Lannett enters into definitive agreement to purchase KU for $1.23 billion

Lannett CompanySep 3 2015

Conference call to discuss transaction, which will be accompanied by a related slide presentation, scheduled today at 5 p.m. ET

Lannett Company, Inc. (NYSE: LCI) today announced that it has signed a definitive agreement to purchase Kremers Urban Pharmaceuticals Inc. (KU), the U.S. specialty generic pharmaceuticals subsidiary of global biopharmaceuticals company UCB S.A. (Euronext: UCB), for $1.23 billion, plus potential contingency payments. Lannett believes the acquisition will be accretive to adjusted EPS in fiscal 2016 in the mid- to high-single digits and 20% to 25% in fiscal 2017. Lannett expects to receive a significant tax benefit as a result of 338(h)(10) election with a value in excess of $100 million. Lannett expects to fund the transaction with a combination of a fully committed term loan and cash on hand. The transaction, subject to regulatory approval and other customary closing conditions, is expected to close in the fourth quarter of calendar 2015 and has been unanimously approved by the Boards of Directors of Lannett and UCB.

"For Lannett, this is a transformational acquisition that is an exceptional strategic fit and builds upon our stellar financial performance over the last several years," said Arthur Bedrosian, chief executive officer of Lannett. "With KU, we are adding a highly profitable business and creating a specialty pharmaceuticals company that has substantial size, scale and reach.

"The acquisition diversifies and augments our current product offerings and significantly enhances our opportunities for continued growth by expanding our pipeline with a number of large market opportunity and complementary product candidates. KU brings considerable manufacturing capacity, a first class research and development team and the potential for advancing our active pharmaceutical ingredients business. This transaction delivers on our objective to supplement and boost our organic growth with strategic acquisitions. We will continue to seek opportunities to build our business and enhance shareholder value."

Strategic Benefits

The acquisition adds a diversified commercial product portfolio of 18 products. The combined company generated pro-forma revenues of more than $800 million for the 12 months ended June 30, 2015. KU brings a strong pipeline that includes 11 product applications pending at the FDA, of which five include Paragraph IV certifications, and 17 product candidates in various stages of development, including one 505(b)(2) product opportunity. KU brings additional research and development and regulatory expertise, particularly in the areas of difficult-to-manufacture products and Paragraph IV certifications. As part of the transaction, Lannett would receive KU's recently inspected 381,000 square foot state-of-the-art facility in Seymour, Indiana, which has substantial manufacturing and warehousing capacity, as well as dedicated product development space.

Lannett believes that there is an opportunity for synergies through enhanced efficiencies and economies of scale. Cost savings are anticipated immediately following the transaction and increasing to more than $40 million annually after the third year.

Product Diversification

KU currently markets generic pharmaceutical products that treat a variety of conditions, including ADHD, gastroesophageal reflux disease, hypertension and respiratory disease. KU's product applications pending at FDA and products in development complement Lannett's drug development program; KU has eight controlled substance products with barriers to entry in various stages of development, which would expand and enhance Lannett's existing controlled substance portfolio.

Methylphenidate Hydrochloride XR

KU currently markets Methylphenidate Hydrochloride XR, a drug that is indicated for the treatment of attention deficit hyperactivity disorder (ADHD). Last year, the FDA asked KU to conduct new bioequivalence testing of its Methylphenidate Hydrochloride XR product using proposed bioequivalence criteria that the FDA issued in November 2014. The FDA also changed the therapeutic equivalence rating for the product from AB to BX. A BX rating means the product is approved and can be prescribed, but is not automatically substitutable at the pharmacy for the branded drug. KU has submitted the final results of new bioequivalence studies designed to assess whether KU's Methylphenidate Hydrochloride XR product meets the FDA's proposed revised bioequivalence criteria. In the event that Methylphenidate Hydrochloride XR's AB rating is restored, UCB is eligible to receive contingency payments under sales and timing thresholds.

Morgan Stanley and RBC Capital Markets are serving as financial advisors to Lannett and have provided committed financing. Debevoise & Plimpton LLP and Fox Rothschild LLP are serving as legal advisors to Lannett. ROTH Capital Partners, LLC served as advisors to Lannett's Board of Directors.