers. It’s also accomplished with leaner manufacturing, as well as efficient marketing activities. While brand-name drug makers have the resources to conduct extensive marketing promotions and ad campaigns, generics must work hard to communicate their product’s capabilities and unique qualities in ways that keep down costs.
Beyond these challenges for LCI, despite effective sourcing strategies and seeking to operate a lean organization, the fact of the matter is that there really are no other ways to cut corners, since generics must contain the same chemical composition and effectiveness as the branded products. The end result is that generics simply must make up in market share what they lose in lower prices and, because of this, they almost always reap less profits than the companies with highly differentiated, brand-name drugs.
In a marketplace where manufacturers must strategically define themselves in order to compete for market share, the end result is almost always about greater innovation, while keeping costs low through efficient value chain management – a consistent challenge for generic drug companies.
If this SWOT analysis makes it appear that LCI has more strengths than weaknesses, that is as it should be. If LCI is to achieve its ambitious goal to produce $1 billion in annual revenues by 2025, as with any company in any industry, its strengths must enable it to offset weaknesses and threats in ways that take advantage of the opportunities in the competitive marketplace. Whether its 2025 annual revenue goal is a reasonably aggressive revenue target, a lofty aspiration, or a matter of blind faith, it remains a question only answered by the choices made by Lannett’s management team over time, guided by its understanding of the factors revealed by some form of strategic analysis.
Disclosure: I am/we are long LCI, ELTP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
