Scotia on CXR - Friday Nov 13CXRX reported solid Q3 results that were generally in line with our forecasts but ahead of consensus. Implications Q3 revenue was $94.9 million, slightly below our $96.3 million but ahead of the consensus estimate of $94.1 million. Legacy drug sales were $90.6 million vs. our $91.2 million estimate. SHD and Orphan drug revenue was $4.3 million versus our estimate of $5.1 million. Adjusted EBITDA was $71.7 million ahead of our $70.7 million estimate and consensus of $68.7 million. Q3 adjusted EPS was $1.46, ahead of our $1.37 forecast and well above the consensus estimate of $1.32. Management reiterated its 2016 company guidance which is in line with our previous expectations. The key metric in our opinion is adjusted EBITDA of $610 million - $640 million which compares to our forecast of $631 million. Management plans to host an investor day in January. Recommendation We reiterate our $75 price target and Sector Outperform rating and continue to believe the shares are undervalued at current levels. At $33.45, the stock is trading at ~5.0x 2016E adj. EPS and ~8.4x EV/2016E EBITDA versus the peer group averages of 12.3x and 10.5x, respectively. As a result, we believe the shares offer substantial opportunity for upside as the market becomes more comfortable with the growth profile of the company's recently acquired UK and ROW business.
Q3 Results Concordia reported Q3 results last night and we have made updates to our model. The details of the results compared to our forecasts are shown in Exhibit 1. Segmented Results On a segmented basis, legacy pharmaceuticals reported revenue of $90.6 million vs. our estimate of $91.2 million and adjusted EBITDA of $75.2 million vs. our estimate of $74.9 million. Gross margin on legacy product sales in Q3 was 91.6% which was in line with our 91.0% forecast. The Orphan drugs segment reported revenue of $2.4 million vs. our $3.0 million estimate and adjusted EBITDA of ($0.07 million) which was in line with our estimate. The Specialty healthcare segment reported revenue of $1.9 million vs. our $2.1 million estimate and adjusted EBITDA of $0.3 million vs. our estimate of $0.4 million. Management Guidance for 2016 Management reiterated its guidance for 2016. We provided the details below: o Revenues of $1,020 to $1,060 million. Approximately 60 per cent of revenues to be generated outside the United States. U.S. government payors to account for less than 10 per cent of overall revenue. o Adj. EBITDA of $610 million to $640 million. o Adj. net income of $330 million to $355 million; o Adj. EPS of $6.29 to $6.77. o Cash interest expense rate at approximately 6.95 per cent (excluding original issue discount). o Cash tax rate between 9 per cent and 10 per cent. o Year-end Net Debt/EBITDA2 of 5.5x or below. o Year-end cash on hand of approximately $130 million. o Undrawn revolving credit facility of $200 million at the end of 2016. The company is planning to host an investor day, likely in January, at which point management plans to provide the street with additional information related to the outlook for growth in the AMCo business. Model Revisions We have updated our model to account for the results of Q3, management’s commentary on the conference call and our revised outlook for the products in the U.S. Legacy business for which we have incorporated current TRx data. Exhibit 2 provides the details of our changes. Valuation and Rating Our unchanged $75 target price is based on a year-end 2016 DCF valuation of $76.19 (9.8% discount rate, 0% terminal growth, 10% cash tax). At $75 our price target implies multiple based valuations of 11.8x EV/EBITDA based on our 2016 EBITDA estimate of $631 million and 11.3x P/E based on our 2016 adj. EPS estimate of $6.67. The peer group is currently trading at 10.5x EV/EBITDA and 12.3x P/E. Given CXRX’s attractive tax rate and limited need for capex, we believe these implied multiples are appropriate. We reiterate our Sector Outperform rating