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AKRX > SEC Filings for AKRX > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for AKORN INC

Form 10-Q for AKORN INC


12-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE RESULTS

Certain statements in this Form 10-Q are forward-looking in nature and are intended to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act. These statements relate to future events or future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These statements are only predictions.

You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance or achievements. Factors that could materially affect our actual results, levels of activity, performance or achievements include, without limitation, those detailed under the caption "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission ("SEC") on March 1, 2013, and include the following items:

? Our ability to comply with all of the requirements of the U.S. Food and Drug Administration ("FDA"), including current Good Manufacturing Practices regulations;

? Our ability to obtain additional funding or financing to operate and grow our business;

? The effects of federal, state and other governmental regulation on our business;

? Our ability to obtain and maintain regulatory approvals for our products;

? Our success in developing, manufacturing, acquiring and marketing new products;

? Our ability to generate cash flow from operations sufficient to meet our working capital requirements;

? The success of our strategic partnerships for the development and marketing of new products;

? Our ability to bring new products to market and the effects of sales of such products on our financial results;

? Our ability to successfully integrate acquired businesses and products;

? The effects of competition from generic pharmaceuticals and from other pharmaceutical companies;

? Availability of raw materials needed to produce our products; and

? Other factors referred to in this Form 10-Q, our Form 10-K and our other SEC filings.

If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. Any forward-looking statement you read in the following Management's Discussion and Analysis of Financial Condition and Results of Operations reflects our current views with respect to future events and is subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, growth strategy, and liquidity. We assume no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise.


RESULTS OF OPERATIONS

The following table sets forth the amounts and percentages of total revenue for
certain items from our Condensed Consolidated Statements of Comprehensive Income
and our segment reporting information for the three and nine month periods ended
September 30, 2013 and 2012 (dollar amounts in thousands):

                                  Three months ended September 30,                          Nine months ended September 30,
                                  2013                        2012                         2013                         2012
                                       % of                        % of                         % of                         % of
                         Amount       Revenue        Amount       Revenue        Amount        Revenue        Amount        Revenue
Revenues:
   Hospital drugs &
injectables             $ 47,861          58.5 %    $ 34,675          49.8 %    $ 130,894          56.2 %    $  92,335          50.0 %
  Ophthalmic              29,421          35.9 %      28,153          40.4 %       83,616          35.9 %       75,114          40.7 %
  Contract services        4,610           5.6 %       6,806           9.8 %       18,248           7.9 %       17,189           9.3 %
Total revenues            81,892         100.0 %      69,634         100.0 %      232,758         100.0 %      184,638         100.0 %
  Gross profit:
  Hospital drugs &
injectables               27,759          58.0 %      22,278          64.3 %       75,669          57.8 %       58,132          63.0 %
  Ophthalmic              15,578          52.9 %      16,637          59.1 %       45,839          54.8 %       43,869          58.4 %
  Contract services          360           7.8 %       1,178          17.3 %        3,426          18.8 %        4,720          27.5 %
Total gross profit        43,697          53.4 %      40,093          57.6 %      124,934          53.7 %      106,721          57.8 %
Operating expenses:
  SG&A expenses           13,645          16.7 %      12,346          17.7 %       39,093          16.8 %       33,625          18.2 %
  Acquisition-related
costs                      1,459           1.8 %         511           0.8 %        1,978           0.9 %        9,155           5.0 %
  R&D expenses             4,837           5.9 %       2,874           4.1 %       15,857           6.8 %        9,824           5.3 %
  Amortization &
write-down of
intangible assets          1,568           1.9 %       1,759           2.5 %        4,978           2.1 %        5,076           2.7 %
Operating income        $ 22,188          27.1 %    $ 22,603          32.5 %    $  63,028          27.1 %    $  49,041          26.6 %
Other expense, net        (2,206 )        (2.7 %)     (2,380 )        (3.4 %)      (6,807 )        (3.0 %)      (7,205 )        (3.9 %)
Income before income
taxes                     19,982          24.4 %      20,223          29.1 %       56,221          24.1 %       41,836          22.7 %
Income tax provision       7,777           9.5 %       6,470           9.3 %       20,537           8.8 %       15,269           8.3 %
Net income              $ 12,205          14.9 %    $ 13,753          19.8 %    $  35,684          15.3 %    $  26,567          14.4 %

QUARTER ENDED SEPTEMBER 30, 2013 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2012

Our consolidated revenue was $81.9 million during the quarter ended September 30, 2013, an increase of $12.3 million, or 17.6%, over our revenue of $69.6 million for the prior year quarter ended September 30, 2012. The increase in revenue was primarily the result of our launch of new and revived products, along with increases in sales volume for existing products, partially offset by decreases in average sales price ("ASP") for existing products and reduced sales from our subsidiary in India, Akorn India Private Limited ("AIPL"). Of the $12.3 million increase in revenue, a $12.1 million increase was related to products launched or revived after June 30, 2012, and a $6.2 million increase was related to sales volume increases on existing products. These increases were partially offset by a $3.4 million decrease attributable to ASP changes on existing products and a $2.6 million decline in sales from AIPL.

Hospital drugs and injectables segment revenues increased by $13.2 million, or 38.0%, over the prior year quarter, with newly-acquired, newly-approved and revived products accounting for $10.9 million of the increase. Sales of existing products generated a $2.3 million increase in sales, and sales volume increases accounted for a $4.7 million increase, more than offsetting a $2.4 million decrease related to changes in ASP. Ophthalmic segment revenue increased by $1.3 million, or 4.5%, over the prior year quarter, with acquisition, new product launches and product revivals accounting for the increase. Sales volume increases on existing ophthalmic products accounted for a $1.0 million increase, offset by a $1.0 million decrease related to ASP changes. Contract services revenue decreased by $2.2 million, or 32.3%, principally due to a $2.6 million decline attributable to lower sales generated by AIPL.

Consolidated gross profit for the quarter ended September 30, 2013 was $43.7 million, or 53.4% of revenue, compared to $40.1 million, or 57.6% of revenue, in the quarter ended September 30, 2012. Gross profit increased in dollars as a result of our increase in sales volume in the current year quarter. The decline in margin was due to increased sales of products that have royalty or profit sharing arrangements with external development partners, particularly within the hospital drugs and injectables segment, the impact of lower margin business generated by our Indian subsidiary, pricing pressures for certain of our products, and fewer opportunities in the current year period related to drug shortages. The gross profit margin from our hospital drugs and injectables segment decreased to 58.0% in the quarter ended September 30, 2013 from 64.3% in the corresponding prior year quarter. The decrease was primarily due to increased sales of lower-margin products, including new partnered products with royalty arrangements, and fewer opportunities to supply drugs experiencing shortages compared to the prior year period. The ophthalmic segment gross profit margin was 52.9% in the quarter ended September 30, 2013, compared to 59.1% in the corresponding prior year quarter. This decline in margin was due to a combination of factors, including increased manufacturing costs and the introduction of certain new products with lower profit margins. The contract segment gross profit margin was 7.8% in the quarter ended September 30, 2013 compared to 17.3% in the quarter ended September 30, 2012. This decline was related to lower revenue from AIPL, combined with higher operating costs related to the pursuit of U.S. FDA site approval.


Selling, general and administrative ("SG&A") expenses were $13.6 million, or 16.7% of revenue, in the quarter ended September 30, 2013, compared to $12.3 million, or 17.7% of revenues, in the prior year quarter. This $1.3 million increase over the prior year quarter included a $1.1 million increase in outside legal costs, principally related to litigation work and the settlement of an outstanding case. Other significant changes from prior years included FDA fees, which increased by $0.8 million, and wages and related costs, which decreased by $1.0 million due to a variety of factors, including lower stock-based compensation expense, employee benefits expense and lower employee bonus accruals compared to the prior year quarter.

We incurred $1.5 million in acquisition-related costs in the quarter ended September 30, 2013 related to the anticipated acquisition of Hi-Tech Pharmacal Co, Inc., which is expected to close in the first quarter of 2014. In the quarter ended September 30, 2012, we incurred $0.5 million in acquisition-related expense related to our acquisition of selected assets of Kilitch Drugs (India) Limited on February 28, 2012 (the "Kilitch Acquisition").

Research and development ("R&D") expense was $4.8 million in the quarter ended September 30, 2013 compared to $2.9 million in the prior year quarter. This increase was related to expansion of both our in-house R&D staff and activities, and our partnerships with outside development partners.

Amortization of intangible assets was $1.6 million in the quarter ended September 30, 2013 compared to $1.8 million in the prior year quarter. This small decline was due to certain intangibles assets becoming fully amortized.

In the quarter ended September 30, 2013, we recognized non-operating expenses totaling $2.2 million compared to $2.4 million in the prior year quarter. In each period, the expense primarily consisted on cash and non-cash interest related to our 3.5% convertible senior notes due 2016.

For the quarter ended September 30 2013, we recorded an income tax provision of $7.8 million reflecting an effective income tax rate of approximately 38.9%. In the quarter ended September 30, 2012, our income tax provision was $6.5 million reflecting an effective tax provision rate of 32.0%. The increase in our effective rate in the current year quarter was primarily due to the impact of acquisition-related costs incurred during the quarter that will not be tax deductible, and the fact that the prior year's tax rate benefited from a discrete favorable adjustment related to R&D tax credits.

We reported net income of $12.2 million for the quarter ended September 30, 2013, equal to 14.9% of revenues, compared to $13.8 million for the quarter ended September 30, 2012, equaling 19.8% of revenues. This decrease in net income was principally attributable to lower operating income as a result of higher acquisition-related costs and the increase in our effective income tax rate in the current year quarter as compared to the prior year period.

NINE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2012

For the nine months ended September 30, 2013, consolidated revenue was $232.8 million, representing an increase of $48.1 million, or 26.1%, over the prior year period's revenue of $184.6 million. Of the $48.1 million increase, $42.2 million was attributable to sales of new and revived products and $7.0 million was due to sales volume increases on existing core products. These sales gains were partially offset by an AIPL sales decline of $0.8 million and a $0.3 million decline attributable to changes in ASP on existing products.

Revenue from the hospital drugs and injectables segment was $130.9 million for the nine months ended September 30, 2013, an increase of $38.6 million, or 41.8%, over the nine months ended September 30, 2012. The increase in revenue was due to with a $36.9 million increase in sales of new and revived products and a $2.3 million increase related to higher ASPs for existing products, partially offset by a $0.6 million decline in sales volume of existing products. Ophthalmic segment revenue was $83.6 million for the nine months ended September 30, 2013, an increase of $8.5 million, or 11.3%, over the prior year period. Of the $8.5 million revenue increase, $5.2 million was due to new and revived products and $5.9 million was due to higher unit sales volume of existing products, partially offset by a $2.6 million reduction in ASPs for existing products. Contract services revenue was $18.2 million, an increase of $1.1 million over the prior year period, due to a $1.8 million increase in domestic contract manufacturing partially offset by a $0.7 million decline in manufacturing at our plant in India.

Consolidated gross profit for the nine months ended September 30, 2013 was $124.9 million, or 53.7% of revenue, compared to $106.7 million, or 57.8% of revenue in the prior year period ended September 30, 2012. The dollar increase in gross profit was primarily related to the increase in revenue. The decrease in gross profit margin was due to lower margins on several newly launched products that have royalty or profit sharing arrangements with external development partners, particularly within the hospital drugs and injectables segment, and the impact of lower margin business generated by our Indian subsidiary. The gross profit margin from our hospital drugs and injectables segment decreased to 57.8% for the nine months ended September 30, 2013 compared to 63.0% in the comparable prior year period due primarily to the increase in royalties and profit sharing payments referenced above. The ophthalmic segment gross profit margin was 54.8% in the nine months ended September 30, 2013 compared to 58.4% in the prior year period. This decline in margin was primarily due to a shift in product mix and pricing pressures for certain products, and the launch of a new product with a lower margin due to a profit-sharing arrangement. The contract segment gross profit margin was 18.8% in the nine months ended September 30, 2013 compared to 27.5% in the corresponding prior year period. This decline was primarily related to lower margin contract services business of AIPL, combined with increased operating costs related to the pursuit of U.S. FDA approval for its manufacturing plant.


Selling, general and administrative ("SG&A") expenses were $39.1 million, or 16.8% of revenues, in the nine months ended September 30, 2013 compared to $33.6 million, or 18.2% of revenues, in the corresponding prior year period. The $5.5 million increase in SG&A expenses was due to a number of factors, including an increase in employee headcount, particularly within our sales force, and increases in legal expenses, FDA fees and accounting and audit expenses.

Acquisition-related expenses in the nine months ended September 30, 2013 were $2.0 million compared to $9.2 million in the corresponding prior year period. The current year expenses consisted of $1.5 million related to the announced Hi-Tech acquisition, and $0.5 million related to the Kilitch acquisition. The prior year expense of $9.2 million included $6.7 million in fees paid and payable to the former owners of the Kilitch business for various services provided to Akorn, and $1.6 million in stamp duties for transfer of ownership of the land and buildings in Paonta Sahib, India to Akorn.

R&D expense was $15.9 million in the nine months ended September 30, 2013, an increase of $6.0 million, or 61.4%, over the prior year. This increase was related to greater R&D activity in the current year, including expansion of our R&D staff size and capabilities as we moved into a new, larger R&D facility early in 2013, and increased activities with outside development partners.

Amortization of intangible assets was $5.0 million in the nine months ended September 30, 2013 compared to $5.1 million in the nine months ended September 30, 2012. The decrease was due to declines in amortization of older intangible assets that became fully amortized, which more than offset the increase related to having nine months amortization of the AIPL intangible assets in the current year period versus seven months in the prior year period.

We recognized non-operating expenses of $6.8 million in the nine months ended September 30, 2013, compared to $7.2 million in the corresponding prior year period. These expenses included cash and non-cash interest of $6.4 million and $6.6 million in the current year and prior year periods, respectively, nearly all of which was related to our 3.5% convertible senior notes due 2016. Also included in each year was $0.6 million in amortization of deferred financing costs.

For the nine months ended September 30, 2013, our income tax provision was $20.5 million, calculated on an effective tax provision rate of 36.5%. In the prior year period, we recorded a $15.3 million provision for income taxes, which also reflects an effective tax rate of 36.5%. The provision rate in each period benefited slightly from prior period R&D tax credits, and was negatively impact by non-deductible acquisition-related expenses.

We reported net income of $35.7 million in the nine months ended September 30, 2013, representing a 15.3% margin on revenues. In the prior year period ended September 30, 2012, we reported net income of $26.6 million, or 14.4% of revenue. The current year increase in net income was primarily due to our revenue growth and a reduction in acquisition-related costs.

FINANCIAL CONDITION AND LIQUIDITY

Overview

During the nine month period ended September 30, 2013, we generated $42.4 million in cash flow from operating activities. This operating cash flow was primarily the result of our net income of $35.7 million, non-cash expenses of $19.2 million, and a $2.9 million increase in trade accounts payable and other accrued expenses, partially offset by a $10.9 million increase in trade receivables, and a $4.6 million increase in inventory. We used $8.4 million in cash for investing activities during the nine month period ended September 30, 2013, including $7.9 million used to acquire property, plant and equipment and $0.5 million invested in various drug product rights. Financing activities generated $1.1 million in cash flow during the nine months ended September 30, 2013, of which $2.4 million was from employee stock option exercise proceeds and participation in the ESPP, and $1.2 million was from excess tax benefits realized from stock-based compensation awards, partially offset by $2.5 million in debt financing costs that were primarily related to the process of securing a $600 million term loan for the Hi-Tech acquisition.

During the nine month period ended September 30, 2012, we generated $21.3 million in cash from operations. This operating cash flow was primarily due to net income of $26.6 million, non-cash expenses of $17.5 million and an $11.5 million increase in accrued expenses and other liabilities, partially offset by a $17.2 million increase in trade receivables, and a $13.1 million increase in inventory. We used $70.0 million in cash in investing activities during the nine month period ended September 30, 2012, consisting of $55.2 million used to complete the Kilitch Acquisition, and $14.8 million used to acquire property, plant and equipment, primarily related to expenditures for the expansion of our Somerset, New Jersey manufacturing plant. Financing activities generated $3.4 million in cash flow, of which $2.4 million was from excess tax benefits from stock-based compensation and $1.0 million was related to proceeds from the exercise of stock options and employee participation in our ESPP.


As of September 30, 2013, we had no outstanding loans under our credit facility with Bank of America N.A. ("B of A") and one outstanding letter of credit in the amount of $0.5 million. As of September 30, 2013, the total loan commitment under our credit facility with B of A was $20.0 million and our availability was $19.1 million. On October 4, 2013, we entered into an amendment to our credit facility agreement with B of A which increased the total loan commitment to $60 million.

Liquidity and Capital Needs

On August 26, 2013, we entered into an Agreement and Plan of Merger to acquire Hi-Tech Pharmacal Co., Inc. ("Hi-Tech") for a purchase price of approximately $640 million in cash, or $540 million net of Hi-Tech's projected cash reserves at closing. Concurrent with negotiating this acquisition, we obtained a loan commitment from JP Morgan Chase Bank, N.A. ("JP Morgan") for a $600 million term loan to finance the acquisition (the "JPM Term Loan") and a $75 million revolving credit facility (the "JPM Revolver") to fund working capital needs and other corporate purposes. The JPM Term Loan is being syndicated to a number of investors. As currently contemplated, the JPM Term Loan will mature in seven (7) years and accrue interest at a variable margin over either prime or LIBOR. Full or partial prepayments of principal will be allowed. The JPM Revolver will carry a term of five years and a total loan commitment of $75 million, or up to $150 million at our election, if oversubscribed by participating lenders. Our $60 million revolving Loan and Security Agreement with Bank of America, N.A. (the "B of A Credit Agreement"), as described below, will be terminated when we enter into a final JPM Revolver agreement. (For full details regarding JP Morgan's commitments to us regarding the JPM Term Loan and JPM Revolver, please refer to Exhibit 4 to the Schedule 13D we filed with the SEC on September 5, 2013.)

We anticipate entering into a final JPM Term Loan agreement during the quarter ending December 31, 2013, after JP Morgan completes the syndication. The loan itself will take place upon closing the Hi-Tech Acquisition. We believe that the $600 million term loan and the approximately $100 million of cash reserves expected to be on Hi-Tech's balance sheet at closing will be sufficient to finance the Hi-Tech acquisition and all applicable deal-related costs.

We require certain capital resources in order to maintain and expand our business. These capital expenditures may include substantial projects undertaken to upgrade, expand and improve our manufacturing facilities, both in the U.S. and India. As of September 30, 2013, we had $75.6 million in cash and cash equivalents, of which $72.6 million was in U.S. accounts and $3.0 million was in the accounts of our subsidiary in India. We believe that our cash reserves, operating cash flows, the committed Hi-Tech Term Loan and availability under our credit facilities will be sufficient to finance the Hi-Tech acquisition and meet our cash needs for the foreseeable future.

We continue to evaluate opportunities to grow and expand our business through the acquisition of new businesses, manufacturing facilities, or pharmaceutical product rights. Such acquisitions may require us to obtain additional sources of capital. We cannot predict the amount of capital that may be required to complete such acquisitions, and there is no assurance that sufficient financing for these activities would be available on terms acceptable to us, if at all.

Convertible Notes

On June 1, 2011, we completed an offering of $120.0 million aggregate principal amount of 3.50% Convertible Senior Notes due 2016 (the "Notes"). Please refer to Note 8 - Financing Arrangements for additional information about the Notes.

Credit Facility

On October 7, 2011, Akorn, Inc. and its domestic subsidiaries entered into the B of A Credit Agreement with Bank of America, N.A. and other financial institutions through which we obtained a $20.0 million revolving line of credit. On October 4, 2013, the parties entered into an amendment increasing the total loan commitment under the revolving credit agreement to $60.0 million. Please refer to Note 8 - Financing Arrangements for additional information about the B of A Credit Agreement.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our significant accounting policies is included in Item 1. Financial Statements, Note 2 - Summary of Significant Accounting Policies, in our Annual Report on Form 10-K for the year ended December 31, 2012. Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2012.

The Company consolidates the financial statements of its foreign subsidiary in accordance with ASC 830, Foreign Currency Matters, under which the statement of operations amounts are translated from Indian rupees ("INR") to U.S. dollars ("USD") at the average exchange rate during the applicable period, while balance . . .

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