Cambrex Corporation (CBM): 33% Downside Risk According to Lakewood Capital Investor Letter

Analysts remain optimistic that Cambrex Corporation (NYSE:CBM) will enjoy revenue and earnings growth next year despite sales pressure on its leading product; Anthony Bozza of Lakewood Capital believes the company’s earnings could actually decline by as much as 30% in 2018.

That’s the message delivered by Bozza in the fund’s latest investor letter, which was released this week. We have already covered other parts of Lakewood Capital’s Q3 Investor Letter, discussing the fund’s new long positions in aircraft maker Airbus and Japanese telecommunications giant Softbank.

Bozza, one of the most renowned short sellers in the world, isn’t anywhere near as bullish on Cambrex Corporation (NYSE:CBM); in fact, he’s flat out bearish, with the fund opening a short position in the life sciences company during the third-quarter. Bozza is bearish on Cambrex partly due to its reliance on Gilead Sciences, Inc. (NASDAQ:GILD) as its top customer (accounting for over one-third of its revenue in 2016), a company that Lakewood has also shorted in the past.



Cambrex has benefited enormously from the profound success of Gilead Sciences, Inc. (NASDAQ:GILD)’s various Hepatitis C treatments, which raked in $19 billion in sales in 2015. As a supplier of active pharmaceutical ingredients, or APIs, for those drugs, their rapid success lead to Cambrex’s earnings compounding at a 40% rate annually over the past four years.

However, the success of Gilead’s drugs at treating Hep C is also having the effect of rapidly diminishing the addressable market for them, as Gilead expected its Hep C drugs to pull in just $7.5 to $9 billion in sales in 2017, less than half the sales that the drugs managed just two years earlier, even at the top end of that guidance.

That’s bad news for Cambrex, which owes 70% of its recent revenue growth to Gilead, as well as 50% of its EBITDA, according to Lakewood. As Lakewood points out, things could go downhill for Cambrex rapidly, as despite the fact that Gilead’s Hep C sales have been falling, it’s actually increased its orders from Cambrex. Lakewood believes that Gilead ordered far more APIs for 2017 than it will end up needing, which will lead to a likely reduction in the amount that it orders in 2018, which will be further compounded if Hep C sales are anticipated to decline even further next year on top of that.

Cambrex Corporation (NYSE:CBM)’s own CEO admitted as much during the company’s latest earnings call, stating that “Our largest product is an API that is used by our customer to produce an anti-viral drug. Our customer’s sales of this antiviral drug have been trending downwards. And accordingly, we expect our sales of this product to our customer to also trend downwards over the next few years.”

Yet despite that rather apparent looming threat, analysts appear to be forecasting further revenue and earnings growth for Cambrex. Lakewood Capital on the other hand believes earnings could fall by 30% or more next year, leaving Cambrex’s stock worth a mere $33 per share at its historical multiple of 15-times. Despite shares having already lost more than 20% since early-August, that would represent downside risk of another 33%.

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