Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Why Akorn, Inc. Shares Were Cracked

By Sean Williams - Mar 3, 2014 at 1:22PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Akorn shares tumble after the company reports its fourth-quarter earnings results. Is this dip the perfect buying opportunity or all the more reason to keep your distance?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Akorn ( AKRX ), a branded and generic developer of pharmaceutical products ranging from ophthalmic and hospital indications to injectable pharmaceuticals, fell as much as 18% after reporting its fourth-quarter earnings results before the opening bell this morning.

So what: For the quarter, Akorn delivered revenue growth of 19% to $85 million, which was driven primarily by new products launched in late 2012 or the beginning of 2013. Its adjusted profit rose more modestly, to $0.14 per share from $0.13 in the year-ago period, as gross margin dipped 340 basis points to 55.3%. By comparison, Wall Street expected Akorn to report just $83.4 million in revenue on $0.14 in EPS. Looking toward fiscal 2014 is where Akorn ran into problems by issuing full-year guidance of $540 million-$560 million in revenue and $0.76-$0.79 in EPS. The current consensus has been calling for just $501 million in revenue (a significant beat), but EPS of $0.86 (a hefty shortfall).

Furthermore, Akorn filed an extension for form 10-K, its annual report, because it "has not completed its testing and assessment of the effectiveness of its internal control over financial reporting due in part to identified control deficiencies related to completeness and accuracy of underlying data used in the determination of certain significant estimates and accounting transactions as well as the existence of inadequate segregation of duties."

Now what: There are certainly a number of factors here for shareholders to be displeased with, including its 10-K extension, which could make some investors question the integrity of the results, as well as its weak full-year EPS guidance, which only reinforces that gross margin weakness is going to continue into fiscal 2014.

However, I see today's dip as a possible buying opportunity for those investors with a longer-term view. Akorn is a hybrid pharmaceutical provider in that it develops both branded and generic products. The advantage is that it's able to bask in the high gross margins of branded drugs while also reveling in the seemingly endless pipeline that generic drugs can bring to the table. Higher sales from generic drugs is going to bring margins down, but that's not necessarily a bad thing if Akorn can keep its sales volume moving higher by double digits. With a growth rate that I suspect can remain in the double digits for years to come, I'd suggest adding Akorn to your watchlist and giving it a closer look.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Akorn, Inc. Stock Quote
Akorn, Inc.
AKRX

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
656%
 
S&P 500 Returns
144%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.