ANALYSIS: Anyone with a passing interest in healthcare knows the practice of drug price increases has come under scrutiny lately. Concerns around this scrutiny evolving into new regulations or legal troubles have wiped out stock values in the process.
The usual targets are Valeant (VRX.TO) and Turing Pharmaceuticals, but Canada’s Concordia International (CXR.TO) has also been put under the microscope. The company says it is looking as “strategic alternatives” after losing 60 per cent in value in the past year. Viewers have asked us several times whether Concordia partakes in the same pricing practices that have drawn regulatory and investor ire.
The answer? It’s complicated.
Yes, some of its drug prices are going up, but not as much as at Valeant or Turing. Yes, volumes are dropping after a price increase, but not as dramatically as the raw data suggests and not necessarily due to price increases turning physicians or payors off.
The bears are resolute in their conviction. Despite the prospect of a takeover, the number of bets against the stock stands at a record high with more than 80 per cent of the shares available for shorting in use, according to data from Markit.
Are you ready to dive into the world of drug pricing? Let’s begin.
Donnatal (treatment for irritable bowel syndrome)
Donnatal is Concordia’s top selling drug in the United States. Since buying it in 2014, Concordia has raised the price by 110 per cent. At the same time, prescription volume of the drug has dropped 44 per cent, according to data from Symphony Health Solutions. However, Concordia says that it has increased the pills per prescription so physicians don’t need to write as many of them. While Concordia acknowledges volume has dropped, it is not as dramatic as the Symphony data would suggest. In fact, while total pill sales are down 33 per cent from before the price hike in 2014 to the first quarter of this year the sales decline has since stabilized to a rate of -7 per cent from the first quarter of 2015 to first quarter of 2016.
There is also a hoarding effect, according to Eden Rahim of NextEdge Capital. “When pharmacy benefit managers know a price increase is coming they stock up on inventory, so volume spikes ahead of an increase and drops following one,” said Rahim, who is net long shares of Concordia.
Plaquenil (rheumatoid arthritis drug)
Another top seller for Concordia in the U.S. is the arthritis treatment Plaquenil. Concordia has driven the price up by 48 per cent since taking ownership of the treatment in 2015. Volume has declined by 21 per cent over the same period, according to data from Symphony. However, Concordia also owns the authorized generic version. The authorized generic is about 50 per cent cheaper at list price and prescription volumes are up nearly three-fold since it launched at the beginning of 2015.
Zonegran (epilepsy) and Lanoxin (atrial fibrillation)
But there are examples of other top drugs that have seen prices increase and volumes decline for which there aren't explanations other than the market is in decline. Concordia’s drugs Zonegran, for epilepsy, and Lanoxin, for atrial fibrillation fit this description. Zonegran prices have seen three increases of about 25 per cent over the course of Concordia’s ownership. Concordia increased the price of Lanoxin by 76 per cent.
The United States represents 40 per cent of the company’s overall revenue. Following its acquisition of Amdipharm Mercury, international revenues now account for 60% with half coming from the United Kingdom according to the company’s 2015 annual filing. Concordia purchased Amdipharm Mercury in October last year for US$3.5 billion. Recently, there has been scrutiny about its drug pricing practices in the U.K.
Fucithalmic (pink eye treatment)
Recent reports have centered around Concordia’s pink eye treatments in the UK. Concordia is the exclusive distributor of Fucithalmic, a treatment for pink eye, which made up about 7 per cent of Concordia’s international revenue as of the end of 2015. The Financial Times reported the price increased from 2 euros in 2013 to 29 euros in 2016. However, Concordia only took ownership of this drug at the end of October 2015.
In fact, since Concordia took ownership in October, the price of the pink eye drug, Fucithalmic, is actually unchanged. The price increased 50 per cent right beforeConcordia took ownership.
Analysts at Veritas Investments recently compared the price of certain UK drugs beforeConcordia bought them versus what the price is today. Another one of its top sellers, Triiodothyronine for severe hypothyroid states, is up 70 per cent when comparing before and after. In total, according to Veritas, Concordia has increased prices on 14 drugs in the UK from September 2015 to May 2016. Increases range from 29 per cent to 119 per cent and average 59 per cent.
However, when you look at price increases after Concordia purchased, they are more modest. For example, the price of the hypothyroid medicine, Triiodothyronine, is higher by 30 per cent from November to May vs 70 per cent if you compare September to May. In order words, Concordia raised the price 30 per cent but the bigger price increase happened just before they bought the drug. Of the 14 price increases highlighted by Veritas, Concordia was only responsible for two of them.
As you can see, it is very easy to get into the weeds on this name, especially considering Concordia has more than 160 drugs in more than 100 countries.
Part of the company’s problems are of its own making due to poor disclosure about price growth versus volume growth. The available volume data in the U.S. can be misleading and there is no available data in the U.K.
The bottom line is that Concordia’s business is filled with nuance. The big picture is that this is a company meeting the prospect of slower revenue growth and declining prescription volumes with price increases.
But, that is not the only way. It is also adding a sales force to some drugs, like Donnatal, and meeting a decline in branded drug performance by selling authorized generics.
Will it work? Anyone who is a buyer of Concordia – whether you are an investor or a private equity firm – will have to form their own opinion. The answer will determine whether it is a buy or a short.
CORRECTION: An earlier version of this story misstated who would buy drugs ahead of a price increase.
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