Mergers are usually more popular with investors in the company
being acquired than in the acquirer. Since specialty
) agreed to buy Hi-Tech Pharmacal, however, its stock has gone
Akorn's $640 million payout isn't huge by drug-industry
standards, but for that price it will nearly double in size, as
both companies' annual revenue is running between $200 million
and $300 million. The buyout will also address a need raised by
analysts and management alike: diversification.
Akorn's principal product is Nembutal, known generically as
pentobarbital, most famous (and infamous) for its use in
execution by lethal injection. It's also used as an anesthetic
and sedative, but its homicidal use made it an albatross for its
previous owner, Lundbeck, since its home country of Denmark
opposes the death penalty.
A Well-Timed Acquisition
Akorn acquired Nembutal from Lundbeck in late 2011, at a
fortuitous moment afterHospira (
) had stopped making sodium thiopental, then the standard drug
for lethal injections.
The controversial nature of the drug was to Akorn's advantage
in one sense: It has no generic competitors, even though it's
long since off patent. However,Sagent Pharmaceuticals (
) has filed for approval of its own generic version, and in early
August CEO Jeff Yordon said it could launch by the end of this
Akorn's buyout ofHi-Tech Pharmacal (
) gets around these problems by building up completely different
parts of its business. Both companies have a considerable
presence in ophthalmology. When Akorn acquired Advanced Vision
Research in 2011, it acquired the TheraTears eye drops and
MacuTrition supplements, and expanded into making private-label
eye products for drugstores.
With the buyout Akorn will get Hi-Tech's two manufacturing
plants, which will further expand its capacity to make
opthalmology products. Akorn's management has said it hopes to be
the No. 1 player in generic ophthalmics by 2018. The facilities
also bring it capabilities it didn't have before, such as in
creams, ointments and nasal sprays.
"We anticipate there is approximately a $500 million
addressable market opportunity in the private label
over-the-counter business in the categories of cough and cold and
allergy oral liquids, nasals and topicals," Akorn CEO Raj Rai
said in the conference call discussing the merger. "We believe
this would give us the credibility and provide us with
cross-selling opportunities with our existing customers and would
further enhance our partnerships with the retailers."
Although over-the-counter drugs make a large chunk of
Hi-Tech's business, its single biggest product is fluticasone,
its generic version of Flonase,GlaxoSmithKline 's (
) prescription asthma spray. The drug fueled big growth in 2010
and 2011, but last year new entrants into the market put Hi-Tech
on a train of quarterly profit declines from which it never
This caused some concern for Deutsche Bank analyst David
"Specifically, why is AKRX buying a company that 1) is growing
considerably more slowly than itself and 2) has a product
(fluticasone) which is (about) 37% of FY13 (revenue) that has
declined 13% year-over-year?" he asked in his Aug. 28 research
note. "What if there are more generic entrants?"
Some other analysts mentioned it in their comments on the
merger, but not all were worried about it.
"We do not envision the pace of new generic Flonase entrants
to accelerate going forward, bearing in mind that the market is
already crowded and that pricing has already eroded
considerably," wrote Piper Jaffray's David Amsellem on Sept.
Amsellem raised his price target on the stock, as did several
other analysts. No one actually upgraded it, though, probably
because it was already carrying good ratings on the Street due to
its recent track record.
Akorn is coming off six straight quarters of double-digit
profit and sales growth. The combination of strategic buyouts
with shortages and withdrawals of some competing products helped
bring the company out of the money-losing wilderness where it
spent the first decade of the 21st century.
The stock, which bottomed out at 73 cents in May 2009, cruised
up to near 17 by July 2012, then spent 12 months consolidating
before the second-quarter earnings report and then the Hi-Tech
announcement drove a breakout. It currently trades near 21.
Although more buyouts may be in the cards, analysts also see
growth potential in Akorn's pipeline. At the end of the second
quarter, it had 57 generic-drug applications in process with the
FDA, representing an addressable market of about $5.4 billion,
according to Craig-Hallum.
The company has been working on generic versions ofNovartis '
(NVS) inhaled antibiotic Tobi and Hospira's intravenous sedative
Precedex. Akorn has also said it plans to go into veterinary
products, starting with ophthalmic products and possibly
expanding into injectables later.
Hi-Tech brings another 25 pipeline products to the table, with
an addressable market of $3.9 billion. It's currently wrangling
withAllergan (AGN) for the right to make knock-offs of Allergan's
eye products Latisse, Lumigan and Zymar.
For those impatient with these longer-term strategies, some
analysts have raised another possibility: the new Akorn-Hi-Tech
hybrid itself might get bought.
"Akorn is a likely acquisition target given its unique
position in a consolidating industry," wrote Guggenheim's Louise
Chen in her Sept. 26 initiation report. "There are only a few
generic ophthalmic companies and a limited number of generic
injectable companies in the U.S."