Strong Revenue Growth, Robust R&D Pipeline, Strong Operating History and Recent Share Price Drop Make Shares Compelling

Strong growth prospects with breakaway results in 2014 and on-track to achieve $1 billion revenue target

90 products pending FDA approval with $8.6 billion addressable market

Excellent history of beating earnings guidance, shares up 2156% over past 5 years

Akorn Inc (NASDAQ: AKRX) is a global specialty pharmaceutical company that develops, manufactures and markets a full line os diagnostic and therapeutic ophthalmic pharmaceuticals, as well as niche hospital drugs and injectable pharmaceuticals. In addition, through its subsidiary – Advanced Vision Research, Inc. (AVR) – it manufactures and markets a line of over-the-counter ophthalmic products for the treatment of dry eye under the TheraTears brand, as well as a portfolio of private label OTC ophthalmic products.

Akorn has a portfolio of 90 treatments on file with the US Food and Drug Administration (FDA), with an addressable market of over $8.6 billion, reflecting strong revenue upside.

Akorn operates three business segments: Ophthalmic, Hospital Drugs & Injectables, and Contract Services. The company serves retail pharmacies, physicians, veterinarians, hospitals, clinics and government agencies in over 20 countries. Akorn has headquarters in Lake Forest, Illinois.


Investment Highlights


Akorn is a fast-growing niche pharmaceutical company with proven strategic vision and execution. The company has successfully expanded its product portfolio, organically and through acquisitions, to include injectables, ophthalmics, oral liquids, nasal sprays, topical creams and ointments.


It has an extensive line of OTC branded products and a growing line of store-branded private label products, with 90 products on file pending FDA approval, for an $8.6 billion addressable market. Akorn plans to expand distribution from 20 to 30 countries in the near future and grow revenues to over $1 billion.


The company has steadily grown financial metrics and, with organic growth, pending approvals and acquisitions, is on track for breakaway performance towards its $1 billion revenue goal.


The company has also steadily grown cash from operations, proving its execution capability.


Recent Dip Offers Buying Opportunity

Akorn shares closed at $36.32 on 11/21/2014, giving the company a market capitalization of $3.92 billion. Year-to-date shares are up 47.52% but are down about 20% from their recent 52-week high of $45.25. At $36.32, shares have a rather rich price-to-earnings ratio of 189.5x on LTM earnings of $0.19 per share.


However, pharmaceutical valuations off single-year earnings can be misleading due to one-off expenses and because pharma shares trade more on pending FDA approvals, clinical stages and R&D pipeline. Operationally, the company has a strong 28.6% EBITDA margin which indicates operational strength.


Akorn does not pay dividends.

Revenue Expected to Grow 180% in 2015

Based on company guidance and pipeline, analysts expect Akorn revenue to grow by 180.6% in 2015 (relative to $317.7 million in 2013) to an average of $891.4 million. This growth upside has analysts bullish on earnings and share price appreciation.


Akorn Consistently Meets or Beats Earnings Expectations

On 11/6/14, Akorn announced quarterly earnings of $0.27 per share that were 8% higher than consensus expectations of $0.25 per share. Over the past year, Akorn has beaten consensus earnings expectations in 3 of 4 quarters.


Institutional broker-dealer CRT Capital recently upgraded Akorn shares from Fairly Valued to Buy and gave the company a price target of $46 per share on beneficial pricing trends and gross margins of over 90% on its Clobetasol drug. CRT Capital expects compounded annual earnings growth of 30% from 2014 to 2018, ahead of the company’s competitors.


The average rating of 12 analysts who cover the firm is a Buy, with an average price target of $45 with a range of $37 – $50. Therefore, Wall Street suggests shares could rise about 18% higher over the next 12 months on bullish earnings estimates.


Akorn trades at a Forward PE of 21.8x which is slightly higher than its peer average of 26x but reflects Akorn’s stronger forward outlook on earnings.


R&D Pipeline of 90 Treatments with $8.6 Bn Addressable Market

Akorn has a portfolio of 90 treatments on file with the US Food and Drug Administration (FDA), with a total addressable market of over $8.6 billion.


As of December 30, 2013, the company had 63 FDA drug applications for 32 injectables, 23 Opthalmics and 8 others for an addressable
market of $5.07 billion.

The company also manufactures over 12 treatments that appear on the FDA’s shortage list. Management aims to dominate the generic drugs market within its target portfolio, with continued emphasis on research and development. Globally, generic drugs account for 84% of all pharmaceutical sales. The company hopes to expand the distribution of its generic therapies from
20 to 30 countries, and plans to push revenues to over $1 billion.

Akorn India Offers Global Expansion and New Revenue Streams

Akorn India Private Limited is a wholly owned subsidiary of Akorn that develops and manufactures its own, separate portfolio of sterile treatments that it sells in Asia, Latin America, Europe – CIS, Africa and the Middle East regions. The subsidiary is one of India’s largest manufacturers of liquid and powder general injectables, cephalosporins, carbapenems and hormones, and has applied to the US FDA for approval to market and distribute Akorn India products in the US, with FDA decisions expected in the late 2015 – early 2016 timeframe. If approved, US sales would get a sizable boost.


Akorn India’s manufacturing capacity for injectables is expected to increase from 255 million units in 2014 to 353 million in 2015 allowing the company to capture more of the $27 billion global injectables’ market.


Portfolio Expansion through Strategic Acquisitions

On August 4, 2014, Akorn received antitrust approval from the Federal Trade Commission on its acquisition of specialty pharmaceutical company VersaPharm for $440 million. With the acquisition, Akorn gained access to development and marketing expertise on hemophilia and tuberculosis drugs. FTC approval was conditional on Akorn selling the rights to manufacture a generic version of the tuberculosis drug Rifampin, which Akorn subsequently sold to a subsidiary of specialty pharmaceutical company Actavis plc (ACT).


On September 30, 2014, Akorn entered into a definitive agreement with pharmaceutical company Sunovion Pharmaceuticals to acquire certain rights to sell bronchodilator Xopenex. Akorn paid Sunovion $45 million in cash and expanded its inhaled therapeutics portfolio which trails its other dosage forms. Xopenex is used to treat and prevent bronchospasm in adults and adolescents suffering from reversible obstructive airway disease. Analysts estimate the US market for branded and generic Xopenex to be approximately $280 million. Management expects Xopenex to add revenues of $18-$20 million by 2015, and increase net income by $0.07-$0.08 per share.

In early October 2014, the company completed its acquisition of several FDA approved veterinary injectable drugs from veterinary and human pharmaceutical company LLOYD Inc. The acquired drugs include AnaSed, Tolazine, Yobine, Butorphic, VetaKet and four more.

Management Team with Proven Vision and Execution

Raj Rai serves as Chief Executive Officer and brings over 15 years of healthcare services experience to the company. Previously, Rai served as President and CEO of specialty pharmacy services company Option Care Inc.

Timothy Dick serves as Chief Financial Officer and previously held senior financial positions with Option Care, Johnson & Johnson (JNJ) and non-profit health care system PeachHealth Medical Group. He holds a BBA in Accounting and a Master of Business Administration in Finance.

Bruce Kutinsky serves as Chief Operating Officer and brings over 20 years of healthcare industry experience to the company. Previously, Kutinsky served as VP – Strategic Solutions of drug retail chain Walgreen Company (WAG) and VP – Specialty Pharmacy of Option Care. He holds a Doctor of Pharmacy degree.

Overall, management has proven itself commendably, has deep industry knowledge with keen strategic and operational insights that drive growth, investment and profitability, and has delivered outstanding shareholder returns

Q3 Revenue Up 62%, Adjusted Net Income Up 80%

For the third quarter ended September 30, 2014, Akorn reported revenues of $132.7 million (up 62% over Q3 2013), gross profit of $51.73 million (up 18%), GAAP operating loss of $6.04 million (down 127%) and GAAP net loss of $11.65 million, or ($0.11) per share.

Q3 revenue was negatively impacted by $39.9 million in expenses related to price increases but partly offset by revenue recognition from its VersaPharm, Hi-Tech and prior acquisitions and the strength of Akorn’s product base. Q3 was also impacted by non-cash amortization of acquired inventories.

Adjusted Net Income, after excluding the impact of price increases, acquisition amortization and other expenses, rose to $0.27 per diluted share, up 80% from $0.15 in Q3 2013.

As of September 30, 2014, Akorn had $131.5 million in cash and cash equivalents, $1.15 billion in long-term debt and $320 million in total shareholders’ equity. Akorn plans to drop long-term leverage to 2.0 – 2.5x EBITDA.


Updated Outlook

Management updated guidance for Q4 and now expects revenues in the range of $215-$225 million and adjusted net income in the range of $0.44-$0.46 per share.

For FY2014, management expects total revenues in the range of $630-$640 million with a 58% gross margin and adjusted net income in the range of $136-$138 million, or $1.13-$1.15 per diluted share. Management lowered planned capital expenditures from a range of $35-$40 million to $30-$35 million.


In Q3 2014, Akorn received FDA approval on four new products in the injectables market segment with a combined addressable market of $228 million and completed multiple acquisitions (VersaPharm, Xopanex/Sunovion and four injectabled from LLOYD).

Summary

With the passing of the Patient Protection and Affordable Care Act, analysts estimate the generic drug market to be worth over $54 billion in 2014 with a CAGR of 10.4% and industry revenue growth of 6.8%. As Akorn continues to grow its portfolio of products, it increases its dominance in the generic drug market. As a niche focused company, Akorn separates itself from other specialty pharmaceutical companies. Management is conservative in its guidance and realistic about growth expectations with a well-laid strategic execution roadmap. While the company does not pay dividends, investors can benefit from solid share price appreciation and earnings growth.

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