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Topic: How To Invest

New epilepsy drug primed to spur growth for Canadian pharma stock

Stock Investing

Pat McKeough responds to many requests from members of his Inner Circle for specific tips on stock investing as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week we offer you a report on one of the stocks profiled in these Q&A sessions. We give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of the specific buy, hold and sell advice we offer you in our daily posts. Every week you get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “U.S. Stock Picks” on Thursday.

This week we had a question from an Inner Circle Member on a Canadian health care stock. Concordia Health Care takes a different approach from many larger drug firms, preferring to buy mature products as opposed to developing its own treatments. It recently acquired the rights to a second-generation epilepsy drug; its other main drug treats irritable bowel syndrome and enterocolitis. Concordia’s sales and share price have both risen. Pat looks at the challenges the company faces in finding new drugs and fighting off generic competition.

Q: Hi: Would you give me your opinion on Concordia Health Care? Thank you.

A: Concordia Health Care, (CXR on Toronto; www.concordiarx.com), is an Oakville, Ontario-based specialty pharmaceutical company that acquires and sells established drugs, mainly in the U.S.

The company aims to acquire the rights to relatively small, mature products as opposed to the newer treatments that larger drug companies target.

Concordia recently announced that it would acquire the North American rights to the epilepsy drug Zonegran from Eisai Inc. for $190 million. The purchase is expected to close shortly.

The company’s growth prospects are now significantly tied to this drug, which was launched in the U.S. in 2000 as a second-generation epilepsy treatment. Eisai has been selling Zonegran, a generic version of which was released in 2006, in the U.S. for the last 10 years. Zonegran’s investment appeal stems from its steady demand and limited sales and marketing requirements.

Growing drug sales point to big revenue increases in 2014 and 2015

The company’s other main drug is Donnatal, a treatment for irritable bowel syndrome and acute enterocolitis that it bought earlier this year.

Concordia’s sales are growing rapidly as it acquires new drugs. It had revenue of just $40.5 million in 2013, but sales of Donnatal and Zonegran should increase that to $130 million this year. A full year of Zonegran could raise Concordia’s revenue to $190 million in 2015.

The company’s shares have risen from just $6 at the start of this year. It will need to keep finding new drugs to buy to keep increasing its sales and fend off generic competition, but it has been successful so far. The stock trades at 18.7 times Concordia’s forecast 2015 earnings of $2.50 a share.

We view Concordia as a hold, but only for highly aggressive investors.

Coming up Next

Monday we take a critical look at an ETF based on the so-called Dogs of the Dow.

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