Fresenius-Akorn Deal Deserves A Price Cut, At Least

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(Bloomberg Gadfly) -- It's not always easy to extricate oneself from a toxic relationship. But that's not a good reason to stay. 

German medical-equipment maker Fresenius SE on Sunday announced it was terminating its $4.3 billion merger agreement with generic drugmaker Akorn Inc. Fresenius said in February it was looking into possible breaches of FDA drug data standards by Akorn, and the results of that probe led it to Sunday's decision. Akorn wants the deal to proceed and has already filed a lawsuit. 

If Fresenius found something in its investigation bad enough to justify breaking off the deal, then it's certainly making the right move. But no matter how strong or weak its case, the company should do its utmost to avoid paying the $34 a share it agreed to pay for Akorn -- which now trades around $14.

The deal didn't look like a disaster when first announced roughly a year ago. It was a strategic fit for Fresenius and looked relatively cheap after a sales slowdown had hit Akorn's share price. It had the potential to add to Fresenius earnings as soon as 2019.

But Akorn's sales decline wasn't a blip. Its revenue and Ebitda have continued to plunge in a difficult generic-drug pricing environment.

Making matters worse, Akorn's then-chairman John Kapoor was indicted last year on racketeering and conspiracy challenges related to a different company.

But neither Akorn's putrid performance nor its chairman's difficulties can compel a deal break -- Fresenius likely has to prove Akorn seriously misled regulators in order to escape. That will not be easy. Judges are generally loath to break merger agreements in this kind of scenario, and Akorn plans to fight "vigorously" for the deal.

It's possible Fresenius has enough evidence to overcome that obstacle. Kapoor's disturbing past and Akorn's recent history of earnings restatements and blown guidance suggests there's more than buyer's remorse at play here. It's worthwhile for Fresenius to take a shot even if the odds against success are steep. The deal was a potential bargain last year; it now looks like wild overpayment. If there are real problems with Akorn's product development and disclosures to the FDA, then further sales declines could follow.  

The obvious comparison here is Abbott Laboratories' troubled acquisition of Alere Inc. Abbott tried to break the deal after a long series of accounting and product mishaps and a government investigation. But even that laundry list of woes couldn't break the deal -- it eventually closed at a modest 9 percent discount to the original price. It took many bruising months to even get to that. 

That's not an encouraging precedent for Fresenius. But the consequences of going through with this deal are such that the company has little choice but to try and top it. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

©2018 Bloomberg L.P.

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