LNTH - Lantheus: Not Quite Ready To Take The Plunge

2023-08-30 08:20:15 ET

Summary

• Radiopharmacy is expected to experience exponential growth over the next decade.
• Radiopharmaceutical-based therapies offer more targeted and specific approaches for cancer treatment and medical imaging, with prostate cancer proving to be a particularly fertile ground for this tech.
• Lantheus Holdings' flagship product, PYLARIFY, has shown promising results in prostate cancer imaging and diagnosis.
• We close with some thoughts on the technicals and valuations.

Radiopharmacy Will Grow In Stature

Lantheus Holdings ( LNTH ) is a mid-cap healthcare firm that is most keenly noted for its expertise in the burgeoning radiopharmaceutical space, something which it has been involved in for over 6 decades (LNTH's radiopharma oncology business accounts for the largest share of group revenue, contributing 57%). This is one of those markets that is poised to witness exponential growth over the next decade, with MedRaysIntell expecting it to expand by 6x through 2031. So, what's all the fuss about?

For the uninitiated, note that, unlike traditional external radiation therapy, radiopharmaceutical-based therapies are more targeted and specific in their approaches as you're basically looking at radioactive compounds that are inherently drawn to certain target molecules that you find on the surface of cancerous cells. If these compounds are potent enough, they could then destroy the specific cancerous cells, and limit the side effects that you'd associate with conventional radiation therapy.

When it comes to medical imaging and diagnosis as well, the outcomes with radiopharma-based tech can be more insightful than conventional imaging; various nuclear imaging tests leverage radioactive compounds, which in turn, bind themselves to molecules on a sick cell; after that, esoteric cameras can be used to pick out even minute traces of cancer.

Prostate cancer, the second most common cancer in American men, appears to be a fertile ground to deploy tech of this sort, as PSMA (Prostate Specific Membrane Antigen) proteins that can link with radioactive compounds are often found in large quantities on the prostate cell. Also note that once traditional radiation is rendered and if the treatment is ineffective in weeding out cancerous cells (the American Cancer Society believes that the probability of recurrence is up to 50%), you could have a situation where the prostate cancer cells have managed to spread to different parts of the body. In that case, conventional radiation is almost pointless, leaving radiopharmaceuticals as the only viable option that can bind to the sick cell molecules spread well across the body.

Given the high incidence of recurrence, there will also likely be multiple instances where imaging will need to be carried out for effective diagnosis. All in all, LNTH believes the scope for PSMA PET imaging in the US is huge with potentially 350,000 scans required annually (translating to an addressable market worth $1.6bn), out of which 56% will likely be linked to recurring cases of prostate cancer.

LNTH's flagship product in this space is the imaging agent - PYLARIFY (launched in mid-2021 with over 200K scans already performed, and growing at 62% annually) which binds itself to the PSMA. As per the company's Phase III Condor Study, close to 67% of the patients who returned negative results through conventional imaging tests had a change in intended management after being scanned with PYLARIFY. Dose administration is also likely to more flexible for patients using PYLARIFY as the half-life associated with it is close to 110 minutes, as opposed to 68 minutes for competing products such as Gallium 68.

Closing Thoughts: Stock-Related Considerations

Clearly, this is an interesting story that has legs, but could LNTH be a rewarding investment at these levels as well?

Well, if one takes a look at LNTH's weekly chart, we can see that over the last 21-odd months, the stock has left imprints in the shape of an ascending channel. However, within this channel, do consider that we are currently in the midst of an intermediate downtrend (since May 2023), with a series of lower lows ((LL)), and lower highs ((LH)) seen across multiple weeks.

Also consider that the share price weakness in August coincided with a step-up in insider selling (an aggregate transaction sum of $1.85m across 5 separate instances), after no selling in June, and just some marginal selling in July ($0.2m). It wouldn't be too troubling to note a pickup in insider selling if the stock was demonstrating some strength, but you do have to wonder about the optics when insiders as well choose to cash in when the stock is in a bad way.

Nonetheless, as things stand, the LNTH stock is now intriguingly perched close to the lower boundary of the channel and has been attempting to build some base over the last couple of weeks. Based on the channel pattern within the standalone chart alone, we think the reward-to-risk equation looks pretty enticing at current levels.

However, given the ongoing theme of the intermediate downtrend, we'd advise investors to see if LNTH can attempt to negate the series of LLs and LHs by making an attempt to trend up, and then defend the previous lows during the next potential bout of correction. If it can manage to do so, we'd turn a lot more constructive.

Marginal support for the stock could potentially also come from a likely ramp-up in buyback activities. Note that late last year, Lantheus had initiated a $150m share buyback program; 50% of that war chest has already been used up, but in recent quarters one hasn't seen any cash deployed in buying back the shares.

This may likely have been driven by weak cash flow generation, particularly in Q2, where FCF stood at a negative figure of -43m. However, investors shouldn't fret over this, as the catalysts here are rather ephemeral, and it should normalize in the quarters ahead. Firstly, LNTH had to spend close to $100m in cash for contingent value rights associated with the Progenics Pharma acquisition, and secondly, there was the timing of H1 tax payments to the tune of $44.5m which were inordinately tilted towards Q2.

Then, investors should also note that despite the correction in the share price since May, it hasn't lifted LNTH's allure as a prospective rotational candidate within the healthcare equipment space. As you can see from the image below, LNTH's relative strength versus the SPDR Health Care Equipment ETF still looks rather elevated and is trading around ~45% higher than the mid-point of its long-term range.

Finally, even the valuation sub-plot isn't wholly compelling. Based on the FY24 EPS, LNTH is currently priced at a forward P/E of 10.8x, hardly 5% away from its long-term average. At a P/E multiple of nearly 11x, one would hope for at least double-digit forward earnings growth, but YCharts consensus for FY24 and FY25 highlight that earnings growth will only come in at 9% p.a. on average.

All in all, a hold rating feels apt at this juncture.

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