Concordia Healthcare Corp. T.CXR.R

A Balanced View of Concordia's Value

[jamesb14]

I've done a lot of digging recently and learned I didn't understand enough about the company I was overly invested in. The short sellers like to paint an overly pessimistic picture, the bulls an overly pessimistic picture. I needed some more facts. Here's what I learned.

1. Management does actually have a decent track record in deal making through Biovail, Trimel, and now Concordia. Mark Thompson is from the school of Eugene Melnyk who is the billionaire owner of the Ottawa Senators. Melnyk is at odds to the approach taken by Michael Pearson when he took over the merged Biovail/Valeant entity in that he believes that healthcare companies need to create value. Valeant took the approach of price gauging and using tax inversion strategies to squeeze profitability without undertaking R&D to create new drugs of value to the market. After Biovail, Melnyk largely sold out but invested in Trimel with Thompson and others managing it. Trimel failed after this crew left to start Concordia, not before. This track record of deal making doesn't necessarily make Thompson and crew great operators and hopefully they're learning a thing or two about creating new products, but when short sellers say that Management doesn't have a track record, that's actually not true.

2. Debt / Valuation - There are risks with the amount of leverage in Concordia but they do have cash flow to pay for the interest on the debt. They had positive cash flow last year of just over $100 million. Adjusted earnings per share are and have always been bogus because it excludes interest on debt and share-based compensation. Amortization is another story that is very subjective. I personally think that the cash flow / share should be the way that adjusted earnings are measured. I see cash flow of $200-250 million this year, or $4-5/share. Add 8x valuation on cash flow and this puts the company at fair value of $32-40 USD per share.

3. Pricing - they're raising prices on some of their drugs which is causing them backlash in both the US and Britain. Thompson isn't exactly being straightforward in his pricing strategies but I know it's more complicated than that. They're trying to be competitive with the market and the whole market has been going up on drug prices. The response to this, though, is that the FDA has accelerated approvals of generics to 1 year from 4 years. This is bringing rapid entry to market of generics which will work to lower prices and you can see this with recent earnings reports from competitors. Now Concordia hasn't been as aggressive as competitors on pricing and AMCo is a different story so I think the downside for Concordia is more limited. But I'm not impressed with their pricing practices that are coming to light.

What the future holds for Concordia, I'm not certain. But I think management is in it for the deals rather than the love of the pharmaceutical industry. So my guess is that if the deals cannot be continued, they will sell off the business in whole or in part. I've sold half my shares and am kicking myself at falling too in love with a company I didn't properly undestand, and I'm keeping the other half to see what happens because I truly think AMCo is the gem in all this and is why I bought most of my shares in the first place. I believe it's more valuable than what they paid for it, and I hope and pray they don't screw it up.

Just my humble thoughts and opinions after trying to look more objectively at my investment rather than the rose coloured glasses I was using.

[Scruggstyle]

I'm expecting cash flow for the full year to be more in line with the $6.68 USD ($7.18 USD for 2017) recently forecasted by Ridgeway.

[jamesb14]

I hope you're right, Scruggstyle. It's very difficult to extrapolate based on 2015 and hard to get solid Q4 numbers. They would have arranged financing before purchasing AMCo which means they incurred interest payments before generating revenue from the purchase so my cash flow estimate was really a baseline minimum estimate. I'd be surprised to see ~ $335 million in Cash Flow but it

[adamchess]

Company guidance is adjusted net income of $330 million to $355 million - should that not be at least equal to cash flow? If so, it makes significant difference to fair value from what you say.  I think more like $65 USD plus bonus for future growth projections. GLTA longs

[jamesb14]

Cash Flow would be less than adjusted earnings because interest payments affect cash. Concordia excludes interest from adjusted earnings which is very misleading when they have $3.3 billion in debt.

[Scruggstyle]

Adjusted EPS does include interest deduction.  Please see definition below: Adjusted Net Income and EPS Adjusted EPS is defined as adjusted net income divided by the weighted average number of fully diluted shares outstanding. Adjusted net income is defined as net income (loss) adjusted for one-time charges including costs associated with acquisitions

[adamchess]

Adjusted net earnings would be after interest deductions same as EBITDA it seems. Extraordary expenses not part of normal operations would not be deducted such as acquisition costs maybe but those were made in 2015. If we deduct $250 million interest from $610 million EBITDA leaving $360 adjusted net income.