The company that I have chosen to analyze for my portfolio project is Akorn Inc. (AKRX). Akorn is a generic ophthalmic injectable pharmaceutical company that is located near Chicago. Akorn had a rather tumultuous path to get where it is today. As recently as 2009 the company was trading at about $2 a share, and the company was nearing bankruptcy. In 2009 the company hired CEO Raj Rai and the company has been on the rise ever since. I have chosen Akorn for this project as I have long been a personal investor with the company, and they have a rather fascinating financial history over the last few years… In this essay, we will investigate the financial results of Akorn over the last three years.
The four primary ratios I chose to take into account for this analysis are the gross profit ratio, the operating profit margin ratio, net profit margin ratio, and the DuPont method measurement. The reason I chose these ratios to analyse the financial results for AXRX is because they tend to provide the best overall look of how the company is doing. First, the gross profit margin ratio provides a simplistic look into how much the company is making after the cost of goods sold. With this, you can see if a company is spending too much to manufacture their products, or on other aspects like marketing. The operating profit margin ratio gives a view of how much the company is taking in after paying for variable costs that are associated with manufacturing. This includes things like salaries and wages and materials. This ratio not only allows us to see how profitable the company is but also gives a view of its operating costs. The next ratio I chose to analyze was the net profit margin ratio. Where the operating profit margin ration only takes into account variable costs, and the gross profit margin takes into account the cost of good sold, the net profit margin includes the cost of goods sold, variable operating expenses, as well as other expenses such as interest and taxes. This ratio provides a far more grand view of how the company is fiscally. The final ratio I utilized in this analysis was the DuPont method analysis. With the DuPont method, which is named after the corporation that first started using it in the 1920’s, the return on equity, is calculated using a gross value for assets, and therefore excludes accumulated depreciation.
One of the biggest contributing factors to the growth of Akorn has been its ability to acquire other companies. For instance in 2013 Akorn acquired a company by the name of Versapharm, which was a generic veterinary pharmaceutical manufacturer. This allowed the company to expand its product lines. In 2012 just a couple years after the company underwent a massive transformation and implemented new leadership, revenues stood at $256 million. By 2013 total revenue had increased to $317 million. One of the problem areas that really stood out for Akorn was their decreasing gross profit margins over the past 3 years. In 2012 they stood at around 58% profit margin, but over the course of the next two years this fell nearly 8 points to 50%. Although I would still consider this a solid gross profit margin, the decreasing trend may be seen as a troubling indicator of what is to come for the company, as this could mean the company is struggling with rising product costs. In the management discussion section of the company’s 10-K filing, CEO Raj Rai states that “The lower margin is primarily due to an increase in sales of products that are not manufactured by us and/or which have profit sharing agreements with co-developers”. One of the even more concerning aspects of the financials for AKRX is the operating profit margin. From 2012-2013 this number was on the rise, reaching nearly 28%. Then in 2014 this number crashed, to a low of 16.31%. I believe much of this can be attributed to the acquisition of versapharm. A similar pattern was seen in the net profit margin for the company as well, a rise from 12-13, followed by a swift decline in 2014. Another aspect of the financials that stands out as concerning is the declining return on equity as shown by the DuPont Methods analysis. In the three years covered by this analysis the ROE for Akorn declined by nearly half a percentage point. This means that the company is generating less and less revenue with the money they are receiving from investors.
One interesting thing to note about Akorn is that in March of 2015 the revealed that they had come across errors during their acquisition of Versapharm, and that they would need to restate their financials for the final three quarters of 2014. The company eventually received a delisting notice from the NASDAQ. AKRX has gone on to request multiple extensions, and is now on its final one, with a deadline of 5/16/2016 to get their financials restated for 2014, and release their 2015 financials. This error has had a massive effect on the company’s stock price. In early 2015 the company reached a high of $57 as share, with a market cap of over $6 billion. Over the last year or so the company has declined to a low of $18 a share, and now is holding steady around S25. Although their financial results have been promising, the lack of confidence from investors has led to a stagnant, if not declining stock price.
There are a number of interesting things about reading the form 10K for AKRX. First, because the most recent filing is from early 2015, it is interesting to see how optimistic management was early last year and now in hindsight to see the events that have transpired with the company over the last year or so. Management makes note of the decrease in gross profit margin in the 10-K, stating that the decrease is “primarily due to the effect of fees incurred due to competitive pricing actions during the year”. What this ultimately means is the company is experiencing high cost of goods sold and that had a large effect on its profit margins. Another intriguing aspect of the management discussion in the 10-K form was the effect that chargebacks has on revenue. In 2014 chargebacks came in at $734 million, which account for nearly 51% of revenue. Much of this was due to the merger, but this also continues to show the competitive pricing pressure that the company is facing in the marketplace.
Going forward it will be interesting the reassess the form 10-K for Akorn once they restate their financials for 2014 and 2015 in the coming weeks. Although the company appears to be finally finding solid ground in the marketplace and well as the stock market, it will be interesting to see how their restatements effect the momentum they have started to build. Although the company has a tough road ahead as competitive pricing pressures continue to exists. I think that their revenue streams appear to be consistent and the acquisition of Versapharm will continue to lead to solid growth for the time to come.
References
- AKRX Income Statement | Akorn, Inc. Stock – Yahoo! Finance. (n.d.). Retrieved March 1, 2015, from http://finance.yahoo.com/q/is?s=
- AKRX Income Statement&annual EDGAR Pro. (n.d.). Retrieved March 1, 2015, from http://yahoo.brand.edgar- online.com/displayfilinginfo.aspx?FilingID=9858142-136552- 210748&type=sect&TabIndex=2&dcn=0001157523-14-001078&nav=1&src=Yaho Gibson, C. H. (2011).Financial Reporting & Analysis: Using Financial Accounting Information (13th Ed.). Mason, OH: South Western/Cengage. ISBN-13: 9781133188797
