Akorn Reports Preliminary 2014 Second Quarter Results

LAKE FOREST, Ill., Aug. 5, 2014 (GLOBE NEWSWIRE) — Akorn, Inc. (AKRX), a niche generic pharmaceutical company, today reported preliminary financial results for the second quarter ended June 30, 2014.

Second Quarter 2014 Key Highlights and Accomplishments

  • Achieved record second quarter consolidated revenue of $150.7 million, an increase of 96% over last year’s second quarter and record adjusted net income per diluted share of $0.25, an increase of 79% over last year’s second quarter.
  • Raises 2014 outlook to a revenue range of $580 to $600 million and an adjusted net income per diluted share range of $1.00 to $1.05.
  • Announced acquisition of VersaPharm which is expected to add $90 to $100 million in annual revenue and $0.10 to $0.12 adjusted net income per diluted share. The acquisition is projected to close mid-August.
  • Successfully completed syndication of $445 million term loan to finance the VersaPharm acquisition.
  • Received FDA approval on five new products with a combined IMS market size of $560 million. Product approvals included: Atropine Sulfate Ophthalmic Solution, USP 1%; Dronabinol Capsules USP, 2.5mg, 5mg, 10mg; Tobramycin Inhalation Solution USP, 300mg/5mL; Zoledronic Acid Injection, 4mg/5mL; and Famotidine for Oral Suspension, USP 40mg/5mL.
  • Filed an additional twelve ANDAs within the quarter. The Company now has 78 ANDAs filed with the FDA with a combined annual IMS market size of approximately $8.0 billion.
  • Divested ECR Pharmaceuticals, a non-core asset which was acquired through the Hi-Tech Pharmacal acquisition, for $41 million in cash and assumption of certain liabilities.

Raj Rai, Chief Executive Officer commented, “We’ve had another great quarter and with the acquisition of Hi-Tech, we are seeing more opportunities for growth for the remainder of 2014 and beyond. Additionally, we received five new product approvals in the second quarter, which positions Akorn for stronger organic growth in 2015. As a result, we are raising our 2014 guidance.”

Financial Results for the Quarter Ended June 30, 2014

Consolidated revenue for the second quarter of 2014 was $150.7 million, an increase of 96% over the second quarter 2013 consolidated revenue of $77.0 million. The increase in consolidated revenue was largely driven by the Hi-Tech acquisition, which contributed $51.5 million in revenue for the partial quarter, as well as by the addition of several branded ophthalmic products which were acquired in late 2013 and early 2014.

Consolidated gross margin for the second quarter of 2014 was 50.9% compared to 54.7% in the comparable prior year period. Second quarter 2014 gross margin included $3.6 million in amortization of the step-up of Hi-Tech’s acquired inventory. Excluding this impact, second quarter 2014 gross margin was 53.2%.

Net income for the second quarter of 2014 was $8.5 million, or $0.07 per diluted share compared to net income of $12.6 million, or $0.11 per diluted share in the comparable prior year quarter. Second quarter 2014 net income included a number of items related to the Hi-Tech and VersaPharm acquisitions, including acquisition and disposition-related expenses, $3.6 million of amortization of inventory step-up, a gain from product divestitures, financing-related fees on the Hi-Tech and VersaPharm term loan commitments, and a loss from discontinued operations for the ECR Pharmaceuticals divestiture. Non-GAAP adjusted net income for the second quarter of 2014, excluding the impact of these items, was $29.3 million, or $0.25 per diluted share, compared to non-GAAP adjusted net income of $15.3 million, or $0.14 per diluted share in the comparable prior year quarter.

2014 Updated Outlook

The 2014 outlook has been updated to account for several developments, including the divestiture of the ECR Pharmaceuticals business, a projected mid-August close for the VersaPharm acquisition, new product approvals, and anticipated changes in price and demand on the remainder of the business.

2014 Outlook Assumptions

  • No additional product approvals for the remainder of the year are included.
  • The VersaPharm acquisition is projected to close mid-August.
  • Assumes no competing generic is launched for Nembutal.
  • Cost synergies that result from the Hi-Tech acquisition are expected to be realized throughout the year and will accelerate as the year progresses. The Company anticipates ending the year at a $20 million annual run-rate for synergies.
  • Intangible asset amortization expense of $32 million is before giving effect to VersaPharm purchase accounting.
  • Fully diluted share count is based on most recent share price.

Second quarter 2014 Conference Call

The Company will host a conference call at 10:00 a.m. Eastern Time on Tuesday, August 5, 2014, to discuss second quarter 2014 results followed by a QA session. The domestic call-in number is 877-415-4117 and the international call-in number is 678-224-7719. The confirmation code for all callers is 74116213. The URL for the webcast is http://www.media-server.com/m/p/3yxbyi45. A live broadcast of the conference call will also be available online at www.akorn.com under the Investor Relations tab and available for replay for 90 days.

About Akorn, Inc.

Akorn, Inc. is a niche generic pharmaceutical company engaged in the development, manufacture and marketing of multisource and branded pharmaceuticals. Akorn has manufacturing facilities located in Decatur, Illinois; Somerset, New Jersey; Amityville, New York and Paonta Sahib, India where the Company manufactures ophthalmic, injectable and niche, non-sterile pharmaceuticals. Additional information is available on the Company’s website at www.akorn.com.

Forward Looking Statements

This press release includes statements that may constitute “forward-looking statements”, including projections of certain measures of Akorn’s results of operations, projections of sales, projections of certain charges and expenses, projections related to the number and potential market size of ANDAs, projections with respect to timing and impact of pending acquisitions, and other statements regarding Akorn’s goals, regulatory approvals and strategy. Akorn cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Because such statements inherently involve risks and uncertainties, actual future results may differ materially from those expressed or implied by such forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. Factors that could cause or contribute to such differences include, but are not limited to: statements relating to future steps we may take, prospective products, prospective acquisitions, future performance or results of current and anticipated products and acquired assets, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. These cautionary statements should be considered in connection with any subsequent written or oral forward-looking statements that may be made by the Company or by persons acting on its behalf and in conjunction with its periodic SEC filings. You are advised, however, to consult any further disclosures we make on related subjects in our reports filed with the SEC. In particular, you should read the discussion in the section entitled “Cautionary Statement Regarding Forward-Looking Statements” in our most recent Annual Report on Form 10-K, as it may be updated in subsequent reports filed with the SEC. That discussion covers certain risks, uncertainties and possibly inaccurate assumptions that could cause our actual results to differ materially from expected and historical results. Other factors besides those listed there could also adversely affect our results.

Non-GAAP Financial Measures

In addition to reporting financial information required in accordance with U.S. generally accepted accounting principles (GAAP), Akorn is also reporting Adjusted EBITDA, Adjusted net income and Adjusted net income per diluted share, which are non-GAAP financial measures. Since Adjusted EBITDA, Adjusted net income and Adjusted net income per diluted share are non-GAAP financial measures, they should not be used in isolation or as a substitute for consolidated statements of operations and cash flow data prepared in accordance with GAAP. In addition, Akorn’s definitions of Adjusted EBITDA, Adjusted net income and Adjusted net income per diluted share may not be comparable to similarly titled non-GAAP financial measures reported by other companies. For a full reconciliation of Adjusted EBITDA and Adjusted net income to GAAP net income, please see the attachments to this earnings release.

Adjusted EBITDA, as defined by the Company, is calculated as follows:

Net income from continuing operations, plus:

  • Interest income (expense), net
  • Provision for income taxes
  • Depreciation and amortization
  • Amortization of acquisition related inventory step-up
  • Non-cash expenses, such as share-based compensation expense, and amortization of financing costs
  • Other adjustments, such as legal settlements, various acquisition and disposition related expenses, and debt financing costs
  • Less settlement of product warranty liability
  • Less gains (or plus losses) on foreign currency transactions
  • Less gains related to acquisitions and divestitures
  • Less elimination of unfavorable contract accruals

The Company believes that Adjusted EBITDA is a meaningful indicator, to both Company management and investors, of the past and expected ongoing operating performance of the Company. EBITDA is a commonly used and widely accepted measure of financial performance. Adjusted EBITDA is deemed by the Company to be a useful performance indicator because it includes an add back of non-cash and non-recurring operating expenses which have little to no bearing on cash flows and may be subject to uncontrollable factors not reflective of the Company’s true operational performance (i.e. fair value adjustments to the carrying value of stock warrants liability).

Adjusted net income, as defined by the Company, is calculated as follows:

Net income from continuing operations, plus:

  • The recorded provision for income taxes
  • Intangible asset amortization
  • Amortization of acquisition related inventory step-up
  • Non-cash expenses, such as non-cash interest, share-based compensation expense, and amortization of financing costs
  • Other adjustments, such as legal settlements, various acquisition and disposition related expenses, and debt financing costs
  • Less an estimated cash tax provision, net of the benefit from utilizing NOL carry-forwards
  • Less settlement of product warranty liability
  • Less gains (or plus losses) on foreign currency transactions
  • Less gains related to acquisitions and divestitures
  • Less elimination of unfavorable contract accruals

Adjusted net income per diluted share is equal to Adjusted net income divided by the actual or anticipated diluted share count for the applicable period.

The Company believes that Adjusted net income and Adjusted net income per diluted shares are meaningful financial indicators, to both Company management and investors, in that they exclude non-cash income and expense items that have no impact on current or future cash flows, as well as other income and expense items that are not expected to recur and therefore are not reflective of continuing operating performance. Adjusted net income and Adjusted net income per diluted share provide the Company and investors with income figures that would be expected to be more aligned with cash flows than GAAP net income, which includes a number of non-cash income and expense items.

While the Company uses Adjusted EBITDA, Adjusted net income and Adjusted net income per diluted share in managing and analyzing its business and financial condition and believes these non-GAAP financial measures to be useful to investors in evaluating the Company’s performance, each of these financial measures has certain shortcomings. Adjusted EBITDA does not take into account the impact of capital expenditures on either the liquidity or the financial performance of the Company and likewise omits share-based compensation expenses, which may vary over time and may represent a material portion of overall compensation expense. Adjusted net income does not take into account non-cash expenses that reflect the amortization of past expenditures, or include stock-based compensation, which is an important and material element of the Company’s compensation package for its directors, officers and other key employees. Due to the inherent limitations of each of these non-GAAP financial measures, the Company’s management utilizes comparable GAAP financial measures to evaluate the business in conjunction with Adjusted EBITDA, Adjusted net income and Adjusted net income per diluted share and encourages investors to do likewise.

AKORN, INC.

PRELIMINARY CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

IN THOUSANDS (UNAUDITED)

THREE MONTHS ENDED

SIX MONTHS ENDED

JUNE 30,

JUNE 30,

2014

2013

2014

2013

OPERATING ACTIVITIES

(Preliminary)

(Preliminary)

Consolidated net income

$ 8,506

$ 12,637

$ 18,334

$ 23,479

Loss from discontinued operations

$ 503

$ —

$ 503

$ —

Adjustments to reconcile consolidated net income to net cash provided by operating activities:

Depreciation and amortization

12,190

3,362

18,865

6,651

Amortization of financing costs

1,502

207

3,631

411

Amortization of favorable contract asset

17

(159)

35

(318)

Amortization of inventory step-up

3,559

3,559

Non-cash stock compensation expense

2,049

2,541

3,331

4,244

Non-cash interest expense

1,406

1,037

2,655

2,263

Gain from product divestiture

(8,968)

(8,968)

Deferred tax assets, net

(8,270)

403

(9,959)

1,201

Excess tax benefit from stock compensation

(798)

(507)

(831)

(745)

Non-cash settlement of product warranty liability

(1,299)

(1,299)

Equity in earnings of unconsolidated joint venture

(76)

Changes in operating assets and liabilities:

Trade accounts receivable

(26,069)

1,050

(26,519)

(6,908)

Inventories

1,774

(2,987)

(4,213)

(4,428)

Prepaid expenses and other assets

(4,979)

(464)

(3,953)

538

Trade accounts payable

(1,135)

1,710

4,965

(151)

Accrued expenses and other liabilities

15,073

(3,055)

18,301

(3,464)

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES

(3,640)

14,476

19,736

21,398

INVESTING ACTIVITIES

Payments for acquisitions and equity investments, net of cash acquired

(574,595)

(244)

(582,095)

(513)

Proceeds from disposal of assets

57,750

57,750

Payments for other intangible assets

(6,300)

(6,300)

Purchases of property, plant and equipment

(6,731)

(2,470)

(11,929)

(5,159)

NET CASH (USED IN) INVESTING ACTIVITIES

(529,876)

(2,714)

(542,574)

(5,672)

FINANCING ACTIVITIES

Proceeds from issuance of debt

600,000

600,000

Debt financing costs

(14,200)

(14,608)

Excess tax benefit from stock compensation

798

507

831

745

Net proceeds from common stock offering and warrant exercises

8,171

8,171

Proceeds under stock option and stock purchase plans

1,049

397

2,071

1,265

NET CASH PROVIDED BY FINANCING ACTIVITIES

595,818

904

596,465

2,010

Effect of changes in exchange rates on cash cash equivalents

(1)

(117)

102

(105)

INCREASE IN CASH AND CASH EQUIVALENTS

62,301

12,549

73,729

17,631

Cash and cash equivalents at beginning of period

45,606

45,863

34,178

40,781

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$ 107,907

$ 58,412

$ 107,907

$ 58,412