https://business.financialpost.com/investing/trading-desk/concordia-healthcare-corp-faces-strategy-change
Concordia Healthcare Corp. appears to have been forced to change its strategy from one based on growth by acquisition, to a purely internal growth story.
Its US$3.5 billion acquisition of Amdipharm Mercury Ltd. (AMCo) and the subsequent equity financing came at an unfortunate time.
As Beacon Securities analyst Doug Cooper noted, Concordia announced the deal on September 8 and the stock rallied. However, less than two weeks later the New York Times published its story about drug price gouging at Turing Pharmaceuticals.
The next day, Democratic presidential candidate Hillary Clinton tweeted about “out of control” drug pricing, and the entire sector has suffered dramatically since, most notably Valeant Pharmaceuticals International Inc.
“While we do not believe that Concordia relies on price increases to the degree of Valeant, its perception as a ‘baby Valeant’ has meant its multiple has contracted alongside it,” Cooper said in a research note.
Concordia’s purchase of AMCo was also financed largely by debt (~85 per cent of the purchase price), and the company wanted to raise more than $500 million in equity, but the market for dried up quickly for pharma companies .
The analyst noted that this leaves Concordia with roughly $3.5 billion in debt and a debt-to-EBITDA ratio of almost 6x.
That’s why Cooper believes Concordia must now focus its growth initiatives on new product launches at AMCO. However, he pointed out that since legacy drugs typically have declining revenue profiles, it remains to be seen if the additional drugs can offset the potential slowdown from existing parts of the portfolio.
“The re-valuing of the sector, coupled with Concordia’s substantial debt load, probably means the end of its financial arbitrage as a means to continue its non-organic for the foreseeable future,” the analyst said, maintaining a buy rating on the stock, but cutting his price target to $45 from $109. “With no imminent acquisition catalysts, we believe the shares will be range bound…”