Morningstar | Fresenius Succeeds in Backing Out of Akorn Acquisition; Raising Fresenius FVE, Lowering Akorn FVE
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.
Fresenius is a health care group providing products and services for dialysis, hospitals and outpatient medical care. Co. operates four business segments: Fresenius Medical Care; Fresenius Kabi; Fresenius Helios; and Fresenius Vamed. Fresenius Medical Care provides dialysis care and dialysis products for patients with chronic kidney failure. Fresenius Kabi is engaged in the provision of generic drugs, infusion therapies, clinical nutrition products, related medical devices and transfusion technology. Fresenius Vamed manages projects and provides services for hospitals and other health care facilities. Fresenius Helios is a private hospital operator which only operates in Germany.
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