Why Lannett Company, Inc. Shares Got Pummeled Today

By Brian OrelliMarketsFool.com

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What happened

Lannett Company, Inc.(NYSE: LCI) ended the day down almost 13% after the Food and Drug Administration proposed withdrawing a generic version of Johnson & Johnson's (NYSE: JNJ) Concerta sold by Lannett's subsidiary Kremers Urban Pharmaceuticals. The FDA also proposed removing Mallinckrodt's (NYSE: MNK) copycat version of the attention-deficit hyperactivity disorder drug as well, but being a much larger company, Mallinckrodt's shares only closed down slightly.

So what

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Almost two years ago, in November 2014, the FDA said it was concerned that generic versions of Concerta sold by Kremers Urban' subsidiary Kudco Ireland and Mallinckrodt weren't really equivalent. Concerta has extended-release technology built into the tablet that releases the drug over a period of 10 to 12 hours, but the FDA found that the generic versions were released in seven to 12 hours depending on the patient. The FDA told the companies that they had six months to confirm the bioequivalence of their generics or voluntarily withdraw their products from the market.

That date came and went. Lannett announced the purchase of Kremers Urban in September 2015, so it was well aware of the issue. The companies still haven't provided the information to the FDA and didn't pull their products, so the FDA is finally doing it for them.

Both companies have to ability to request a hearing to stop the withdrawal of their drugs from the market.

Now what

What's bad news for Lannett and Mallinckrodt is good news for Johnson & Johnson and Teva Pharmaceuticals (NYSE: TEVA). As often happens when drugs go off patent, Johnson & Johnson decided to sell its own generic version of the drug through an authorized generic deal with Allergan, which recently sold its generic drug business to Teva Pharmaceuticals. With the other generic players out of the way, Johnson & Johnson and Teva can raise the price of their generic drug until a generic-drug company figures out how to mimic Concerta's extended release profile.

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Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Johnson and Johnson and Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.