Concordia takeover unlikely: Goldman
A recent U. K. bill targeting generic drug pricing reduces the likelihood of a takeover of Concordia International Corp., Goldman Sachs said in a report Tuesday.
Analyst Stephan Stewart cut his price target on neutral- rated Concordia to $ 5 from $ 17 in anticipation of further weakness in the stock.
“We would continue to avoid the stock even at current levels, given potential pricing downside on one end, and high short interest and ongoing strategic review on the other,” Stewart told clients.
A bill introduced in the U. K. parliament on Sept. 15 could give the National Health Service control of generic drug pricing, in instances where market competition fails and companies charge the government agency excessively high prices.
Stewart noted that if the bill passes, it would limit Concordia’s ability to make significant price hikes on old drugs in environments with limited competition. This practice has helped the company’s U. K. business, which represents an estimated 40 per cent of sales.
As a result, the analyst believes Concordia’s outlook for mid-single-digit growth in its international segment is at risk.
“In a more extreme negative scenario, we see potential for price reductions on drugs currently benefiting from large price increases,” he added.
As for the company’s U. S. business, Stewart noted that its brands will likely see further volume declines.
“Concordia’s business model of acquiring legacy branded drugs beyond their peak and with little to no patent protection render its portfolio particularly susceptible to these declines on increased competition from both generics and more innovative brands,” he said.
In addition to the U.K. bill, the analyst highlighted two other setbacks for Concordia: the Brexit vote, and increased competition for two of the company’s larger U. S. products.
Based on these factors, Stewart no longer anticipates a full takeover of Concordia.
Concordia shares have declined roughly 30 per cent since the bill was introduced, and are down nearly 90 per cent so far in 2016.
The stock fell approximately 3.5 per cent on Tuesday.
Canaccord Genuity analyst Neil Maruoka expects implementation of the bill will hinder Concordia’s organic growth, limit its ability to make large price increases, and potentially lead to price reductions on drugs marketed in the U.K.
He downgraded Concordia to speculative buy from buy, and cut his price target to US$10 from US$20 on Sept. 16. “The proposed legislation is a cause for concern, specifically relating to whether this l onger- term growth driver remains intact; however, our expectations are that the company will be able to meet all of its obligations over the next two years (with a considerable free cash flow cushion),” Maruoka said in a research note.