Medicure Inc (MPH), a company that we have held across multiple funds for over two years, is a specialty pharma company focused on cardiovascular solutions based in Winnipeg, MB. Medicure is “our kind of bio-tech company”. Our investment thesis was based on Medicure having a R&D-light business model, limited regulatory risk and an owner-operator with significant skin in the game.
Medicure had two main assets:
- The North American distribution rights to a drug named Aggrastat, an anti-coagulant (blood thinner) primarily used in emergency rooms directly after a patient has experienced a cardiac arrest.
- An investment in a generic drug manufacturer named Apicore, based in India.
On Tuesday (October 3, 2017), Medicure sold its entire interest in Apicore for US$105 million, representing nearly a 100% return on its investment in under one year. However extraordinary that return may seem, we are left scratching our heads as the stock is down over 5% after the announcement. It seems the market does not like 100% IRR’s. And it is precisely this kind of investor behavior that makes investing such a peculiar activity.
In particular, short term market reaction is seldom tied to reality but is more often tied to a change in expectations. This subtle but important difference is the same reason many of us find that the movie is never as good as the book. A book lets the mind wonder, enabling the reader to create her own details of reality, whereas a movie’s reality is set in stone – there is nothing left for the imagination. Medicure set in stone the valuation of a hidden asset leaving no ability for the investor to conjure up his own perfect ending.
Sure, one could argue that Medicure gave up some future growth potential in the Apicore business, but the reduction in leverage and cash optionality the company has today is what makes us excited. Even better, a CEO that is driven by value creation and deems that everything is for sale, at the right price, is what makes our collective hearts sing. We happily hold on to our position with increased confidence in an owner-operator that just made a 100% IRR capital allocation decision and a company that now has money in the bank to both protect on the downside and smartly deploy for the upside.
David Barr & Kenndal McArdle
October 4, 2017