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Concordia International: An In-Depth Look Into AMCo's Drug Price Gouging

Lambda Research profile picture
Lambda Research


  • Concordia’s $3.5 billion acquisition of AMCo in October 2015 exposed them to severe price gouging regulatory risk.
  • AMCo was previously flipped multiple times with increasing valuations by private equity firms and Concordia ended up holding the bag.
  • AMCo acquired off patent branded drugs with limited competition and resold them as expensive generics to avoid NHS price controls.
  • Our research finds the average price increase of AMCo’s drug portfolio that only face one competitor or less is on average 1,220%, ranging from 82%-26,429%.
  • A reversion to historical drug prices for AMCo’s portfolio could result in an equity value of zero for Concordia.

Note: All images in this article are created by the author, except where otherwise noted.


Concordia International (NASDAQ:CXRX-OLD) is a specialty pharmaceutical roll-up that has been growing through acquisitions. Using the capital markets as their fuel, Concordia valiantly bought 18 of Covis' drugs for $1.2 billion in early 2015 and AMCo's entire drug portfolio for $3.5 billion in late 2015. Both of these transactions were heavily financed by debt, pushing Concordia's leverage to 6.6x Debt/EBITDA and 2x EBITDA/Interest based on management's latest guidance. On September 16, 2016, the UK drafted a bill to close a loophole that allowed geometric price increases on generic drugs. In this article, we will present evidence that AMCo is one of the few drug companies targeted in this new bill due to their opportunistic price gouging practices.

History of AMCo - Slumdog millionaire

Amdipharm Mercury was formed as a merger between Amdipharm and Mercury Pharma, both of which were founded by UK immigrants.

Amdipharm was founded by Vijay and Bhikhu Patel in 2002. The brothers had humble beginnings living in poverty in Kenya. Thanks to their father choosing British rather than Kenyan citizenship after the Kenyan independence in 1964, they had the opportunity to leave for the UK when they were 16. After graduating from university, Vijay started his own chain of pharmacies and learned how the industry works. It is likely that while operating the pharmacies, and after seeking help from his brother Bhikhu, he learned that more profits could be made in the distribution business. The brothers founded Amdipharm and started acquiring international pharmaceutical assets in order to exploit the NHS loophole that they discovered (See loophole section for more details). As a result, they were able to amass a fortune of £366 million after selling Amdipharm to Cinven in 2013, instantly becoming UK's 14th richest Asian.

This article was written by

Lambda Research profile picture
I am currently an investor with previous experience in corporate M&A and private equity. I look for both long and short opportunities in small to mid capitalization stocks that are often ignored or overbought in the marketplace. In long opportunities, I seek out deep value that is overlooked by the general public. In short opportunities, I look for highly promoted companies that are likely to be misrepresenting information to investors. I conduct the necessary due diligence to present the facts and try to eliminate the asymmetrical information gap that exists in these opportunities.

Analyst’s Disclosure: I am/we are short CXRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (67)

At these prices Amco makes it worthwhile
mikejcps profile picture
Jeff B - normally I would agree with u but $100 million stock buyback at today's pricing would reduce float by over 40%. The $100 million it would cost relative to the $3.3 billion in debt is irrelevant. All they need to is announce a $50 million buyback and the stock price will take off. The debt holders would be much happier with a higher stock price. It's the only way they can get the stock price moving up in the short term
Lambda Research profile picture
Equity holder=dog food
Jeff B profile picture
And senior debtholders are top of the food chain. If there's anything left to eat in the end.
I may be eating crow and be giving you props in march. If Theresa May takes the UK out of the EU single market, you'll never have to cover. Even a complete sweep by the democrats in november will tank the stock. Your position is looking better and better.
mikejcps profile picture
Not necessarily. Covenants can be negotiated or cashflow from profits after interest can be used to fund share buy back.
Jeff B profile picture
Wouldn't you rather CXR pays down debt rather than buy back shares?

There are better (and less irresponsible) uses for excess cash flow. In CXR's case, diverting cash flow to buybacks would likely sink share price; it would be perceived as an irrational denial of their debt. In any event, their debtholders would respond severely to the idea.
mikejcps profile picture
Slide 37 of the investor presentation on CXRX website, shows that the payout for earn-outs/loan repayments, for the 9 months to March 31 2017 to be $246 million. It is only another $70 million, for the next 9 months to Dec 31 2017. 2018 is only $47 million. With the new raise of $330 million and cash in hands of $145m at June 30 2016 the cash balance is $475 million. Less the payouts to Mar 31 2017 of $246 million - remaining cash balance of $229 million at Mar 31 2017 + profits after interest generated. So no liquidity issues through 2018. Could the board be thinking of announcing a share buyback of $100million - over $40% of the current market cap. Stock price would start to recover very quickly!!!
Bottom line: if the banks are prepared to lend another $350 million, and they have access to significantly more data, CXRX is not going bankrupt anytime soon!
Lambda Research profile picture
covenants on the note would not allow them to buy back shares. likely debt sweep in place.
Interesting reaction to the announced offering!
I have to admit - I am trying to see the forest for the trees - why would anyone seemingly intelligent do so much research and still short at this point in time....either extreme confidence or arrogance - intriguing - I do not for a minute believe that pricing is going to 2002 levels nor the enforceability of it. Very interesting.
Lambda Research profile picture
appreciate the comment. I was short in the 20s and wanted to publish this for a while. just had the time to write it now. have reduced my position significantly since then as the risk reward is not as attractive.

you could also say that to be long the stock, some level of extreme confidence is needed. either way, this stock is a battleground stock of bulls and bears. I am just slightly tilted towards the bears.
Thanks for the reply. My view is that if you are still shorting, you have to believe in bankruptcy because the risk reward makes no sense otherwise. I don't agree that the long position illustrates extreme confidence at this point.
You know how you read that last bullish article just before a stock starts a long downward trend - this is what this article is.... but in reverse....not sure why this is published for a 5 buck stock
mikejcps profile picture
interesting article with some great research. it should have been released when market cap was $5 billion - not when it's $235 million.
Risk/reward tilted towards reward.
05 Oct. 2016
Well done for a well written article. The price rises do make interesting reading however I do have a couple of issues.

1)from NHS data and IMS the price rises on the drugs you mentioned are not reflected in the total UK drugs bill . For example the net ingredient cost for phenindione despite the price increase has remained relatively flat suggesting reduced prescribing offset by the price increase. The net ingredient cost of fusidic acid hasn't risen in line with the price increase suggesting reduced prescribing or parallel trade. The department of health focus on reducing net ingredient cost rather price.

2) after analysing health bill 72, there is little substance to show how historical category c prices can be enforced. Admittedly the full force of the U.K. PPRS scheme could be applied which would require generic suppliers to report their profitability. However almost all the big pharmaceutical suppliers (branded and generic) structure themselves in such a way to limit their reported profitability. Furthermore PPRS price cuts are minimal versus the rest of Europe. All it seems to suggest is that high double digit or greater percentage price increases in future will be difficult to implement without very clear justification. However price increases are not off the table.

I do think your article was very well written and it is clear that Concordia face some interesting challenges. The deferred earnout announcement on the 3rd October clearly reflects this. The next 12 months will be interesting!
Great analysis, Lambda. One quibble: you use $525M as your baseline EBITDA, but their EBITDA run rate is $484M based on guidance for the 2nd half of the year. I'd use that as the starting point EBITDA to make adjustments for UK pricing actions.
Lambda Research profile picture
That is true. If run-rate is $484M then they will seriously have issues when prices start falling.
shares could easily double if not triple from here. A financing announcement would double share price overnight. over 12 million shares are short legally much more with naked shorts.
As I pointed out, competition is the only price regulator. Most businesses are opportunistic, that's the nature of the beast. If the legislation were already in place, then this wouldn't even be an issue.
bodado profile picture
history tells us price-fixing destroys competition
Whether or not a company can charge a certain amount for a drug should be determined by competition. No competition means higher pricing,period. If no one is interested in providing competition to these drugs then where is the incentive to lower prices. You can legislate these drugs out of existence, but I fail to see how that does anyone any good. Maybe governments will start legislating oil, oops they make too much money in taxes, so I guess that's not happening. Where were the legislators when we were paying $5/gal. for gas! This is a smear campaign against big pharma, and ultimately competition will determine pricing. As long as a drug is relevant it will be prescribed until something better,or cheaper and better comes along.
Lambda Research profile picture
You have a valid point. Unfortunately, politics makes the world go around. In this case, it does not look good that the NHS, a government organization, is getting price gouged by opportunistic businessmen due to a flaw in the legislation.
Politics certainly does NOT make the world go round. Politics can distort for periods of time but thats it - new loopholes develop and we continue merrily along. What is not being mentioned is that demographics will increase drug requirements.....good luck trying to control the prices through legislation.
bodado profile picture
A lot of things going on in the back ground with this company including speculation about if and how proposed legislation with affect it. No one in the company seems to be in a panic, other than MT supposedly being forced to sell part of his holdings. Think I'll hold and gamble at my buy in level. I don't hear much discussion about alternate financial arrangements other than reading something in the Globe and Mail today.
Lambda Research profile picture
this stock will trade like an option until their UK and debt situation gets sorted out
Can anyone comment on Lambda's statement that MT sold additional co stock?
Jeff B profile picture
"Just like how an alcoholic never truly quits, the Patel brothers went back to business by starting another firm ..."

Do you routinely apply that sort of insult to anyone who sells one business and starts another? I hope for better than this from SA authors.
RI$ING CAPITAL profile picture
Long CXRX in the 5 buck range & will continue to add more when opportunities arise.
What a terrible article - the price increases for these drugs are in relative terms. In absolute terms they seem reasonable based on the companies WACC. Terrible article
Take back my comment of terrible. It's misleading and brilliant because of your short position. Bravo
Lambda Research profile picture
Did the WACC magically go up right after Cinven acquired amdipharm and mercury?
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