Does Reward Potential Still Outweigh The Risk In Akorn Shares?

Deutsche Bank downgraded Akorn, Inc. AKRX to Hold from Buy as the stock has recovered since the post-third quarter correction. According to Deutsche Bank, further upside will depend on “hard-to-call dynamics of new product approvals vs. base business erosion.”

Akorn has a large number of ANDAs (generic applications) at the FDA that should help offset a shrinking base. But, analyst Gregg Gilbert noted that "this dynamic could be especially challenging over the next 6–12 months in light of expected significant share erosion for the very high-margin ephedrine line (~19 percent of revenue)."

Analyst's Reaction

Meanwhile, Gilbert cut his 2017 revenue estimate to $1.04 billion (from $1.15 billion) and 2018 revenue to $1.12 billion (from $1.18 billion) to reflect significant erosion for ephedrine. The analyst also trimmed his gross margin assumptions by about 500bp to reflect the mix impact of lower ephedrine sales.

As such, the analyst’s 2017 EPS view comes down to $1.57 (from $2.15) and 2018 EPS to $1.79 (from $2.23).

“For new launches, we model $45 million in 2017 (AKRX expects $30 million–60 million) and $100 million in 2018+. For the base business (ex-ephedrine and new launches), we model 5 percent annual erosion in 2018+,” Gilbert wrote in a note.

At last check, shares of Akorn had fallen 6.86 percent to $22.46. The analyst cut the target price by $4 to $24.

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