It is a rainy, snow flurrying type of Saturday here in New York, the perfect kind of day to put finger to keyboard or pen to paper for us old schoolers, and give the people what they want; an under the radar, oversold, beaten up stock with value in the balance sheet and rich option premiums. "Ding" we have a winner! Take a look at this company and let me know your thoughts.
Akorn, Inc. (AKRX $25.80) develops, manufactures, and markets generic and branded prescription pharmaceuticals, as well as animal and over-the-counter (OTC) consumer health products in the United States and internationally. It operates through two segments, Prescription Pharmaceuticals and Consumer Health. The Prescription Pharmaceuticals segment markets generic and branded ophthalmics, injectables, oral liquids, optics, topical, inhalants, and nasal sprays. This segments generic products include Clobetasol Propionate, a corticosteroid, which is used to treat various skin conditions; Fluticasone Propionate, a corticosteroid used for nasal symptoms of allergic and non-allergic rhinitis conditions; Lidocaine/Prilocaine, a topical anesthetic; Progesterone, which is used to prevent endometrial hyperplasia; Vancomycin, an antibiotic used to treat bacterial infections; and other products. The Consumer Health segment markets branded and private label animal health products, as well as OTC products for the treatment of dry eye under the TheraTears brand name. This segments branded products comprise Akten, a topical ocular anesthetic gel; AzaSite, an antibiotic used to treat bacterial conjunctivitis; Cosopt, Cosopt PF, Betimol, and Zioptan, which are used in the treatment of glaucoma; Nembutal, a sedative; and Xopenex inhalation solution for the treatment or prevention of bronchospasm. It also markets other OTC consumer health products, including Mag-Ox, a diabetes magnesium supplement, and the Zostrix brand of capsaicin products for pain management; and animal health branded and generic products comprising Anased, Tolazine, Yobine, Butorphic, and VetaKet.
Akorn has had some internal problems to deal with over the past couple of years and the SEC had to grant them an extension to avoid being delisted. There were some internal accounting issues from 2014 earnings report that had an additional $35 million in revenues and earnings added on. It seems the clouds are clearing, this link shows their latest report.
Now mind you the stock jumped 35% on this report, and you are probably asking "Hey Harris where were you on March 21st?" Well my crystal ball was in the shop that day, I am sorry to say, however the stock has held that gain and a little more since March 22nd and I am confident they have turned the corner. Let us not forget AKRX is still down over 50% in the past 52 weeks, the high was $57.
Management plans to file its 10-K by the May 9 financial reporting deadline, which should remove recent delisting fears on the stock. In the meantime, Akorn's product portfolio and pipeline should be able to keep the company's performance mostly on track with the streets expectations. Complete response letters from the Food and Drug Administration on approximately 50 of the company's 87 generic drug applications have somewhat slowed its pace of new applications. Akorns investments, including likely higher research and development spending as a percentage of sales, can uphold the earnings forecasts in the more attractive complex generic product category. Akorn's financial position remains relatively strong, ending the year at a net debt/EBITDA ratio of approximately 1.6.
As far as the shorts are concerned I am shocked they are not finished running for the hills. As of March 15 2016 there were still 11 million shares short (13%), that alone could run the stock back over $30 in the near term. Of the 13 Wall Street firms that cover the stock, the lowest target price is $28, and the average mean/median target is around $38.
The real treat is in the covered calls. I could not believe how much premium was dripping out of the September $30 calls. The last trade on Friday April 8th was $3.75 a share (14.5%) So a 6 month trade looks like this. $26 is your buy in price, less the $3.75 for the premium is $22.25. September you lose the stock at $30 in a perfect world and you cash out at 35% return. If you want to stay a little closer to home, the June $30 calls are paying $2.15 (8.2%), your return would be around 26%. You can always split the position and sell June $30 and September $35 calls if you are concerned the stock may run away from you. Akorns lofty premiums can protect your downside in case there are some more bumps along the way. I think this company is ready for another big run, good luck as always.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.