AKORN INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------------
FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE YEAR ENDED DECEMBER 31, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File Number: 0-13976

AKORN, INC.
(Name of registrant as specified in its charter)

LOUISIANA 72-0717400
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

2500 MILLBROOK DRIVE, BUFFALO GROVE, ILLINOIS 60089
(Address of principal executive offices and zip code)

REGISTRANT'S TELEPHONE NUMBER: (847) 279-6100

SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
None

SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
Common Stock, No Par Value
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

The aggregate market value of the voting stock of the Registrant held by
non-affiliates (affiliates being, for these purposes only, directors, executive
officers and holders of more than 5% of the Registrant's common stock) of the
Registrant as of June 30, 2003 was approximately $12,049,596.

The number of shares of the Registrant's common stock, no par value per share,
outstanding as of March 15, 2004 was 19,915,897.

FORWARD-LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE RESULTS

Certain statements in this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act.
When used in this document, the words "anticipate," "believe," "estimate" and
"expect" and similar expressions are generally intended to identify
forward-looking statements. Any forward-looking statements, including statements
regarding our intent, belief or expectations are not guarantees of future
performance. These statements involve risks and uncertainties and actual results
may differ materially from those in the forward-looking statements as a result
of various factors, including but not limited to:

- Our ability to resolve our Food and Drug Administration compliance
issues at our Decatur, Illinois facilities;

- Our ability to avoid defaults under debt covenants;

- Our ability to generate cash from operations sufficient to meet our
working capital requirements;

- Our ability to obtain additional funding to operate and grow our
business;

- The effects of federal, state and other governmental regulation of our
business;

- Our success in developing, manufacturing and acquiring new products;

- Our ability to bring new products to market and the effects of sales of
such products on our financial results;

- The effects of competition from generic pharmaceuticals and from other
pharmaceutical companies;

- Availability of raw materials needed to produce our products; and

- Other factors referred to in this Form 10-K and our other Securities and
Exchange Commission filings.

See "Item 1. Business -- Factors That May Affect Future Results" on pages 8
through 15. You should read this report completely with the understanding that
Akorn's actual results may differ materially from what we expect. Unless
required by law, we undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.

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FORM 10-K TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

Akorn, Inc. manufactures and markets diagnostic and therapeutic
pharmaceuticals in specialty areas such as ophthalmology, rheumatology,
anesthesia and antidotes, among others. Our customers include physicians,
optometrists, wholesalers, group purchasing organizations and other
pharmaceutical companies. We are a Louisiana corporation founded in 1971 in
Abita Springs, Louisiana. In 1997, we relocated our headquarters and certain
operations to Illinois. We have a wholly owned subsidiary named Akorn (New
Jersey), Inc. which has operations in Somerset, New Jersey. Our subsidiary is
involved in manufacturing, research and development, and administrative
activities related to our ophthalmic segment.

As described more fully herein, our losses from operations in recent years
and working capital deficiencies, together with the need to successfully resolve
our ongoing compliance matters with the Food and Drug Administration ("FDA"),
raise substantial doubt about our ability to continue as a going concern. For
further information, see Note A "Business and Basis of Presentation" to the
consolidated financial statements included in Item 8 of this report.

We classify our operations into three identifiable business segments,
ophthalmic, injectable and contract services. These three segments are discussed
in greater detail below. For information regarding revenues and gross profit for
each of our segments, see Note M "Segment Information" to the consolidated
financial statements included in Item 8 of this report.

Ophthalmic Segment. We market a line of diagnostic and therapeutic
ophthalmic pharmaceutical products. Diagnostic products, primarily used in the
office setting, include mydriatics and cycloplegics, anesthetics, topical
stains, gonioscopic solutions, angiography dyes and others. Therapeutic
products, sold primarily to wholesalers and other national account customers,
include antibiotics, anti-infectives, steroids, steroid combinations, glaucoma
medications, decongestants/antihistamines and anti-edema medications.
Non-pharmaceutical products include various artificial tear solutions,
preservative-free lubricating ointments, lid cleansers, vitamin supplements and
contact lens accessories. We exited the surgical products business in late 2002.
The impact of the exit was not material to our financial results.

Injectable Segment. We market a line of specialty injectable pharmaceutical
products, including anesthesia and products used in the treatment of rheumatoid
arthritis and pain management. These products are marketed to hospitals through
wholesalers and other national account customers as well as directly to medical
specialists.

Contract Services Segment. We manufacture products for third party
pharmaceutical and biotechnology customers based on their specifications.

Manufacturing. We have two manufacturing facilities located in Decatur,
Illinois and Somerset, New Jersey. See "Item 2. Properties." We manufacture a
diverse group of sterile pharmaceutical products, including solutions, ointments
and suspensions for our ophthalmic and injectable segments. The Decatur
facilities manufacture product for all three of our segments. The Somerset
facility manufactures primarily ointment products for the ophthalmic segment. We
are also in the process of adding freeze-dried (lyophilized) manufacturing
capabilities at our Decatur facilities. However, we cannot assure you that we
can add freeze-dried manufacturing capabilities to our Decatur facilities, or
that such addition, if completed, will prove to be profitable. See "Item 1.
Business -- Factors That May Affect Future Results -- Our growth depends on our
ability to timely develop additional pharmaceutical products and manufacturing
capabilities."

Sales and Marketing. While we are working to expand our proprietary product
base through internal development, the majority of our current products are
non-proprietary. We rely on our efforts in marketing, distribution, development
and low cost manufacturing to maintain and increase market share.

Our ophthalmic segment uses a three-tiered sales effort. Outside sales
representatives sell directly to physicians and group practices. In-house sales
(telemarketing) and customer service (catalog sales) sell to optometrists and
other customers. A national accounts group sells to wholesalers, retail chains
and other group

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purchasing organizations who represent hospitals in the U.S. This national
accounts group also markets our injectable pharmaceutical products, which we
also sell through telemarketing and direct mail activities to individual
specialty physicians and hospitals. The contract services segment markets our
contract manufacturing services through direct mail, trade shows and direct
industry contacts.

Research and Development. As of December 31, 2003, we had 21 Abbreviated
New Drug Applications ("ANDAs") for generic pharmaceuticals in various stages of
development. We filed one of these ANDAs along with a New Drug Application
("NDA") in 2003. See "Government Regulation." We plan to continue to file ANDAs
on a regular basis as pharmaceutical products come off patent allowing us to
compete by marketing generic equivalents. However, unless and until our issues
pending before the FDA regarding our Decatur facilities are favorably resolved,
we believe it is doubtful that the FDA will approve any NDAs or ANDAs we submit
related to these facilities. We believe our Somerset facility is not impacted by
the FDA issues regarding our Decatur facilities.

On February 18, 2003, we announced that we had received approval from the
FDA for our ANDA for Lidocaine Jelly, 2% ("Lidocaine Jelly"), a bioequivalent to
Xylocaine Jelly(R), a product of AstraZeneca PLC used primarily as a topical
anesthetic by urologists and hospitals. According to industry sources, it is
estimated that the total annual U.S. market for comparable products was
approximately $30 million in 2002. We manufacture this product at our Somerset
facility, and it was commercially available in the third quarter of 2003.

On February 9, 2004, we announced we had received approval from FDA for the
ANDA for Neomycin and Polymyxin B Sulfates, and Bacitracin Zinc Ophthalmic
Ointment USP ("Neomycin and Polymyxin B"). Neomycin and Polymyxin B is
bioequivalent to Neosporin(R) Ophthalmic Ointment, a product of Monarch
Pharmaceuticals, Inc. which is used primarily as an ophthalmic antibiotic
ointment. We anticipated that this product, which will be manufactured at our
Somerset facility, will be commercially available in the third quarter of 2004.

Pre-clinical and clinical trials required in connection with the
development of pharmaceutical products are performed by contract research
organizations under the direction of our personnel. No assurance can be given as
to whether we will file NDAs, or ANDAs, when anticipated, whether we will
develop marketable products based on any filings we do make, or as to the actual
size of the market for any such products, or as to whether our participation in
such market would be profitable. See "Government Regulation" and "Item 1.
Business -- Factors That May Affect Future Results -- Our growth depends on our
ability to timely develop additional pharmaceutical products and manufacturing
capabilities."

We also maintain a business development program that identifies potential
product acquisition or product licensing candidates. We have focused our
business development efforts on niche products that complement our existing
product lines and that have few or no competitors in the market.

At December 31, 2003, 14 of our full-time employees were involved in
research and development and product licensing.

Research and development costs are expensed as incurred. Such costs
amounted to $1,465,000, $1,886,000, and $2,598,000 for the years ended December
31, 2003, 2002 and 2001, respectively.

Patents and Proprietary Rights. We consider the protection of discoveries
in connection with our development activities important to our business. We have
sought, and intend to continue to seek, patent protection in the United States
and selected foreign countries where deemed appropriate. As of December 31,
2003, we had received six U.S. patents and had three additional U.S. patent
applications and one international patent application pending.

We also rely upon trademarks, trade secrets, unpatented proprietary
know-how and continuing technological innovation to maintain and develop our
competitive position. We enter into confidentiality agreements with certain of
our employees pursuant to which such employees agree to assign to us any
inventions relating to our business made by them while in our employ. However,
there can be no assurance that others may not acquire or independently develop
similar technology or, if patents are not issued with respect to products

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arising from research, that we will be able to maintain information pertinent to
such research as proprietary technology or trade secrets. See "Item 1.
Business -- Factors That May Affect Future Results -- Patents and Proprietary
Rights."

Employee Relations. At December 31, 2003, we had 360 full-time employees,
308 of whom were employed by Akorn and 52 by our wholly owned subsidiary, Akorn
(New Jersey), Inc. We believe we enjoy good relations with our employees, none
of whom are represented by a collective bargaining agent.

Competition. The marketing and manufacturing of pharmaceutical products is
highly competitive, with many established manufacturers, suppliers and
distributors actively engaged in all phases of the business. Most of our
competitors have substantially greater financial and other resources, including
greater sales volume, larger sales forces and greater manufacturing capacity.
See "Item 1. Business -- Factors That May Affect Future Results -- Our industry
is very competitive; changes in technology could render our products obsolete."

The companies that compete with our ophthalmic segment include Alcon
Laboratories, Inc., Allergan Pharmaceuticals, Inc., Ciba Vision and Bausch &
Lomb, Inc. ("B&L"). The ophthalmic segment competes primarily on the basis of
price and service. The ophthalmic segment purchases some ophthalmic products
from B&L, which is in direct competition with us in several markets.

The companies that compete with our injectable segment include both generic
and name brand companies such as Abbott Laboratories, Gensia, American
Pharmaceutical Products, Elkin Sinn and American Regent. The injectable segment
competes primarily on the basis of price.

Competitors in our contract services segment include Cook Imaging (Baxter),
Chesapeake Biological Laboratories and Ben Venue. The contract services segment
competes primarily on the basis of price and technical capabilities. The
manufacturing of products in all three segments must be performed under
government mandated Current Good Manufacturing Practices ("cGMP").

Suppliers and Customers. No supplier of products accounted for more than
10% of our purchases in 2003, 2002 or 2001. We require a supply of quality raw
materials and components to manufacture and package pharmaceutical products for
ourselves and for third parties with which we have contracted. The principal
components of our products are active and inactive pharmaceutical ingredients
and certain packaging materials. Many of these components are available from
only a single source and, in the case of many of our ANDAs and NDAs, only one
supplier of raw materials has been identified. Because FDA approval of drugs
requires manufacturers to specify their proposed suppliers of active ingredients
and certain packaging materials in their applications, FDA approval of any new
supplier would be required if active ingredients or such packaging materials
were no longer available from the specified supplier. The qualification of a new
supplier could delay our development and marketing efforts. If for any reason we
are unable to obtain sufficient quantities of any of the raw materials or
components required to produce and package our products, we may not be able to
manufacture our products as planned, which could have a material adverse effect
on our business, financial condition and results of operations.

A small number of large wholesale drug distributors account for a large
portion of our gross sales, revenues and accounts receivable. Those distributors
are:

- AmerisourceBergen Corporation ("AmerisourceBergen")

- Cardinal Health, Inc. ("Cardinal"); and

- McKesson Drug Company ("McKesson").

These three wholesale drug distributors accounted for approximately 54% of
our total gross sales and 44% of our revenues in 2003, and 52% of our gross
accounts receivables as of December 31, 2003. The difference between gross sales
and revenue is that gross sales do not reflect the deductions for chargebacks,
rebates and product returns (See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Critical Accounting Policies).
The percentages of gross sales, revenue and gross trade

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receivables attributed to each of these three wholesale drug distributors for
the years ended December 31, 2003 and December 31, 2002 were as follows:

AmerisourceBergen, Cardinal and McKesson are distributors of our products
as well as a broad range of health care products for many other companies. None
of these distributors is an end user of our products. If sales to any one of
these distributors were to diminish or cease, we believe that the end users of
our products would find little difficulty obtaining our products either directly
from us or from another distributor. However, the loss of one or more of these
customers, together with a delay or inability to secure an alternative
distribution source for end users, could have a material negative impact on our
revenue, business, financial condition and results of operations. A change in
purchasing patterns, inventory levels, an increase in returns of our products,
delays in purchasing products and delays in payment for products by one or more
distributors also could have a material negative impact on our revenue,
business, financial condition and results of operations. See "Item 1.
Business -- Factors That May Affect Future Results -- Dependence on Small Number
of Distributors."

Backorders. As of December 31, 2003, we had approximately $3.1 million of
products on backorder as compared to approximately $5.4 million of backorders as
of December 31, 2002. This decrease in backorders is due to the fact that in
2002 one of our production rooms at our Decatur, Illinois facility was not fully
operational. This production room was fully operational at the end of 2003. We
anticipate filling all current open backorders during 2004.

Government Regulation. Pharmaceutical manufacturers and distributors are
subject to extensive regulation by government agencies, including the FDA, the
Drug Enforcement Administration ("DEA"), the Federal Trade Commission ("FTC")
and other federal, state and local agencies. The federal Food, Drug and Cosmetic
Act (the "FDC Act"), the Controlled Substance Act and other federal statutes and
regulations govern or influence the development, testing, manufacture, labeling,
storage and promotion of products. The FDA inspects drug manufacturers and
storage facilities to determine compliance with its cGMP regulations,
non-compliance with which can result in fines, recall and seizure of products,
total or partial suspension of production, refusal to approve new drug
applications and criminal prosecution. The FDA also has the authority to revoke
approval of drug products.

FDA approval is required before any drug can be manufactured and marketed.
New drugs require the filing of an NDA, including clinical studies demonstrating
the safety and efficacy of the drug. Generic drugs, which are equivalents of
existing, off-patent brand name drugs, require the filing of an ANDA. An ANDA
does not, for the most part, require clinical studies since safety and efficacy
have already been demonstrated by the product originator. However, the ANDA must
provide data demonstrating the equivalency of the generic formulation in terms
of bioavailability. The time required by the FDA to review and approve NDA's and
ANDA's is variable and beyond our control.

FDA Warning Letter. In October 2000, the FDA issued a warning letter to us
following the FDA's routine cGMP inspection of our Decatur manufacturing
facilities. An FDA warning letter is intended to provide notice to a company of
violations of the laws administered by the FDA. We believe its primary purpose
is to elicit voluntary corrective action. The letter warns that if voluntary
action is not forthcoming, the FDA may use other legal means to compel
compliance. These include seizure of products and/or obtaining injunctions
against the company and responsible individuals which could include our
employees, officers and directors. The October 2000 warning letter addressed
several deviations from regulatory requirements including general documentation
and cleaning validation issues and requested corrective actions be undertaken by
us. We initiated corrective actions and responded to the warning letter.
Subsequently, the FDA conducted another inspection in late 2001 and identified
additional deviations from regulatory requirements including

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cleaning validation and process control issues. This led to the FDA leaving the
warning letter in place and issuing a Form 483 to document its findings. While
no further correspondence was received from the FDA, we responded to the
inspectional findings. This response described our plan for addressing the
issues raised by the FDA and included improved cleaning validation, enhanced
process controls and approximately $2.0 million of capital improvements. In
August 2002, the FDA conducted an inspection of the Decatur facility and
identified deviations from cGMPs. We responded to these observations in
September 2002. In response to our actions, the FDA conducted another inspection
of the Decatur facility during the period from December 10, 2002 to February 6,
2003. This inspection identified deviations from regulatory requirements
including the manner in which we process and investigate manufacturing
discrepancies and failures, customer complaints and the thoroughness of
equipment cleaning validations. Certain deviations identified during this
inspection had been raised in previous FDA inspections. We have responded to
these latest findings in writing and in a meeting with the FDA in March 2003. We
set forth our plan for implementing comprehensive corrective actions and have
provided progress reports to the FDA on April 15, May 15 and June 15, 2003.

The Company's is working with the FDA to favorably resolve such compliance
matters and has submitted to the FDA and continues to implement a plan for
comprehensive corrective actions at its Decatur, Illinois facility. On February
11, 2004, the FDA began an inspection of the Decatur facility. This inspection
is still ongoing at the time of this filing.

Upon completion of the inspection, the FDA may take any of the following
actions: (i) find that the Decatur facility is in substantial compliance; (ii)
require us to undertake further corrective actions, which could include a recall
of certain products, and then conduct another inspection to assess the success
of those efforts; (iii) seek to enjoin us from further violations, which may
include temporary suspension of some or all operations and potential monetary
penalties; or (iv) take other enforcement action which may include seizure of
our products. At this time, it is not possible to predict the FDA's course of
action.

If the FDA chooses option (iii) or (iv), such action could significantly
impair our ability to continue to manufacture and distribute our current product
line and generate cash from our operations and could result in a covenant
violation under our senior debt, any or all of which would have a material
adverse effect on our liquidity and our ability to continue as a going concern.
Any monetary penalty assessed by the FDA also could have a material adverse
effect on our liquidity.

We believe that unless and until the issues identified by the FDA have been
successfully corrected and the corrections have been verified through
inspection, it is doubtful that the FDA will approve any NDAs or ANDAs that may
be submitted by us for products to be manufactured at our Decatur facility. This
has adversely impacted, and is likely to continue to adversely impact, our
ability to grow sales. However, we believe that unless and until the FDA chooses
option (iii) or (iv), we will be able to continue manufacturing and distributing
our current product lines. See "Item 1. Business -- Factors That May Affect
Future Results -- Our Decatur, Illinois manufacturing facility is the subject of
an FDA Warning Letter."

Product Recalls. In February 2003, we recalled two products, Fluress and
Fluoracaine, due to container/ closure integrity problems resulting in leaking
containers. The recall has been classified by the FDA as a Class II Recall,
which means that the use of, or exposure to, a violative product may cause
temporary or medically reversible adverse health consequences or that the
probability of serious health consequences as a result of such use or exposure
is remote. We had not received any notification or complaints from end users of
the recalled products. Because we had curtailed the production of these items
due to the above container/ closure integrity issues, the financial impact to us
of this recall was not material as our customers did not hold significant
inventories of these products.

In March 2003, as a result of the December 10, 2002 to February 6, 2003 FDA
inspection, we recalled twenty-four lots of product produced from the period
December 2001 to June 2002 in one of our production rooms at our Decatur
manufacturing facilities. The majority of the lots recalled were for third party
contract customer products. Subsequent to this decision and after discussions
with the FDA, eight of the original twenty-four lots have been exempted from the
recall due to medical necessity. The recall has been classified by the FDA as a
Class II Recall. We had not received any notification or complaints from end
users of the

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recalled products. Due to the passage of time between the production of these
lots and the recall, the financial impact of this recall was not material as our
customers did not hold significant inventories of these products.

DEA Consent Decree. We also manufacture and distribute several
controlled-drug substances, the distribution and handling of which are regulated
by the DEA. Failure to comply with DEA regulations can result in fines or
seizure of product. See "Item 1. Business -- Factors That May Affect Future
Results -- Government Regulation."

On March 6, 2002, we received a letter from the United States Attorney's
Office, Central District of Illinois, Springfield, Illinois, advising us that
the DEA had referred a matter to that office for a possible civil legal action
for alleged violations of the Comprehensive Drug Abuse Prevention Control Act of
1970, 21 U.S.C. sec. 801, et. seq. and regulations promulgated under the Act.
The alleged violations relate to record keeping and controls surrounding the
storage and distribution of controlled substances. On November 6, 2002, we
entered into a Civil Consent Decree with the DEA. Under terms of the Civil
Consent Decree, without admitting any of the allegations in the complaint from
the DEA, we agreed to pay a fine of $100,000, upgrade our security system and to
remain in substantial compliance with the Comprehensive Drug Abuse Prevention
Control Act of 1970. If we do not remain in substantial compliance during the
two-year period following the entry of the Civil Consent Decree, we, in addition
to other possible sanctions, may be held in contempt of court and ordered to pay
an additional $300,000 fine. We completed the upgrades to our security system in
2003.

We do not anticipate any material adverse effect from compliance with
federal, state and local provisions that have been enacted or adopted regulating
the discharge of materials into the environment, or otherwise relating to the
protection of the environment.

FACTORS THAT MAY AFFECT FUTURE RESULTS

WE MUST OBTAIN ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS.

We will require additional funds to operate and grow our business. We may
seek additional funds through public and private financing, including equity and
debt offerings. However, adequate funds through the financial markets or from
other sources may not be available when needed or on terms favorable to us. In
addition, because our common stock currently is quoted on the Pink Sheets (See
Item 5. -- "Market for Common Equity and Related Stockholder Matters"), we may
experience further difficulty accessing the capital markets. Without sufficient
additional funding, we may be required to delay, scale back or abandon some or
all of our product development, manufacturing, acquisition, licensing and
marketing initiatives, or operations. Further, such additional financing, if
obtained, likely will require the granting of rights, preferences or privileges
senior to those of the common stock and result in substantial dilution of the
existing ownership interests of the common stockholders.

OUR DECATUR, ILLINOIS MANUFACTURING FACILITY IS THE SUBJECT OF AN FDA WARNING
LETTER.

Unless we can successfully resolve the FDA's concerns, we may be subject to
fines, suspension of our Decatur operations, seizure of products or forced
product recalls. Our Decatur, Illinois manufacturing facility has been the
subject of a warning letter issued by the FDA in October 2000 following the
FDA's routine cGMP inspection of the facility. The warning letter addressed
several deviations from regulatory requirements and requested corrective actions
be undertaken. Since then, we have undergone further FDA inspections which have
identified that certain previously reported deviations continue to be unresolved
and that there are additional deviations from regulatory requirements. The
noncompliance of the Decatur facility with FDA requirements has prevented us
from developing additional products at Decatur, some of which cannot be
developed at our other facilities. The inability to fully use our Decatur
facility has had a material adverse effect on our business, financial condition
and results of operations.

Upon future inspections, the FDA could take various actions including (i)
requiring us to undertake further corrective actions, which could include a
recall of certain products; (ii) seeking to enjoin us from further violations,
and/or suspend some or all of our operations at Decatur; (iii) assess monetary
penalties; or

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(iv) take other enforcement action which may include seizure of our products.
Action taken by the FDA could significantly impair our ability to continue to
manufacture and distribute our current product line and generate cash from our
operations, which could have a material adverse effect on our business,
financial condition and results of operations, any or all of which would have a
material adverse effect on our liquidity and our ability to continue as a going
concern. Any monetary penalty assessed by the FDA also could have a material
adverse effect on our liquidity. See Item 3 -- "Legal Proceedings" for further
description of these matters.

Unless we can successfully resolve the FDA's concerns, we believe it is
doubtful that the FDA will approve any NDAs or ANDAs that may be submitted by us
for products to be manufactured in Decatur. We believe that unless and until the
issues identified by the FDA have been successfully corrected and the
corrections have been verified through inspection, it is doubtful that the FDA
will approve any NDAs or ANDAs that may be submitted by us for products to be
manufactured at our Decatur facility. This has adversely impacted, and is likely
to continue to adversely impact, our ability to grow sales. See Item 3 -- "Legal
Proceedings" for further description of these matters.

Past product recalls could continue to effect us. In February 2003, we
recalled two products, Fluress and Fluoracaine in a Class II Recall due to
container/closure integrity problems resulting in leaking containers. In
connection with the recall we temporarily suspended production of pending
requalifications in a new container. A delay beyond the second quarter of 2004
in restarting production of these products could adversely effect revenue and
cash from operations.

WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS THAT INCREASE OUR COSTS AND
COULD SUBJECT US TO FINES, PREVENT US FROM SELLING OUR PRODUCTS OR PREVENT US
FROM OPERATING OUR FACILITIES.

Federal and state government agencies regulate virtually all aspects of our
business. The development, testing, manufacturing, processing, quality, safety,
efficacy, packaging, labeling, record keeping, distribution, storage and
advertising of our products, and disposal of waste products arising from such
activities, are subject to regulation by the FDA, DEA, FTC, the Consumer Product
Safety Commission, the Occupational Safety and Health Administration and the
Environmental Protection Agency. Similar state and local agencies also have
jurisdiction over these activities. Noncompliance with applicable United States
regulatory requirements can result in fines, injunctions, penalties, mandatory
recalls or seizures, suspensions of production, recommendations by the FDA
against governmental contracts and criminal prosecution and could have a
material adverse effect on our business, financial condition and results of
operations.

New, modified and additional regulations, statutes or legal interpretation,
if any, could, among other things, require changes to manufacturing methods,
expanded or different labeling, the recall, replacement or discontinuation of
certain products, additional record keeping and expanded documentation of the
properties of certain products and scientific substantiation. Such changes or
new legislation could have a material adverse effect on our business, financial
condition and results of operations.

FDA regulations. All pharmaceutical manufacturers, including Akorn, are
subject to regulation by the FDA under the authority of the FDC Act. Under the
FDC Act, the federal government has extensive administrative and judicial
enforcement powers over the activities of pharmaceutical manufacturers to ensure
compliance with FDA regulations. Those powers include, but are not limited to,
the authority to initiate court action to seize unapproved or non-complying
products, to enjoin non-complying activities, to halt manufacturing operations
that are not in compliance with cGMP, to recall products which present a health
risk, and to seek civil monetary and criminal penalties. Other enforcement
activities include refusal to approve product applications or the withdrawal of
previously approved applications. Any such enforcement activities, including the
restriction or prohibition on sales of products we market or the halting of our
manufacturing operations could have a material adverse effect on our business,
financial condition and results of operations. In addition, product recalls may
be issued at our discretion, or at the direction of the FDA or other government
agencies having regulatory authority for pharmaceutical product sales. Recalls
may occur due to disputed labeling claims, manufacturing issues, quality defects
or other reasons. No assurance can be given that restriction or prohibition on
sales, halting of manufacturing operations or recalls of our pharmaceutical
products will not

9

occur in the future. Any such actions could have a material adverse effect on
our business, financial condition and results of operations. Further, such
actions, in certain circumstances, could constitute an event of default under
our senior debt.

We must obtain approval from the FDA for each pharmaceutical product that
we market. The FDA approval process is typically lengthy and expensive, and
approval is never certain. Our new products could take a significantly longer
time than we expect to gain regulatory approval and may never gain approval.
Even if the FDA or another regulatory agency approves a product, the approval
may limit the indicated uses for a product, may otherwise limit our ability to
promote, sell and distribute a product or may require post-marketing studies or
impose other post-marketing obligations.

We and our third-party manufacturers are subject to periodic inspection by
the FDA to assure regulatory compliance regarding the manufacturing,
distribution, and promotion of sterile pharmaceutical products. The FDA imposes
additional stringent requirements on the manufacture of sterile pharmaceutical
products to ensure the sterilization processes and related control procedures
consistently produce a sterile product. Pharmaceutical products must be
distributed, sampled and promoted in accordance with FDA requirements. The FDA
also regulates drug labeling and the advertising of prescription drugs. A
finding by a governmental agency or court that we are not in compliance could
have a material adverse effect on our business, financial condition and results
of operations.

If the FDA changes its regulatory position, it could force us to delay or
suspend indefinitely, our manufacturing, distribution or sales of certain
products. While we believe that all of our current pharmaceuticals are lawfully
marketed in the United States under current FDA enforcement policies or have
received the requisite agency approvals for manufacture and sale, such marketing
authority is subject to withdrawal by the FDA. In addition, modifications or
enhancements of approved products are in many circumstances subject to
additional FDA approvals which may or may not be granted and which may be
subject to a lengthy application process. Any change in the FDA's enforcement
policy or any decision by the FDA to require an approved NDA or ANDA for one of
our products not currently subject to the approved NDA or ANDA requirements or
any delay in the FDA approving an NDA or ANDA for one of our products could have
a material adverse effect on our business, financial condition and results of
operations.

A number of products we market are "grandfathered" drugs that are permitted
to be manufactured and marketed without FDA-issued ANDAs or NDAs on the basis of
their having been marketed prior to enactment of relevant sections of the FDC
Act. The regulatory status of these products is subject to change and/or
challenge by the FDA, which could establish new standards and limitations for
manufacturing and marketing such products, or challenge the evidence of prior
manufacturing and marketing upon which grandfathering status is based. We are
not aware of any current efforts by the FDA to change the status of any of our
"grandfathered" products, but there can be no assurance that such initiatives
will not occur in the future. Any such change in the status of our
"grandfathered" products could have a material adverse effect on our business,
financial condition and results of operations.

We are subject to extensive DEA regulation, which could result in our being
fined or otherwise penalized. We also manufacture and sell drugs which are
"controlled substances" as defined in the federal Controlled Substances Act and
similar state laws, which established, among other things, certain licensing,
security and record keeping requirements administered by the DEA and similar
state agencies, as well as quotas for the manufacture, purchase and sale of
controlled substances. The DEA could limit or reduce the amount of controlled
substances which we are permitted to manufacture and market. On November 6,
2002, we entered into a Civil Consent Decree with respect to violations alleged
by the DEA relating to record keeping and controls surrounding the storage and
distribution of controlled substances. Under the terms of the Civil Consent
Decree, we, without admitting any of the allegations in the complaint from the
DEA, agreed to pay a fine of $100,000, upgrade our security and to remain in
substantial compliance with the Comprehensive Drug Abuse Prevention Control Act
of 1970. If we do not remain in substantial compliance during the two-year
period following the entry of the Civil Consent Decree, we, in addition to other
possible sanctions, may be held in contempt of court and ordered to pay an
additional $300,000 fine. See Item 3. "Legal Proceedings." A

10

failure to comply with DEA requirements or the Civil Consent Decree could have a
material adverse effect on our business, financial condition and results of
operations.

OUR GROWTH DEPENDS ON OUR ABILITY TO TIMELY DEVELOP ADDITIONAL PHARMACEUTICAL
PRODUCTS AND MANUFACTURING CAPABILITIES.

Our strategy for growth is dependent upon our ability to develop products
that can be promoted through current marketing and distributions channels and,
when appropriate, the enhancement of such marketing and distribution channels.
As of December 31, 2003, we had 21 ANDAs in various stages of development. See
"Item 1. Description of Business -- Research and Development." We may not meet
our anticipated time schedule for the filing of ANDAs and NDAs or may decide not
to pursue ANDAs or NDAs that we have submitted or anticipate submitting. Our
internal development of new pharmaceutical products is dependent upon the
research and development capabilities of our personnel and our infrastructure.
There can be no assurance that we will successfully develop new pharmaceutical
products or, if developed, successfully integrate new products into our existing
product lines. In addition, there can be no assurance that we will receive all
necessary approvals from the FDA or that such approvals will not involve delays,
which adversely affect the marketing and sale of our products. Unless and until
our issues pending before the FDA are resolved, it is doubtful that the FDA will
approve any NDAs or ANDAs we submit for products to be manufactured at our
Decatur facility. Our failure to develop new products, to successfully resolve
the compliance issues at our Decatur facility or to receive FDA approval of
ANDAs or NDAs, could have a material adverse effect on our business, financial
condition and results of operations.

Another part of our growth strategy is to develop the capability to
manufacture lyophilized (freeze-dried) pharmaceutical products. While we have
devoted resources to developing these capabilities, we may not be successful in
developing these capabilities, or we may not realize the anticipated benefits
from developing these capabilities.

Generic Substitution. Our branded pharmaceutical products are subject to
competition from generic equivalents and alternative therapies. Generic
pharmaceuticals are the chemical and therapeutic equivalents of brand-name
pharmaceuticals and represent an increasing proportion of pharmaceuticals
dispensed in the United States. There is no proprietary protection for most of
the branded pharmaceutical products sold by Akorn and other pharmaceutical
companies selling generic and other substitutes for branded pharmaceutical
products. In addition, governmental and cost-containment pressures regarding the
dispensing of generic equivalents will likely result in generic substitution and
competition generally for our branded pharmaceutical products. Although our
attempts to mitigate the effect of this substitution through, among other
things, creation of strong brand-name recognition and product-line extensions
for our branded pharmaceutical products, there can be no assurance that we will
be successful in these efforts. Increased competition in the sale of generic
pharmaceutical products could have a material adverse effect on our business,
financial condition and results of operations.

OUR SUCCESS DEPENDS ON THE DEVELOPMENT OF GENERIC AND OFF-PATENT PHARMACEUTICAL
PRODUCTS WHICH ARE PARTICULARLY SUSCEPTIBLE TO COMPETITION, SUBSTITUTION
POLICIES AND REIMBURSEMENT POLICIES.

Our success depends, in part, on our ability to anticipate which branded
pharmaceuticals are about to come off patent and thus permit us to develop,
manufacture and market equivalent generic pharmaceutical products. Generic
pharmaceuticals must meet the same quality standards as branded pharmaceuticals,
even though these equivalent pharmaceuticals are sold at prices that are
significantly lower than that of branded pharmaceuticals. Generic substitution
is regulated by the federal and state governments, as is reimbursement for
generic drug dispensing. There can be no assurance that substitution will be
permitted for newly approved generic drugs or that such products will be subject
to government reimbursement. In addition, generic products that third parties
develop may render our generic products noncompetitive or obsolete. Although we
have successfully brought generic pharmaceutical products to market in a timely
manner in the past, there can be no assurance that we will be able to
consistently bring these products to market quickly and efficiently in the
future. An increase in competition in the sale of generic pharmaceutical
products or our failure to bring

11

such products to market before our competitors could have a material adverse
effect on our business, financial condition and results of operations.

WE ARE SUBJECT TO LEGAL PROCEEDINGS AGAINST US, WHICH MAY PROVE COSTLY AND
TIME-CONSUMING EVEN IF MERITLESS.

As discussed above, we are currently involved in several pending or
threatened legal actions with both private parties and certain government
agencies. See Item 3. "Legal Proceedings." While we believe that our positions
in these various matters are meritorious, to the extent that our personnel must
spend time and we must expend resources to pursue or contest these various
matters, or any additional matters that may be asserted from the time to time in
the future, this represents time and money that is not available for other
actions that we might otherwise pursue which could be beneficial to our future.
In addition, to the extent that we are unsuccessful in any legal proceedings,
the consequences could have a negative impact on our business, financial
condition and results of operations. These consequences could include, but not
be limited to, fines, penalties, injunctions, the loss of patent or other
rights, the need to write down or off the value of assets (which could
negatively impact our earnings and/or cause the violation of debt covenants) and
a wide variety of other potential remedies or actions that could be taken
against us. While we will continue to vigorously pursue our rights in all such
matters, no assurance can be given that we will be successful in any of these
proceedings or, even if successful, that we would be able to recoup any of the
money expended in pursuing such matters.

WE MAY IMPLEMENT PRODUCT RECALLS AND COULD BE EXPOSED TO SIGNIFICANT PRODUCT
LIABILITY CLAIMS; WE MAY HAVE TO PAY SIGNIFICANT AMOUNTS TO THOSE HARMED AND MAY
SUFFER FROM ADVERSE PUBLICITY AS A RESULT.

The manufacturing and marketing of pharmaceuticals involves an inherent
risk that our products may prove to be defective and cause a health risk. In
that event, we may voluntarily implement a recall or market withdrawal or may be
required to do so by a regulatory authority. We have recalled products in the
past and, based on this experience, believe that the occurrence of a recall
could result in significant costs to us, potential disruptions in the supply of
our products to our customers and adverse publicity, all of which could harm our
ability to market our products.

Although we are not currently subject to any material product liability
proceedings, we may incur material liabilities relating to product liability
claims in the future. Even meritless claims could subject us to adverse
publicity, hinder us from securing insurance coverage in the future and require
us to incur significant legal fees. Successful product liability claims brought
against us could have a material adverse effect on our business, financial
condition and results of operations.

We currently have product liability insurance in the amount of $5.0 million
for aggregate annual claims with a $50,000 deductible per incident and a
$250,000 aggregate annual deductible. However, there can be no assurance that
such insurance coverage will be sufficient to fully cover potential claims.
Additionally, there can be no assurance that adequate insurance coverage will be
available in the future at acceptable costs, if at all, or that a product
liability claim would not have a material adverse effect on our business,
financial condition and results of operations.

THE FDA MAY AUTHORIZE SALES OF SOME PRESCRIPTION PHARMACEUTICALS ON A
NON-PRESCRIPTION BASIS, WHICH WOULD REDUCE THE PROFITABILITY OF OUR PRESCRIPTION
PRODUCTS.

From time to time, the FDA elects to permit sales of some pharmaceuticals
currently sold on a prescription basis, without a prescription. Approval by the
FDA of the sale of our products without a prescription would reduce demand for
our competing prescription products and, accordingly, reduce our profits.

OUR INDUSTRY IS VERY COMPETITIVE; CHANGES IN TECHNOLOGY COULD RENDER OUR
PRODUCTS OBSOLETE.

We compete with other pharmaceutical companies, including major
pharmaceutical companies with financial resources substantially greater than
ours, in developing, acquiring, manufacturing and marketing pharmaceutical
products. The selling prices of pharmaceutical products typically decline as
competition
12

increases. Further, other products now in use, under development or acquired by
other pharmaceutical companies, may be more effective or offered at lower prices
than our current or future products. The industry is characterized by rapid
technological change that may render our products obsolete, and competitors may
develop their products more rapidly than we can. Competitors may also be able to
complete the regulatory process sooner, and therefore, may begin to market their
products in advance of our products. We believe that competition in sales of our
products is based primarily on price, service and technical capabilities. There
can be no assurance that: (i) we will be able to develop or acquire commercially
attractive pharmaceutical products; (ii) additional competitors will not enter
the market; or (iii) competition from other pharmaceutical companies will not
have a material adverse effect on our business, financial condition and results
of operations.

MANY OF THE RAW MATERIALS AND COMPONENTS USED IN OUR PRODUCTS COME FROM A SINGLE
SOURCE SO INTERRUPTIONS IN THE SUPPLY OF THESE RAW MATERIALS AND COMPONENTS
COULD DISRUPT OUR MANUFACTURING OF SPECIFIC PRODUCTS AND CAUSE OUR SALES AND
PROFITABILITY TO DECLINE.

We require a supply of quality raw materials and components to manufacture
and package pharmaceutical products for ourselves and for third parties with
which we have contracted. The principal components of our products are active
and inactive pharmaceutical ingredients and certain packaging materials. Many of
these components are available from only a single source and, in the case of
many of our ANDAs and NDAs, only one supplier of raw materials has been
identified. Because FDA approval of drugs requires manufacturers to specify
their proposed suppliers of active ingredients and certain packaging materials
in their applications, FDA approval of any new supplier would be required if
active ingredients or such packaging materials were no longer available from the
specified supplier. The qualification of a new supplier could delay our
development and marketing efforts. If for any reason we are unable to obtain
sufficient quantities of any of the raw materials or components required to
produce and package our products, we may not be able to manufacture our products
as planned, which could have a material adverse effect on our business,
financial condition and results of operations.

OUR REVENUES DEPEND ON SALE OF PRODUCTS MANUFACTURED BY THIRD-PARTIES, WHICH WE
CANNOT CONTROL.

We derive a significant portion of our revenues from the sale of products
manufactured by third parties, including our competitors in some instances.
There can be no assurance that our dependence on third parties for the
manufacture of such products will not adversely affect our profit margins or our
ability to develop and deliver our products on a timely and competitive basis.
If for any reason we are unable to obtain or retain third-party manufacturers on
commercially acceptable terms, we may not be able to distribute certain of our
products as planned. No assurance can be made that the manufacturers we use will
be able to provide us with sufficient quantities of our products or that the
products supplied to us will meet our specifications. Any delays or difficulties
with third-party manufacturers could adversely affect the marketing and
distribution of certain of our products, which could have a material adverse
effect on our business, financial condition and results of operations.

DEPENDENCE ON SMALL NUMBER OF DISTRIBUTORS

A small number of large wholesale drug distributors account for a large
portion of our gross sales, revenues and accounts receivable. The following
three distributors, AmerisourceBergen, Cardinal and McKesson, accounted for
approximately 54% of total gross sales and 44% of total revenues in 2003, and
52% of gross trade receivables as of December 31, 2003. In addition to acting as
distributors of our products, these three companies also distribute a broad
range of health care products for many other companies. None of these
distributors is an end user of our products. If sales to any one of these
distributors were to diminish or cease, we believe that the end users of our
products would find little difficulty obtaining our products either directly
from us or from another distributor. However, the loss of one or more of these
customers, together with a delay or inability to secure an alternative
distribution source for end users, could have a material negative impact on our
revenue and results of operations and lead to a violation of debt covenants. A
change in purchasing patterns, inventory levels, an increase in returns of our
products, delays in purchasing products and

13

delays in payment for products by one or more distributors also could have a
material negative impact on our revenue and results of operations and lead to a
violation of debt covenants.

PATENTS AND PROPRIETARY RIGHTS

The patent position of competitors in the pharmaceutical industry generally
is highly uncertain, involves complex legal and factual questions, and is the
subject of much litigation. There can be no assurance that any patent
applications relating to our potential products or processes will result in
patents being issued, or that the resulting patents, if any, will provide
protection against competitors who: (i) successfully challenge our patents; (ii)
obtain patents that may have an adverse effect on our ability to conduct
business; or (iii) are able to circumvent our patent position. It is possible
that other parties have conducted or are conducting research and could make
discoveries of pharmaceutical formulations or processes that would precede any
discoveries made by us, which could prevent us from obtaining patent protection
for these discoveries or marketing products developed therefrom. Consequently,
there can be no assurance that others will not independently develop
pharmaceutical products similar to or obsoleting those that we are planning to
develop, or duplicate any of the our products. Our inability to obtain patents
for our products and processes or the ability of competitors to circumvent or
obsolete our patents could have a material adverse effect on our business,
financial condition and results of operations.

EXERCISE OF WARRANTS, CONVERSION OF SUBORDINATED DEBT AND PREFERRED STOCK, MAY
HAVE DILUTIVE EFFECT

Under the terms of a $5,000,000 subordinated debt transaction, which we
entered into on July 12, 2001 with the John N. Kapoor Trust dtd. 9/20/89 (the
"Kapoor Trust"), the sole trustee and sole beneficiary of which is Dr. John N.
Kapoor, our current Chairman of the Board of Directors, the Kapoor Trust agreed
to provide us with $5,000,000 of subordinated debt in two separate tranches of
$3,000,000 ("Tranche A") and $2,000,000 ("Tranche B"). In return for providing
the subordinated debt, the Kapoor Trust was granted Warrants to purchase
1,000,000 shares of common stock, at a purchase price of $2.85 per share for
Tranche A and 667,000 shares of common stock, at a purchase price of $2.25 per
share, for Tranche B. In addition, Tranche A, plus the interest on Tranche A, is
convertible into shares of our common stock at a price of $2.28 per share, and
Tranche B, plus the interest on Tranche B, is convertible into shares of our
common stock at a price of $1.80 per share. The subordinated debt warrants
mature on December 20, 2006.

Our restructuring consultants, AEG Partners LLC ("AEG") alleges that we are
required to issue 1,250,000 warrants to purchase our common stock at an exercise
price of $1.00 per warrant share under a success fee arrangement entered between
AEG and Akorn. We dispute that AEG is owed this success fee, including the
warrants. See Item 3 -- "Legal Proceedings".

In connection with the Exchange Transaction (see "Financial Conditions and
Liquidity"), we issued 257,172 shares of our Series A 6.0% Participating
Convertible Preferred Stock ("Preferred Stock"). The Preferred Stock accrues
dividends at a rate of 6.0% per annum, which rate is fully cumulative, accrues
daily and compounds quarterly, provided that in the event stockholder approval
authorizing sufficient shares of common stock to be authorized and reserved for
conversion of all of the Preferred Stock and warrants issued in connection with
the Exchange Transaction ("Stockholder Approval") has not been received by
October 7, 2004, such rate is to increase to 10.0% until Stockholder Approval
has been received and sufficient shares of Common Stock are authorized and
reserved. Subject to certain limitations, on October 31, 2011, we are required
to redeem all shares of Preferred Stock for an amount equal to $100 per share,
as may be adjusted from time to time as set forth in our Articles of Amendment
to the Articles of Incorporation (the "Articles of Incorporation") (the "Stated
Value"), plus all accrued but unpaid dividends on such shares. Shares of
Preferred Stock have liquidation rights in preference over junior securities,
including the common stock, and have certain antidilution protections. The
Preferred Stock is convertible at any time into a number of shares of common
stock equal to the quotient obtained by dividing (x) the Stated Value plus any
accrued but unpaid dividends by (y) $0.75, as such numbers may be adjusted from
time to time pursuant to the terms of the Articles of Incorporation. Provided
that Stockholder Approval has been received and sufficient shares of common
stock are authorized and reserved for conversion, all shares of Preferred Stock
shall convert to shares of common stock on the earlier to occur of (i) October
8, 2006 and (ii) the date on which the closing price per
14

share of common stock for at least 20 consecutive trading days immediately
preceding such date exceeds $4.00 per share.

In addition, we have agreed to issue to each of the Kapoor Trust and Arjun
Waney, respectively, on each anniversary of the date of the consummation of the
Exchange Transaction, warrants to purchase an additional number of shares of
common stock equal to 0.08 multiplied by the principal dollar amount of the our
indebtedness then guaranteed by them under the New Credit Facility entered with
in connection with the Exchange Transaction. The warrants issued in exchange for
these guarantees have an exercise price of $1.10 per share. See "Financial
Condition and Liquidity."

We also issued to the holders of the 2003 Subordinated Notes, warrants to
purchase an aggregate of 276,714 shares of common stock with an exercise price
of $1.10 per share. All unexercised subordinated debt warrants expire on October
7, 2006.

The warrants issued in connection with the Exchange Transaction are
exercisable at any time prior to expiration on October 7, 2006. Of those
warrants, warrants for 8,572,400 shares of common stock have an exercise price
of $1.00 per share and warrants for the remaining 1,236,714 shares of common
stock have an exercise price of $1.10 per share.

If the price per share of our common stock at the time of exercise of the
Warrants or conversion of the subordinated debt is in excess of the various
Warrant exercise or conversion prices, exercise of the Warrants and conversion
of the subordinated debt would have a dilutive effect on our common stock. The
amount of such dilution, however, cannot currently be determined as it would
depend on the difference between the stock price and the price at which the
warrants were exercised or the subordinated debt was converted at the time of
exercise or conversion.

WE MUST CONTINUE TO ATTRACT AND RETAIN KEY PERSONNEL TO BE ABLE TO COMPETE
SUCCESSFULLY.

Our performance depends, to a large extent, on the continued service of our
key research and development personnel, other technical employees, managers and
sales personnel and its ability to continue to attract and retain such
personnel. Competition for such personnel is intense, particularly for highly
motivated and experienced research and development and other technical
personnel. We are facing increasing competition from companies with greater
financial resources for such personnel. There can be no assurance that we will
be able to attract and retain sufficient numbers of highly-skilled personnel in
the future, and the inability to do so could have a material adverse effect on
our business, operating results and financial condition and results of
operations.

DEPENDENCE ON KEY EXECUTIVE OFFICERS

Our success will depend, in part, on its ability to attract and retain key
executive officers. The inability to find or the loss of one or more of our key
executive officers could have a material adverse effect on our business,
financial condition and results of operations.

QUARTERLY FLUCTUATION OF RESULTS; POSSIBLE VOLATILITY OF STOCK PRICE

Our results of operations may vary from quarter to quarter due to a variety
of factors including, but not limited to, the timing of the development and
marketing of new pharmaceutical products, the failure to develop such products,
delays in obtaining government approvals, including FDA approval of NDAs or
ANDAs for our products, expenditures to comply with governmental requirements
for manufacturing facilities, expenditures incurred to acquire and promote
pharmaceutical products, changes in the our customer base, a customer's
termination of a substantial account, the availability and cost of raw
materials, interruptions in supply by third-party manufacturers, the
introduction of new products or technological innovations by our competitors,
loss of key personnel, changes in the mix of products sold by us, changes in
sales and marketing expenditures, competitive pricing pressures, expenditures
incurred to pursue or contest pending or threatened legal action and our ability
to meet our financial covenants. There can be no assurance that the we will be

15

successful in avoiding losses in any future period. Such fluctuations may result
in volatility in the price of our common stock.

RELATIONSHIPS WITH OTHER ENTITIES; CONFLICTS OF INTEREST

Mr. John N. Kapoor, Ph.D., our current Chairman of the Board and Chief
Executive Officer from March 2001 to December 2002, and a principal shareholder,
is affiliated with EJ Financial Enterprises, Inc., a health care consulting
investment company ("EJ Financial"). EJ Financial is involved in the management
of health care companies in various fields, and Dr. Kapoor is involved in
various capacities with the management and operation of these companies. The
Kapoor Trust, the beneficiary and sole trustee of which is Dr. Kapoor, is a
principal shareholder of each of these companies. As a result, Dr. Kapoor does
not devote his full time to our business. Although such companies do not
currently compete directly with us, certain companies with which EJ Financial is
involved are in the pharmaceutical business. Discoveries made by one or more of
these companies could render our products less competitive or obsolete. In
addition, one of these companies, NeoPharm, Inc. of which Dr. Kapoor is Chairman
and a major stockholder, recently entered into a loan agreement with us. We also
believe we owe EJ Financial $18,000 in consulting fees for each of 2003, 2002
and 2001, as well as expense reimbursements of approximately $2,000 and $182,000
for 2002 and 2001, respectively. Further, the Kapoor Trust has loaned us
$5,000,000 resulting in Dr. Kapoor effectively becoming a major creditor of ours
as well as a major shareholder. See "Financial Condition and Liquidity."
Potential conflicts of interest could have a material adverse effect on our
business, financial condition and results of operations.

As part of the Exchange Transaction, we also issued subordinated promissory
notes in the aggregate principal amount of approximately $2,767,000 (the "2003
Subordinated Notes"), to the Kapoor Trust, Arjun Waney and Argent Fund
Management, Ltd. ("Argent"). Mr. Waney, a new director of Akorn, Mr. Waney
serves as Chairman and Managing Director of Argent, 51% of which is owned by Mr.
Waney. The 2003 Subordinated Notes mature on April 7, 2006 and bear interest at
prime plus 1.75%, but interest payments are currently prohibited under the terms
of subordination arrangements. Consequently, Mr. Waney and Argent are also
creditors of ours. See "Financial Condition and Liquidity."

ITEM 2. DESCRIPTION OF PROPERTIES

Since August 1998, our headquarters and certain administrative offices, as
well as a finished goods warehouse, have been located in leased space at 2500
Millbrook Drive, Buffalo Grove, Illinois. We leased approximately 24,000 square
feet until June 2000 at which time it expanded to the current occupied space of
approximately 48,000 square feet.

We own a 76,000 square foot facility located on 15 acres of land in
Decatur, Illinois. This facility is currently used for packaging, distribution,
warehousing and office space. In addition, we own a 55,000 square-foot
manufacturing facility in Decatur, Illinois. The Decatur facilities support all
three of our segments. Our Akorn (New Jersey) subsidiary also leases
approximately 35,000 square feet of space in Somerset, New Jersey. This space is
used for manufacturing, research and development and administrative activities
related to the ophthalmic segment. We do not have any idled manufacturing
facilities, however, the capacity utilization at both our Decatur and Somerset
facilities was approximately 62% during the year ended December 31, 2003. We can
produce approximately 65 batches, per month, at normal capacity. Operating the
manufacturing facilities at the reduced level has led to lower gross margins due
to unabsorbed fixed manufacturing costs.

We are in the process of completing an expansion of our Decatur, Illinois
manufacturing facility to add capacity to provide lyophilization manufacturing
services, which manufacturing capability we currently do not have. Subject to
among other things, our ability to generate operating cash flow or to obtain new
financing for future operations and capital expenditures, we anticipate the
completion of the lyophilization expansion in the first half of 2005. As of
December 31, 2003, we had spent approximately $17.9 million on the expansion and
anticipate the need to spend approximately $1.0 million of additional funds
(excluding capitalized interest) to complete the expansion. The majority of the
additional spending will be focused on validation testing of the Lyophilization
facility as the major capital equipment items are currently in place. Once the
Lyophilization

16

facility is validated, we will proceed to produce stability batches to provide
the data necessary to allow the Lyophilization facility to be inspected and
approved by the FDA.

The current combined space is considered adequate to accommodate our
manufacturing needs for the foreseeable future. Lyophilization capabilities are
not currently needed by us, but would give us the capability to manufacture
additional products for our contract customers, allow us to pursue ANDA
products, and allow us to internally produce one of our currently outsourced
products.

ITEM 3. LEGAL PROCEEDINGS

On March 27, 2002, we received a letter informing us that the staff of the
regional office of the Securities and Exchange Commission ("SEC") in Denver,
Colorado, would recommend to the SEC that it bring an enforcement action against
us and seek an order requiring us to be enjoined from engaging in certain
conduct. The staff alleged that we misstated our income for fiscal years 2000
and 2001 by allegedly failing to reserve for doubtful accounts receivable and
overstating our accounts receivable balance as of December 31, 2000. The staff
alleged that internal control and books and records deficiencies prevented us
from accurately recording, reconciling and aging our accounts receivable. We
were also notified that certain of our former officers, as well as a then
current employee had received similar notifications. Subsequent to the issuance
of our consolidated financial statements for the year ended December 31, 2001,
we determined the need to restate our financial statements for 2000 and 2001,
resulting in the recording of a $7.5 million increase to the allowance for
doubtful accounts as of December 31, 2000, which we had originally recorded as
of March 31, 2001.

On September 25, 2003, we consented to the entry of an administrative cease
and desist order to resolve the issues arising from the staff's investigation
and proposed enforcement action as discussed above. Without admitting or denying
the findings set forth therein, the consent order finds that we failed to
promptly and completely record and reconcile cash and credit remittances,
including those from our top five customers, to invoices posted in our accounts
receivable sub-ledger. According to the findings in the consent order, our
problems resulted from, among other things, internal control and books and
records deficiencies that prevented us from accurately recording, reconciling
and aging our receivables. The consent order finds that our 2000 Form 10-K and
first quarter 2001 Form 10-Q misstated our account receivable balance or,
alternatively, failed to disclose the impairment of our accounts receivable and
that our first quarter 2001 Form 10-Q inaccurately attributed the increased
accounts receivable reserve to a change in estimate based on recent collection
efforts, in violation of Section 13(a) of the Exchange Act and rules 12b-20,
13a-1 and 13a-13 thereunder. The consent order also finds that we failed to keep
accurate books and records and failed to devise and maintain a system of
adequate internal accounting controls with respect to our accounts receivable in
violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The
consent order does not impose a monetary penalty against us or require any
additional restatement of our financial statements. The consent order contains
an additional commitment by us to do the following: (A) appoint a special
committee comprised entirely of outside directors, (B) within 30 days after
entry of the order, have the special committee retain a qualified independent
consultant ("consultant") acceptable to the staff to perform a test of our
material internal controls, practices, and policies related to accounts
receivable, and (C) within 180 days, have the consultant present his or her
findings to the commission for review to provide assurance that we are keeping
accurate books and records and have devised and maintained a system of adequate
internal accounting controls with respect to our accounts receivables. On
October 27, 2003, we engaged Jefferson Wells, International ("Jefferson Wells")
to serve as consultant in this capacity. On February 6, 2004, Jefferson Wells
reported its findings to the special committee, such findings being that we have
made the necessary personnel changes and procedural improvements required to
maintain control over the accounts receivable process and establish the
necessary reserves. Jefferson Wells' report was delivered to the SEC on February
13, 2004.

In October 2000, the FDA issued a warning letter to us following the FDA's
routine cGMP inspection of our Decatur manufacturing facilities. An FDA warning
letter is intended to provide notice to a company of violations of the laws
administered by the FDA. We believe its primary purpose is to elicit voluntary
corrective action. The letter warns that if voluntary action is not forthcoming,
the FDA may use other legal means to compel compliance. These include seizure of
products and/or injunction of the company and responsible
17

individuals. The October 2000 warning letter addressed several deviations from
regulatory requirements including general documentation and cleaning validation
issues and requested corrective actions be undertaken by us. We initiated
corrective actions and responded to the warning letter. Subsequently, the FDA
conducted another inspection in late 2001 and identified additional deviations
from regulatory requirements including cleaning validation and process control
issues. This led to the FDA leaving the warning letter in place and issuing a
Form 483 to document its findings. While no further correspondence was received
from the FDA, we responded to the inspectional findings. This response described
our plan for addressing the issues raised by the FDA and included improved
cleaning validation, enhanced process controls and approximately $2.0 million of
capital improvements. In August 2002, the FDA conducted an inspection of the
Decatur facility and identified deviations from cGMPs. We responded to these
observations in September 2002. In response to our actions, the FDA conducted
another inspection of the Decatur facility during the period from December 10,
2002 to February 6, 2003. This inspection identified deviations from regulatory
requirements including the manner in which we process and investigates
manufacturing discrepancies and failures, customer complaints and the
thoroughness of equipment cleaning validations. Certain deviations identified
during this inspection had been raised in previous FDA inspections. We have
responded to these latest findings in writing and in a meeting with the FDA in
March 2003. We set forth our plan for implementing comprehensive corrective
actions and have provided progress report to the FDA on April 15, May 15 and
June 15, 2003.

We continued to have discussions with the FDA relating to our ongoing
compliance matters and continue to complete our current corrective plan for the
Decatur facility in the fourth quarter of 2003. On February 11, 2004, the FDA
began an inspection of the Decatur facility. This inspection is still ongoing at
the time of this filing.

Upon completion of the inspection, the FDA may take any of the following
actions: (i) find that the Decatur facility is in substantial compliance; (ii)
require us to undertake further corrective actions, which could include a recall
of certain products, and then conduct another inspection to assess the success
of those efforts; (iii) seek to enjoin us from further violations, which may
include temporary suspension of some or all operations and potential monetary
penalties; or (iv) take other enforcement action which may include seizure of
our products. At this time, it is not possible to predict the FDA's course of
action.

If the FDA chooses option (iii) or (iv), such action could significantly
impair our ability to continue to manufacture and distribute our current product
line and generate cash from our operations and could result in a covenant
violation under our senior debt, any or all of which would have a material
adverse effect on our liquidity and our ability to continue as a going concern.
Any monetary penalty assessed by the FDA also could have a material adverse
effect on our liquidity.

We believe that unless and until the issues identified by the FDA have been
successfully corrected and the corrections have been verified through
inspection, it is doubtful that the FDA will approve any NDAs or ANDAs that may
be submitted by us for products to be manufactured at our Decatur facility. This
has adversely impacted, and is likely to continue to adversely impact, our
ability to grow sales. However, we believe that unless and until the FDA chooses
option (iii) or (iv), we will be able to continue manufacturing and distributing
our current product lines.

On December 19, 2002 and January 22, 2003, we received demand letters
regarding claimed wrongful deaths allegedly associated with the use of the drug
Inapsine, which we produced. The total amount claimed was $3.8 million. In July
2003, we agreed to a settlement with respect to one of the claims alleged by
these demand letters. We do not believe that this settlement or the outcome of
the second alleged claim will have a material impact on our financial position.

On August 9, 2003, Novadaq Technologies, Inc. ("Novadaq") notified us that
it had requested arbitration with the International Court of Arbitration ("ICA")
related to or dispute with Novadaq regarding the issuance of a Right of
Reference to Novadaq from Akorn for Novadaq's NDA and Drug Master File ("DMF")
for specified indications for Akorn's drug IC Green. In its request for
arbitration, Novadaq asserts that we are obligated to provide the Right of
Reference as described above pursuant to an amendment dated September 26, 2002
to the January 4, 2002 Supply Agreement between the two companies. We do not
believe we are obligated to provide the Right of Reference which, if provided,
would likely reduce the required
18

amount of time for clinical trials and reduce Novadaq's cost of developing a
product for macular degeneration. We are also contemplating the possible
development of a separate product for macular degeneration which, if developed,
could face competition from any product developed by Novadaq. Even if the Right
of Reference is provided, the approval process for such a product is expected to
take several years. On October 17, 2003, the ICA notified us that it decided
that this matter shall proceed to arbitration. The arbitration has been
scheduled for the week of June 7, 2004. We are in the process of preparing for
arbitration on this matter and will defend ourselves vigorously.

In connection with the request for arbitration described above, on August
22, 2003, Novadaq filed a lawsuit and a Notice of Emergency Motion in the
Circuit Court of Cook County, Illinois, County Department, Chancery Division for
interim relief related to the issuance of the Right of Reference from Akorn to
Novadaq. On September 22, 2003, Akorn and Novadaq entered into an Agreed Order
whereby we would provide the requested Right of Reference to Novadaq. The Agreed
Order terminates upon the settlement of the dispute between the parties or in
the event that the final disposition of the arbitration filed with the ICA
results in a final decision against Novadaq or a failure to hold that Novadaq
has a right to the Right of Reference.

On October 8, 2003, pursuant to the terms of the Letter Agreement dated
September 26, 2002 between Akorn and AEG, as amended (the "AEG Letter
Agreement"), we terminated our consultant AEG Partners LLC ("AEG"). AEG contends
that, as a result of the Exchange Transaction, we must pay it a "success fee"
consisting of $686,000 and a warrant to purchase 1,250,000 shares of our common
stock at $1.00 per share, and adjust the terms of the warrant, pursuant to
certain anti-dilution provisions, to take into account the impact of the
convertible preferred stock issued in connection with the exchange transaction.
We dispute that AEG is owed this success fee. Pursuant to the AEG Letter
Agreement, we and AEG are trying to resolve the dispute. If this fails, the AEG
Letter Agreement provides for mandatory and binding arbitration. On January 9,
2004, AEG filed a demand for arbitration. A single arbitrator has been chosen,
but no arbitration date has been set. We are in the process of preparing for
arbitration and will vigorously defend ourselves and assert any appropriate
counterclaims in regards to this matter.

On October 14, 2003, Leerink Swann & Co., Inc. ("Leerink") filed a
complaint in the Supreme Court of the State of New York alleging a breach of
contract regarding our payment of fees by for investment banking services.
Leerink alleged we were obligated to pay $1,765,032 pursuant to a written
agreement dated May 8, 2003 between Leerink and Akorn (the "Leerink Agreement").
We disputed that Leerink was owed $1,765,032. On December 5, 2003, we reached a
settlement with Leerink where, among other things, we paid $750,000 to Leerink,
and we extended the Leerink Agreement for an additional year. As a result of the
settlement, the above mentioned complaint was dismissed on December 8, 2003.

On February 23, 2004, we were sued in the United States District Court for
the District of Arizona for damages resulting from the death of an Arabian show
horse allegedly injected with the drug Sarapin in the summer of 2003. The
complaint alleges that we are liable in strict products liability, in negligence
and for injury to property for manufacturing and selling the Sarapin injected
into the horse. The complaint alleges that the Sarapin was sold at a time when
several lots of Sarapin were being recalled due to a "lack of sterility
assurances." The complaint seeks unspecified special, general and punitive
damages against us in an amount in excess of $75,000. We tendered the defense of
the complaint to our insurer, and the insurer has indicated that the tender will
be accepted subject to a reservation of rights as to the punitive damage claim.

We are party to legal proceedings and potential claims arising in the
ordinary course of our business. The amount, if any, of ultimate liability with
respect to such matters cannot be determined. Despite the inherent uncertainties
of litigation, we at this time do not believe that such proceedings will have a
material adverse impact on our financial condition, results of operations, or
cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the quarter
ended December 31, 2003.

19

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock was traded on the NASDAQ National Market under the symbol
AKRN until June 24, 2002. Because our Form 10-K for the year ended December 31,
2001 contained unaudited financial statements, our common stock was delisted for
the NASDAQ on June 25, 2002, for non-compliance with the NASDAQ report filing
requirements. Subsequently, our common stock has traded on the Pink Sheets under
the symbol AKRN.

On March 15, 2004, there were approximately 589 holders of record of our
common stock. This number does not include shareholders for which shares are
held in a "nominee" or "street" name. The closing price of our common stock on
March 15, 2004 was $3.35 per share. The bid prices below reflect the high and
low bid quotations from the NASDAQ National Market and the Pink Sheets, as
applicable, for the periods set forth in the first paragraph above.

High and low bid prices for the periods indicated were:

We did not pay cash dividends in 2003, 2002 or 2001 and do not expect to
pay dividends on our common stock in the foreseeable future. Moreover, we are
currently prohibited by our New Credit Facility from making any dividend
payment. See "Financial Conditions and Liquidity beginning on page 25."

20

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth our selected consolidated financial
information for the years ended December 31, 2003, 2002, 2001, 2000, and 1999.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

Our losses from operations in recent years and working capital
deficiencies, together with the need to successfully resolve our ongoing
compliance matters with the Food and Drug Administration ("FDA"), have raised
substantial doubt about our ability to continue as a going concern.

On October 7, 2003, a significant threat to our ability to continue as a
going concern was resolved when we consummated a transaction with a group of
investors that resulted in the extinguishment of our then outstanding senior
bank debt in the amount of approximately $37,731,000 in exchange for shares of
Akorn's

21

convertible preferred stock, warrants to purchase shares of Akorn's common
stock, subordinated promissory notes in the aggregate amount of $2,767,139 and a
new credit facility under which approximately $7,000,000 was outstanding as of
the date of the transaction, $5,473,862 of which was paid to the investors in
the transaction. For more information regarding this transaction, see Note
G -- "Financing Arrangements".

Although we have refinanced our debt on a long-term basis as described
above, it continues to be subject to ongoing FDA compliance matters that could
have a material adverse effect on us. See Note N -- "Commitments and
Contingencies" for further description of these matters. We are working with the
FDA to favorably resolve such compliance matters and have submitted to the FDA
and continue to implement a plan for comprehensive corrective actions at our
Decatur, Illinois facility. On February, 11, 2004, the FDA began an inspection
of the Decatur facility. This inspection is still ongoing at the time of this
filing. The management of Akorn believe that Akorn will successfully resolve
these compliance matters with the FDA. In addition, if we are enjoined from
further violations, including a temporary suspension of some or all operations
of the Decatur facility, management believes it will be able to successfully
manage through this situation. There can be no guarantee that the FDA matters
will be successfully resolved, and if we are not successful in doing so, there
remains substantial doubt about our ability to continue as a going concern.

We have added key management personnel, including the appointment in early
2003 of a new chief executive officer and additional personnel in critical
areas. Management has reduced our cost structure, improved our processes and
systems and implemented strict controls over capital spending. Management
believes these activities will continue to improve our results of operations,
cash flow from operations and our future prospects.

As a result of all of the factors cited in the preceding paragraphs, we
believe that we should be able to sustain our operations and continue as a going
concern. However, the ultimate outcome of this uncertainty cannot be presently
determined and, accordingly, there remains substantial doubt as to whether we
will be able to continue as a going concern.

22

Our revenues are derived from sales of diagnostic and therapeutic
pharmaceuticals by the ophthalmic segment, from sales of diagnostic and
therapeutic pharmaceuticals by the injectable segment, and from contract
services revenue. The following table sets forth the percentage relationships
that certain items from our Consolidated Statements of Operations bear to
revenues for the years ended December 31, 2003, 2002 and 2001.

COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 2003 AND 2002

Consolidated revenues decreased 11.5% for the year ended December 31, 2003
compared to the prior year. Ophthalmic segment revenues decreased 11.9%, or
$3,523,000, partially due to the temporary suspension throughout 2003 of
production of Fluress and Flouracaine due to leaking containers, as well as
increased customer purchases of angiography and ointment products in the fourth
quarter of 2002, which resulted in surplus customer inventory and lower sales
during the first half of 2003. Injectable segment revenues decreased 6.3%, or
$822,000 for the year, reflecting the lower volumes of anesthesia and antidote
products partially offset by sales of our newly introduced product, Lidocaine
Jelly. Contract services revenues decreased by 17.9%, or $1,583,000, due mainly
to customer concerns about the status of the ongoing FDA compliance matters at
our Decatur facilities as well as the temporary closure of an aseptic production
room at that same facility.

We anticipate that revenues from all of our product segments are not likely
to substantially grow until the issues surrounding the FDA review are resolved.
The FDA compliance matters are not anticipated to be resolved prior to the
second quarter of 2004; however, no assurance can be made that these matters
will be resolved by such time, or ever. See Part II -- Item 1 -- "Legal
Proceedings." The production of Fluress and Flouracaine, two of our opthalmic
products, remains suspended pending development of a new container closure
system for those products. We do not expect to resume production of Fluress and
Flouracaine prior to the second quarter of 2004. As a result, we expect that
revenues and cash flow from operations for the first quarter of 2004 will be
adversely impacted and that revenues and cash flows in the second quarter of
2004 and beyond could be adversely impacted if we are unable to resume
production of Fluress and Flouracaine in the second quarter of 2004.

23

The chargeback and rebate expense for the year ended December 31, 2003
declined to $12,836,000 from $15,418,000 in 2002, due to a general decrease in
volume and the increase in the product sales mix of lower chargeback and rebate
percentage items.

The 2003 consolidated gross margin of $12,148,000 was 26.7% for 2003 as
compared to a gross margin of $20,537,000, or 39.9% for 2002. The gross profit
by each of our segments also decreased due to the decrease in volume across all
revenue categories as well as increased costs and reduced capacity associated
with the resolution of our current FDA compliance matters.

Selling, general and administrative ("SG&A") expenses decreased 23.2%, to
$16,015,000 from $20,860,000, for the year ended December 31, 2003 as compared
to the same period in 2002. Included in 2002 results were $1,559,500, $257,000
and $545,000 asset impairment charges related to the Johns Hopkins patents,
intangible assets and construction-in-progress. Excluding these charges, SG&A
decreased by 13.4% due to lower personnel and marketing costs.

Provision, net of recoveries, for bad debts was a $471,000 net recovery
year to date, reflecting a $309,000 provision, which was offset by $780,000 in
recoveries for the same period. The bad debt expense net of recoveries for the
same period in 2002 was a net $55,000 recovery.

Research and development ("R&D") expense decreased 22.3% in 2003, to
$1,465,000 from $1,886,000 for the year ended December 31, 2002, due to
refocusing resources away from R&D activities to resolve issues related to FDA
compliance.

Interest and other expense for the full year 2003 was $6,220,000, a 97.5%,
or $3,070,000 increase compared to the same period in the prior year, reflecting
a $3,102,000 loss on the Exchange Transaction disclosed in Note G of the
financial statements offset by lower interest rates and a lower debt balance as
a result of the Exchange Transaction.

We recorded a valuation allowance of $4,816,000 for the twelve months
ending December 31, 2003, which offset the deferred income tax asset recorded in
that period. The net income tax benefit of $171,000 for the year relates to
state tax refunds. The net income tax provision of $6,239,000 for the same
period in 2002 includes a $9,216,000 deferred income tax valuation allowance
established against deferred income tax assets recorded in 2002 and in prior
periods.

We reported a net loss of $12,325,000 or $0.62 per weighted average share
for the twelve month period ended December 31, 2003, versus $12,952,000 or $0.66
per weighted average share for the comparable prior year. The decrease in net
loss was due primarily to the impact of the deferred income tax valuation
allowance established in 2002 against previously recorded income tax assets, as
well as reduced SG&A, R&D and interest expenses offset by lower sales, gross
profit and the loss on the Exchange Transaction in 2003.

COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 2002 AND 2001

Consolidated revenues increased 23.8% for the year ended December 31, 2002
compared to the prior year. Results for 2002 exclude shipments made at or near
the end of the year for which shipping terms are FOB destination and,
accordingly, revenue is not recognized until delivery occurs. The revenue
related to these shipments recognized in the first quarter of 2003 was $601,000.
Prior year revenues reflect virtually all shipments to customers during the
applicable year as virtually all sales terms were FOB shipping point. See Note
B -- "Summary of Significant Accounting Policies" to the consolidated financial
statements included in Item 8.

Ophthalmic segment revenues increased 74.7%, or $12,643,000, primarily
reflecting lower charges related to chargebacks and returns in 2002 (See Note
B -- "Summary of Significant Accounting Policies" to the consolidated financial
statements included in Item 8.) as compared to 2001, and, to a lesser extent,
increased angiography and ointment product sales. The 2002 sales mix reflects
our shift in sales and marketing efforts within the Ophthalmic segment to those
key product lines that generate higher margins. Injectable revenues increased
34.3%, or $3,314,000 compared to the same period in 2001 primarily due to the
lower level of chargebacks and returns and a 52% increase in anesthesia and
antidote product sales in 2002. Contract

24

Services revenues decreased 40.7%, or $6,083,000 compared to the same period in
2001 due mainly to customer concerns about the status of the ongoing FDA issues
at our Decatur facility.

Consolidated gross margin of $20,537,000 was an increase of 39.9% from
$6,398,000, or 15.4% from the prior year, due primarily to the aforementioned
increase in revenues in 2002 as compared to 2001, as well as an increase in the
reserve for slow-moving, unsaleable and obsolete inventory items recorded in
2001. Improvements in gross margin also resulted from our continued focus on
shifting the product mix to higher gross margin products in the angiography,
antidote and ointment product lines.

SG&A expenses increased 10.4%, from 18,900,000 to $20,860,000 for the year
due to a $1,559,500 impairment charge related to the JHU/APL settlement (See
Note N -- "Commitments and Contingencies" to the consolidated financial
statements included in Item 8), a $545,000 asset impairment charge related to
abandoned construction projects, a $257,000 intangible asset charge and higher
legal and marketing expenditures in 2002. SG&A expenses in 2001 included
$1,117,000 of restructuring-related charges consisting primarily of severance
and lease costs.

The provision for bad debt decreased from $4,480,000 in 2001 to a $55,000
recovery in 2002. The decrease is primarily related to our increased efforts to
collect past due receivables.

Amortization of intangibles decreased from $1,493,000 to $1,411,000, or
5.5% over the comparable period in the prior year, reflecting the write-off of
intangibles which were determined to have been impaired in 2002, offset in part
by inception of the intangible amortization related to the product launch of
Paremyd.

R&D expense decreased 27.4% for the year reflecting our scaled back
research activities to preserve capital and to focus on strategic product niches
such as controlled substances and ophthalmic products which we believe will add
greater value. The lower level of R&D in 2002 also reflects our refocusing of
resources away from R&D to resolve issues in the FDA's Form 483 notification.

Interest expense of $3,150,000 was 16.4% lower than the $3,768,000 recorded
in 2001, due to a lower debt balance and lower interest rates in 2002.

An income tax provision of $6,239,000 was recorded for 2002, compared to an
income tax benefit of $9,780,000 recorded in 2001. The 2002 income tax provision
primarily relates to the valuation allowance of $9,216,000 recorded during 2002.
In performing its analysis of whether a valuation allowance to reduce the
deferred tax asset was necessary, we considered both negative and positive
evidence, which could be objectively verified. Based upon this analysis, the
negative evidence, primarily the three consecutive years of operating losses,
outweighed the positive evidence in determining the amount of the deferred
income tax assets that is more likely than not to be realized. Based upon its
analysis, beginning with the September 30, 2002 deferred tax assets, we
established a valuation allowance to reduce the deferred tax assets to zero.

Net loss for 2002 was $12,952,000, or $0.66 per share, compared to a net
loss of $15,146,000, or $0.78 per share, for the prior year. The improvement in
revenue and gross profit was offset by the increase in the provision for income
taxes reflecting the reduction of deferred income tax balance to zero.

FINANCIAL CONDITION AND LIQUIDITY

OVERVIEW

We have experienced losses from operations in 2003 and 2002 of $6,300,000
and $3,600,000, respectively. The net losses for these years were $12,300,000
and $13,000,000, respectively.

As of December 31, 2003, we had cash and cash equivalents of $218,000. The
net working capital deficiency at December 31, 2003 was $1,364,000 versus
$30,564,000 at December 31, 2002, resulting primarily from the retirement of the
defaulted The Northern Trust Company ("Northern Trust") debt in the Exchange
Transaction.

During the year ended December 31, 2003, we used $1,932,000 in cash from
operations, as the net loss for the year was partially offset by reductions in
inventory. Investing activities, which include the purchase of equipment,
required $1,743,000 in cash and included $1,504,000 related to the lyophilized
(freeze-dried)
25

pharmaceuticals manufacturing line expansion. Financing activities provided
$3,529,000 in cash primarily for borrowings on our line of credit. The balance
on our line of credit with our primary lender was $1,500,000 at December 31,
2003.

On October 7, 2003, a group of investors (the "Investors") purchased all of
Akorn's then outstanding senior bank debt from Northern Trust, a balance of
$37,731,000, at a discount and exchanged such debt with Akorn (the "Exchange
Transaction") for (i) 257,172 shares of Series A 6.0% Participating Convertible
Preferred Stock of Akorn, ("Preferred Stock") (ii) subordinated promissory notes
in the aggregate principal amount of approximately $2,767,000 (the "2003
Subordinated Notes"), (iii) warrants to purchase an aggregate of 8,572,400
shares of Akorn's common stock with an exercise price of $1.00 per share
("Exchange Warrants"), and (iv) $5,473,862 in cash from the proceeds of the term
loan under the New Credit Facility described in a following paragraph. The 2003
Subordinate Notes and cash were issued by Akorn to (a) The John N. Kapoor Trust
dtd 9/20/89 (the "Kapoor Trust"), the sole trustee and sole beneficiary of which
is Dr. John N. Kapoor, Akorn's Chairman of the Board of Directors and the holder
of a significant stock position in Akorn, (b) Arjun Waney, a newly-elected
director and the holder of a significant stock position in Akorn, and (c) Argent
Fund Management Ltd., for which Mr. Waney serves as Chairman and Managing
Director and 51% of which is owned by Mr. Waney. Akorn also issued to the
holders of the 2003 Subordinated Notes warrants to purchase an aggregate of
276,714 shares of common stock with an exercise price of $1.10 per share. A
portion of the legal fees of the Investors was paid for by Akorn.

Simultaneously with the consummation of the Exchange Transaction, we
entered into a credit agreement with LaSalle Bank providing us with a $7,000,000
term loan and a revolving line of credit of up to $5,000,000 to provide for
working capital needs (collectively, the "New Credit Facility") secured by
substantially all of the assets of Akorn. Our obligations under the New Credit
Facility have been guaranteed by the Kapoor Trust and Arjun Waney. In exchange
for this guaranty, we issued additional warrants to purchase 880,000 and 80,000
shares of common stock to the Kapoor Trust and Arjun Waney, respectively, and
have agreed to issue to each of them, on each anniversary of the date of the
consummation of the Exchange Transaction, warrants to purchase an additional
number of shares of common stock equal to 0.08 multiplied by the principal
dollar amount of the our indebtedness then guaranteed by them under the New
Credit Facility. The warrants issued in exchange for these guarantees have an
exercise price of $1.10 per share.

The primary impact of the Exchange Transaction and New Credit Facility on
our liquidity and capital resources was as follows:

- The then-existing default on our senior bank debt with Northern Trust was
eliminated, as the associated debt was retired;

- The then-existing defaults on our subordinated loans from NeoPharm, Inc.
and the Kapoor Trust were waived;

- The total amount of our senior bank debt was reduced from $37,731,000 as
of September 30, 2003 to $7,000,000 as of the closing of those
transactions;

- The interest rate on our senior bank debt was reduced from prime plus
3.0% to prime plus 1.75% for the new term loans and prime plus 1.50% for
the new revolving line of credit;

- We obtained a revolving line of credit of up to $5,000,000 and an
additional $1,000,000 pursuant to the term loan under the New Credit
Facility to meet working capital needs and fund future operations;

- We issued additional subordinated debt with an aggregate principal amount
of approximately $2,767,000, which accrues interest at a rate of prime
plus 1.75% per annum;

- We issued preferred stock with an aggregate initial stated value of
$25,717,200, which accrues dividends at a rate of 6.0% per annum; and

- The Investors acquired Preferred Stock and warrants that, as of the
closing, had the right to acquire approximately 44,000,000 shares of our
common stock, or more than 220% of the outstanding shares of common stock
prior to the closing.

26

As of March 15, 2004, we had approximately $375,000 in cash and
approximately $2,000,000 of undrawn availability under the New Credit Facility
with LaSalle Bank.

We believe that our new line of credit and cash flow from operations will
be sufficient to operate our business. However, we incurred operating losses for
the last three years and although we were able to generate positive cash flow
from operations in 2002, cash flow from operations for 2003 was ($1,932,000).

If the new line of credit and cash flow from operations are not sufficient
to fund the operation of our business, we may be required to seek additional
financing. Such additional financing may not be available when needed or on
terms favorable to Akorn and its shareholders. Any such additional financing, if
obtained, will likely require the granting of rights, preferences or privileges
senior to those of the common stock and result in additional dilution of the
existing ownership interests of the common stockholders.

We continue to be subject to potential claims by the FDA that could have a
material adverse effect on us. See part II -- Item 1 -- "Legal Proceedings."
There can be no guarantee that we will successfully resolve the ongoing
compliance matters with the FDA. However, we have submitted to the FDA and have
implemented a plan for comprehensive corrective actions at our Decatur, Illinois
facility.

Our recurring losses, working capital deficiencies and FDA compliance
issues raise substantial doubt as to our ability to continue as a going concern.

NEW CREDIT FACILITY

As described in Note G -- "Financing Arrangements" -- to the Consolidated
Financial Statements, we entered into a New Credit Facility with LaSalle Bank.
The New Credit Facility with LaSalle Bank consists of a $5,500,000 term loan A,
a $1,500,000 term loan B (collectively, the "Term Loans"), as well as a
revolving line of credit of up to $5,000,000 (the "Revolver") secured by
substantially all of our assets. The New Credit Facility matures on October 7,
2005. The Term Loans bear interest at prime plus 1.75% and require principal
payments of $195,000 per month commencing October 31, 2003, with the payments
first to be applied to term loan B. The Revolver bears interest at prime plus
1.50%.

Availability under the Revolver is determined by the sum of (i) 80% of
eligible accounts receivable, (ii) 30% of raw material, finished goods and
component inventory excluding packaging items, not to exceed $2.5 million, and
(iii) the difference between 90% of the forced liquidation value of machinery
and equipment ($4,092,000) and the sum of $1,750,000 and the outstanding balance
under term loan B. The New Credit Facility contains certain restrictive
covenants including but not limited to certain financial covenants such as
minimum EDITDA levels, Fixed Charge Coverage Ratios, Senior Debt to EBITDA
ratios and Total Debt to EBITDA ratios. If we are not in compliance with the
covenants of the New Credit Facility, LaSalle Bank has the right to declare an
event of default and all of the outstanding balances owed under the New Credit
Facility would become immediately due and payable. The New Credit Facility also
contains subjective covenants providing that we would be in default if, in the
judgment of the lenders, there is a material adverse change in our financial
condition. We have negotiated an amendment to the New Credit Facility effective
December 31, 2003 that will clarify certain covenant computations and waive
certain technical violations. Because the New Credit Facility also requires us
to maintain our deposit accounts with LaSalle, the existence of these subjective
covenants, pursuant to EITF Abstract No. 95-22, require that we classify
outstanding borrowings under the Revolver as a current liability

FDA COMPLIANCE MATTERS

As described in more detail in Part II -- Item 1 -- "Legal Proceedings," we
continue to be subject to potential claims by the FDA. While we are cooperating
with the FDA and seeking to resolve our ongoing compliance matters, an
unfavorable outcome may have a material impact on our operations and its
financial condition, results of operations and/or cash flows and may constitute
a covenant violation under the New Credit Facility, any or all of which could
have a material adverse effect on our liquidity and ability to continue as a
going concern.

27

FACILITY EXPANSION

In 2000, we began an expansion project at our Decatur, Illinois facility to
add capacity to provide Lyophilization manufacturing services, which is a
capability we do not have currently. Subject to our ability to generate
operating cash flow or obtain new financing for future operations and capital
expenditures, we anticipate the completion of the Lyophilization expansion in
the first half of 2005. As of December 31, 2003, we had spent approximately
$17.9 million on the expansion and anticipates the need to spend approximately
$1.0 million of additional funds (excluding capitalized interest) to complete
the expansion. The majority of the additional spending will be focused on
validation testing of the Lyophilization facility as the major capital equipment
items are currently in place. On