Valeant Clone Concordia Top Canada Stock as CEO Eyes Deal

Concordia Healthcare Corp. is eyeing bigger targets and more assets in Europe, extending an acquisition streak that has helped make the Canadian company the top performer on the Toronto Stock Exchange this year.

Concordia has surged almost fivefold in the past 12 months as consolidation sweeps through the pharmaceutical industry. The Toronto-based company agreed to buy assets of Covis Pharma Holdings Sarl for $1.2 billion last month and will likely announce another purchase in the third quarter, Chief Executive Officer Mark Thompson said.

“There is a willingness now to look at assets outside of North America and look to build more of a scale of a business that would have presence both in Europe and North America,” Thompson, 47, said in a phone interview. “What you’re going to see is we’re going to lay the groundwork in the second quarter and then move to close something in the third quarter.”

Concordia’s growth-by-acquisition strategy mirrors that of its larger peer Valeant Pharmaceuticals International Inc. Concordia has completed or announced six deals valued at about $1.5 billion since 2013, according to data compiled by Bloomberg and the company. Valeant, which trades on U.S. and Canadian exchanges and company officials say is based in Laval, Quebec, has announced 16 purchases for a combined value of about $23 billion in the same period, the data show.

No Stopping

“I don’t have any intention of stopping because there are lots of opportunities for us out there,” said Thompson, who worked for Biovail Corp. before its 2010 merger with Valeant.

Concordia was added to the Standard & Poor’s/TSX Composite Index after the close on March 20 and Thompson said the company has a “listing in progress” in the U.S., without giving further details.

Concordia and Valeant, which recently won a bidding war against Endo International Plc to buy drugmaker Salix Pharmaceuticals Ltd. for about $11.1 billion, join companies in almost $100 billion worth of deals in the past quarter as the world’s biggest health-care firms race to acquire the rights to lucrative drugs or treatments.

Concordia has advanced 81 percent this year, giving it a market value of C$2.44 billion. That’s made it the top performer among stocks in the S&P/TSX, Canada’s benchmark equity gauge. Valeant is third with a gain of 48 percent, giving it a market value of C$84.1 billion.

Concordia’s purchase of the assets of Zug, Switzerland-based Covis, which Thompson sees closing in late April, will give the company 18 branded and generic products sold mostly in the U.S. to treat primarily heart and nervous-system disorders.

The company said April 6 it will raise $610 million by selling senior notes to fund the cost of the deal as well as pay down earlier debt.

Legacy Drugs

The company is focused on managing and acquiring legacy pharmaceuticals usually off patent, including Donnatal for irritable bowel syndrome, and orphan drugs treating rare diseases, such as Photofrin for cancer of the esophagus, according to Concordia’s website.

The Covis deal shows investors that “we do what we say we’re going to do” and increases the scale and diversity of Concordia’s business, Thompson said.

“Concordia already enjoyed a stronger competitive position than most of its peers; with its Covis assets it will put even more distance between it and the rest of its group,” David Dean, an analyst at Cormark Securities Inc. said in March 23 note. “It will begin competing with even larger companies for assets that would have been out of reach in the past.”

More Runway

Concordia also has an advantageous tax structure with a blended tax rate in the “single digits,” according to Thompson, that helps its bottom line after acquisitions. Valeant has highlighted a low tax rate as an edge to its operations too.

“I think a lot people see Concordia as a company that’s got a lot of runway in front of it whereas Valeant continues to execute, obviously, but their opportunity set has shrunk,” Thompson said.

Bruce Campbell, a fund manager at StoneCastle Investment Management in Kelowna, British Columbia, said he owns Concordia shares instead of Valeant for that reason.

“Valeant is significantly larger, so it’s a lot less risk,” said Campbell, whose firm manages about C$110 million. “But if you look at where it’s trading and how it can move the needle moving forward, there’s a lot more opportunity left in Concordia compared to Valeant.”

While Concordia’s share price-to-earnings ratio is about 94 compared with Valeant’s 75, that view reverses when assessing earnings potential, according to data compiled by Bloomberg.

‘Strong Start’

Concordia trades at 10.2 times its enterprise value, which measures the company’s total value against analysts’ forecasts for earnings before interest, taxes, depreciation and amortization 12 months out. Valeant’s stands at 15.5 times. A lower ratio suggests a company may be undervalued relative to its growth potential.

Analysts forecast a further 25 percent increase in Concordia shares over the next 12 months, which would take the stock to C$105.50. That compares with a forecast for an 11 percent advance in Valeant shares, the data show.

Valeant’s acquisition of Salix Pharmaceuticals has been completed and the company is well positioned for another year of outperformance, Laurie Little, a spokeswoman for Valeant, said in an e-mailed statement.

“2015 is also a very strong start as we continue to focus on building diversified, durable businesses with strong organic growth platforms and pursuing disciplined business development opportunities,” Little said.

‘Anything’s Possible’

Valeant’s growth prospects remain bright, with the inclusion of Salix and beyond, said Alex Arfaei, an analyst at BMO Capital Markets in New York. Arfaei ranks Valeant as his top pick among large pharmaceutical companies. He holds a $243 price target for Valeant, the highest among 19 analysts surveyed by Bloomberg.

“We believe the street continues to under appreciate Valeant’s near-term growth prospects and gross margin expansion,” Arfaei said in a March 17 note. The company’s strong free cash flow will also help Valeant keep its debt level manageable as it makes acquisitions, he said.

Valeant’s free cash flow is forecast to more than double to $4.37 billion by 2016 from $2 billion in 2014, according to data compiled by Bloomberg.

Give Concordia enough time and it could someday grow to rival its much-bigger peer Valeant, StoneCastle’s Campbell said.

“When Valeant started off as Biovail, nobody thought they’d end up the third-largest company on the TSX,” Campbell said. “Anything’s possible.”

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