Morningstar | Fresenius Succeeds in Backing Out of Akorn Acquisition; Raising Fresenius FVE, Lowering Akorn FVE. See Updated Analyst Note from 01 Oct 2018
A Delaware judge sided with Fresenius SE in the company’s attempt to block its acquisition of Akorn over material manufacturing and data integrity issues. While the ordeal raises concerns about Fresenius’ due diligence efforts leading up to the acquisition announcement, the judge’s ruling is nonetheless a positive for Fresenius financially as well as strategically. We’re raising our fair value estimate for Fresenius to $65 per share, essentially on par with our fair value estimate before the dramatic decline in Akorn’s performance. Given Akorn’s poor operating performance after the deal was announced, we had lowered our fair value estimate as a result of potential capital destruction at the previously agreed price. Fresenius’ ability to back out of the deal also helps protect the company’s narrow economic moat, in our view, even though Akorn would have been a small contributor to the company’s large, diversified operations. We’re lowering our fair value estimate for no-moat Akorn to $10 per share. Our previous $16 fair value estimate included a 25% probability that Fresenius would be legally forced to purchase Akorn at the previously agreed $34 share price.Although Akorn intends to appeal the decision, we think this ruling creates even more doubt regarding the company’s ability to uphold the original merger agreement. We’re therefore comfortable removing the effect of the deal on our assumptions for both companies. Furthermore, we think this event--especially with known concerns about the company's operating practices--will make it difficult for Akorn to find other potential buyers. While we long expected Akorn to be a takeout target, we think recent challenges in the generic drug industry will slow generic drug manufacturer consolidation as well as diminish the appeal of certain complex generic categories. We imagine Akorn will struggle as a stand-alone entity even though it is arguably still better positioned than some peers.
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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