What happened

A bad 2018 keeps getting worse for specialty generic drug developer Akorn (NASDAQ:AKRX). The company's shares fell over 16% today -- and are now down 61% year to date -- as a worrisome development got even worse.

Court documents made public late on Tuesday show that Fresenius (NYSE:FMS) dropped its acquisition of Akorn after uncovering evidence that the generic drug developer submitted fraudulent data to the U.S. Food and Drug Administration for at least six different drugs dating back to 2012.

That's a remarkable allegation -- and one that doesn't bode well for the smaller company's argument that the acquisition should proceed as originally intended.  

As of 3:18 p.m. EDT, the stock had settled to a 15.9% loss.

A man with his face on a desk and a sharply negative stock chart on the wall behind him.

Image source: Getty Images.

So what

The sequence of recent events makes a lot more sense now for investors. After originally agreeing to purchase Akorn in a $4.75 billion deal, Fresenius announced in February it was investigating "data integrity" issues uncovered during its due diligence into the acquisition. In April, it announced it was pulling out of the agreement to acquire the generic drug specialist. And now investors know why: "blatant fraud at the very top level of Akorn's executive team, stunning evidence of blatant and pervasive data integrity violations," according to a Reuters report on the court filing.

Akorn responded by saying that it fired an executive involved in the fraudulent scheme, while Fresenius said the executive is still being paid a salary of $250,000 as a consultant and stands to profit significantly from the merger. Additionally, the smaller company retorted that the six drugs alleged to have been submitted on fabricated information "either have never been marketed or are not currently being marketed and were never forecasted to form a material portion of Akorn's future earnings," again according to Reuters.

Shockingly, it doesn't appear that Akorn is denying that fraud took place. Rather, it's arguing that the acquisition should proceed because, hey, those drugs weren't that important anyway. If that's the culture of the company, then Fresenius and investors are better off avoiding the stock altogether.

Now what

It doesn't seem likely that a court would force Fresenius to proceed with its proposed acquisition. That leaves Akorn with a market cap of just $1.6 billion (far below the acquisition price) and a significant lack of trust with investors and Wall Street. It's tough to imagine a more toxic situation. Investors should avoid this stock at all costs.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.