Concordia Healthcare CEO addresses deal speculation

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The head of Canadian pharmaceutical company Concordia Healthcare says he's "hopeful we'll get something done," addressing rumours the company is on the verge of announcing a major acquisition.

Shares of the Oakville, Ont.-based company have jumped 12 per cent in the past month on speculation of a deal. On Nov. 23, Canaccord Genuity Corp. analyst Neil Maruoka wrote in a note to clients: "Recent management comments and voracious speculation in the market points to Concordia doing a near-term acquisition that could double its EBIDTA (profit) for next year."

When asked in an interview whether a deal would be announced before the end of the year, Mark Thompson, CEO of Concordia said "It's very fluid."

Concordia has been a spectacular success story since it went public on Dec. 24, 2013. Its stock has surged more than 600 per cent, driven higher by a wave of acquisitions that have powered revenue surges and profit spikes. Concordia, whose market capitalization is $1.35-billion, mostly acquires individual drugs from pharma companies.

Mr. Thompson also addressed speculation that the company is planning to list its stock in the U.S. in the first quarter.

"That's the plan. Two reasons. The healthcare investor market in the U.S. is much larger than Canada. So while being listed in Toronto doesn't necessary prohibit them from being involved, they have a higher degree of comfort when you have a company that is listed in the U.S. as well. The second reason is to get U.S. analyst coverage."

Concordia is planning on doing a capital raise, concurrent with the U.S. listing, which would likely be on the Nasdaq. "To make a U.S. listing effective, you have to do a U.S. capital raise and bring in U.S. institutions," he said.

Mr. Thompson made it clear that the U.S. listing and capital raise are contingent on Concordia doing a deal first. "If a transaction occurs, the goal is to complete the transaction, list, and then look at the capital market landscape at that point, and decide what the best route for us is".

In his note to clients Mr. Maruoka said he expects Concordia would finance an acquisition largely with debt, and Mr. Thompson confirmed that is the likely scenario. "Through our relationship with GE Capital, we now have a North American syndicate that can lend us money at extremely attractive rates."

When asked whether a major deal would load up the company with too much debt, Mr. Thompson admitted that Concordia's debt/EBIDTA ratio could rise to four from under three, but he countered that cash flow from the acquisition would rapidly pay down any debt incurred.

Concordia has built it business mainly by acquiring what are known as "legacy" drugs. These are medications that have been on the market for a long time, that are off patent protection, but that generate a stable and predictable cash flow.

Concordia bought Donnatal, a legacy drug for treating irritable bowel syndrome from Revive Pharmaceuticals for $329-million in May. That one drug currently generates about half of Concordia's revenue. Mr. Thompson admits he gets "pushback from some shareholders" who feel the company is overly exposed to Donnatal. To counter some of that criticism, he says he plans to diversify its product mix. Analysts have also speculated that Concordia may set its sights on buying drugs that have a global reach, as opposed to its current roster, which caters mainly to the U.S. market.

While Mr. Thompson won't rule out the possibility of buying pharma companies instead of individual drugs, his preference is clear. "Buying a company comes with a lot of management of people. I'd rather just buy an asset that is just generating cash flow."