Concordia Healthcare Corp. and Valeant Pharmaceuticals Intl Inc. Suffer Big Declines

The Democrats have their eyes on limiting drug-price increases. It’s good for patients, but not so much for Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) and Concordia Healthcare Corp. (TSX:CXR)(NASDAQ:CXRX).

Karen Thomas, MSc, CFA

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published September 29, 2015 9:17 am EDT

Hillary Clinton’s tweet reads like this: “Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on.”

Clearly, sky-rocketing drug prices is an area of focus for Democratic presidential-hopeful Hillary Clinton. After “outrageous” drug-price increases from companies such as Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) and Turing Pharmaceuticals AG, politicians are taking action and drawing attention to this issue.

Reports state that Valeant’s heart drugs, Nitropress and Isuprel, saw a 212% and 525% price increase after Valeant acquired them, and that one of Turing’s acquired antibiotic drugs was raised to $750 per pill from $13.50 per pill after it was acquired.

Valeant’s stock was down over 16% yesterday as investors react to this. The stock is already very richly valued, and its aggressive acquisition strategy was already under scrutiny, but this tweet and the revelation that U.S. lawmakers are questioning Valeant’s heart drug-price increases seems to be the tipping point.

For its part, Valeant CEO Michael Pearson issued a letter to calm investors. In this letter, he states that Valeant’s exposure to U.S. government reimbursements is lower than any other major pharmaceutical company (about 15% of total revenue) and that Valeant is “well positioned for strong organic growth, even assuming little to no price increases.”

In short, he states that the company’s business model is not dependent on large price increases. He goes on to say that in 2016, 30% of the company’s revenue will be generated from outside the U.S., which has not seen significant price increases, and he continues to expect strong organic growth going forward.

Similarly, Concordia Healthcare Corp. (TSX:CXR)(NASDAQ:CXRX), which also has an aggressive acquisition strategy, whereby it manages and acquires legacy pharmaceutical products and acquires and develops orphan drugs, fell more than 25% yesterday.

This is also no doubt related to the developments in the U.S. political and regulatory scene. And the company just completed an equity offer, where it raised $520 million and issued eight million shares of common stock at $65 to fund the purchase of Amdipharm Mercury Ltd.

Valeant and Concordia have been very successful and profitable, generating strong margins and ROEs, and the stocks’ valuations have more than reflected this fact. Valeant trades at a P/E of 82 times and Concordia trades at a P/E of 90 times, even after the dramatic price declines yesterday.

And this talk from the Democrats clearly casts doubt on the future earnings numbers for these companies, and therefore increases the risk profile of these shares.