Drugmaker in trouble after debt-fuelled deal spree
Concordia bonds lose $245M after posting disappointing third-quarter earnings
Concordia International Corp.’s $6.5-billion debt-fuelled acquisition spree is coming back to haunt the drugmaker’s lenders.
Bonds of the junk-rated company lost about $245 million Monday, in their biggest one-day decline, after the company posted disappointing third-quarter earnings results and suspended its forecast. The Canadian drugmaker’s biggest note now yields about 28.5 per cent, which is close to what investors demand to hold Venezuela’s benchmark debt. Its shares plunged more than 36 per cent to close at $2.71.
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 than10-fold to $4.3 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 $4.7-billion takeover of U.K.’s Amdipharm Mercury agreed to in September 2015. The acquisition left Concordia saddled with about $4 billion in debt and made it among the 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 much as 27 per cent on Sept. 16 when the news of the bill emerged.
All of this did little to dent enthusiasm for the company when it came to the bond market a month later to raise $467 million for debt repayments. The company was willing to pay as much as 9.25 per cent on the note sale that was handled by Goldman Sachs, but managed to sell the debt at a coupon of 9 per cent.
Adam Peeler, a Concordia representative, and Michael DuVally, a Goldman Sachs spokesperson, 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 per cent.
Concordia’s acquisitions increased its debt load by more than 10-fold.