Akorn's consolidated revenue for fourth quarter 2013 increases 19% to $85 million

Akorn, Inc. (NASDAQ: AKRX), a niche generic pharmaceutical company, today reported financial results for the fourth quarter and year-ended December 31, 2013.

Raj Rai, Chief Executive Officer commented, "2013 was a pivotal year for Akorn. As a result of investment in our sales infrastructure and new product launches, we grew our business by over 20% year-over-year. In addition, we announced the planned acquisition of Hi-Tech and completed acquisitions that expanded our branded ophthalmic portfolio. We expect 2014 to be a transformational year as we evolve into a well diversified company, with a variety of niche dosage forms, and a commercial platform to launch novel ophthalmic formulations through partnerships and acquisitions."

2013 Key Highlights and Accomplishments

• Achieved record year-end consolidated revenue of $317.7 million, an increase of 24% over the prior year.
• Generated record operating cash flow of $57.3 million.
• Announced the planned acquisition of Hi-Tech Pharmacal (Hi-Tech) to build scale, breadth of products and dosage forms, and enhance the diversification of the Company's product portfolio.
• Filed 12 ANDAs and completed the development on an additional 11 ANDAs with a combined annual IMS market size of approximately $2.3 billion.
• Completed the acquisition of the U.S. rights to three branded ophthalmic products from Merck; AzaSite®, COSOPT® and COSOPT® PF.

Financial Results for the Quarter Ended December 31, 2013

Consolidated revenue for the fourth quarter of 2013 was $85.0 million, which was an increase of 19% over the fourth quarter 2012 consolidated revenue of $71.5 million. The increase in consolidated revenue was largely driven by the sale of products launched late in the fourth quarter of 2012 and at the beginning of 2013. Consolidated gross margin for the fourth quarter of 2013 was 55.3% compared to 58.7% in the comparable prior year period. The decrease in the Company's overall gross profit margin was due to a significant percentage of Akorn's revenue growth coming from products that were contract manufactured, some of which also contain profit sharing arrangements with development partners. Pricing pressure for various products was also a contributing factor to the overall decrease in gross profit margin.

Net income for the fourth quarter of 2013 was $16.7 million, or $0.14 per diluted share, compared to net income of $8.8 million, or $0.08 per diluted share, in the prior year quarter. Non-GAAP adjusted net income for the fourth quarter of 2013 was $16.1 million, or $0.14 per diluted share, compared to non-GAAP adjusted net income of $14.6 million, or $0.13 per diluted share, in the prior year quarter.

Financial Results for the Year Ended December 31, 2013

Consolidated revenue for the year 2013 was $317.7 million, an increase of by 24% over the prior year consolidated revenue of $256.2 million. The increase in consolidated revenue was driven by increased sales of new and revived products which accounted for approximately $48.5 million of the increase. Sales of existing products accounted for $12.0 million of the increase, and business and product acquisitions accounted for the remainder.

Consolidated gross margin for 2013 was 54.1% compared to 58.0% in the prior year. The decrease in the Company's overall gross profit margin was due to a significant percentage of Akorn's revenue growth coming from products that were contract manufactured, some of which also contain profit sharing arrangements with development partners. Pricing pressure for various products was also a contributing factor to the overall decrease in gross profit margin.

Net income for 2013 was $52.4 million, or $0.46 per diluted share, compared to net income of $35.4 million, or $0.32 per diluted share, in the prior year. Non-GAAP adjusted net income for 2013 was $62.5 million, or $0.55 per diluted share, compared to non-GAAP adjusted net income of $57.6 million, or $0.52 per diluted share, in the prior year.

The Company generated $57.3 million in cash flow from operating activities in 2013 and ended the year with $34.2 million in cash and cash equivalents after funding the fourth quarter acquisition of branded ophthalmic products from Merck.

Filing Extension for Form 10-K

Separately, today the Company filed a Form 12b-25, Notification of Late Filing with the Securities and Exchange Commission that allows the Company to extend the deadline to file its Form 10-K for the year-ended December 31, 2013. The Company has not completed its testing and assessment of the effectiveness of its internal control over financial reporting due in part to identified control deficiencies related to completeness and accuracy of underlying data used in the determination of certain significant estimates and accounting transactions as well as the existence of inadequate segregation of duties. The Company believes that these deficiencies, or combination of deficiencies, represent material weaknesses in its internal control over financial reporting. There is a possibility that upon completion of its testing and assessment of the effectiveness of internal controls over financial reporting, the Company may determine that there are additional material weaknesses. The Company expects to file within the 15-day extension period and expects final financial results will be consistent with those reported in this release.

2014 Outlook

The following table provides Akorn's 2014 guidance, which assumes that the Company's acquisition of Hi-Tech closes on April 1, 2014. Further, while Akorn has 65 ANDAs on file with the FDA, this guidance does not consider the impact of new product approvals given the timing uncertainty of the regulatory approval process.

2014 Outlook Assumptions

• Assumes no generic is launched for Nembutal.
• Revenue has been reduced for products the Company anticipates divesting as a result of the Hi-Tech acquisition.
• Cost synergies resulting 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.
• The Company anticipates that it will incur approximately $15 million in one-time acquisition-related expenses to close the Hi-Tech transaction and realize synergies. These expenses are reflected as an add-back to adjusted net income per diluted share in the GAAP to non-GAAP reconciliation later in this release.
• A significant portion of the 2013 planned capital spending related to the expansion of our Indian facilities has rolled into the 2014 Outlook. In addition, the Company is investing in modernization projects at our Decatur, Illinois sterile injectables facility. Finally, the 2014 Outlook also includes capital expenditures anticipated for Hi-Tech.
• Fully diluted share count is based on most recent share price.

Frequently Asked Questions

Q: Will Akorn be able to maintain 2013 gross margins of approximately 54% in 2014?

A: Overall gross margins for 2014 are expected to be in the range of 52-54% as a result of the full year impact of partnered products launched in early 2013 and the addition of Hi-Tech's portfolio at an estimated 48% gross margin.

Q: Are there margin improvement opportunities in the future?

A: Yes, longer-term margins are expected to improve. The vast majority of Akorn's active pipeline products will be manufactured by Akorn with no partnering or shared economics and as a result are expected to have higher margins than the products which contributed to growth in 2013. Additionally, the Company expects improvement in the margins on its more competitive products once it achieves US FDA approval of the Indian manufacturing site.

Q: When will the Akorn India facilities be US FDA approved?

A: In February 2014, the Company filed its first product out of one of Akorn India's four facilities. Because this is a site transfer of an approved NDA product, the Company anticipates the FDA will inspect the facility in 2014. By that time, Akorn plans to have products filed out of each of the remaining manufacturing facilities.

Q: Why is Akorn projecting a substantial increase in R&D costs?

A: There are three primary factors contributing to the increased costs: 1) the Generic Drug User Fee Act ("GDUFA") fees associated with the projected 35-40 abbreviated new drug application ("ANDA") filings for 2014; 2) the cost of bio-equivalence ("BE") studies associated with high-value products; and 3) the increased internal R&D costs resulting from the expansion of Akorn's R&D infrastructure, the costs associated with product development and global filings out of Akorn India, and the inclusion of Hi-Tech in the 2014 Outlook. The Company views ongoing investment in R&D as a key to its long-term growth objectives.

Q: Can you provide some guidance on new product approvals?

A: It has become increasingly difficult to predict timing of new approvals given the implementation of GDUFA and the growing backlog of filings at the FDA.

The following table shows the number and total IMS market size of our ANDA filings based on the age of the filing (in months):

* The IMS market size, shown in millions, is based on the IMS data for the trailing 12 months ended December 31, 2013, and excludes any trade and customary allowances and discounts. The IMS market size is not a forecast of our future sales.

Q: What is the impact of GDUFA on the approval timelines for your pending filings?

A: Following the implementation of GDUFA, the FDA modified the ANDA review process. In the past, before GDUFA implementation, the Company used to receive regular feedback from each discipline in the form of individual deficiencies. This regular feedback allowed the Company to stay on top of the status of the review and resolve any issues in a dynamic and timely fashion. Now, for all pending filings including those filed pre-GDUFA, the feedback is less frequent, and comes in the form of a Complete Response Letter which is not issued until the FDA has collected the feedback from each discipline. It is our expectation that this new Complete Response Letter process has significantly lengthened the time to approval.

In 2013, Akorn submitted responses to six Complete Response Letters received from the FDA. As of now, the Company has an additional 14 CRLs that will be responded to shortly.