Shares of Akorn (NAS: AKRX) hit a 52-week high on Wednesday. Let's take a look at how it got there and see whether clear skies are still in the forecast.
How it got here
Akorn, a niche generic pharmaceutical company, has joined Teva Pharmaceutical (NAS: TEVA) , Mylan (NYS: MYL) , and Dr. Reddy's Laboratories (NYS: RDY) in the ranks of generic-drug producers who are reaping the benefits of constantly expiring patents. Teva has a diverse generic portfolio of roughly 1,450 molecules, while Mylan and Dr. Reddy's are feasting off of Pfizer's aging pipeline. Now it's Akorn's turn to shine.
In addition to Akorn's line of ophthalmic and over-the-counter products, the most exciting news for shareholders has to be the company's new offering of generic Vancocin. If you recall, brand-name Vancocin is produced by ViroPharma (NAS: VPHM) , and last year it contributed $289 million of ViroPharma's $544 million in total revenue. Akorn, along with Watson Pharmaceuticals, which also sells generic Vancocin, is looking to take a large chunk of that revenue in the coming quarters.
Akorn also has 39 abbreviated new drug applications in its pipeline, with combined annual revenue totaling $4 billion and seven additional ANDAs waiting to be filed worth an additional $1.2 billion. When you add in the company's aggressive acquisition strategy, you have a well-rounded producer of generic and over-the-counter drugs.
How it stacks up
Let's see how Akorn stacks up next to its peers.
Akorn certainly has had the wildest ride of the group, but shareholders who have stuck with the company are being greatly rewarded.
Dr. Reddy's Laboratories
Source: Morningstar. Yields are projected.
Generic companies have two methods by which they grow. The first is through submitting new drug applications to the FDA and around the world, and the second is through acquisitions. For each company here, acquisitions played a huge part in their growth over the past five years and represent the main reason I've chosen not to include a five-year growth rate in these metrics.
Akorn is the smallest company here, which affords it the greatest opportunity to grow its pipeline at the fastest rate. I'm not sure yet if that quite means the company is worth 54 times cash flow, but its revenue growth of 103% last quarter (including acquisitions) is a good start to that argument.
Teva is, without question, my favorite pharmaceutical company among branded and generic producers. It trades at a significant discount to its peers, its dividend has grown rapidly, and it boasts a deep pipeline of drugs.
Mylan's generic-drug segment only managed 7% growth last quarter, even after unfavorable currency translations are removed. It did recently up its full-year EPS guidance and initiate a $500 million share repurchase program, but still no dividend for its shareholders.
Dr. Reddy's is in a similar situation to Akorn in that it's still in the mid-stages of its growth phase. It grew sales by 30% in fiscal 2011 and recently began selling generic Plavix. However, with a minimal dividend and priced at 27 times cash flow, it's not as great a value as you might think.
Now for the $64,000 question: What's next for Akorn? The answer is going to depend on whether Akorn can keep growing its pipeline rapidly enough through acquisitions and FDA approvals to justify its current valuation.
Our very own CAPS community gives the company a three-star rating (out of five), with 93.3% of members expecting it outperform. Although I've yet to make a CAPScall on Akorn in either direction, I am ready to enter a limit order of outperform at $11.50.
"Why not buy Akorn right now?" Quite simply, I'm having a hard time justifying the company's price of 53 times cash flow, even with the Vancocin win and 39 ANDAs potentially in its pipeline. I don't doubt Akorn's ability to grow via acquisition, and I do see long-term value in the stock, but I have a suspicion I'll be able to grab it at a moderate discount to its current levels.
Akorn clearly has a product pipeline that's helping to change lives. If you'd like the inside scoop on a stock our Motley Fool Rule Breakers team feels could offer the next revolutionary product, get free access to our latest report.
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At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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