Concordia Healthcare CEO says pricing controls unlikely

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The head of battered Canadian pharmaceuticals company Concordia Healthcare Corp. says that wheeling and dealing in the global pharma sector is not over – not by a long shot.

"The M&A market is not dead at all. It's just a question of what it looks like," Mark Thompson, Concordia's chief executive officer, said in an interview.

Until recently, shares in Concordia, like the much bigger Valeant Pharmaceuticals International Inc., had skyrocketed after it made a series of "accretive acquisitions" – buying assets that add to profit and sales, using near-historically cheap debt to finance the whole shebang.

But over the past six weeks, investors have fled the specialty pharma sector en masse after a series of scares, including threats of a U.S. crackdown on drug-price increases and doubts being raised about the quality of Valeant's accounting. Concordia has repeatedly been caught in the downdraft, with its stock cratering more than 60 per cent since hitting an all-time high of $84.17 (U.S.) a share in early September.

Mr. Thompson argued that the currently depressed valuations in pharma companies will attract buyers. "There is a high probability that there will be further consolidation," he said.

He is not overly concerned about the shaky U.S. market and argued that even if the worst-case scenario were to play out for the sector – i.e. Hillary Clinton becomes president – politicians are not likely to ever reach a consensus on what to do about drug pricing.

"I don't believe there will be pricing controls," he said.

Mr. Thompson said "market dynamics" will fix any pricing problems in the interim – i.e. price hikes by one pharma company will result in a competitor offering a lower-priced product. He used the example of Imprimis Pharmaceuticals Inc. recently offering a $1 version of the infamous Turing Pharmaceuticals drug that was jacked up by an astounding 5,000 per cent to $750 a pill.

When the pricing issue blew up in late September, Concordia had just launched a major equity raise to help pay for its $2.1-billion (U.S.) acquisition of British-based Amdipharm Mercury Co. Ltd. (AMCo).

"Unfortunately we got caught right in the middle of a storm," Mr. Thompson said.

Investors who agreed to buy shares at $65 (U.S.) saw their investment almost cut in half, even before the deal had closed. If investors were bitter about losing money, Mr. Thompson said, it never got back to him. "There are people who may have squawked in the background. I never heard anything directly," he said.

Concordia ultimately fell short on how much equity it planned to raise, and had to resort to a $180-million (U.S.) bridge loan at an interest rate of 9.5 per cent to make up the difference.

Nailing down the terms of the rest of the company's recently closed $1.8-billion debt financing was no picnic either, with interest rates spiking over the past few weeks.

After the AMCo. acquisition, Concordia is much less exposed to the shaky U.S. market, but it is highly leveraged, with a net debt of $3.5-billion (U.S.) at a blended interest rate of 7.25 per cent. Not surprisingly, Mr. Thompson said his biggest priority is paying down that debt.

He is also not that keen any more on the comparisons to Valeant – which served the company well when Valeant was going supersonic. But now that Valeant is getting kicked from all angles, the "Baby Valeant" moniker is wearing thin.

"I think we're getting tarred with the same brush," Mr. Thompson said. "I don't think it's fair. We do have a very different model than they do. We buy products. We don't buy companies."

In addition, Concordia's price hikes have been relatively benign in comparison with Valeant's. Donnatal, which is Concordia's best-selling drug, has seen a price hike in the region of 100 per cent since the company acquired it. Valeant's increases on its U.S. drugs have been much more dramatic.