CONCORDIA INTERNATIONAL CORP. (CXRX) – SHAREHOLDER ATTENTION DEFICIT DISORDER By Caleb Gibbons, CFA, FRM,– Originally at IBankCoin. Reposted with permission
Concordia International, regarded as the Canadian little sister of Valeant, was taken to the mat in Friday’s trade after a disaster of a Q2 2016 earnings report. Including after hours action, a full 40% was taken off the market cap of $CXRX ($510mm now). A $0.04 earnings miss (“adjusted” earnings of $1.38 vs. $1.42, < 3%) does not normally elicit such revulsion, but in concert with horrendous un-adjusted (i.e. GAAP) numbers, reduced forward guidance, departure of the CFO, and abolition of the dividend, all that was missing was a crow’s foot from this steaming mess of a report.
The qtly GAAP loss was -$570.5mm (-11.18 per share), largey due to the write down in the value of Plaquenil and Nilandron, both of which are under assail from generic drug competitors.
Founder, Chairman & CEO Mark Thompson formerly worked at Biovail, before Valeant tucked them under their wing in 2010. Concordia has been highly acquisitive since their formation, spending $5bln since 2013 (Covis and AMCo being the largrest). The focus has been on buying legacy drugs (i.e. buying spent oranges and extracting more juice from them) and tweaking the pricing (i.e. not lower).
A great deal of debt was assumed to finance the aforementioned m&a binge. Total debt is $3.3bln. The benchmark (cusip EK849878) US$735mm 7% April 15, 2023 , issued in 2015 to finance the Covis aquisition, broke through $80.00 in Friday’s trade to settle in the high $70’s. I would expect the rating agencies to take action, now that the horse has left the barn, in the coming weeks. CCC, aka “fish hooks” are likely in the cards. Credit ratings are alphabetic, it should be kept in mind. A is good, C much less so and D stands for default. Expect analysts that have not yet suspended coverage to turn their attention to recovery rates. The base case recovery rate assumption on Concordia debt, in a tap out situation, will likely not have a 7 handle, as in 70 cents on the dollar.
There are many unknowns for equity holders. The trading range on $CXRX has been a wide $9.65 (Friday’s intraday low) to $89.10, sitting 88% below their all time high. The margin for error on execution going forward is very low. Jesus take the wheel. I’d give it a wide berth. JCG