Marcel7 wrote: Very strange.
I do not have an Alphapro subscription and read it on the app on my way into work. Just tried the link on desktop and it says it requires a subscription. Emailed myself the content from mobile, here it is in it's entirety blow my comment. I feel that for a long he has a balanced view. There is no doubt the debt is the biggest concern, however I think the stock has been unfairly punished for this and even taking debt and risk into consideration there is the potential for significant upside.
Is It Time To Buy Valeant's Little Brother?
Dec 9 2015, 05:09
About: CXRX • Includes: VRX
Summary
Concordia Healthcare utilized Valeant's business model to achieve exceptional growth over the last 2 years.However, after making a poorly timed acquisition in September and Valeant's negative headlines, Concordia's share price has collapsed.Trading at less than 5 times projected 2016 earnings, Concordia offers 100%+ upside potential.
Two years ago, while working for a Canadian wealth management firm, I attended a presentation by a former Biovail Vice President who was trying to raise money for his soon-to-be-public healthcare company, Concordia Healthcare (NASDAQ:CXRX). Less than two years after successfully raising $30 million at C$6.25 per share, Concordia's stock price had increased by more than 15 fold and it's market capitalization had surpassed $2 billion. Since September, the stock has suffered a steep decline. This article will explain Concordia's short history, the reasons for the recent sell off and why its shares current represent an attractive, albeit risky, investment opportunity.
Those of you who are familiar with Valeant Pharmaceuticals (NYSE:VRX) might well recognize the Biovail name. Biovail was the (somewhat shady) Canadian healthcare company that merged with Valeant back in 2010 and gave Valeant its start as a publicly traded firm. At Biovail, Mark Thompson worked as Vice President of Business Development. Back in 2013, Mr. Thompson made no mention of Valeant during the presentation I attended. However, as a Valeant shareholder (side note - I sold the last of my Valeant shares this summer), I recognized that Concordia's strategy came right out of the Valeant playbook (acquire specialized products, raise prices, improve marketing, spend minimally on R&D, raise capital, repeat). After the presentation, I shook Mr. Thompson's hand and asked him if this apparent similarity was a coincidence. He admitted that Concordia was looking to utilize a very similar strategy to the one Valeant became successful with. And at the time, this got me very excited.
Remember that prior to Hillary's fateful Tweet, a probe by the U.S. Senate, Citron's report and well before anyone had ever heard of Philidor Rx, Valeant was riding high. From 2010 through July of 2015, Valeant could seemingly do no wrong, at least according to the market:
Back in November of 2013, the thought of getting in on the ground floor of the next Valeant was exciting. While I did not get in right at the beginning, I did become a shareholder of Concordia soon after. Mr. Thompson did exactly as he promised, making several acquisitions (each of which got the market excited) and using an ever-increasing stock price as currency. I did sell a portion of my shares in Concordia earlier this year, but only because they had grown to represent a larger position in my portfolio than I was comfortable with. Until September of this year, much like Valeant, Concordia could do no wrong:
On September 8th, Concordia announced its largest acquisition to date, scooping up Amdipharm Mercury Company Limited [AMCo] for approximately $3.5 billion. Concordia's shares spiked that morning as the market believed this purchase would give the firm the global reach it needed to continue its expansion. However, by the end of the day, the stock had fallen more than 10% from its opening price as investors began to worry about the amount of dilution this transaction would cause.
Over the next two weeks, the stock continued to struggle. On September 21st, just as Concordia was trying to wrap up a massive share issuance to pay for the AMCo acquisition, Hillary tweeted, the market's enthusiasm for biotech stocks plummeted and so did Concordia's share price. The company ended up raising $520 million by selling shares at $65 apiece. As the biotech sector continued to struggle, these new investors immediately became underwater on their new purchase. Furthermore, it quickly became clear that Concordia had not been able to raise as much cash as expected via the equity sale and would be required to take on more (and more expensive) debt as a result.
Frequent comparisons to Valeant - apart from using a similar strategy, both companies are incorporated in Canada (mostly for tax reasons) - had helped Concordia's stock the whole way up. However, on top of making a massive, poorly timed acquisition, Concordia also got lumped in with Valeant as the recent multitude of negative headlines emerged. The market's reaction was swift and vicious:
There are a few important things to note here. First of all, Concordia has never been accused of the aggressive accounting and channel stuffing that Valeant was. In addition, Concordia is still a small enough (and obscure enough) firm that the politicians do not seem to care what it does. And finally (and most importantly), based onconsensus estimates, the stock currently trades at less than 7 times projected 2015 earnings and less than 5 times projected 2016 earnings.
There are risks, of course. The debt load is massive ($1.3 billion as of 2015 Q2, plus an additional $2.8 billion from the AMCo financing alone). Those valuations are based on an adjusted earnings figure and you can bet that GAAP profits will be much lower. It is always possible that Concordia is using some of the same tricks to distribute its products that Valeant has recently become infamous for. Furthermore, much like Valeant, Concordia's business eschews R&D spending (less than $6 million over the first half of 2015). One slight difference is that Concordia has actually targeted purchasing drugs that have already come off patent and have generic competition; the idea is that these products are easier and cheaper to acquire due to the increased level of competition, yet they continue to generate significant free cash flow for many years into the future. Still, access to the capital markets is critical to the growth through acquisition model and the lack of internal drug development represents a long term risk to Concordia and its shareholders.
Mr. Thompson has committed to focus on debt repayment in the coming months. As I mentioned, fortunately, Concordia is seemingly too small a company to draw the attention of the politicians looking into drug price increases. In the near term, staying under the radar would be the best possible outcome for the firm. A particularly positive sign is that while Concordia's stock moved in tandem with Valeant's for much of the last month, its share price has stabilized in recent days while Valeant's continues to drop:
(click to enlarge)
Based on a conservative 10x forward earnings multiple, Concordia has greater than 100% upside potential. If the firm can distance itself from the Valeant comparisons, focus on paying down its debt and deliver the level of earnings that analysts expect, investors will be rewarded if they use this significant price decline to load up on shares of Concordia Healthcare. I fully recognize that due to the company's highly levered balance sheet and the headline risks associated with its sector (and business model), there is plenty of risk associated with investing in Valeant's little brother. Nevertheless, I think there is an extremely attractive opportunity here for investors with the appropriate level of risk tolerance. And heck, if you are already short Valeant (or are looking to initiate a short position), Concordia could be an effective way to hedge your trade.
Disclosure: I am/we are long CXRX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I was previously also long VRX but sold the remainder of my shares this summer.