Found this "take" on CXR on a another bull board Some thoughts on this company. If someone has special insights about the pharma sector, particularly the areas in which Concordia operates or can think up some risks I'm not considering, they would be greatly appreciated.
2016 estimates:
~4.2x P/E
~7.5x EV/EBITDA
<5.25x Net Debt/TTM EBITDA
Looking ahead to 2017, company is on <6.5x EV/EBITDA. Most of EBITDA converts to unlevered free cash because of negligible capex and low taxes.
Yea, it took on considerable debt, levering up to ~6x net debt/EBITDA at the worst possible time when Turing and Valeant's price gouging drew negative publicity towards the entire sector. I think this stock has been punished unfairly though. Concordia doesn't really have the same business model or issues as Valeant (though it has some similarities). Some of the selling makes sense, because of the increased leverage, but a lot of it was based on false rumours (around deal financing), non-economic reasons (margin selling + selling from new holders from equity raise who probably didn't know the company that well + further momentum based selling + risk-off market environment) and misperception of how the company works (linking this to Valeant is to miss many differences between the companies). But the financing went over smoothly, Concordia is not guilty of egregious price gouging like Valeant, it can support the debt and delever pretty quickly, and the AMCo acquisition was strategically sound. I think as uncertainties continue to clear up + the company deleverages + consolidated financials come through and market better appreciates AMCo's assets, the share price will recover sharply.
I like Concordia's focus on acquiring products or a portfolio of products instead of entire companies (notwithstanding the AMCo transaction). This is a simpler acquisition strategy as there is lesser integration risk from acquiring products than companies, and it makes the company’s strategy more manageable for both management and investors. It focuses on managing off-patent legacy drugs and then uses that cash to continue building out its drug portfolio (eg. acquiring drugs coming off patent from bigger players) and to fund development of its orphan drugs segment (though this is a small part of the business).
AMCo’s business is focused on buying, developing and managing off-patent generic and branded drugs. Many of these drugs are in niche areas with few competitors and have been off patent for decades so pricing and volumes have stabilized. These drugs have a long history (decades) of being prescribed because they are affordable and have a strong track record of efficacy and safety. As a result, the portfolio of drugs produces stable, predictable cash and there is not much economic incentive for other drug companies to develop new drugs to serve low volume areas where effective and affordable treatment already exists. The company’s portfolio is well diversified with over 190+ products in 100+ countries, further adding to the stability and predictability of its cash generation. Manufacturing is outsourced so the business model, like Concordia’s, is asset light requiring negligible capex.
Deal made strategic sense for Concordia as AMCo has a complementary business model, but more importantly, AMCo will help to diversify its product portfolio, which previously was too dependent on a single drug (Donnatal has gone from comprising 42% of revenue in 2014 to ~10% in 2016). The company was looking for both geographic and product diversification, the AMCo acquisition provides both. The acquisition also gives Concordia access to AMCo's infrastructure and distribution network to (I'm guessing) introduce its drugs into new markets.
The company can grow organically without further acquisitions through new product launches (~60 launches expected over next 3-4 years), volume growth in various geographies, and conservative (single digit %) price increases. The pipeline is low risk as its mainly comprised of reformulation of existing drugs (eg. developing different dosages). The CEO has stated that the company is not considering further acquisitions for now (aside from small tuck-ins), instead focusing on deleveraging and developing/launching its pipeline. CEO also bought 1 million CAD worth of stock in mid-November and he is the largest individual holder of stock in the company. Cinven (the PE group that formed AMCo) is the largest overall shareholder at ~20%, so we are getting significant alignment with insiders (though Cinven will probably exit when stock trades closer to fair value).
Concordia, unlike Valeant, is not guilty of the egregious price gouging that has drawn recent attention. Most of Concordia’s drugs actually trade at a discount to peer drugs and part of the value proposition of AMCo’s portfolio is its affordability relative to on-patent drugs. The company's pricing strategy is conservative and it seems to me they just bring their drug prices closer to the peer group average when that opportunity exists. 60+% of the company’s revenue will be generated outside of the US (as a result of the geographic diversification from Amco). Legislation capping prices in US, if it ever even occurs, will not affect Concordia the way it would the genuine price gougers, but even if it did, most of the company’s sales are insulated from it.
btw, if there is regulatory risk with this company, I don't think it is from pricing, but from Canadian government eventually cramping down on companies taking advantage of the Barbados-Canada tax treaty (though even this seems pretty unlikely).
Leverage:
The company ended 2015 with ~3.4 billion in net debt with most of this debt, except a 22.5 million bridge loan, being termed out 6-8 years, giving the company ample time to generate the necessary cash. There are term loans, which will require annual repayments but the specific amortization schedule for these loans has not been communicated yet (or maybe I missed it?).
The company can delever quickly because of its outstanding FCF conversion. The business model (especially AMCo's) is defensive, generating predictable cash flows with not much exposure to the biz cycle. The business is capital light, with almost no capex. The tax rate is just 9-10%. Of 625 million of EBITDA, the company will convert approximately ~560 million of it to unlevered free cash. ~230 million will leave the company through interest payments, leaving ~330 million in free cash. The company also has another liability in the form of an earnout payment related to the AMCo deal, which will represent an additional 110 million cash payout in September ’16 and then another 110 million payout in February ‘17. This leaves ~220 million of excess cash + cash on the balance sheet (not sure how much but guessing 50-100 mill) in '16 to pay down the term loans. I think they'll be fine with liquidity and should get to ~4x net debt/ebitda by end of 2017.
« Last Edit: February 28, 2016, 08:28:44 PM by SwimmingNaked »