LNTH - Lantheus Holdings: Huge Catalysts Ahead And Cheap Valuation

2023-11-12 08:36:13 ET

Summary

• Lantheus experienced tremendous growth in the last two years thanks to the approval of a new imaging agent called PYLARIFY.
• The company now faces several catalysts including the approval of PYLARIFY in Europe and the commercialization of PNT2002 and PNT2003.
• The valuation in very cheap, and we believe the market is not pricing these opportunities accordingly.

Investment Thesis

Lantheus Holdings (LNTH) develops, manufactures, and commercializes diagnostic and therapeutic products worldwide, assisting clinicians in diagnosing and treating heart, cancer, and other diseases. The company has experienced tremendous growth in the last two years, thanks to the approval of a new imaging agent called PYLARIFY.

We believe the company has a robust line of products that can continue to grow in double digits while generating substantial free cash flow. More importantly, the stock faces several catalysts with the approval of PYLARIFY in Europe and the commercialization of PNT2002 and PNT2003. Because of these factors and the low multiples at which the stock is trading, we are bullish.

Overview

Lantheus sole focus is to enhance patient outcomes. The achieve this through diagnostics, radiotherapeutics, and artificial intelligence solutions that empower healthcare providers to detect, combat, and monitor diseases. Lantheus categorizes its products into three segments:

• Radiopharmaceutical Oncology

This is the biggest segment by far, representing 55% of total revenue in the first nine months of 2023. The entirety of this can be attributed to one product: PYLARIFY. PYLARIFY is a type of imaging agent used with a PET/CT scan. In other words, it makes a specific protein more visible in the resulting images. It is used to detect areas in the bodies of men with prostate cancer that contain a protein called PSMA. This helps doctors determine whether the cancer has spread or returned, aiding them in deciding on the best initial treatment.

PYLARIFY is the clear market leader in PSMA PET imaging. It was launched in June 2021 and earned $43 million in revenue during that year. However, in 2022 sales skyrocketed to $527.4 million. In the first nine months of 2023, revenue from PYLARIFY was $621.4 million, up 69.4% YoY.

How big is the opportunity? Management estimates the current addressable market for the PSMA PET imaging agents to be $1.6 billion and believes this market potential will grow to more than $3 billion by 2028 in the US. For context, PYLARIFY is expected to do between $840 million and $860 million in revenue this year, so they have around 50% of market share.

And what about the rest of the world? PYLARIFY has a pending EU approval. In May, a panel of advisors to the European Medicines Agency recommended its approval . Overall, the potential growth for PYLARIFY remains large.

• Precision Diagnostics

The precision diagnostics is the second largest segment and accounts for ~30% of total revenue. It is composed of primarily two products: DEFINITY and TechneLite.

DEFINITY is a special liquid that's used in heart ultrasound tests. It contains tiny bubbles, and it helps doctors see the heart better in echocardiograms. There are two types: one needs to be kept in the fridge, and the other can be stored and shipped at room temperature. Although it was launched in 2001, it continues to dominate the market. According to the 10-K , DEFINITY had over 80% share of the U.S. segment for ultrasound enhancing agents in echocardiography procedures in 2022. In the first nine months of 2023, DEFINITY sales grew 14% to $206.7 million.

Then in TechneLite. TechneLite is like a little machine that makes a special radioactive material used for medical imaging. This material, called Tc-99m, is essential for creating imaging agents that help doctors see inside the body during medical scans.

TechneLite is sold to special pharmacies that prepare and send these imaging agents directly to hospitals. In the U.S., the company has deals with big pharmacy groups like Cardinal Health and others. As of the end of 2022, TechneLite had about a third of the U.S. market for these machines. Over the first three quarters of the year, TechneLite sales increased 2.7% to $65.8 million.

• Strategic Partnerships And Other Revenue

The company actively considers collaborations, licensing agreements and acquisitions of new products, product candidates, businesses, and technologies that can contribute to their future growth.

Recently, on August 2023, Lantheus sold their RELISTOR royalties to HealthCare Royalty partners for a cash payment of $98 million. These royalties contributed $22 million in revenue in 2022 and an additional $13.2 million in the first half of 2023.

Drugs Under Development

In addition to the commercial products and strategic partnerships with third parties, Lantheus also have ongoing clinical development programs, including, among others, the following:

• PNT2002 & PNT2003

On November 2022, Lantheus announced an important partnership with POINT Biopharma (PNT) (The company has since them been acquired by Eli Lily (LLY)). This agreement granted Lantheus exclusive worldwide rights (excluding certain territories) to two of POINT'S drug candidates: PNT2002 and PNT2003. PNT2002 is a treatment for advanced prostate cancer, and PNT2003 is a therapy for certain types of tumors.

In exchange for these rights, Lantheus paid $260 million upfront, and they might pay up to an additional $1.8 billion based on the success of the products in terms of FDA approval, sales, and other goals. They also agreed to pay POINT a percentage of sales as royalties, specifically 20% for PNT2002 and 15% for PNT2003, beyond certain sales thresholds.

Both drugs are currently in Phase 3 trials. However, top-line data from Point's Phase 3 SPLASH study is expected to arrive this year. In terms of the potential market size, PNT2002 and PNT2003 have a TAM of $3.5 billion and $800 million, respectively, in the US.

• 1095

1095 is a type of medicine designed to target prostate cancer cells specifically. The study is in Phase 2.

• flurpiridaz

In April 2017, Lantheus teamed up with GE Healthcare to develop and sell a special agent called flurpiridaz, which helps doctors check blood flow to the heart in patients suspected of having coronary artery disease. Under the agreement, GE Healthcare is responsible for completing the development of flurpiridaz, obtaining regulatory approvals worldwide, and, if everything goes well, launching and selling the agent globally. In exchange, Lantheus received an upfront cash payment of $5.0 million and could receive up to $60.0 million more in payments based on regulatory and sales milestones.

In September 2022, their second Phase 3 clinical trial was successful . If everything goes well with regulatory approval, they plan to start selling flurpiridaz in 2024.

Financial Statements

Lantheus has experienced exponential growth since the approval of PYLARIFY, as illustrated in the following chart. The trailing twelve-month revenue is now over $1.2 billion, compared to $340 million at the end of 2020, representing a ~250% increase in almost three years.

And this has also lead to an increase in profitability. If we just take the first three quarters of 2023, the operating margin was 24.10%, the highest in 10 years.

And lastly, the company is generating strong free cash flow. In just the last year, they brought in $259 million, contributing to the building of the cash position on the balance sheet. They haven't deployed it yet. Because of this, it wouldn't be surprising to see them start paying a dividend or buying back shares.

For 2023, the company expects revenue to reach $1.26 billion at the midpoint of the guidance(+36% YoY) and adjusted EPS to be between $5.80 and $5.85.

Risk

The success and expansion of PYLARIFY depend on keeping it as the top choice among PSMA PET imaging agents in a competitive environment. Right now, PYLARIFY has competition mainly from two other PSMA imaging agents that use Gallium-68 ("Ga-68"), as well as imaging agents that don't rely on PSMA. There's also a chance of facing competition from a new F18 PSMA PET imaging agent, which is currently being reviewed by the FDA.

DEFINITY Orange Book-listed composition of matter patent expired in June 2019, so the company may face generic challengers in the near to intermediate term.

Lastly, the future growth of the company is highly dependent on the approval of PNT2003 and PNT2002. If Lantheus and POINT don't manage to obtain regulatory approval for the drugs, we might see a big decline in the stock price.

Takeaway

At $63 per share, Lantheus has a market cap of $4.25 billion. If we sum the cash ($614 million) and subtract the financial debt ($560 million), we arrive at an enterprise value of $4.2 billion. This means that the stock is trading at 10.6x P/E and 7.5x EV/EBIT (forward measures). According to Seeking Alpha, these are 40% and 52% lower than the sector median.

We believe these are absurdly low multiples for a company that will continue to grow in the high single digits with their existing product lineup and has the potential approval of new drugs (PNT2002 and PNT2003) that could double revenue again in a couple of years. Moreover, the company is highly profitable and could start distributing this cash to shareholders at any time. Given the several catalysts the stock has, we believe Lantheus represents an attractive long-term investment.

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