Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Disappointing earnings. Substantially lower guidance for 2016. A CFO departure. A suspended dividend. A drug-pricing controversy. Oh, and a libel suit against a chicken farmer.

All were features of Concordia International's unusually calamitous earnings report on Friday. For a day, at least, the Ontario-based specialty pharma firm one-upped its better-known progenitor Valeant, which has had a mixed week of its own. 

Concordia's most troubling resemblance to Valeant is that it, too, has become a poster child for major trends in pharma. First, the FDA is approving generics at a much faster rate than it has in the past, as it works through a backlog of applications, increasing competition for the older drugs on which Concordia relies. Secondly, U.S. payers are aggressively clamping down on pricey drugs, including some of Concordia's.

These issues have hurt small firms and multi-billion-dollar giants alike. But for Concordia, which has racked up more than $3 billion in debt buying drugs that are often vulnerable to competition, it hurts a lot more. Concordia's shares were down 27 percent on Friday. 

Flawed Legacy
Concordia's focus on older drugs and big debt load is doing it no favors in a tough quarter.
Source: Bloomberg

Concordia's strategy focuses largely on "legacy" (read: long-in-the-tooth) products. Its cumulative R&D expenditure since 2014 is just $42 million. And it has no plans to change, blaming its $100 million-plus revenue guidance cut on foreign-exchange woes and unexpected competition for North American products. An ongoing "strategic review" has yet to yield results. 

The "unexpected competition" meme, which has been trotted out by other generic and specialty firms such as Endo Pharmaceuticals, is getting a bit old. The FDA has been making a concerted effort to work through a backlog of applications. Expectations of greater competition arguably should have been baked into companies' forecasts.

Bureaucranking
So far in its approval year, which ends in October, the FDA has approved more generics than it did in any of the previous three years
Source: the FDA

Older products such as Concordia's don't tend to grow or even keep sales flat organically; they require price hikes and promotion. That makes them targets for pharmacy benefit managers, which exist to drive down prices on just such products.

One of the main ways PBMs do this is by threatening to exclude drugs from their formularies -- lists of drugs they're willing to cover -- when there are cheaper alternatives. Either you agree to big price cuts to stay on the formulary, or you risk getting the boot. It's an issue across the industry, even for companies that develop new drugs. Danish diabetes-drug giant Novo Nordisk cut its full-year guidance last week due to payer-driven U.S. pricing problems. 

While PBMs once paid relatively little attention to older products and those that treat small patient populations, the behavior of Valeant and its ilk has changed that.  

Concordia was singled out for special attention by CVS, one of the two biggest PBMs in the country. Two of the 10 drugs CVS kicked off its formulary for what it called "egregious" price increases were Concordia's prostate cancer drug Nilandron and its blood-pressure treatment Dutoprol. 

The company said the sales impact of CVS' exclusion should be minimal. But if other payers follow suit, or if political outrage about the company's pricing practices has a broader impact, then Concordia may be in big trouble.

Concordia's international business is in better shape. But the health-care trends in the U.S. are seismic, and Concordia is on the wrong side of them. It and others like it have no clear escape, short of a major shift in their business models. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net