Sunday, March 22, 2009

Endo Pharmaceuticals: A Growth Story

Endo Pharmaceuticals Holdings Inc. (ENDP), is a specialty pharmaceutical company. Their particular niche is pain management. The company develops and sells branded and generic pharmaceuticals used primarily to treat and manage pain. According to the company's profile,

"Endo Pharmaceuticals is a specialty pharmaceutical company engaged in the
research, development, sale and marketing of branded and generic prescription
pharmaceuticals used primarily to treat and manage pain. Its products include
LIDODERM®, a topical patch to relieve the pain of post-herpetic neuralgia;
PERCOCET® and PERCODAN® tablets for the relief of moderate-to-moderately severe pain; FROVA® tablets for the acute treatment of migraine attacks with or without aura in adults; OPANA® tablets for the relief of moderate-to-severe acute pain where the use of an opioid is appropriate; OPANA® ER tablets for the relief of
moderate-to-severe pain in patients requiring continuous, around-the-clock
opioid treatment for an extended period of time; and VOLTAREN® gel, a
nonsteroidal anti-inflammatory drug indicated for the relief of the pain of
osteoarthritis of joints amenable to topical treatment, such as the knees and
those of the hands. VOLTERAN gel has not been evaluated for use on the spine,
hip, or shoulder. The company markets its branded pharmaceutical products to
physicians in pain management, neurology, surgery, oncology, and primary
care."

Recently, the company made the following announcement.

"Endo Pharmaceuticals (Nasdaq: ENDP) today announced the successful
completion of the tender offer by its wholly owned subsidiary, BTB Purchaser
Inc., for all of the outstanding shares of common stock of Indevus
Pharmaceuticals, Inc. (Nasdaq: IDEV). American Stock Transfer & Trust
Company, the depositary for the tender offer, has advised Endo that, as of 5
p.m., New York City time, on March 18, 2009, the expiration of the subsequent
offering period, approximately 70,856,245 shares were validly tendered in the
tender offer, representing approximately 89.155% of Indevus' issued and
outstanding shares. Endo has accepted for payment and promptly paid for all
shares validly tendered during the subsequent offering period."

In another development, ENDP announced the following concerning NEBIDO(S):

"Endo Pharmaceuticals (Nasdaq: ENDP) and its majority-owned subsidiary
Indevus Pharmaceuticals, Inc. (Nasdaq: IDEV) announced today that the U.S. Food
and Drug Administration (FDA) has accepted for review the complete response
submission to the new drug application for NEBIDO(R) (testosterone undecanoate)
intramuscular injection, an investigational testosterone preparation for the
treatment of male hypogonadism. FDA is targeting September 2, 2009 as the action
date for a decision on this application. Endo's president and CEO, David Holveck, stated: "We are pleased with the FDA's action and congratulate the NEBIDO development team on reaching this milestone. We look forward to receiving the FDA's decision on the NEBIDO marketing application in September."

The Balance Sheet

Cash represents about 40% of the company's recent selling price. ROIC is 16.66% and tangible equity to capital is 72%. P/TBV is about 2.74. The company carries about $413.5 million in goodwill and intangibles on its balance sheet and about $442.4 million in long term liabilities.

TTM ROA is about 14.31% compared with a five year average of 14.36%. TTM ROE is 21.63% which is in line with the five year average of 20.78%.

The company is profitable, reporting FY 08 EPS at $2.12. Consensus estimates for FY 09 and FY 10 are $2.53 and $2.81, respectively. Standard & Poor's provides estimates of $2.75 for FY 09 and $2.94 in FY 10. The trailing P/E is 7.8X while the forward looking P/E is 6.64X and 5.8X.

Price to Sales (TTM) is 1.55X and 1.36X estimated FY 09 sales of $$1,432.29 and 1.25X FY 10 sales of $1,562.54. The company is selling at 7.9X free cash flow (TTM), 5.6X our estimated free cash flow of $2.99 FY 09 and 5.16X our estimate of $3.25 for FY 10.

Valuation

We are putting a fair market value on ENDP of $30 by the end of FY 10. This translates to a P/FCF multiple of 9.23X; P/E of 10.2 and a PSR of 2.24X.

Disclosure: Author holds no position in ENDP.

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