The New Leader in Ophthalmology


The global ophthalmology drug and devices market is seeing substantial growth recently due to the increasing frequency of eye disorders in the older population.

This space has a bright future outlook, and according to Markets and Markets, it is projected to reach a market size of $36 billion by 2014, increasing at a CAGR of 5.4% during 2009-2014. The drugs addressable market is expected to rise to $19.8 billion by the year 2014, increasing at a CAGR of 4% during the period 2009-2014.

Akorn specializes in the manufacture and marketing of diagnostic and therapeutic ophthalmic pharmaceuticals products. It has been trying to secure a higher market share by making a series of acquisitions. The company recently acquired rival Hi-Tech Pharmacal to enhance its product offerings outside ophthalmics.

In this article, I'll focus on analyzing Akorn's business and financial performance, its recent acquisition of Hi-Tech, and how it has benefited in terms of its enhancing its market presence and enriching its product range.

Company performance analysis

Source: Company filings 10-K.

The company is on its road to success and has registered an exceptionally high revenue growth in the last few years. This growth was the result of new product launches, the revival of dormant products, and acquisitions. The company received Food and Drug Administration approval for vancomycin hydrochloride capsules and progesterone capsules. Some drugs were relaunched to establish an ongoing market presence for these products, as well as filling any market shortage needs. Akorn took over the business assets and principal manufacturing plant of Kilitch Drugs (India) Limited three branded, injectable drugs from Lundbeck, and AVR, the makers of the TheraTears line of over-the-counter eye care products.

The growth in the company's top line did not fully trickle down as it ramped up its research and development activities, both internally and through strategic partnerships. Selling, general, and administrative expenses also increased resulting from a higher headcount to support growth, operating expenses associated with the expanded operations in India and marketing costs associated with the promotion of AVR business.

Source: Morningstar.

Operating cash flow growth is one indicator that can give an insight about the company's survival prospects. Although Akorn is doing far better than its competitor, Novartis (NVS), it is lagging behind Allergan . The reason can be very well explained by Akorn's much higher cash conversion cycle of 136 days as compared to 70 days reported by Allergan.

What results to expect ahead?
The addition of Hi-Tech adds immensely not to Akorn's existing eye drug portfolio, but it goes beyond that as the company will now be offering other niche dosage forms such as oral liquids, topical creams and ointments, nasal sprays, and otics, which has a U.S. market demand worth $16.2 billion. Hi-Tech's robust product pipeline is a great addition, and it enhances the growth opportunities for the combined company.

Source: Company presentation.

Akorn has filed 57 patents with the FDA seeking awaiting approval, with an estimated market value of $5.4 billion. The acquisition of Hi-Tech has added 18 additional products that are awaiting approval from the FDA and have a market value of $2.6 billion and nearly 25 products currently in the development phase that have a total market of $3.9 billion.

The combined larger scale of operations will result in operational efficiencies accruing to Akorn, and it is expected that the company will be able to materialize annual benefits ranging in between 15 million to 20 million.

Source: Morningstar.

Akorn has financed this deal with borrowings of $600 million from JPMorgan Chase. This has raised the company's debt-to-equity ratio to 3.2 from 0.5, an exuberant increase of 540%, where the industry norm is a ratio of 0.9. However, this may not be such a big issue in the light of the strong balance sheet and cash profile of the combined company through which Akorn will repay its debt.

Bottom line
After its recent acquisition, Akorn is expected to become the third largest U.S. generic pharmaceutical company in the field of ophthalmology. The company has been working rigorously to achieve its strategic objectives and was able to register a healthy growth in its revenues and profits. In the midst of the rising global demand for ophthalmology, the company has a great future ahead. Hence, this stock seems to uphold upside potential for at least the medium term.

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Awais Iqbal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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