March 27, 2016
Concordia Healthcare Corp.
Q4/15 Results – Slight Beat on Strong AMCo Contribution but Legacy Weighs
Our view: The Q4 results (first partial AMCo quarter) slightly exceeded our expectations but the shares came under pressure on U.S. Legacy and FX headwind concerns. We note, however, that AMCo outperformed and should position CXRX for future growth. We believe U.S. ops will rebound in Q1/Q2 and we would be buyers on the weakness. We adjust our price target to $64 from $68.
Key points:
• A Slight Q4 Beat but US Weakness and Potential FX Headwinds Weigh on Shares – We Would Be Buyers. While Concordia’s Q4 results were slightly ahead of consensus and our Q4 outlook, the shares came under pressure likely associated with weaker U.S. results and potential FX headwinds. Management noted several transient U.S. items that affected the quarter that would be addressed in Q1 and Q2 2016. Separately, FX was a focus of the conference call, as it appeared to concern participants. However, we believe that a number of analysts have already factored in these headwinds judging by current revenue estimates (consensus revenues of $1.0B versus $1.04B guidance midpoint) and as such should not have come as a significant surprise. We also believe that we remain in a healthcare environment in which any perceived issue is magnified significantly, especially as it relates to highly levered companies such as Concordia. Overall, we were comfortable with the quarter and consequently surprised by the reaction to the results. As such, we believe the weakness in the shares provides an attractive buying opportunity.
• Slight Beat vs. Consensus. Concordia reported Q4 revenues of $191.9MM for the quarter vs. $42.9MM last year, above our $189.4MM forecast and consensus of $187.9MM (FactSet: 10 analysts, range $154.5–201.4MM). The large YoY increase is attributed to the addition of the Covis portfolio (deal closed in April 2015) and AMCo (deal closed October 21, 2015). Adjusted EBITDA in Q4 was $120.1MM vs. $25.4MM last year, our $118.8MM forecast, and consensus of $117.5MM (FactSet: 9 analysts, range $110.5–120.7MM). Q4 cash EPS of $1.24 was slightly above our $1.23 estimate but below consensus of $1.29 (FactSet: 6 analysts, range $1.23–1.48). Cash EPS in Q4/14 was $0.74. The beat vs. our forecast was largely related to stronger than anticipated AMCo (Concordia International) revenues, as U.S. Legacy revenues were short of expectations.
• Guidance Reaffirmed but on Constant FX Basis. Concordia reaffirmed its 2016 guidance on a constant currency basis: revenues of $1.02– 1.06B, Adj. EBITDA of $610–640MM, Adj. net Income of $330–355MM, and Adj. EPS of $6.29–6.77. Management is also targeting a year-end Net Debt/EBITDA ratio of ~5.5x. We believe this signals that nothing has changed operationally, but it does not reflect recent FX headwinds, particularly those facing sterling/USD. However, we note that our forecasts already take into account these FX headwinds