Akorn Reports Third Quarter 2009 Financial Results; Launches Two New Products: Ketorolac Tromethamine Ophthalmic and Hydralazine HCL

November 10, 2009 1:01 AM EST

LAKE FOREST, Ill.--(BUSINESS WIRE)-- Akorn, Inc. (NASDAQ: AKRX) a specialty pharmaceutical company, today reported financial results for the third quarter ended September 30, 2009.

Consolidated revenue for the third quarter 2009 was $19.4 million, versus $31.9 million in the third quarter 2008 representing a decrease of approximately 39%. The decrease was due to lower sales of tetanus-diphtheria ("Td") and flu vaccines and overall lower sales to wholesalers as part of an effort to reduce wholesaler inventory levels. Ophthalmic segment revenue decreased by $0.3 million or 6%, primarily due to targeted wholesaler reductions in stocking levels. Hospital drugs and injectables segment revenue decreased $3.1 million or 49%, reflecting the targeted wholesaler reduction in stocking levels. Vaccine revenue for this quarter decreased by $8.5 million versus the prior year period primarily due to stronger third quarter 2008 sales resulting from the introduction of a single dose vial Td vaccine and a flu vaccine supply shortage this quarter. As previously disclosed, the Company does not intend to distribute flu vaccine after the 2009 flu season. Contract manufacturing revenue decreased by $0.6 million or 25%, mainly due to decreased order volumes on ophthalmic contract products.

Consolidated gross profit was $2.7 million or 13.9% of revenue for the third quarter of 2009 as compared to a gross profit of $9.9 million or 31.1% of revenue in the same period a year ago. The decrease in third quarter 2009 gross profit compared to the prior year period is primarily due to lower vaccine sales and an increase in Td vaccine unit cost. Also contributing to the decrease were the lower hospital drug and injectable and ophthalmic sales and a corresponding negative impact on manufacturing capacity utilization.

During the third quarter of 2009, the Company recognized equity earnings totaling $0.5 million from its investment in the Akorn-Strides, LLC joint venture and marketing fee revenue of $0.3 million for its commission on sales of joint venture products. The joint venture recognized net sales of approximately $3.8 million during third quarter 2009. Joint venture sales increased $1.9 million over the second quarter 2009 as a result of a full quarter of sales of injectable Vancomycin, which launched in June 2009.

The Company's net loss was approximately $5.1 million in the third quarter 2009 compared to a net profit of $2.4 million in the third quarter 2008. This reflects the revenue and gross profit decreases and a $1.1 million charge for the change in the fair value of warrants issued in conjunction with the Company's renegotiated revolving line of credit and subordinated debt, offset by a $1.0 million decrease in selling, general and administrative expense compared to the prior year period resulting from targeted cost reductions. Adjusted EBITDA (a non-GAAP financial measure defined below) for third quarter 2009 was a negative $1.6 million compared with a positive $4.4 million Adjusted EBITDA in the prior year period.

Third quarter cash flow from operating activities was a use of $0.7 million. The revolving line of credit ended the quarter with a balance of $7.5 million compared to $5.5 million on June 30, 2009, while the cash balance ended at $2.0 million on September 30, 2009 compared with $1.0 million on June 30, 2009.

Akorn also announces the launch of the generic version of Acular(R) (Ketorolac Tromethamine Ophthalmic), a drug with estimated brand sales of $119 million in 2008 according to IMS data. In addition, the company launched Hydralazine Hydrochloride, an existing generic, with estimated sales of $23 million in 2008 according to IMS data.

Raj Rai, Interim Chief Executive Officer said, "We are very pleased with the progress we have made this quarter. While we are on track to achieve the operational objectives we initiated in the second quarter, we are transitioning the company to generate higher margins from the sale of our core ophthalmic and hospital products and positive cash flow in the fourth quarter."

Rai further stated, "We are pleased to announce the launch of two new generic products, Ketorolac Tromethamine and Hydralazine HCL. These products, in addition to the products launched in the third quarter, will serve as building blocks to the future growth of the company."

About Akorn, Inc.

Akorn, Inc. manufactures and markets sterile specialty pharmaceuticals. Akorn has manufacturing facilities located in Decatur, Illinois and Somerset, New Jersey and markets and distributes an extensive line of hospital and ophthalmic pharmaceuticals. Additional information is available at the Company's website at www.akorn.com.

This press release includes statements that may constitute "forward-looking statements", including with regard to the company's future operations and its earnings expectations. 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, future performance or results of current and anticipated products, 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 all financial information required in accordance with generally accepted accounting principles (GAAP), Akorn is also reporting Adjusted EBITDA, which is a non-GAAP financial measure. Since Adjusted EBITDA is not a GAAP financial measure, it 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 definition of Adjusted EBITDA may not be comparable to similarly titled non-GAAP financial measures reported by other companies. For a full reconciliation of Adjusted EBITDA to net income (loss), please see the attachments to this earnings release.

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

Net income/(loss), plus:

    --  Interest income/(expense), net
    --  Provision for income taxes
    --  Depreciation and amortization
    --  Non-cash expenses, such as share-based compensation expense and changes
        in the fair value of warrants
    --  Non-recurring operating expenses, such as supply agreement termination
        expenses

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).

While the Company uses Adjusted EBITDA in managing and analyzing its business and financial condition and believes it to be useful to investors in their evaluating the Company's performance, Adjusted EBITDA has certain shortcomings. Specifically, Adjusted EBITDA does not take into account the impact of capital expenditures on the liquidity or GAAP 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. Accordingly, the Company's management utilizes comparable GAAP financial measures to evaluate the business in conjunction with Adjusted EBITDA and encourages investors to do likewise.

AKORN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

IN THOUSANDS, EXCEPT SHARE DATA

                                                   September 30,   December 31,

                                                   2009            2008

                                                   (Unaudited)

ASSETS

CURRENT ASSETS

 Cash and cash equivalents                         $ 2,018         $ 1,063

 Trade accounts receivable (less allowance for       11,360          6,529
 doubtful accounts of $2 and $22, respectively)

 Other receivable                                    -               1,221

 Inventories                                         17,409          30,163

 Prepaid expenses and other current assets           485             1,770

       TOTAL CURRENT ASSETS                          31,272          40,746

PROPERTY, PLANT AND EQUIPMENT, NET                   32,169          34,223

OTHER LONG-TERM ASSETS

 Intangibles, net                                    5,033           6,017

 Deferred financing costs                            4,060           272

 Other                                               1,892           1,071

       TOTAL OTHER LONG-TERM ASSETS                  10,985          7,360

       TOTAL ASSETS                                $ 74,426        $ 82,329

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES

 Trade accounts payable                            $ 4,458         $ 8,795

 Accrued compensation                                1,469           1,070

 Accrued expenses and other liabilities              3,856           2,906

 Short-term subordinated debt - related party        -               5,332

 Revolving line of credit - related party            7,509           -

 Warrants liability - related party                  6,654           -

 Supply agreement termination costs                  1,500           -

       TOTAL CURRENT LIABILITIES                     25,446          18,103

LONG-TERM LIABILITIES

 Lease incentive obligations                         1,350           1,484

 Product warranty liability                          1,299           1,299

 Subordinated note - related party                   5,853           -

       TOTAL LONG-TERM LIABILITIES                   8,502           2,783

        TOTAL LIABILITIES                            33,948          20,886

SHAREHOLDERS' EQUITY

 Common stock, no par value -- 150,000,000 shares
 authorized, 90,340,678 and 90,072,662 shares        173,304         170,617
 issued and outstanding at September 30, 2009 and
 December 31, 2008, respectively

 Warrants to acquire common stock                    1,821           2,731

 Accumulated deficit                                 (134,647)       (111,905)

       TOTAL SHAREHOLDERS' EQUITY                    40,478          61,443

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY         $ 74,426        $ 82,329

AKORN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

IN THOUSANDS, EXCEPT PER SHARE DATA

(UNAUDITED)

                               THREE MONTHS ENDED       NINE MONTHS ENDED

                               SEPTEMBER 30,            SEPTEMBER 30,

                               2009        2008         2009         2008

Revenues                       $ 19,371    $ 31,874     $ 57,711     $ 67,562

Cost of revenue                  16,686      21,968       47,997       49,082

 GROSS PROFIT                    2,685       9,906        9,714        18,480

Selling, general and             5,187       6,199        18,016       18,370
administrative expenses

Supply agreement termination     -           -            5,929        -
expenses

Amortization of intangibles      320         339          1,234        1,016

Research and development         1,013       1,143        3,681        4,744
expenses

 TOTAL OPERATING EXPENSES        6,520       7,681        28,860       24,130

 OPERATING INCOME (LOSS)         (3,835 )    2,225        (19,146 )    (5,650 )

Write-off and amortization of    (187   )    -            (1,739  )    -
deferred financing costs

Interest expense, net            (441   )    (295   )     (1,095  )    (579   )

Equity in earnings of            484         447          672          447
unconsolidated joint venture

Change in fair value of          (1,122 )    -            (1,432  )    -
warrants liability

Other income (expense)           -           24           -            (177   )

 INCOME (LOSS) BEFORE INCOME     (5,101 )    2,401        (22,740 )    (5,959 )
 TAXES

Income tax provision             -           -            2            3

 NET INCOME (LOSS)             $ (5,101 )  $ 2,401      $ (22,742 )  $ (5,962 )

NET INCOME (LOSS) PER SHARE:

 BASIC                         $ (0.06  )  $ 0.03       $ (0.25   )  $ (0.07  )

 DILUTED                       $ (0.06  )  $ 0.03       $ (0.25   )  $ (0.07  )

SHARES USED IN COMPUTING NET
INCOME (LOSS) PER SHARE:

 BASIC                           90,303      89,250       90,209       89,169

 DILUTED                         90,303      90,065       90,209       89,169

AKORN, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

IN THOUSANDS (UNAUDITED)

                               THREE MONTHS ENDED       NINE MONTHS ENDED

                               SEPTEMBER 30,            SEPTEMBER 30,

                               2009        2008         2009         2008

OPERATING ACTIVITIES

Net income (loss)              $ (5,101 )  $ 2,401      $ (22,742 )  $ (5,962  )

Adjustments to reconcile net
income (loss) to net cash
used in operating activities:

 Depreciation and                1,270       1,126        4,118        3,348
 amortization

 Write-off and amortization      187         -            1,739        -
 of deferred financing fees

 Non-cash stock compensation     432         572          1,675        1,821
 expense

 Non-cash supply agreement       -           -            1,051        -
 termination expense

 Non-cash change in fair         1,122       -            1,432        -
 value of warrants liability

 Gain on disposal of assets      -           (25    )     -            (25     )

 Equity in earnings of           (484   )    (447   )     (672    )    (447    )
 unconsolidated joint venture

 Changes in operating assets
 and liabilities:

  Trade accounts receivable      (2,316 )    (5,631 )     (4,831  )    (11,620 )

  Inventories                    7,198       (3,058 )     12,754       2,662

  Prepaid expenses and other     654         112          1,228        252
  current assets

  Other long-term assets         -           -            -            1,246

  Supply agreement               (3,250 )    -            1,500        -
  termination liabilities

  Trade accounts payable         (781   )    2,988        (4,337  )    (6,651  )

  Accrued expenses and other     332         719          1,736        1,081
  liabilities

NET CASH USED IN OPERATING       (737   )    (1,243 )     (5,349  )    (14,295 )
ACTIVITIES

INVESTING ACTIVITIES

Purchases of property, plant     (280   )    (1,322 )     (922    )    (2,742  )
and equipment

Purchase of product licensing    -           -            (250    )    -
rights

Proceeds from sale of fixed      -           74           -            74
assets

NET CASH USED IN INVESTING       (280   )    (1,248 )     (1,172  )    (2,668  )
ACTIVITIES

FINANCING ACTIVITIES

Repayment of long-term debt      -           -            -            (208    )

Restricted cash for revolving    -           -            -            (2,050  )
credit agreement

Loan origination fees -
revolving line of credit &       (43    )    -            (1,356  )    -
subordinated note

Proceeds from (repayments of)    2,000       (3,931 )     7,509        5,727
line of credit

Proceeds from warrants           -           -            -            37
exercised

Proceeds from subordinated       -           5,000        -            5,000
note

Proceeds under stock option      59          143          1,323        599
and stock purchase plans

NET CASH PROVIDED BY             2,016       1,212        7,476        9,105
FINANCING ACTIVITIES

INCREASE (DECREASE) IN CASH      999         (1,279 )     955          (7,858  )
AND CASH EQUIVALENTS

Cash and cash equivalents at     1,019       1,369        1,063        7,948
beginning of period

CASH AND CASH EQUIVALENTS AT   $ 2,018     $ 90         $ 2,018      $ 90
END OF PERIOD

AKORN, INC.

RECONCILIATION OF NET INCOME (LOSS) TO NON-GAAP ADJUSTED EBITDA

IN THOUSANDS (UNAUDITED)

                                   THREE MONTHS ENDED    NINE MONTHS ENDED

                                   SEPTEMBER 30,         SEPTEMBER 30,

                                   2009        2008      2009         2008

NET INCOME (LOSS)                  $ (5,101 )  $ 2,401   $ (22,742 )  $ (5,962 )

ADJUSTMENTS TO ARRIVE AT EBITDA:

 Depreciation and amortization       1,270       1,126     4,118        3,348

 Interest expense, net               441         295       1,095        579

 Income tax provision                -           -         2            3

EBITDA                             $ (3,390 )  $ 3,822   $ (17,527 )  $ (2,032 )

NON-RECURRING & NON-CASH
OPERATING EXPENSES:

 Non-cash stock compensation         432         572       1,675        1,821
 expense

 Change in fair value of warrants    1,122       -         1,432        -
 liability

 Write-off and amortization of       187         -         1,739        -
 deferred financing costs

 Supply agreement termination        -           -         5,929        -
 expense

ADJUSTED EBITDA                    $ (1,649 )  $ 4,394   $ (6,752  )  $ (211   )

    Source: Akorn, Inc.

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