Akorn has experience dealing with FDA warnings. The following is the company's mention on its latest 10-K of an October 2000 warning letter:
FDA Warning Letter. The FDA issued a Warning Letter to us in October 2000 following a routine inspection of our Decatur manufacturing facility. Since 2000, and in response to the violations cited by the FDA, we implemented a comprehensive systematic compliance plan at our Decatur manufacturing facility. We maintained regular communications with the FDA and provided periodic progress reports. During this time, the FDA initiated no enforcement action. On December 13, 2005, the FDA notified us that we had satisfactorily implemented corrective actions and the FDA had determined that our Decatur manufacturing facility was in substantial compliance with cGMP regulations. Consequently, the restrictions of the Warning Letter were removed and we became eligible for new product approvals for products manufactured at our Decatur manufacturing facility. Several such product approvals were received in 2006. While under the Warning Letter restrictions from 2000 to 2005, our inability to fully utilize the capabilities of the Decatur manufacturing facility had a material adverse effect on our business, financial condition and results of operations.
The company's 2001 10-K filing states that the letter in 2000 was focused on documentation issues. Even if AKRX is no stranger to FDA warning letters, the company has two manufacturing facilities (one in Decatur, Illinois, the other in Somerset, New Jersey), and its growth is dependent on the plants' ability to timely develop products. In short, an FDA warning letter can be considered somewhat of a setback.
In its statement, the company mentioned that the impact of such notice will be approximately US$2 million in 1H '07. For a company with estimated 2007 sales in the range of US$80 - 100 million, this represents an approximate 2% impact on sales.
Is this significant enough to worry? Well, it so happens that the FDA warning also mentions that it may withhold approval of pending new drug applications. As of December 31, 2006, Akorn had spent more than US$22 million in expanding the Decatur plant, to add capacity to provide lyophilization manufacturing services. The company mentions in its 10-K that it was working toward the development of an internal ANDA lyophilized product pipeline and expected manufacturing capabilities for these products to be in place by mid-2007. There is no doubt in my mind that management will be able to sort this out promptly and that it will be able to find a contract manufacturer for its products. What does worry me is that the letter cited "significant deviations from current Good Manufacturing Practice" and even if the company can work with the FDA to solve this issue within the mandated 15 days, any "significant deviation" on a US$22+ million investment could be material.
AKRX continues to have an attractive pipeline for 2007, and this will most likely put on hold some of the grand announcements the company had planned for the 1H. The time frame of my investment might have changed, but it does not detract from my view of the company. It certainly does brings to mind the many risks inherent with investing in this very volatile industry.
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