RE:CIBC TODAYIt was part of a 130 page report entitled: Canadian Specialty Pharmaceuticals - Is the Model Broken? Their focus was on 4 companies (CPH,CXR, MSL and VRX). I've included an intro + the cover page for the analyst report. GLTA
--------------------------------------------------------------------------------------------------------------------------
Badly Bruised, But Not Broken
The Canadian specialty pharmaceutical sector has been enormously successful over the past five to seven years, with M&A spurred on by the plethora of products being jettisoned from Big Pharma, access to low cost capital, and the benefit of being domiciled in an attractive tax jurisdiction. However, the sector has run into some headwinds recently, notwithstanding the trials and tribulations of Valeant (VRX-SP), the poster child for the woes of the industry.
In the face of those headwinds, more investors are questioning the sustainability of the growth-by-acquisition business model, and whether it is truly generating value beyond short-term accretion and without reliance on aggressive price increases. Furthermore, what happens when accelerated M&A that is supported by cheap debt suddenly slows to a crawl when companies become too highly leveraged? Additionally, there is the question of whether companies that have become overly diversified through a rapid succession of disparate acquisitions can effectively and efficiently integrate and manage multiple therapeutic areas and diverse business lines.
The specialty pharma sector has definitely taken it on the chin lately, leaving it with a great deal of reputational repair to accomplish. While we do not think the model is broken, we do believe that, in order to continue to be successful, the sector needs to evolve.
Future success will require the sector to undergo a transition away from the feeding frenzy M&A practices we have witnessed over the past several years, to a more balanced approach that combines selective M&A, a reasonable investment in R&D, and a greater emphasis on higher-quality products that have expanded market opportunity based upon their sensitivity to promotional spend, the potential for expansion of indications / interested audiences, and the possibility for greater reimbursement.
We believe that investors will:
Become more discriminating in their assessment of acquisitions, focusing more on valuations, growth drivers that are independent of pricing power, durability in light of competition, and the ability of management to execute and rapidly realize synergies.
Be more supportive of growth strategies that minimize exposure to legacy assets that have limited, or no market protection, and that rely on price increases to show revenue growth.
Concordia Healthcare Corp Waiting For AMCo
What's The Event
As of November 29, we are initiating coverage of Concordia Healthcare with a Sector Performer rating and a 12- to 18-month price target of $47, which is based on a 10x multiple of 2016E EV/EBITDA.
Implications
Concordia has a deal-driven management team that is highly capable of sourcing and executing acquisitions. Since its inception three years ago, Concordia has transformed into a diverse, fully integrated global specialty pharma company with over 200 products being sold in 100 countries.
AMCo is Concordia's first company acquisition, and a very large one at that. The transaction only closed on October 21. Given the size of the acquisition, and that we have yet to see one quarter where AMCo is included in Concordia's financials, we take a conservative stance for now. We will wait to see how the AMCo business performs as part of Concordia, and monitor how management executes the integration and pays down debt. Management has guided for 2016 revenue of $1.02 billion–$1.06 billion and EBITDA of $610 million– $640 million. Our estimates are just slightly below the low end of the range.
While we see merit in the model of acquiring legacy assets, using price as a growth driver, in the future we would like to see Concordia consider more products that have expanded market opportunity based on sensitivity to promotional spend, potential for expanded indications, and possibility for greater reimbursement.
Given Concordia's highly leveraged balance sheet, its business developments efforts will be constrained, and no significant acquisitions in 2016 are expected. Instead, management will likely be focused on debt reduction to reduce its net debt/EBITDA multiple to under 5.5x.
Concordia stock will largely reflect the performance of AMCo. We will re-evaluate our position once we gain more clarity on AMCo's drug portfolio, confidence on management's ability to grow a newly acquired business that operates primarily in Europe, and comfort that AMCo can provide the growth that Concordia expects.