Unarguably, the biggest disaster for Wall Street in the last year was Valeant Pharmaceuticals, the drug company whose stock has lost about 90% of its value since October.
Of course not everybody lost. Valeant was targeted by short sellers who made a bundle on the stock’s plunge.
And they’re looking everywhere in the market for companies that may share Valeant’s losing business strategy of using debt-funded acquisitions to grow their product line (rather than R&D), and then jack up the price of those acquired drugs.
Enter Concordia International, a $1.6 billion Canadian drugmaker that Wall Street’s short sellers are circling, trying to decide if it’s a “baby-Valeant.” The stock is down 78% since this time last year.
Some of the symptoms of Valeant’s disease seem to be there. The company hiked the price of eye drops in the UK 14-fold back in May. And then there’s Donnatal, an irritable bowel syndrome drug from the 1940s that the company acquired back in 2014. In 2010, Donnatal cost $87. When Concordia acquired it, Donnatal cost $353. Concordia immediately increased the price to $602. It now costs $782 and generates 10% of the company’s revenue.
We’ll get back to that.
First, recall that once upon a time Valeant’s strategy made it the darling of the hedge-fund community. So there was a time when being compared to the company was something to brag about.
Like Concordia CEO Mark Thompson did in this interview with Canadian news network, BNN:
He said his company was “an M&A company very similar to Valeant … Valeant, when Mike Pearson took over the company was in a very similar position to what we are in now. He’s done a very good job in terms of acquisitions. We have a very full pipeline and the objective is just to keep going. The wind is at our back so to speak and the opportunities are there.”
We should also note that Thompson was an associate general counsel and vice president for business development at Biovail, which merged with Valeant in 2010.
Of course, none of this necessarily makes Concordia a mini-Valeant, and no company wants to be called that (anymore). So Concordia has gone very much on the defensive. Last week Charley Grant at the Wall Street Journal reported that Concordia is suing a semi-retired short seller named Marc Cohodes for libel.
This is what set Thompson and Concordia off (from the WSJ):
“The management of Concordia, their past gig was at something called Biovail, which I was short a long time ago [and] was a complete and utter fraud. So [Mr.] Thompson has a history of nonsense when he was at Biovail,” Mr. Cohodes said in an interview with BNN back in April.
Biovail was charged with accounting fraud and material misstatements back in 2008. It settled for $10 million neither admitting nor denying its guilt.
Cohodes responded to the suit saying Thompson “believes that he can silence his and Concordia’s critics” by hitting them with lawsuits. He does not sound like he had any intention of backing down.
Cohodes isn’t the only short seller Concordia has taken issue with. Back in March it released a statement denying media reports that its fourth-quarter financial results might be under review by PricewaterhouseCoopers.
“We categorically deny the claims being made in the report and our independent auditors stand by our results,” said Mark Thompson, founder, chairman and chief executive officer of Concordia. “Concordia has been the subject of an unrelenting and unscrupulous attack by a group of short sellers for several months. We will continue to monitor this situation and will act accordingly. However, we are extremely excited about the business we have built and the opportunity to deliver long-term shareholder value.”
Not like Valeant
There are ways in which Concordia is very different from Valeant, though those differences aren’t necessarily great either. The FDA is currently reviewing Donnatal to try to figure out whether or not it’s actually effective at all.
RBC explained the issue a recent note to clients:
The product is under review by the FDA and has been since 1975 until a hearing to determine whether it is effective occurs. There are no timelines for when or if a hearing is to be held, but the product represents ~10% of the company’s total revenues and would impact the valuation if it were not allowed to stay on the market. Continued weakness in the GBP following the recent Brexit vote could further impact Concordia’s international business. These risks could impact Concordia’s ability to meet our price target, valuation, and rating expectations.
Of course, when something has been under review since 1975 it’s hard to see why now, all of the sudden, it’s going to become a priority — unless it just is.
In January the House Republicans on the Energy and Commerce Committee sent a letter to the FDA checking in on its Drug Efficacy Study Implementation (DESI) program. In March, the FDA responded with a list of drugs that are currently on the docket, and Donnatal was first on the list.
“Fewer than a dozen DESI proceedings remain open or “pending,” covering approximately 20 active ingredients,” said the letter. “FDA is actively working to close these proceedings. It has been FDA’s policy to allow continued marketing of drugs that are subject to a pending DESI proceeding.”
Donnatal came up at a 2015 FDA conference about the DESI program as well. The presentation was given by the FDA’s historian Suzanne Junod and Robert Temple, MD, Deputy Director of the Office of Drug Evaluation.
In response to Business Insider’s questions about the drug, a Concordia spokesperson said the following: “There is no change to Donnatal’s regulatory status. Our business is based on product launches, M&A and product promotion.”
But even if Donnatal doesn’t get completely taken off the market for being ineffective, it’s facing intense competition. As RBC notes, since Allergan put another IBS drug, Viberzi, on the market in December 2015 Donnatal prescription growth has slowed — not the healthiest news for a bouncing baby billion dollar company.