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Akorn executives look to restore 'freedom' after $74M data quality settlement

Akorn Inc. has finally settled a lawsuit regarding allegations that executives withheld information about manufacturing and data quality, which has been a drag on earnings and ultimately doomed a merger with German healthcare company Fresenius SE & Co. KGaA.

"2019 is the year that we get back to operating our company in the best interest of Akorn and all of our stakeholders," said CEO Douglas Boothe during an Aug. 1 second-quarter earnings call. "Importantly, we are taking steps to restore our freedom to operate by addressing our capital structure and resolving litigation overhangs."

The Lake Forest, Ill.-based manufacturer of generic drugs agreed to pay investors $74 million to settle a securities class-action lawsuit that alleged the company's CEO, CFO and chief accounting officer made false or misleading statements and failed to disclose sooner the existence of investigations into data integrity at the company. Akorn and the plaintiffs agreed to settle the lawsuit on July 31.

The events occurred while Akorn was being acquired by Fresenius for $4.3 billion, and when revealed, the deal was terminated and the two companies battled each other in court.

CFO Duane Portwood said the settlement is an important step towards resolving the ongoing uncertainty posed by the litigation, and it will do so in a way that is cash neutral to the company.

Akorn continues to be dogged by manufacturing quality warnings from the U.S. Food and Drug Administration. The most recent arrived in July, flagging "significant violations" of manufacturing processes and data integrity at the company's Somerset, N.J.-based manufacturing facility. The warning letter was related to an inspection that happened in July and August of 2018.

Boothe said Akorn has already submitted a response to the FDA citation at Somerset. The facility is currently in a shutdown to complete enhancements to satisfy the FDA's concerns. He expects the compliance activities to be completed in early 2020. Akorn has asked for a meeting with the FDA to discuss the quality issues, the executive added.

Warnings letters have also been received for violations and quality issues at three other Akorn facilities in Decatur, Ill.; Parsippany, N.J.; and Amityville, N.Y.

"While we still have work to do to complete all the FDA compliance-related improvement activities ... we now have a strong governance model and the right team to ensure sustainable compliance and harmonization of best practices across our global network," Boothe said. "We understand there is much work left to do as we continue to rebuild trust and credibility with all of our stakeholders."

Portwood said Akorn expects $50 million of compliance-related and data integrity assessment expenditures for the year, an increase of $10 million after the Somerset warning letter.

Under the agreement in the securities class action lawsuit, Akorn will pay a combination of up to $30 million in insurance proceeds and issue about 6.5 million common shares, plus 2.5 million to 3 million additional common shares to be issued over five years under an expiry option. Portwood reminded investors during the earnings call that insurance will cover up to $30 million of the payments.

Shares of Akorn jumped to $4.04 as the market opened Aug. 1, up 8.6% from $3.72 at close a day prior. The stock price had dropped back down to $3.64 as of 4:54 p.m. ET.

As for earnings, Akorn reported a net loss of $112 million for the second quarter, compared to a loss of $88 million in the year-ago period. The settlement is included in that net loss value. Net revenue was up 7% for the quarter to $178 million, down 7% from the same period a year ago.

Boothe said that Akorn saw a reduction in back orders and fewer failure to supply penalties, which had a direct impact on performance in the quarter.

Akorn increased its net loss guidance for the full year by $107 million to a range of $273 million to $258 million due to the settlement.

Net revenue guidance for the full year remains at a range of $690 million to $710 million.