Impending recapitalization and increasing competition from generics means there’s little value in holding onto pharmaceutical company Concordia International (TSX:CXR, NASDAQ:CXRX), says Canaccord Genuity analyst Neil Maruoka, who maintains his “Sell” rating for Concordia.
On Thursday, Concordia announced its fourth quarter and fiscal 2017 results, with Q4 revenue and adjusted EBITDA coming in at $150.2 million (down from $170.4 million for Q4/16) and $70.8 million (down from $80.5 million for Q4/16), respectively.
In October of last year, Concordia announced that it would be seeking restructuring of its debt obligations, which caused CXR shares to abruptly lose half their value. With its Q4, FY17 results, the company also announced the implementation of a new leadership structure meant to streamline and help with Concordia’s recently devised corporate strategy.
"We believe that our accomplishments in 2017, which included the development of DELIVER, our long-term growth strategy, have positioned Concordia to have a promising 2018," said Allan Oberman, Concordia’s CEO, in a press release. "As we make progress towards the potential realignment of our capital structure, our global team remains focussed on leveraging our diverse portfolio of medicines, global sales platform, and product pipeline in order to support our aspirations for long-term growth."
In an update to clients on Thursday, Maruoka said that CXR’s Q4 and FY17 revenues came in above his and the Street’s estimates but they fell short on adjusted EBITDA due to weaker gross margins. Going forward, however, generic competition along with the company’s ten to 20 per cent decrease in revenue and EBITDA guidance are cause for a lowering of the analyst’s next year forecasts, with 2018 sales estimate dropping from US$541.5 million to US$518.7 million and Adj. EBITDA falling from US$280.8 million to US$257.9 million.
Moreover, the above-mentioned recapitalization comes with the “very high” threat of significant dilution for current shareholders, says Maruoka. “Given the substantial haircut that is likely coming for both secured and unsecured debtholders, we believe there is a good chance that existing equity could have limited value; a view that is supported by management commentary,” says the analyst. “Consistent with our SELL rating, we do not foresee any near-term fundamental catalysts that could turn the page for Concordia.”
“While the chances that existing equity is worth nothing is high, in our view, we have envisioned
a restructuring scenario (assuming a 6.5x post-restructuring EV/EBITDA multiple and a ~3.0x leverage ratio target) where current shareholders can recover some value ranging from $0.03 to $0.23 per share,” says the analyst. “Based on this analysis, we arrive at a target price of US$0.15; our target implies a negative return of (75 per cent) and continues to support our SELL recommendation.”