Morningstar | Akorn Continues to Suffer Following Termination of Fresenius Deal
Akorn's operations remain in rough shape following the recent court ruling that terminated Fresenius SE's agreement to acquire the company. Third-quarter results fell below our expectations on both the top and bottom lines. We’ve lowered our revenue and margin expectations, leading to an updated fair value estimate of $7. Despite its niche focus on higher-barrier-to-entry product categories, we don’t foresee Akorn earning an economic moat, given its small position in the generics industry.New product launches--amounting to $3.4 million in the quarter--haven’t kept pace with eroding sales of the existing portfolio, which fell by $39.6 million. Pressure on some of these higher-margin products combined with ongoing remediation costs to address manufacturing issues, which led to two Form 483s from the Food and Drug Administration earlier this year, has sapped profitability, which also fell below our expectations for the quarter. Management believes it can complete its corrective actions at the Decatur facility by year-end, but the Somerset facility will take more time. We expect revenue growth and profitability will improve over the coming quarters, however. This quarter’s weak performance was affected by a planned temporary shutdown at the Decatur facility during the quarter, and we anticipate costs for corrective measures should begin to decline if Akorn can appease regulators.
We doubt Akorn can overturn the Delaware court’s previous decision to block Fresenius SE’s agreement to acquire the company based on problems with manufacturing and data integrity that arose after the deal was announced. Oral arguments for the appeal to the Delaware Supreme Court will occur in a month with a potential ruling by early next year, by our guess.
Akorn is a generic pharmaceutical company that develops, manufactures and markets generic and branded prescription pharmaceuticals, branded as well as private-label over-the-counter consumer health products and animal health pharmaceuticals. The company's segments include: Prescription Pharmaceuticals, which primarily consists of generic and branded prescription pharmaceuticals in a variety of dosage forms including sterile ophthalmics, injectables and inhalants and non-sterile oral liquids, topicals, nasal sprays and otics; and Consumer Health, which primarily consists of branded and private-label over-the-counter products and animal health products dispensed by veterinary personnel.
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