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Stock Strategist

Akorn On Track

The stock looks undervalued as accounting issues temporarily detract from an attractive business.

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 Akorn's (AKRX) 2016 outlook falls a bit short of our expectations, but we still think the stock looks considerably undervalued at current levels. Management's commentary leaves us reasonably confident that the firm can get its financial restatements and 10-K filed by early May to meet its filing extension deadline and avoid having its shares delisted from the Nasdaq. Expected 2015 results of $985 million in revenue and $1.93 in adjusted earnings per share are mostly on par with management's previous expectations. Our forecast for 2016 is slightly above management's outlook for about $1.07 billion in revenue and adjusted EPS of $2.15 at the midpoint, but management has not included a number of potential product launches in its guidance, and these could still put the company on pace with our projections. Akorn's financial position remains relatively strong, ending the year at a net debt/EBITDA ratio of approximately 1.6. We're leaving our narrow economic moat rating unchanged, thanks to the company's ongoing strength in complex generic drug markets, which helps preserve pricing and profitability.

Management plans to file its 10-K by the May 9 financial reporting deadline, which should remove recent delisting fears on the stock. In the meantime, Akorn's product portfolio and pipeline should be able to keep the company's performance mostly on track with our expectations. Complete response letters from the Food and Drug Administration on approximately 50 of the company's 87 generic drug applications have somewhat slowed its pace of new applications, but we anticipate that its investments, including likely higher research and development spending as a percentage of sales, can uphold the firm's position in the more attractive complex generic product categories. Management estimates that nearly half of the drugs with complete response letters could receive approval over the next year. Also, management doesn't anticipate an inspection of its India facility by the FDA until mid-2018, which is slightly behind our initial expectations but not a critical factor in our longer-term forecasts.

Michael Waterhouse does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.