The Ridiculous Reason Akorn, Inc. Shares Dropped as Much as 17.4% Today

By Markets Fool.com

Image source: Getty Images.

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What happened

Specialty generic pharmaceutical manufacturer Akorn (NASDAQ: AKRX) reported third-quarter 2016 earnings this morning, which promptly sent shares lower. Investors may be scratching their heads as to why, though.

So what

Ironically, the company reported solid earnings that actually beat analyst expectations. Here's how important financial metrics stack up against the same period last year:

Metric

3Q16

3Q15

% Change

Revenue

$284.1 million

$256.8 million

10.6%

Gross profit

$170.2 million

$163.0 million

4.4%

Operating income

$88.8 million

$90.8 million

(2.2%)

EPS

$0.38

$0.39

(2.6%)

Shareholders' equity

$810.0 million

$584.5

38.6%

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Data source: Press release.

Akorn also increased its full-year 2016 guidance as follows:

Metric

Previous Guidance

New Guidance

Revenue

$1.06 billion to $1.08 billion

$1.125 billion

EPS

$1.56 to $1.66

$1.65

Adjusted EPS (non-GAAP)

$2.10 to $2.20

$2.25

Adjusted EBITDA

$485 million to $505 million

$515 million

Data source: Press release.

The company generates value by producing and marketing difficult-to-manufacture specialty drugs in ophthalmic (eyes), injectable, and topical indications, among several others. Therefore, its future value potential is based on the number of Abbreviated New Drug Applications, or ANDAs, it puts before the U.S. Food and Drug Administration. But at the end of September, Akorn had 83 ANDAs under FDA review, with a total expected value of $8.74 billion. That bodes well for the company's ability to grow in the near and long term, something also supported by the company's year-over-year revenue growth.

However, the big kicker came on the conference call. While Akorn had originally expected to gain FDA approval for roughly 25 products by the end of the first quarter of 2017, it now only expects 12 product approvals by that artificial deadline. That sounds bad, and it will have an impact on near-term revenue and earnings, but it's an absolutely ridiculous reason to punish the company. That's especially true considering an additional 10 product approvals (of the original "roughly 25") are still expected, just at later dates.

Now what

It seems clear to me that Mr. Market is acting irrationally today concerning Akorn and taking a near-sighted view of the company's value. Sure, there may be a chance that the company never receives approvals for the 10 delayed ANDAs, but investors understand that the success rate won't be 100%. That's why the company takes a lot of shots on goal in the first place. With 83 ANDAs pending at the FDA, the long-term potential remains intact. And at a price-to-earnings ratio of 14 -- and with earnings still growing -- punishing shares seems ridiculous.

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Maxx Chatsko has no position in any stocks mentioned. Follow him on Twitterto keep up with developments in engineered biology and materials science.

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