December 7, 2016
Concordia International Corp.
Downgrading to Underperform Following Negative Pfizer/Flynn CMA Outcome
Our view: This morning, the CMA imposed a £90MM fine on Pfizer/ Flynn and ordered price reductions but noted that these price reductions will allow the drugs to remain profitable. We are downgrading CXRX to Underperform following this negative outcome as we anticipate the focus of the CMA will now shift to other companies which have significantly increased drug prices, including CXRX.
Key points:
We are downgrading Concordia to Underperform due to the realistic nature of a fine from the CMA and mandated price reductions on certain drugs. Subsequently, we have lowered our EV/EBITDA multiple from 7.4x to 7.25x, lowering our price target from $2.50 to $1.00. The decrease of ~$1.50 per share is also consistent with a potential $80MM fine against the company.
• CMA imposes record £84.2MM fine on Pfizer and £5.2MM fine on Flynn Pharma. We had highlighted the risk of a negative PFE/Flynn decision for months and today's decision will likely weigh on CXRX shares. The CMA imposed the fines after finding that each company broke competition law by charging excessive and unfair prices in the UK for an anti epilepsy drug, phenytoin sodium. The fine imposed on Flynn was the statutory maximum that the CMA can impose (10%). As we have previously noted, Flynn and Pfizer are alleged to have sold an epilepsy drug, phenytoin sodium, with little competition, to the NHS for 25-27 times higher than historical prices. The CMA noted that although Pfizer claimed that the drug was sold at a loss before it was de-branded, Pfizer should have recovered all losses within two months of the price increases.
• Price reductions ordered but drugs will remain profitable. The CMA also ordered the companies to lower the price of the drug, but the price reductions ordered will allow the drugs to remain profitable. The CMA noted that in order to ensure that there is no supply risk/drug shortage, the companies have been given between 30 working days (PFE) and 4 months (Flynn) to reduce their respective prices.
• Anticipate focus of CMA will now shift to other companies which have significantly increased drug prices; downgrading to Underperform. We continue to believe that following the CMA's determination that Pfizer/ Flynn's behaviour impaired genuine competition and drug pricing was excessive and unfair, attention will likely now turn to other companies which have significantly increased the prices of certain drugs, including AMCo (CXRX acquired Oct/15). We note that if a similar 10% fine were to be imposed on Concordia, it would be equivalent to an ~$80-85MM fine based on 2016E revenues. We have previously anticipated mandated price decreases of 25% on certain drugs but note that increasing this price cut to 75% would lower 2018E revenues and Adj. EBITDA by $46.3MM and $44.0MM respectively.
Sector: Biotech & Pharma, Healthcare
Underperform (prev: Sector Perform) Speculative Risk