Concordia Healthcare Corp. T.CXR.R

RBC CUTS TARGET TO 50 PENNIES, LOL

[InsiderTrader]

March 15, 2017

Concordia International Corp.

2017E Outlook Expected to Decline Although Formal Guidance Not Provided

Our view: Concordia reported Q4/16 results this morning. Although results were below expectations, we believe the focus is now on the company's poor 2017E outlook. Management guided to single-digit price erosion relative to Q4/16 on a run-rate basis, which we believe leads to an Adj. EBITDA range of $313-341MM (3-9% decline). Combined with ongoing UK regulatory risk (NHS bill and CMA investigations), we continue to view the equity negatively.

Key points:

• Forecast Decline YoY in 2017E. Concordia noted that it expects single- digit percentage pricing erosion across its business in 2017E. We anticipate this will impact both revenues and Adj. EBITDA, on a Q4/16 run-rate basis, by ~3-9%. Consequently, our 2017E Adj. EBITDA forecast declines from $413.0MM to $325.4MM, representing an ~21% decrease relative to our prior forecast. Ahead of the quarter, 2017E consensus was $447.2MM (FactSet). We note that Concordia will have ~$270MM in interest payments, $40MM in amortization payments, and principal repayment of $34MM (Oct/17) this year. In combination with the ~ $100MM Feb/17 earn-out, we anticipate these expenses will consume Concordia's FCF. Details of our forecast revisions are in Exhibit 2.

• Operational updates - long term strategy expected mid-year. Although 2017 guidance was not provided, management did outline its intention to focus largely on AMCo, which has a pipeline of 32 products at various stages of development. We anticipate a continued ramp-down of expenses associated with the U.S. legacy business and CXRX noted that the only internal sales force in its U.S. operations is a 10-person team for Photofrin. Management also noted that it may look at refinancing debt, asset sales, capital raising initiatives, and in-licensing of products going forward. We note that we have minimized debt repayment for Concordia in 2021 and consequently anticipate a refinancing could be necessary if EBITDA does not improve relative to our forecasts.

• Impairments of ~$560MM recorded in Q4/16, consisting of: $306.9MM North America ($219MM Plaquenil AG due to further pricing pressures - we now assume a 95% gross-to-net discount - and $87MM impairments to five other products due to competitive factors); and $255.2MM International ($197MM related to product rights and $58MM due to cancelled projects or revised cash flow expectations).

• Valuation: PT lowered to $0.50. We have rolled our valuation from 2018 Adj. EBITDA to 2019 Adj. EBITDA as we believe equity investors will need to take a long-term approach to the name as CXRX develops a new long- term strategy, which we anticipate will focus on the AMCo business.

• Revenue, Adj. EBITDA, and Adj. EPS - Below Expectations in Q4/16. Q4/16 revenues were $170.4MM vs. our $185.1MM forecast (AMCo $128.7MM vs. $136.9MM RBCCM; U.S. $39.3MM vs. $45.9MM RBCCM). Adj. EBITDA was $80.5MM vs. our forecast of $102.0MM. Adj. EPS of $0.13 was also below our $0.49 estimate.

Sector: Biotech & Pharma, Healthcare

Underperform
Speculative Risk
NASDAQ: CXRX; USD 1.98; TSX: CXR

Price Target USD 0.50 ↓ 1.00