A Mini-Teva in the Making

Usually when a company announces that it's buying a company a third its size, the shares go down. Investors are rightfully a little weary of integration issues. So I was a little surprised to see Endo Pharmaceuticals (Nasdaq: ENDP  ) up 8% yesterday after announcing a monster -- for a company the size of Endo -- purchase of privately held generic-drug maker Qualitest Pharmaceuticals for $1.2 billion.

And then I saw the details.

Excluding the usual charges associated with acquisitions, Endo expects Qualitest to add $0.40 in earnings during the first year after the acquisition. For a company that's guiding for adjusted earnings of $3.30 to $3.35 per share this year, that's a pretty substantial addition. Even if Endo flubs up the integration and doesn't hit its goal, the earnings from Qualitest should easily cover the interest on the loans it'll have to take out to make the purchase.

Qualitest is also a good fit for Endo, with pain relievers making up about 40% of Qualitest's products. That's right in Endo's wheelhouse, since it sells the Lidoderm patch and oral pain treatments Opana and Percocet.

Endo already has a generic-drug division, but generic-drug sales made up just 7% of total revenue last quarter. In the low-margin world of generic drugs, if you're going to compete with the big boys -- Teva Pharmaceuticals (Nasdaq: TEVA  ) , Novartis (NYSE: NVS  ) , and Mylan (Nasdaq: MYL  ) -- you'll need to grow. The addition of Qualitest will save the combined company $30 million annually starting in 2013, thanks to synergies.

Like Teva has done in the past, I think Endo needs to just keep adding on to both the generic and branded side of the equation. If it can seek out deals like Qualitest that immediately add to earnings, investors will continue to reward the company with a higher share price.

John Keeling and CAPS community members see value in yesterday's 11 O'Clock Stock.