Concordia International Corp shares continue freefall amid concerns over debt load, takeover prospects
The freefall in shares of Concordia International Corp. continued on Monday, with the stock marking a more than 42 per cent decline since the Canadian specialty healthcare company reported second quarter results on Friday.
Not only have growth-by-acquisition stories fallen out of favour with investors in the wake of the scandal at Valeant Pharmaceuticals International Inc. and amid tax-related opposition from politicians, but there are also growing concerns about Concordia’s debt load and the diminishing prospect that it will be taken over.
While the company’s second quarter results were generally in line with analysts’ estimates, Concordia reduced its revenue guidance by 16 per cent and its EBITDA outlook by 13 per cent, due to increased competition for three of its top five drugs in North America.
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This came alongside a suspension of its dividend and the departure of chief financial officer Adrian de Saldanha.
“While we expected a guidance revision, the magnitude was surprising, raising the spectre of debt repayment issues in the future,” Prakash Gowd, an analyst at CIBC World Markets, said in a research note Monday.
He downgraded Concordia to sector underperformer from sector performer, and reduced his price target to US$7.80 from US$27.60, telling clients the company will likely face a cash shortfall of US$170 million when its US$1.66 billion of term loans come due in October 2021.
“Based on our estimates, we believe Concordia will have difficulty in meeting its debt obligations when they start coming due in 2021,” Gowd said, adding that its total cash shortfall is anticipated to be above US$500 million.
Concordia’s results and guidance prompted Goldman Sachs analyst Stephan Stewart to reduce his EBITDA estimates for fiscal 2016 through 2018 by 10 to 15 per cent.
He sees further declines in North American sales, unless the company is able to boost prices or produce significant gains outside the U.S. market.
“Post the update, we struggle to find a silver lining in the company’s North American business given the lack of any pipeline or growth assets,” Stewart said in a report Monday, noting that this segment accounts for 36 per cent of Concordia’s sales.
While sales from the international business grew eight per cent on a quarterly basis, the analyst cautioned that regulatory scrutiny could limit price increases there.
At this point, Stewart believes the focus will be on Concordia’s strategic review, which the company noted is now focused on “one specific opportunity.”
Regardless of who is running the company going forward, we believe it is going to be a mess digging out of the debt load.
He believes this will force management to address both its growth and capital structure.
Despite rumours of a takeover, Mackie Research analyst Andre Uddin envisions a “treacherous path” going forward for Concordia.
“Regardless of who is running the company going forward, we believe it is going to be a mess digging out of the debt load,” the analyst told clients, estimating it will take Concordia at least 12 years to pay off its debt, even based on optimistic forecasts.
On Wednesday, Uddin discontinued coverage of Concordia, telling clients the stock was a rocket ship that has now “crashed back to earth.”
“Concordia remains an extremely high risk investment,” he said, adding that the company overpaid for weak assets and took on too much debt.
Uddin pointed out that ratings agencies may choose to downgrade Concordia’s debt if more products encounter intensified competition, and if the U.K. National Health Service opts to target the company for its prior drug pricing policies.
He also questioned why Concordia’s management is targeting a short seller.
Chief executive Mark Thompson is seeking $4 million in damages from short seller Marc Cohodes, who used to be a hedge fund manager but now runs his own money.
Cohodes has called Concordia “the poor man’s Valeant,” and as highlighted in the lawsuit, called Biovail, which merged with Valeant in 2010, “a complete and utter fraud” in an April 29 appearance on Business News Network.
“Time is Money: Investors should really ask themselves why is management targeting a short seller rather than being focused on running the business,” Uddin said.
All this comes amid dwindling support for pharma companies that purchase weak legacy assets, and then raise prices.
Like much of the sector, Concordia shares are down sharply – nearly 90 per cent – since September 2015, when Democratic presidential candidate Hillary Clinton tweeted about “out of control” drug pricing.
Uddin noted that the environment for obtaining reimbursement and raising drug prices for legacy products is tougher than it’s been in the past twenty years, although this isn’t the case for innovative drugs.
He also noted that Concordia has one of the lowest research and development expense to revenue ratios in the industry based on its market cap.
“Investors should ask why Concordia is trying so hard to sell the company at such depressed levels?”
In the absence of more definitive information about Concordia’s strategic review, TD Securities analyst Lennox Gibbs considers the three-month lapse since its formal initiation to be a negative indicator.
“This is compounded by the emergence of Brexit as a significant confounding development,” he said in an August 4 report. “In our view, these signs point to a protracted process.”
While Britain’s surprise plan to exit from the EU was difficult to forecast, the deceleration in Concordia’s U.S. portfolio may have been easier to foresee. It is largely the result of the negative climate surrounding U.S. drug pricing.
Pricing power among manufacturers has eroded due to elevated price sensitivity among both pharmaceutical payers and policy makers.
As investors have witnessed in many instances throughout the healthcare space, integrating acquisitions is often difficult, and it takes smart management teams to anticipate what’s coming.
Unfortunately, for Concordia, that’s where it may have fallen short.
“Although we had expected and modelled in headwinds for some of Concordia’s key U.S. products, the large guidance revision suggests a breakdown in company forecasting, as we believe management should have foreseen many of these issues,” Canaccord Genuity analyst Neil Maruoka said in a report Monday, pointing to the CFO change.
He also noted that the risks of a private equity buyout appear to great at this point.
“Concordia maintains that its strategic review, initiated after overtures from private equity, is ongoing,” Moruoka said. “We continue to believe that a takeout is unlikely, but management commentary suggested that a transaction is being considered…”