Investment thesis on Lantheus
I recently opened an investment position in Lantheus. My initial assessment of this investment is that it has a combination of discounted valuation and potential for significant further growth based on products in the approval pathway over the next 2 years which is not being accounted for in the current valuation.
An overview of Lantheus
Lantheus is a radiopharmaceutical company that has successfully brought several diagnostic products to market (PET imaging). This shows they 1.) have the expertise to successfully develop these products while navigate the complex regulatory landscape of CDRH and 2.) have the infrastucture in place to manufacture these specialized radiodiagnostics. While they do not specifically breakdown revenue by region, it appears most of their revenue comes from the US. Key products as of Q3, 2024 include
Pylarify - used for PSMA PET (detection of prostate cancer). Approved in 2021, this is currently Lantheus’s biggest source of revenue reaching 259.8 million (68.7%) of total revenue for the quarter. This reflected a 20.6% increase YoY although going forward, it’s not expected to grow as fast. In the US, the overall PSMA PET market is expected to grow from ~2B currently in 2024 to ~3B by 2029. This should provide tailwind for the biggest current revenue driver.
Definity - is an ultrasound enhancing agent (UEA) for patients with suboptimal echocardiograms (looking at the heart). Approved July 2001, the company extended patent through a sNDA for Definity RT (room temperature) until 2035. In Q3 2024, reached $77 million (20.3%) of total revenue for the quarter. This reflects a 14.3% increase YoY. In the US, the overall UEA market is about $330 million and the potentially addressable market of ~$600M of which Definity is the #1 used. This is likely to be stable revenue given the strong moat attributable to popularity but also unlikely to be a huge growth driver given market size.
TechneLite - A source of Tc-99m radioactive isotope used for preparation of radiodiagnostic imaging. In Q3 2024, product accounted for $20.5 million (5.4%) of total revenue for the quarter and this is shrinking, -12% YoY. This along with the other products are not too concerning in my mind as they account for a relatively small percentage and we should focus primarily on Pyarify and Definity which account for almost 90% of total revenue.
Future products - Currently 2 late stage radiotherapeutics and 2 late stage diagnostics.
The 2 late stage radiotherapeutics are are collaborations with Lilly (formerly Point Biopharma). PNT2003 for neurendocrine tumors is a generic version of Lutathera currently under review by FDA. PNT2002 is for specific resistant forms of prostate cancer and the top line results appear positive. Overall, it’s good to see the company leveraging its expertise to strategically get into the radiotherapeutic field through partnerships. Unclear yet what the potential revenue gain here is.
The 2 late stage diagnostics are for Alzheimer’s (AD) diagnosis of aBeta (NAV-4694) and aTau (MK-6240). Both these are currently in phase 3 but could be a huge market given the recently AD approvals targetting aBeta. If this sees broad use, the market could be substantial. Information here is relatively sparse. Assume ~ 7 million Americans with AD, 10% take a PET image annually, $3000 per scan, revenue would be approximately 2.1 billion. Assume this also grows at a fairly rapid pace of 11% a year. This could potentially have over $1 billion in revenue annually.
Valuation of Lantheus
Lantheus is both cashflow positive and earnings positive. There are a few significant tailwinds such as the 4 late stage programs, continued further adoption of Pylarify, the new Center for Medicare and Medicaid Services (CMS) ruling taking effect beginning of 2025 to enhance payment of specialized diagnostic radiopharmaceuticals leading to potentially higher reimbursment that lead me to believe the next few years should continue at a good rate of growth. A discounted cash flow analysis (DCF) based next year free cash flow of 394 million and assuming the following:
9% discount rate
Year 2-4 growth rate: 10%, Year 5-6 growth rate: 5%, Longterm growth rate: 4%
suggests a fair stock price of $122.94 which is a substantial discount to the market close value of $89.34 as of 12/5/2024.
Using an earnings per share (EPS) approach, Uber has TTM EPS of $6.02. Assuming the following:
EPS growth rate of 10%
PE of 15
suggests an intrinsic value of the stock at $99.33.
A combined weighted approach with 2:1 weight towards the DCF methodology gives a fair market valuation of $115.07.
Rationale for investment in Lantheus
Valuation: Lantheus is modestly discounted even when taking fairly conservative estimates assuming more than half the products currently in the pipeline do not get approved.
Limited downside: Both Pylarify and Definity are proven products at this point and should provide a relatively stable floor for revenue given that clinical practice trends are relatively hard to change.
Moderate moat: While other companies can compete in this space, expertise in dealing with radioactive isotopes + navigating the regulatory environment should present a relatively difficult entry point for new companies. The space itself is also niche enough that having the most popular product such as Pylarify should provide some natural moat.
Future prospect of Alzheimer’s: This is a potential to play on the rapidly expanding AD market without taking on the very high risk of high cost phase 3 therapeutic trials.
Increasing interest in radiopharmaceuticals: Several acquisitions have occurred in the last 2 years by big pharma of radiopharmaceutical companies implying renewed interest in this niche field
CMS recent guidance chances can provide payer based tailwind for revenue increase. (Maybe counteracted by Trump administration but will need to re-evaluate next year).
In summary, Lantheus is a strong player in their current niche providing a safe future cash flow with interesting prospects to be a tangential player in the Alzheimer’s space. I continue to purchase at market prices below $95 as this gives a 20% upside as compared to the fair market valuation.
Disclaimer: Any information contained here is not intended as, and shall not be understood or construed as, financial advice. I am not a financial advisor and this is only a documentation of my personal investment journey and decisions. You should always do your own research before making any final decision on investments.