The recent negative sentiment towards Valeant Pharmaceuticals is unfairly spilling over to Concordia Healthcare (TSX:CXR, Nasdaq:CXRX), says Cantor Fitzgerald Canada analyst Scott Curtis.
This week, shares of Valeant Pharmaceuticals fell sharply after a report accusing the company of impropriety was released by a short-seller called Citron Research.
The accusation came in the wake of Turing Pharmaceuticals scandal, and U.S. presidential hopeful Hillary Clinton’s vow to fight drug price gouging, which weighed heavily on Valeant and engulfed the entire specialty pharma sector. The issue goes back to at least August, when two members of the U.S. Congress who had been investigating generic drug price increases wrote to Valeant after it acquired two heart drugs, Isuprel and Nitropress, from Marathon Pharmaceuticals and then raised their prices sharply.
“Citron Research has delivered the proof that something really stinks at Valeant and it goes beyond their egregious price hikes,” concluded the report.
Valeant says it will address accusations made in the report in a conference call this coming Monday. The company says it will “…lay out the facts, including allegations made against the company regarding its relationship with Philidor and R&O, the company’s accounting practices, and channel stuffing that contain numerous errors, unsupported speculation, and incorrect interpretations of facts and circumstances to the detriment of the shareholders of the company.”
On Wednesday, Concordia CEO Mark Thompson appeared on BNN to defend his company, whose shares fell from more than $110 in early September to close at just $30.50 on October 21. Thompson said Concordia was being unfairly swept up in the Valeant/Turing soap opera.
“I think there is a fair bit of guilt by association which I think is completely unwarranted, said Thompson. “We have a very different business model than both Valeant and Turing. We have a model that doesn’t rely on taking geometric price increases. We also have a model that buys products. Were not like Valeant, who buys companies and tries to find synergies and strip them down.”
Thompson later added: “I think the short-sellers are wrong.”
In a research update to clients today, Curtis underlined some of the ways he feels Concordia diverges in makeup from Valeant.
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“Concordia’s growth strategy is not fixated on identifying “mispriced” products in the marketplace; instead the Company seeks to find assets that generate stable cash flow and have the potential to provide additional growth through a combination of targeted promotion and moderate price increases,” he said. “Although one of CXR’s flagship products, Donnatal (now ~10% of the business) received a 100% price increase when it was acquired in Q2/14, it has only received one 10% price increase since then. These 10-15% price increases pale in comparison to certain peers that have several products that have undergone price increases of 250% – 500% or more.”
The analyst said Concordia’s recent successful completion of the AMCo acquisition was a “huge milestone” for it in part because it diversifies the company the dilutes the risk of increased pricing regulation.
Curtis today reiterated his “Buy” recommendation on Concordia Healthcare, but lowered his one-year target price on the stock from (U.S.) $96.00 to (U.S.) $80.00, implying a return of 192% at the time of publication. The analyst said he lowered his target in part because of a “witch hunt” from politicians, the media, and short-seller that is compressing valuation multiples in the space.