Drugmaker Akorn Becoming Mighty Oak In Hi-Tech Merger
Mergers are usually more popular with investors in the company being acquired than in the acquirer. Since specialty drugmakerAkorn ( AKRX ) agreed to buy Hi-Tech Pharmacal, however, its stock has gone up.
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 ( HSP ) 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 ( SGNT ) 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 year.
Akorn's buyout ofHi-Tech Pharmacal ( HITK ) 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 ( GSK ) 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 recovered.
This caused some concern for Deutsche Bank analyst David Steinberg.
"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. 4.
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."