Asked to name this year's best-performing billion-dollar Canadian stock, most investors likely wouldn't guess Concordia Healthcare Corp., if they had heard of the company at all.
The stock, which began trading in December on the TSX, has registered a 350-per-cent rise in share price so far this year, having passed the $1-billion mark in market capitalization. That kind of trajectory alone warrants some attention.
Having risen so fast, Concordia's valuation would naturally be of concern to prospective investors. But there's good reason to expect the drug company to continue to add value through acquisitions, said Bruce Campbell, a portfolio manager at StoneCastle Investment Management, which owns shares of Concordia.
"We think there's still a lot of runway," Mr. Campbell said, noting that investors should be prepared for short-term volatility. "I think you could close your eyes, buy it right now and forget about it. The stock is going to be significantly higher down the road. But I think the endgame is that this gets sold."
Concordia is primarily focused on acquiring drugs facing patent expirations, which big pharmaceutical companies are keen to unload.
The industry is grappling with the expiration of a slew of brand-name drug patents and the resulting competition from generic alternatives. As a result of the "patent cliff," companies like Concordia are finding willing sellers ready to cash out on the dwindling value of their popular medications.
These deals make sense to both sides in part because of Concordia's tax structure. Through a Barbados-domiciled subsidiary, the Oakville, Ont.-based company can lower its tax bill substantially.
A long-standing tax treaty between Canada and the Barbados allows for the repatriation of profits without further taxation.
That arrangement effectively makes a drug more valuable to the acquiring company than it is to a U.S.-based drug company paying full taxes. So Concordia can afford to overpay and still make a deal accretive.
"There's a lot of value to be split between the buyer and the seller," said James Hodgins, chief investment officer at Curvature Hedge Strategies. "It's effectively an arbitrage. Repeat until rich."
That method was honed by the Mississauga-based drug company Biovail Corp., which was later merged with Valeant Pharmaceuticals International Inc.
One of the key players behind the Biovail approach was Mark Thompson, the man now in charge of Concordia.
Mr. Thompson has added to his reputation as a deal-maker at Concordia with deals including the $265-million (U.S.) acquisition in March of Donnatal, a treatment for irritable bowel syndrome, as well as the deal announced last week for the anti-seizure drug Zonegran for about $90-million.
After that announcement, Beacon Securities analyst Doug Cooper raised his target price to $47.50 (Canadian), which he said does not factor in any further acquisitions. But the company, he added, is likely considering "substantially larger" deals that could "significantly" move his price target, which already represents a 32-per-cent premium over Thursday's closing price of $36.10.
One big potential future catalyst for the stock would be the acquisition of Concordia itself. With its tax structure, the company could make for an attractive target for a U.S. company looking to reduce its tax burden by changing its legal address.
Known as "tax inversion," that approach has come under renewed scrutiny as a result of deals like the proposed takeover of Tim Hortons Inc. by Burger King Worldwide Inc.
But even if tax inversion is restricted by the U.S. government, Concordia could still come out a winner, Mr. Hodgins said. Drug companies could become even more inclined to offload their drugs with expiring patents. "You might actually see the deal flow to companies like Concordia increase," he said.
All of the M&A possibilities have likely played a role in elevating Concordia's stock, to the extent that Mr. Hodgins said he thinks the stock is fully valued. But he admits that investor optimism could prove justified.
"There's a lot of 'future' already in the stock. That said, the future looks good."