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Morningstar | Akorn’s Self-Inflicted Wounds and Generic Industry Pressure Lead to Challenging 2019

Between termination of the Fresenius SE deal, erosion of key products, and addressing regulatory issues flagged by the FDA, Akorn remains in a tough spot. These three factors, which included temporary manufacturing facility shutdowns during the quarter to address compliance issues, led to a 17.6% decline in revenue and a significant drop in gross margin to 16.5% from the year-ago period. We’re lowering our fair value estimate to $5 on the weak results and longer expected recovery time. While these temporary headwinds should remain over the near term, we expect Akorn can begin to gradually transition to improved performance as remediation efforts continue, facility production ramps up, and new products get approved. Management noted production at its Decatur facility, which previously received a warning letter from the FDA, has already returned to more normal manufacturing levels, while the Somerset facility is in the early stages of bringing operations back on line. Regardless, the costs and time for Akorn to remediate its regulatory and operating issues remain uncertain. Management also noted it will investigate strategic alternatives for its facilities based in India.

We don’t anticipate a change to our no-moat rating as Akorn will likely continue to face pricing pressure from lower cost peers in the low-barrier-to-entry generic drug industry. Akorn’s focus on complex products offers minor differentiation, but we expect many of these markets to get more crowded over time and competitors seek higher margin opportunities. Lastly, management noted it doesn’t expect an approval of its generic version of Allergan’s Restasis in 2019.