Another Canada Drugmaker Trips After Debt-Fueled Deal Spree

  • Concordia’s bonds plunge after company misses earnings
  • Company sold $350 millon of bonds just one month ago

Rahim: Concordia, Valeant Are Structurally Broken

Concordia International Corp.’s $4.9 billion debt-fueled acquisition spree is coming back to haunt the Canadian drugmaker’s lenders.

Bonds of the junk-rated company lost about $271 million since Monday, in their biggest two-day decline, after the company posted disappointing third-quarter earnings results and suspended its forecast. The drugmaker’s biggest note now yields about 28.5 percent, which is close to what investors demand to hold Venezuela’s benchmark debt. Its shares plunged more than 36 percent to close at $2.03 on Monday and have dropped by another 10.8 percent on Tuesday to $1.81.

Similar to its better-known and bigger peer, Valeant Pharmaceuticals International Inc., Concordia employed a growth-by-acquisition strategy that increased its debt load by more than 10-fold to $3.2 billion in the last three years, according to data compiled by Bloomberg. Now that debt is weighing on Concordia as it faces slow growth and an investigation of its pricing policies.

“The problem with the strategy of growth by acquisition is that it was predicated on buying drugs and raising prices significantly,” said Dimitry Khmelnitsky, an analyst at Veritas Investment Research in Toronto. “That model right now is unsustainable.”

Khmelnitsky has a sell rating on Concordia.

A lot of the company’s woes can be traced back to its largest deal: the $3.5 billion takeover of U.K.’s Amdipharm Mercury Ltd. agreed to in September 2015. The acquisition left Concordia saddled with about $3 billion in debt and made it among Canadian firms with the largest exposure to Europe and vulnerable to the fallout from the U.K.’s vote to leave the European Union in June.

The company’s fortunes took another hit when a bill was introduced in the U.K. House of Commons in September proposing controls on drug prices. The company’s shares plunged as as much as 27 percent on Sept. 16 when the news of the bill emerged.

‘Another Victim’

All of this did little to dent enthusiasm for the company when it came to the bond market a month later to raise $350 million for debt repayments. The company was willing to pay as much as 9.25 percent on the note sale that was handled by Goldman Sachs Group Inc., but managed to sell the debt at a coupon of 9 percent.

Adam Peeler, a Concordia representative, and Michael DuVally, a Goldman Sachs spokesman, didn’t immediately respond to messages seeking comment.

Concordia financed the Amdipharm takeover with a mixture of loans and bonds.

The company is “another victim of leverage,” Martin Shkreli, former chief executive officer of Turing Pharmaceuticals AG, said in a tweet on Monday. “We all have to learn the lesson -- don’t borrow money excessively.”

Shkreli is currently facing charges related to securities fraud. He has been dubbed the “most hated man in America” in the media for raising the price of a potentially life-saving drug by 5,000 percent.

Investors who purchased Concordia’s $350 million bond sale last month have seen the value of those securities fall to 86.75 cents, down from par. The bondholders could have fared worse, according to Christian Hoffmann of Thornburg Investment Management, a $53 billion money manager that owns Concordia debt.

“Owing to the secured bond deal, liquidity remains reasonable and appears to adequately cover the earn-out obligations as well as near-term debt requirements,” Hoffmann said.

Concordia reported third-quarter revenue of $185.5 million, below analysts’ estimates of $208.3 million. Earnings per share were 69 cents. Analysts had expected $1.05. The company also said in its earnings statement that it would suspend its forecast as it “assesses the business under new leadership.”

Allan Oberman, former chief executive officer of Sagent Pharmaceuticals Inc., will become CEO of Concordia on Tuesday, according to the statement. The company’s founder, chairman and CEO, Mark Thompson, announced last month that he was stepping down.

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