I want it to be known that I mean no disrespect to the sewers. Concordia Healthcare (NASDAQ:CXRX) has been a horrid company whose business model is severely flawed and is struggling to find a firm to acquire it before its stock price drops further into the abyss. Concordia has indeed been one of the biggest destroyers of wealth on the TSX and this will be my third bearish article on the stock because I want investors to ask themselves why they bought the stock in the first place. If you're a holder of Concordia, you've got to be honest with yourself and cut your losses, as it makes no sense to hang on to this company because even in the best case it could take many years for the stock to rebound. There is no value being generated. It is in pure survival mode and I believe the worst is yet to come for this overleveraged rollup of old off-patent drugs.
Many investors believe that the reason the stock is down is because it wrongly fell along with Valeant (NYSE:VRX), which is a poorly run company. I do not believe it's that simple. There are many similarities between the two companies and I believe the assets owned by Concordia are actually far inferior to those of Valeant, thus if debt obligations become a problem, it will be much harder for Concordia to liquidate its assets because off-patent drugs are simply not in high demand. I'm not going into further detail about Concordia's flawed business model, as this information can be found in my two previous pieces found here and here. Instead, I'm going to focus on the best case scenario - if Concordia doesn't go bankrupt, but it in fact is able to pay its debt off and change its business model. Charlie Munger referred to Valeant as a sewer and I believe the same applies to Concordia as well.
Concordia is incredibly hard to value, especially considering the massive amount of debt that it has accrued. In this piece I will attempt to value Concordia and give a reasonable price target. Currently, Concordia has a P/B of 1.0 and a forward P/E of 3.3. According to these valuation metrics, the stock looks cheap. Too cheap. In fact, it's too good to be true and I believe the stock is your typical value trap whose P/E will correct once the true earnings are realized in the long-term. Right now Concordia is bleeding cash. Concordia has a net loss of -7.7% in the past year with a ridiculous 2.9 debt-to-equity ratio, which is worse than anything in the medical sector. The company also has a negative return on equity of -5%, which shows that Concordia is incapable of generating decent profits.
The value that came from Concordia's previous acquisitions are also subject to scrutiny. Concordia acquired Covis Pharmaceuticals for $1.2 billion and Amdipharm Mercury for a whopping $3.5 billion within a few months of each other. I believe Concordia paid a huge premium for these assets and the $3.3 billion in long-term debt is incredibly risky for investors especially when considering the speculative Valeant-like nature of the business. Going forward, price hikes are out of the question and I do not see any growth coming from the legacy assets integrated in Concordia's portfolio from its previous acquisitions.
Currently, Concordia is not investable and the company may need to liquidate its recently acquired assets for much less than what it paid for. This is not the formula for a rising stock price, but I do believe Concordia may survive if the business model changes. Concordia will continue to free fall until its debt obligations are paid back and this could takes years. Fact of the matter is, there's no more room in the stock market for companies who drown themselves in debt to try to make short-term gains for shareholders. I believe the greed of the management team got the better of them, just like in the case of Valeant. There are no ways to get rich quick: consider all the stocks that sacrificed long-term fundamentals for short-term gains all ended up crashing hard and never recovering many years down the road. I believe the same is true for Concordia and all investors should cut their losses and move on before things get worse. Because things could definitely get worse. Hillary Clinton who may become the next U.S. president is planning on fighting corrupt pharmaceutical companies who have been taking advantage of the system, as Concordia has. New regulations may be put in place by her and the result will be utter devastation for Concordia, as they're already struggling to pay back the massive debt load. More regulation and strict guidelines may actually prevent Concordia from all future forms of M&A and may make asset liquidation a difficult challenge, which in turn would make it harder for Concordia to meet its huge debt obligations, some of which becomes due next year. For these reasons I have a price target of $0 for the stock because of the huge risk involved with keeping the business under control right now.
Investors who bought Concordia on its rise up are just as greedy as the management team at Concordia or Valeant, and hopefully the crash is a lesson learned. For those investors who bought Concordia after the crash, I highly recommend you read Benjamin Graham's The Intelligent Investor and Peter Lynch's One Up On Wall Street. In both books, they describe the importance of not buying stocks just because they're cheap. Warren Buffett used to refer to these types of stocks as "cigar butts" and cigar butt investors would be looking through stock screeners for stocks or "cigar butts" who have one last puff left in them. In the case of Concordia, there are no puffs left and it's time to move on and discard it.