CONCORDIA HEALTHCARE CORP CXRX S W
June 03, 2016 - 12:15pm EST by
bigvic
2016 2017
Price: 34.60 EPS 0 0
Shares Out. (in M): 51 P/E 0 0
Market Cap (in $M): 1,362 P/FCF 0 0
Net Debt (in $M): 3,128 EBIT 0 0
TEV ($): 4,490 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

Sign up for free guest access to view investment idea with a 45 days delay.

  • winner
 

Description

Please note that what you read below are solely my own interpretations:

Concordia's business is best described by reading Nathan Vardi's article in Forbes: http://goo.gl/hBtPnE 

Nathan will do a much better job than I will in describing what Concordia does.

I am writing on this timely matter because of the news that came out yesterday.  You can read more about it from Amy Or's article in the WSJ: http://goo.gl/v1RcEE 

If you fully read Nathan's article, then it paints a clear picture of likely why Blackstone and Carlyle are not interested in being involved with a company like Concordia (per Amy, they did NOT even submit a bid).

Concordia's biggest business (~60% of sales) is ex-US and primarily based in the UK.  This business model is described by Nathan as:

RBC said “AMCo petitions the government to strip its brand name from the drug, which allows it to compete in the generic market.” In other words, RBC is saying that through a slight change in its branded drug, AMCo launches its drug at a lower price and gets it added to government formularies in the U.K. so that it can be easily accessible to users and easily reimbursed by the U.K. government payer. It then gets the drug classified as a generic. Once its drugs are on the formularies as generics in the U.K., AMCo appears to find opportunities to increase the price. RBC noted that 88% of AMCo’s drugs have two or less competitors.

My personal interpretation of what Nathan (and RBC sellside note) is describing is that the business model of Concordia's bigggest business (based primarily in the UK) is:

  1. Concordia creates very slight changes in drugs already on the market to make "new" branded drug [typically changes to formulation (tablets vs pills vs liquid gels, etc.) or dosage (5 mg vs 2 mg vs 1.5 mg, etc.)]
  2. It then sells this branded drug at a lower price!  This should strike everyone as odd!  So why would they do that?  The answer appears to be simply so that Concordia's branded drugs can be added to government formularies in the UK (i.e. if it's very cheap, the UK government won't push back on Concordia and Concordia's drug gets added to the formulary)
  3. Getting access to formularies is critical because then Concordia's branded drug will be used (by doctors/hospitals) and paid for (by the UK government, the bigggest payor)
  4. Here's the really cool twist: This is the what Nathan (who is quoting RBC's sellside note) appears to be saying: once Concordia gets its branded drugs on the formulary, Concordia immediately works on removing the brand name and makes it a generic!  Why would Concordia do that?  Because branded drugs are price-controlled and generic drugs are not price-controlled!
  5. In summary, my read of the section above from Nathan's article is simply: Concordia's business model is to jack up drug prices in the UK and the only way they can do this is by making their drugs generic drugs, where the UK government does not control drug prices!

The logical next question is, well, if generic drugs, by definition, are commodities with low BTE, then how can Concordia even raise prices?

Concordia's whole business model, according to Nathan's article, appears to suggest that Concordia is aware of this dynamic (i.e. LBTE in the generic business).  So what Concordia does is that 88% of their drugs have <=2 competitors.  It appears that Concordia is focused on niche drugs that others don't care about where there are few competitors, jack up prices when they can, and the limited competitors makes it whole business model possible.

2 reasons why the buy-out offer currently in the news is highly unlikely to happen:

1.  You assume that PE firms and strategics are rational.  If they do their diligence, I think they will also come to the conclusion that Concordia's business model (for their biggest business, which is ex-US), as described above, is not sustainable.  And to that end, rational PE firms will not be interested in buying Concordia.

After doing so quick digging, it looks like the business model is indeed unsustainable: UK government is actually already looking into almost this exact business model:

 https://goo.gl/wsS9y9

Go to Page 18: 3.39. We are aware of instances where a product has been marketed as a brand, and is subsequently marketed as a generic, either by the original supplier, or by the new supplier if sold on, and a large increase in price has been applied due to lack of regulatory control and lack of a competitive market for the product. This has an adverse effect on NHS budgets. We would welcome views on whether we should consider the options available to the DH such as Secretary of State’s powers to limit the prices of health service medicines, for generic medicines such as these where there is no competitive market to secure value for money.

In fact, there is a precedent of Flynn and Pfizer being potentially being fined (up to 10% of sales in this specific case) by the government due to a very similar business practices: https://goo.gl/eObUkr 

2.  Below are additional reasons why a PE firm would not be interested in buying a company like Concordia:

  1. VRX has often been criticized for focusing on financial engineering (i.e. acquiring assets drugs/companies) without developing drugs through its own internal R&D. CXR spends <4% (of sales) on R&D and its peers are almost double that! CXR is just as bad an offender of financial engineering as VRX, which spends ~3%! Given the mainstream scrutiny of such practices, does any PE or strategic want to support this and risk reputational damage?
  2. A Senate committee has been investigating dramatic increases in drug prices imposed by VRX et al. Mike Pearson, VRX’s departing CEO, stated “it was a mistake to pursue, and in hindsight I regret pursuing” transactions such as Valeant’s acquisition of Isuprel and Nitropress, two cardiac‐care drugs that VRX acquired in 2015 and quickly boosted prices on by 525% and 212%, respectively. CXR is just as bad of an offender of price gouging as VRX: refer to Nathan's article. Again, given the mainstream scrutiny of such practices, does any PE or strategic want to support this and risk reputational damage?
  3. CXR has 60% Adj 2016E EBITDA margins, substantially higher than other spec pharma companies (~45%): what more can a private equity company do to cut out fat in a company that is already so financially optimized? Maybe cut out all of R&D?! If so, please refer to point #1 above.
  4. CXR trades at a ~7.7x EV/NTM EBITDA, which is in-line with comps still! Given CXR’s deteriorating fundamental businesses, does it make sense for a value‐focused investor or strategic to pay a premium for CXR's unsustainable business?
  5. CXR is ~5.5x levered: how can a private equity firm add more debt to make this investment work so that they can still obtain an a healthy double digit IRR given CXR’s already imploding fundamentals?
  6. If PE firms are interested in playing the “long” game and adding CXR to a strategic platform company and awaiting for the high drug price rhetoric to die down and then look to “optimize” prices opportunistically (i.e. jack up prices on those drugs that can withstand such actions), I will only say that we are aware of many advocacy groups and investors that are willing to use all of their resources to do that which is best for patients in both the US and elsewhere affected by high drug prices fostered by companies with egregious business practices.  Drug pricing scrutiny is not going to go away: this is the new normal.

So what does this all mean?  What is the trade?

Simply, if you believe the above is rational (and it is my personal interpretation of what I've read), then it would be unlikely for a PE firm to buy Concordia.  Amy Or's article suggests that this is already true: Blackstone and Carlyle did not even submit a bid.

And if no one buys Concordia, then the stock is substantially less because it will trade on fundamentals, which I think is highly unsustainable and may crack at any time.  To that end, given the fundamentals, the markets -- if efficient -- will cause Concordia to no longer be trading at 7.7x EBITDA but will likely trade closer to the bottom of the comps (closer to 5.5x).

But wait: Concordia is 5.5x levered.  Thus, if this happens, then all-or-most of the EV will be all debt.  Which means equity will get crushed!

 

Getting in front of Amy's article yesterday would have been ideal.  But Concordia's equity could very much be worth close to $0.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

No rational PE firm will be interested in buying Concordia because they will recognize, upon quick diligence, that the business model of Concordia's biggest business is unsustainable and the reputational risk to their brand.  When the buyout offers are gone, then Concordia should trade on fundamentals, which should value it closer to the bottom of the spec pharma comps multiples.  If Concordia trades at the bottom of the spec pharma comps on a EV/EBITDA multiple basis, Concordia's entire EV will be all debt (5.5x levered) and the equity will be crushed: stock will be close to $0.

2       sort by   Expand   New

    Description

    Please note that what you read below are solely my own interpretations:

    Concordia's business is best described by reading Nathan Vardi's article in Forbes: http://goo.gl/hBtPnE 

    Nathan will do a much better job than I will in describing what Concordia does.

    I am writing on this timely matter because of the news that came out yesterday.  You can read more about it from Amy Or's article in the WSJ: http://goo.gl/v1RcEE 

    If you fully read Nathan's article, then it paints a clear picture of likely why Blackstone and Carlyle are not interested in being involved with a company like Concordia (per Amy, they did NOT even submit a bid).

    Concordia's biggest business (~60% of sales) is ex-US and primarily based in the UK.  This business model is described by Nathan as:

    RBC said “AMCo petitions the government to strip its brand name from the drug, which allows it to compete in the generic market.” In other words, RBC is saying that through a slight change in its branded drug, AMCo launches its drug at a lower price and gets it added to government formularies in the U.K. so that it can be easily accessible to users and easily reimbursed by the U.K. government payer. It then gets the drug classified as a generic. Once its drugs are on the formularies as generics in the U.K., AMCo appears to find opportunities to increase the price. RBC noted that 88% of AMCo’s drugs have two or less competitors.

    My personal interpretation of what Nathan (and RBC sellside note) is describing is that the business model of Concordia's bigggest business (based primarily in the UK) is:

    1. Concordia creates very slight changes in drugs already on the market to make "new" branded drug [typically changes to formulation (tablets vs pills vs liquid gels, etc.) or dosage (5 mg vs 2 mg vs 1.5 mg, etc.)]
    2. It then sells this branded drug at a lower price!  This should strike everyone as odd!  So why would they do that?  The answer appears to be simply so that Concordia's branded drugs can be added to government formularies in the UK (i.e. if it's very cheap, the UK government won't push back on Concordia and Concordia's drug gets added to the formulary)
    3. Getting access to formularies is critical because then Concordia's branded drug will be used (by doctors/hospitals) and paid for (by the UK government, the bigggest payor)
    4. Here's the really cool twist: This is the what Nathan (who is quoting RBC's sellside note) appears to be saying: once Concordia gets its branded drugs on the formulary, Concordia immediately works on removing the brand name and makes it a generic!  Why would Concordia do that?  Because branded drugs are price-controlled and generic drugs are not price-controlled!
    5. In summary, my read of the section above from Nathan's article is simply: Concordia's business model is to jack up drug prices in the UK and the only way they can do this is by making their drugs generic drugs, where the UK government does not control drug prices!

    The logical next question is, well, if generic drugs, by definition, are commodities with low BTE, then how can Concordia even raise prices?

    Concordia's whole business model, according to Nathan's article, appears to suggest that Concordia is aware of this dynamic (i.e. LBTE in the generic business).  So what Concordia does is that 88% of their drugs have <=2 competitors.  It appears that Concordia is focused on niche drugs that others don't care about where there are few competitors, jack up prices when they can, and the limited competitors makes it whole business model possible.

    2 reasons why the buy-out offer currently in the news is highly unlikely to happen:

    1.  You assume that PE firms and strategics are rational.  If they do their diligence, I think they will also come to the conclusion that Concordia's business model (for their biggest business, which is ex-US), as described above, is not sustainable.  And to that end, rational PE firms will not be interested in buying Concordia.

    After doing so quick digging, it looks like the business model is indeed unsustainable: UK government is actually already looking into almost this exact business model:

     https://goo.gl/wsS9y9

    Go to Page 18: 3.39. We are aware of instances where a product has been marketed as a brand, and is subsequently marketed as a generic, either by the original supplier, or by the new supplier if sold on, and a large increase in price has been applied due to lack of regulatory control and lack of a competitive market for the product. This has an adverse effect on NHS budgets. We would welcome views on whether we should consider the options available to the DH such as Secretary of State’s powers to limit the prices of health service medicines, for generic medicines such as these where there is no competitive market to secure value for money.

    In fact, there is a precedent of Flynn and Pfizer being potentially being fined (up to 10% of sales in this specific case) by the government due to a very similar business practices: https://goo.gl/eObUkr 

    2.  Below are additional reasons why a PE firm would not be interested in buying a company like Concordia:

    1. VRX has often been criticized for focusing on financial engineering (i.e. acquiring assets drugs/companies) without developing drugs through its own internal R&D. CXR spends <4% (of sales) on R&D and its peers are almost double that! CXR is just as bad an offender of financial engineering as VRX, which spends ~3%! Given the mainstream scrutiny of such practices, does any PE or strategic want to support this and risk reputational damage?
    2. A Senate committee has been investigating dramatic increases in drug prices imposed by VRX et al. Mike Pearson, VRX’s departing CEO, stated “it was a mistake to pursue, and in hindsight I regret pursuing” transactions such as Valeant’s acquisition of Isuprel and Nitropress, two cardiac‐care drugs that VRX acquired in 2015 and quickly boosted prices on by 525% and 212%, respectively. CXR is just as bad of an offender of price gouging as VRX: refer to Nathan's article. Again, given the mainstream scrutiny of such practices, does any PE or strategic want to support this and risk reputational damage?
    3. CXR has 60% Adj 2016E EBITDA margins, substantially higher than other spec pharma companies (~45%): what more can a private equity company do to cut out fat in a company that is already so financially optimized? Maybe cut out all of R&D?! If so, please refer to point #1 above.
    4. CXR trades at a ~7.7x EV/NTM EBITDA, which is in-line with comps still! Given CXR’s deteriorating fundamental businesses, does it make sense for a value‐focused investor or strategic to pay a premium for CXR's unsustainable business?
    5. CXR is ~5.5x levered: how can a private equity firm add more debt to make this investment work so that they can still obtain an a healthy double digit IRR given CXR’s already imploding fundamentals?
    6. If PE firms are interested in playing the “long” game and adding CXR to a strategic platform company and awaiting for the high drug price rhetoric to die down and then look to “optimize” prices opportunistically (i.e. jack up prices on those drugs that can withstand such actions), I will only say that we are aware of many advocacy groups and investors that are willing to use all of their resources to do that which is best for patients in both the US and elsewhere affected by high drug prices fostered by companies with egregious business practices.  Drug pricing scrutiny is not going to go away: this is the new normal.

    So what does this all mean?  What is the trade?

    Simply, if you believe the above is rational (and it is my personal interpretation of what I've read), then it would be unlikely for a PE firm to buy Concordia.  Amy Or's article suggests that this is already true: Blackstone and Carlyle did not even submit a bid.

    And if no one buys Concordia, then the stock is substantially less because it will trade on fundamentals, which I think is highly unsustainable and may crack at any time.  To that end, given the fundamentals, the markets -- if efficient -- will cause Concordia to no longer be trading at 7.7x EBITDA but will likely trade closer to the bottom of the comps (closer to 5.5x).

    But wait: Concordia is 5.5x levered.  Thus, if this happens, then all-or-most of the EV will be all debt.  Which means equity will get crushed!

     

    Getting in front of Amy's article yesterday would have been ideal.  But Concordia's equity could very much be worth close to $0.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    No rational PE firm will be interested in buying Concordia because they will recognize, upon quick diligence, that the business model of Concordia's biggest business is unsustainable and the reputational risk to their brand.  When the buyout offers are gone, then Concordia should trade on fundamentals, which should value it closer to the bottom of the spec pharma comps multiples.  If Concordia trades at the bottom of the spec pharma comps on a EV/EBITDA multiple basis, Concordia's entire EV will be all debt (5.5x levered) and the equity will be crushed: stock will be close to $0.

    Messages


    SubjectRe: Cinven
    Entry06/03/2016 03:28 PM
    Memberbigvic

    Right, I think the latter point is key: the current environment makes owning a company like Concordia hard if the acquirer cares about reputation.

    The pension funds and LPs for PE firms are likely similar to the ones that invest in a fund like Pershing.

    At the recent Senate hearing on VRX, a senator asked Ackman if he thought that his public and private pension investors want him to invest in this kind of business model. "Certainly not," he responded.

    http://www.businessinsider.com/live-bill-ackman-and-valeant-execs-get-grilled-by-angry-senators-2016-4

     


    SubjectRe: Stock is $27...not $34?
    Entry06/03/2016 03:51 PM
    Memberbigvic

    It is 34 CAD.  When you click SUBMIT IDEA, you enter information in the country the company's domiciled in.  VIC doesn't show it's CAD (it should get that fixed) but it requests you enter info as of the country of domicile.


    Subject$CXRX
    Entry06/05/2016 03:42 PM
    Memberbigvic

    Is it the beginning of the end for $CXRX?

    http://www.thetimes.co.uk/article/lessons-in-exploiting-a-loophole-to-make-millions-out-of-the-nhs-mtp7kl2x0

    http://www.bbc.com/news/health-36449913


    SubjectRe: $CXRX
    Entry06/06/2016 10:02 AM
    MemberMSLM28

    Thanks for posting. I wanted to hear your thoughts on Apollo and if you think their "bid" is real or another ploy. They have done some pretty crappy deals as of recent. 


    SubjectRe: Re: $CXRX
    Entry06/06/2016 11:45 AM
    Memberbigvic

    2 things:

    1. Concordia currently under active investigation per UK Times (see pasted article below and the link to it).

    2. One of its top 3 drugs is in process of being taken off the market.

    While Apollo may still buy CXRX, I don't think rational PE firms would be interested.

     

    1. http://www.thetimes.co.uk/article/drug-profiteers-face-fines-b0bc5tgbx 

     

    Drug ?profiteers? face fines

    Billy Kenber

    Billy Kenber, Investigations Reporter

    644 words

    4 June 2016

    08:00

    thetimes.co.uk

    TIMEUK

    English

    © Times Newspapers Limited 2016

    Times investigation prompts government inquiry into ?260m NHS rip-off

    Drug companies that raised the price of medicines by up to 12,500 per cent could face multimillion-pound fines after the government called in the competition watchdog.

    Jeremy Hunt, the health secretary, asked the Competition and Markets Authority (CMA) urgently to examine evidence uncovered in an investigation by The Times, which revealed that a select group of entrepreneurs had made a fortune exploiting a loophole in NHS pricing rules.

    The companies face limited competition on long-established, off-patent drugs, which they bought from large pharmaceutical companies. By dropping the brand name, the medicines are taken outside NHS profit controls and suppliers are free to oversee “extortionate” price rises.

    The price rises on more than 50 drugs cost the taxpayer an extra £262 million last year alone, with one drug increasing from £9.57 to £353.06 a packet in the space of five years. Not all of this money goes to manufacturers, with wholesalers and their customers also receiving a cut.

    Overall, the prices of 32 drugs have risen by more than 1,000 per cent over the past five years. This newspaper also reveals today that Cinven, a private equity firm, made about £1.5 billion from buying and merging drug companies that imposed large price rises.

    It bought two of the leading com- panies in the market, Amdipharm and Mercury Pharma, and merged them before further takeovers. The business was sold to the Canadian company Concordia Healthcare last October.

    Responding to the investigation, a spokesman for the Department of Health said: “These are serious allegations and no pharmaceutical company should be exploiting the NHS. The secretary of state has asked the CMA to urgently look at the evidence uncovered by The Times as part of their continuing investigations into excessive drugs pricing.”

    The competition watchdog has the power to impose financial penalties of up to 10 per cent of global turnover on any company found guilty of abusing a dominant market position by charging excessive prices. The government can also retrospectively recover losses through the courts.

    It is understood that the CMA is already conducting five inquiries into suspected anti-competitive practices in the pharmaceutical and healthcare industries. It is not known whether any of the companies identified by The Times are involved in these investigations.

    A petition that has been set up by the campaigning organisation 38 Degrees calling on Mr Hunt to close the loophole in the NHS pricing rules had been signed by 35,000 people in the space of a few hours. Lorna Greenwood, campaign manager, said: “This proves the level of public anger at drugs companies holding the NHS to ransom. Taxpayers expect NHS funding to be used to save lives, not line the pockets of pharmaceutical bosses.”

    Two of the four companies named by The Times were founded by the entrepreneurs Vijay and Bhikhu Patel, who have received a string of awards and honorary degrees.

    Their present firm, Atnahs, acquired the rights to a number of drugs for which they are the sole supplier and which have risen sharply in price over the past two years. The antidepressant doxepin rose from £5.71 to £154 for a packet of 50mg tablets, and from £3.77 to £97 for 25mg tablets, over that time.

    The Patels had previously declined to comment but last night Atnahs issued a statement saying that it acquires the rights to make medicines from large pharmaceutical companies “at significant upfront costs”. It said that it then spends “significant money on ensuring that the medicines are in line with the latest regulatory, medical and technical standards”.

     

    Atnahs generated revenue of more than £18 million in Britain last year and said that the average price of a packet of its medicine was £18.20.

    2. http://www.thetimes.co.uk/edition/news/huge-price-rise-forces-nhs-to-ditch-life-changing-drug-09xlwh0j7 


    SubjectSmoke
    Entry06/08/2016 12:16 PM
    Memberbigvic
    I don't know what Apollo will do.  But does Apollo want
     
    1) the reputational risk (see main page)?
    2) to buy a company with active UK governmental investigations into its biggest business (AMCo, ~60% of sales) that has already led a top 3 drug to be effectively banned by UK government?
     
     

    SubjectRe: Smoke
    Entry07/12/2016 09:33 AM
    Memberbigvic

    The end may be near:

    http://www.parliament.uk/documents/commons-committees/Health/Correspondence/2015-16/Jeremy-Hunt-reply-to-Chair-medicine-prices-redacted.pdf

      Back to top