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Shares of specialty generic-pharmaceutical manufacturer Akorn Inc. (NASDAQ: AKRX) rose nearly 13% this morning after management announced that it was discussing a possible sale to Fresenius Kabi. The potential suitor is a subsidiary of Fresenius SE & Co. KGaA, a $41 billion healthcare conglomerate headquartered in Germany.
Unfortunately, no other specifics were given to investors. It's customary for both parties to remain mum during potential acquisition discussions until a deal is reached, talks are abandoned, or more important information needs to be disclosed. As of 2 p.m. EDT, the micro-cap stock had settled down to a 7.5% gain.
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Despite the pop from today's news, the specialty generic-drug leader is trading just shy of a $5 billion market cap and at a historically low 22 times trailing earnings. Why the low valuation for a high-growth company? After all, growth has come easy in the past. Akron has grown sales from $317 million in 2013 to $1.16 billion in 2016, while net income swelled from $52 million to $184 million in the same period. But the stock has had a rough time in the past year.
Management announced several delays regarding regulatory approvals in 2016 that pushed back growth estimates, then followed up with weak guidance for 2017. The high range of revenue estimates calls for just $1.06 billion (8% lower than the prior year), while the high range of earnings-per-share estimates calls for just $1.18 (20% lower than the prior year). The company has also found itself mixed up in uncertainty regarding the potential for stricter regulation of generic-drug pricing, which includes a Department of Justice probe into possible collusion between generic-drug manufacturers. Akorn has not been mentioned specifically, but merely being in the same neighborhood has increased the volatility of its shares.
In other words, while the stock is trading below its all-time high of $55 per share, it may not be realistic to expect any potential acquisition price to match that high-water mark.
For now investors simply need to wait for another update regarding the acquisition talks. At this point there's no guarantee that Akorn will be acquired by Fresenius Kabi. Even if a sale does materialize, the fact that the former high-growth company will turn in its weakest year-over-year performance ever in 2017 could hint that any potential acquisition price will be below what long-term investors think is fair. Long story short: Knee-jerk reactions are never good, but realistic expectations can go a long way to successful investing. Investors should stick with their original investment theses even with today's news.
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