Prescription drug costs rose 13% in 2014. That’s the biggest year-over-year increase since 2003. And the prices of specialty medicines for rare or hard-to-treat conditions jumped by 31%! Now, the higher prices are fueling fierce competition between drugmakers – giving consumers more options.
It’s simple supply and demand. Growing profits attract pharmaceutical firms looking to capture market share.
At the same time, though, this fresh competition can be a potential nightmare for drug companies already cornering the market. And on Tuesday, we saw exactly what happens when competing drug companies lock horns…
Let the Battle Begin
Akorn’s (AKRX) clobetasol product contributed upwards of $100 million in total revenue for the company (after the firm instituted a significant price increase in August 2014).
Well, Actavis (ACT) just launched Temovate – a competing product to Akorn’s topical corticosteroid, clobetasol. And the launch sent Akorn shares down by more than 12.8%.
Actavis’ bombshell announcement triggered investment banker Jefferies Group to cut its price target for Akorn from $59 down to $56. Jefferies did maintain its “Buy” rating for the company, however.
But once the dust settled, Akorn shares closed Tuesday’s volatile session $6.67 lower than Monday’s close.
More Headaches Ahead for Akorn?
Actavis isn’t the only company causing pain for Akorn.
Research firm IMS Health reports that Akorn is facing potential competition from other companies, including Teva Pharmaceutical Industries (TEVA). The company possesses FDA-approved abbreviated new drug applications (ANDA) for a variety of competing formulations.
Should these competitors choose to enter the market with these formulations, they could force Akron to cut its prices significantly.
But that’s not Akorn’s biggest concern… You see, Akorn filed a Form 12b-25, Notification of Late Filing, with the U.S. Securities and Exchange Commission. This allows the company to extend the deadline to file its Form 10-K for the year ended December 31, 2014.
The company took the unusual step because Akorn has yet to integrate some financial data from recently acquired companies. As a result, Akorn hasn’t been able to close out its books for the year.
Management expects the company to complete its 10-K by the extended deadline of March 17, 2015. Once completed, Akorn will then have to deal with shareholder litigation alleging corporate malfeasance for its failure to file the 10-K on time.
So far, everything sounds pretty devastating for Akorn, right?
Well, here’s the silver lining for the company…
Still a Compelling “Buy”
The company’s fourth-quarter report indicates that Akorn is a strong player in its niche market.
Total revenue in Q4 2014 was $227.8 million, a 168% increase year over year. And on an adjusted basis, Akorn’s revenue topped $240.2 million, a 183% increase over the same quarter in 2013.
The company reported an improvement in its non-GAAP adjusted gross margin. It rose from 55.3% in Q4 2013 to 61.8% in its latest quarter.
Akorn said its non-GAAP adjusted earnings per share diluted was $0.50. That’s a 257% increase from the year-ago period. Meanwhile, the company reported a diluted EPS of $0.29 on a GAAP basis. That’s still a 107% increase!
Plus, despite the delay in delivering the company’s 10-K, Akorn reaffirmed its 2015 guidance. It’s calling for revenue of between $960 million and $980 million. It also expects its 2015 non-GAAP diluted EPS to be between $1.88 and $1.98.
Bottom line: At the end of February 2015, Akorn had 87 ANDAs filed with the FDA, with a combined annual market size of approximately $8.4 billion. This proves that the company can compete with Actavis and Teva, as needed.
Therefore, prudent investors will seize the opportunity to buy shares on any weakness, as the drug companies fight for their lives.
Good investing,
Richard Robinson
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