We are maintaining our Neutral stance on Endo Pharmaceuticals (ENDP) with a target price of $34.00.
Endo Pharma is a specialty healthcare solutions company that operates in the US and reports results through three segments: Branded Pharmaceuticals, Generics and Devices and Services. Endo Pharma offers more than 175 products in the areas of pain management, urology and oncology.
In October 2011, Endo Pharma reported its third quarter 2011 results. Third quarter adjusted earnings of $1.25 per share surpassed the year-ago earnings by $0.39 and the Zacks Consensus Estimate by $0.07. The year-over-year rise in earnings was attributable to a surge in revenues. (Read our full coverage on the earnings report at Strong Quarter at Endo Pharma).
We note that Endo Pharma is on an acquisition spree to expand its business. The latest acquisition is the purchase of American Medical Systems, a leading pelvic-health devices provider, for $2.9 billion in June 2011. We note that the purchase of American Medical is the fourth major acquisition by Endo Pharma in the last two years.
Endo Pharma completed three major acquisitions in 2010. We believe that these acquisitions are steps in the right direction and will help to counter the generic threat that Endo Pharma is currently facing.
The company boasts of a strong product portfolio that should drive growth in the coming quarters. It is worth noting that the Generics division at Endo Pharma has been strengthened significantly by the purchase of generic company Qualitest Pharmaceuticals in 2010.
The sale of generic products at Endo Pharma jumped 439% to $148.0 million in the third quarter of 2011. The segment has been boosted by the approval of many new generic products such as the generic equivalent of AstraZeneca’s (AZN) Plendil extended-release tablets and the generic version of Johnson & Johnson’s (JNJ) Ortho-Cept.
However, the lack of near-term catalysts concerns us, especially with the company’s lead product Lidoderm slated to go off patent in 2015. The patent challenge to Lidoderm by Mylan Inc. (MYL) is another test for Endo Pharma. Moreover, other generic companies too have challenged the patents of other drugs in Endo Pharma’s portfolio.
Apart from the generic threat, pipeline setbacks like the failure of pain drug axomadol, could limit the upside potential. Consequently, we maintain our Neutral recommendation on the stock.
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