Pharma Pair Trade? Susquehanna Starts Lannet At Buy, Akorn At Neutral

In separate reports published Monday, Susquehanna Financial Group analyst Andrew Finkelstein initiated coverage of Lannet Company, Inc. LCI with a Buy rating and $75 price target and Akorn, Inc. AKRX with a Neutral rating and $48 price target.

Lannet: Focus On ‘Attractive' Nice Areas

Lannet is a mid-size generics company with a focus on "niche" generic opportunities and operates in a space with limited competition that results in "strong" margins and "relatively durable" cash flows.

According to Finkelstein, Lannet is not only on track to achieve its five-year revenue goal of achieving a 10 percent compounded annually growth rate, but is in a position to exceed the metric. The analyst added that its pipeline is "larger than generally appreciated" and the company has the capability to be "one of a handful of vertically integrated players" with a "breadth of product opportunities."

Finkelstein said that the company's standalone profit will be "muted" in the near-term, but growth is expected as soon as fiscal 2016 and the company is likely to issue guidance that will "reinforce a positive outlook."

Finkelstein also noted that Lannet's acquisition of Silarx was a "good start" as the company is likely to target firms such as Amphastar Pharmaceuticals Inc AMPH, among others. Upside from a transformational deal (especially if it is a inversion deal) is "attractive" to the analyst at the current valuation.

Finally, even though Lannet's management team does not "appear to welcome" a sale of the company in the near-term, the analyst suggested shares could be worth $75 to $90 in a sale.

Bottom line, Lannet's focus on "attractive" niche areas will result in the company generating growth and narrowing the valuation gap relative to its peers.

Akorn: Investing For The Future

Akorn is a mid-size company in the consolidating generic pharma space with an "enviable" high single-digit compounded annual growth in generics revenues with an "impressive" pipeline of generics, but is only producing profits that are growing "in-line."

Finkelstein continued that he "likes" the company's organic revenue growth story and the company's focus on niche dosage tends to support higher profitability and reduces risks. However, the analyst is expecting the company to continue investing internally to support its growth initiatives that could limit margin expansion.

On the M&A front, Akorn "moved more aggressively" than some its peers to "capture" attractive acquisitions. However, an accounting error forced the company to take a "pause" in its deal-making but is now looking at transactions again to achieve a double-digit revenue compounded annual growth rate. The analyst suggested that it is "unclear" how quickly the company will act or if investor reaction will be "muted" pending integration.

On the other hand, Finkelstein estimated Akorn could fetch $63 per share if it were to sell itself. Its portfolio and cost/tax savings could attract companies including Teva Pharmaceutical Industries Ltd (ADR) TEVA, among others.

Bottom line, Akorn is investing for the future and multiple expansion is likely to be seen only when the company demonstrates further upside for margins along with sustainable double-digit growth.