On the morning of Sept. 8, Concordia announced it was buying Amdipharm Mercury Ltd. (AMCo) for $2.1-billion (U.S.).PAUL O'DRISCOLL
A Canadian pharmaceuticals company on a winning streak. A "transformative" acquisition. Two of North America's most powerful investment banks in its corner. What could possibly go wrong? In the space of three weeks, it turns out, quite a lot.
This week, as the U.S. Congress vowed to crack down on "price gouging" in the pharmaceutical industry, the world watched former shooting stars – such as Canada's Valeant Pharmaceuticals International Inc. – lose billions of dollars in market value in a handful of trading sessions.
But it would be at the much smaller Oakville, Ont.-based Concordia Healthcare Corp. – a.k.a. "Baby Valeant" – where a larger drama would play out. Shares in the company ended the week more than 50 per cent below a record reached just 24 days earlier.
On the morning of Sept. 8, Concordia was riding high. The specialty pharma company, known for its Valeant-like savvy deal making, announced it was buying Amdipharm Mercury Ltd. (AMCo) for $2.1-billion (U.S.).
The reception was positive. After all, this was exactly what investors had been waiting for. By purchasing the Britain-based firm, Concordia's sales and profits would surge. Shares rose in early morning trading on the Nasdaq – to an all-time high of $89.10.
But minutes into the session, the stock started falling. By the end of the day, they had plunged 11 per cent. The devil was in the details: The price tag was hefty, the $1.4-billion in debt Concordia was taking on was substantial, and a big part of the financing was contingent on an equity increase of at least half a billion dollars. Plus, it was unclear whether the Canadian market could absorb millions of new Concordia shares.
But the company had a plan.
"We are doing a U.S. institutional raise," Mark Thompson, Concordia's chief executive officer, said in an e-mail the day after the AMCo deal was announced. "Goldman is leading."
In theory, it was a great idea. RBC Dominion Securities Inc., one of Concordia's go-to investment banks, had an extensive distribution network in the United States and was on board to sell its stock. More crucially, the company had an "in" with Goldman Sachs & Co. If anyone was going to be able to sell its shares on Wall Street, it was Goldman.
But the move wasn't without risk. Unlike a traditional Canadian "bought deal," in which a syndicate of brokers agrees to buy a block of stock and is responsible for reselling it to third parties – often within 24 hours – a fully marketed U.S. stock offering could take weeks. New American investors would need to be educated on the company's story and convinced to buy in.
In the days after the AMCo deal was announced, when investors realized there was no clear timeline for the equity issue, an "overhang" fell over the company. Over the next two weeks, shares in Concordia drifted downward. By Sept. 18, the stock had fallen to $72.23 – down 19 per cent from its peak just 10 days prior.
"It's kind of like 'well hurry up and do the deal,' because the faster you do it, the faster you clear the overhang," explained Bruce Campbell, president of Campbell Lee & Ross Investment Management Inc., a shareholder in the company.
Like a climber on Everest looking to make a final push to the summit, Concordia needed clear skies before it could make its move. On the morning of Sept. 21 – two weeks after the AMCo acquisition was announced – it was time. Concordia launched a public offering of eight million shares.
Multiple sources close to the deal told The Globe and Mail that early demand from U.S. investors was high. Just hours into the sale, the "book" was filling up fast, and it was clear not everyone who put in an order would get stock. But the brokers' job was about to get more difficult.
The same morning, a New York Times article with the headline "Once a neglected treatment, now an expensive specialty drug " appeared on the front cover of the business section. The piece focused on Turing Pharmaceuticals, a U.S. company that had raised the price of a 62-year-old, off-patent drug by more than 5,000 per cent. It went viral, generating almost instantaneous outrage.
"Price gouging like this in the specialty drug market is outrageous," tweeted Democratic presidential hopeful Hillary Clinton. "Tomorrow I'll lay out a plan to take it on."
Over the next few days, shares in pharma companies with exposure to the U.S. market started selling off.
"Concordia's business before [the AMCo acquisition] was 100 per cent U.S. and 100 per cent driven by price increases," said Neil Maruoka, an analyst with Canaccord Genuity Corp.
The company had made its big Everest push, but it was now caught in a stock market storm.
"I've never seen [anything like this]. I mean the whole group. Unbelievable. And Concordia's doing a financing in the middle of it," Mr. Campbell said.
During the final sales push for the public offering, sentiment had dramatically shifted. Buyers that had committed to taking the shares 24 hours earlier were realizing the entire industry was potentially coming under threat.
Still, on the evening of Thursday, Sept. 24, Concordia announced it had raised $520-million at $65 a share.
While the deal was done, Concordia had garnered a much lower price than it might have envisaged a few weeks prior.
"I don't think anybody feels good about the timing of the equity issue," said Jason Donville, CEO of hedge fund company Donville Kent Asset Management Inc., whose Donville Kent Capital Ideas fund has an 8-per-cent weighting in Concordia.
But with the stock closing at $66.50 on Thursday, it was still a satisfactory outcome for all involved. Concordia had raised the money, and those big shot U.S. investors had received a discount – albeit a small one. What nobody was prepared for was what would happen next.
The worst of the selling was yet to come – and it wasn't just big institutional investors who were about to get burned.
George McAllister, a 73-year-old retired emergency room doctor and a onetime commodity broker, had been following Concordia's share sale all week. Heading into the Friday trading session he bought in.
"I waited until about 2 [p.m.]. And I thought this thing looks awful. There's something really wrong here. Do I get out there, down a few dollars, or do I wait and see if they close higher?"
He didn't get out "until two minutes to 4." But by that point the damage was done. The stock had sunk 14 per cent.
It could have been worse.
On Monday, Sept. 28, Democratic politicians threatened Valeant with a subpoena that could force it to give up documents detailing recent price increases in some of its U.S. drugs. Concordia got caught in the downdraft, losing a staggering 25 per cent of its value.
The next day, margin-call selling from a number of Bay Street brokerages put further pressure on shares.
"There were a couple of retail houses that had large margin calls. A whole bunch of clients that were underwater on the name. And they just had to sell," Mr. Donville said. Concordia shares plummeted another 16 per cent.
By this point, U.S. institutional investors – the so-called "smart money"– who had bought in the stock sale had lost nearly half of their investment, and the offering hadn't yet closed. It was akin to buying a house and seeing it lose half its value, before even taking possession.
Investors caught with their pants down seemingly had no way out.
"There is no market out for the equity deal. There are no conditions to be met for closing of the transaction," Concordia's Mr. Thompson said two days before the closing.
As long as the decline in the stock was caused by wider market forces, then nobody could ask for their money back. On Wednesday morning, Concordia closed the sale.
Concordia was a beneficiary – and a victim of – timing.
Had the Amdipharm deal, and its subsequent financing, been completed a week or two earlier, the stock sale would likely have passed without a hitch. Alternatively, had the company waited a week, the outcome could have been very different.
"There are certain things that are analyzable. There are certain things that are not. Sometimes [stuff] just happens and you have to just manage your way through," Mr. Donville said.
Almost as quickly as the madness descended upon Concordia, it started to dissipate. On Thursday, the last piece of the deal financing puzzle fell into place. Concordia was able to nail down terms on a $1-billion loan at an interest rate of approximately 7 per cent, significantly lower than many had predicted. Shares in the company started to recover.
Where does the company go from here? And what about the political threat in the United States?
While there is "headline risk" over Concordia in the medium term, Mr. Campbell argues there are also a lot of ducks that would need to line up in a row for the worst-case scenario to play out.
"Hillary would have to win the election. She wouldn't get in until January of 2017. Then you have to get something through the House and the Senate."
And what about Mr. McAllister, the retail investor who got caught in the middle?
"It doesn't really matter to me. I heard Bill Clinton talking … and he casually said, 'I don't get mad at anyone, or anything any more. I'm just lucky to be here.' "