Akorn is a specialty generic pharmaceutical company. We like Akorn for multiple reasons. First, despite being in the generic segment, it focuses on products that are more difficult to manufacture compared to other drugs. Therefore, Akorn manufacturing capabilities insulates the company from low price competition.
Second, the company is rapidly growing and is executing its strategy very efficiently. The slide below shows how quickly revenues and earnings increased over the last few years.
Valuation
From 2010 to 2015, Akorn traded at a P/E multiple ranging from 27.1 in 2011 to 95.3 in 2014, for an average P/E of 46 (source: 4-Traders). It now trades at 13.4X 2016 earnings and 12.4X 2017 earnings. We run three valuation models:
- Our valuation model, assuming a growth of 6% and a WACC of 10%, provides a fair value of $39 per share (almost double the current levels).
- However, an “abnormal earnings growth” model offers a valuation just below $20.
Considering the current downtrend, we suggest starting a 50% position at current price and then increase the position if the stock goes down to around $16 to $18.
Conclusion
We believe that the pharmaceutical sector has received too much negative attention. Despite the risks, a few companies offer good entry opportunities. Today we have analysed Akorn. The company is interesting and valued conservatively.
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