No Pain, No Gain - Will Investors Buy Endo's Turnaround Plan?

Wracked by FDA delays, closure of a whole division and shareholder lawsuits, Endo International (ENDP) shares have been among the worst performers in the biotech/pharma group this year. But can a new focus on R&D, a new generics platform, and careful consolidation rather than pell-mell acquisition growth get these shares back to earlier highs near $100?

Triple Digits to Single Digits?

Fueled by past acquisitions including Par Pharmaceuticals, Paladin Labs, Boca Pharmacal, SOMAR, DAVA Pharmaceuticals, and Litha Healthcare Group, as well as record earnings in Q1/2015, Endo shares topped out over $96 just a little over one year ago.
Since then, however, a disappointing Q1/2016 earnings report, lowered guidance for full-year 2016, a delay at the FDA for a product-line extension for pain product Opana ER, and the closure of its Astora Women's Health division have dropped Endo's share price to the low-teens.

What's the Game Plan Going Forward?

Taking a breather from acquisitions, Endo instead is now focusing on:
  1. New branded products, including recently launched BELBUCA and XIAFLEX, and pipeline products Opana ER for ADF, now more likely to launch in 2017;
  2. Stepped-up generic product launches, including generics for multi-billion dollar brands Zetia and Seroquel later this year, a focus on high-growth sterile injectables, and a transition to the Par generic operating platform, led by new Generics Chief Paul Campanelli, brought in last fall with the Par deal; and
  3. Improved cash flow and operating margins, rather than revenue growth, leading to lower debt levels and positive year-over-year comparisons for earnings and other operating metrics.

Deep Value with a P/E of 3?

With a recently revised guidance of $4.50-$4.80 in adjusted EPS for full-year 2016, Endo's going-forward price/earnings ratio is just over 3X, cheap by any standards. If Endo can post more positive quarterly earnings comparisons as this year progresses, begin to pare down long-term debt, or get some positive news flow related to new products (for example, an FDA panel OK for Opana ER by the end of the year), these shares could bounce back to recent levels near $30, or higher.

Less Painful alternatives?

Investors seeking less risky alternatives in the pain-relief area could look to Johnson & Johnson (JNJ), maker of OTC Tylenol and branded Fentanyl, with a dividend near 3%. Alternatively, smaller-cap ideas in the pain-relief market include BioDelivery Sciences (BDSI), Endo's partner for BELBUCA, and potential competitors such as ACADIA Pharmaceuticals (ACAD), or new product Remoxy partners DURECT (DRRX) and Pain Therapeutics (PTIE).

On the device side, investors might explore NeuroMetrix (NURO) and its innovative, award-winning OTC pain-relief device, Quell. At just $1.75, NURO shares are trading below cash value despite growing revenues in the pain-relief market and a recent regulatory approval (CE Mark receipt) for Quell in the European Union.

Disclosure: The author owns shares of Johnson & Johnson (JNJ).
Published on Jun 28, 2016
By Robert Wasserman
Bob Wasserman has been following healthcare and biotech stocks for over 30 years, with a bias toward value investing.

Copyrighted 2016. Content published with author's permission.

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