A Smart Move for Endo International?

It's hard to find fault with Endo International PLC (NASDAQ: ENDP  ) . Management has done a great job of unwinding the mistakes of past management and has pursued an aggressive growth-by-M&A strategy that has the company well-positioned for the future and domiciled in low-tax Ireland. Over the past two months management has given investors another two examples of its ability to generate value – settling a large part of its vaginal mesh litigation and announcing another accretive M&A transaction.

Putting mesh largely to rest
Endo International sold vaginal mesh products through its AMS subsidiary and wound up facing the same sort product liability challenges as Johnson & Johnson (NYSE: JNJ  ) , Bard (NYSE: BCR  ) , Boston Scientific (NYSE: BSX  ) and Coloplast as lawyers mobilized patients to file claims. From an initial level of around 8,000 claims, Endo saw the claims balloon to over 20,000 and with speculations on settlements/judgments ranging from $50,000 to over $100,000, Endo was potentially looking at a sizable payout.

At the risk of detouring a bit, I wonder if this claim liability motivated at least part of the company's decision to aggressively pursue M&A targets. Acquiring companies with present-day EBITDA and cash flow could add to the company's wherewithal to pay settlements (or borrow to do so) and offset some of the risk.

As of late April, though, management has largely fenced in this issue. The company announced that it had reached a settlement covering around 20,000 claims for $830 million. At $41,500 per settlement, Endo's outcome was similar to Coloplast's $40,000/claim settlement and clearly well below the worst-case scenario that bears were projecting. By way of comparison, Bard reported 10,400 claims as of February 13, 2014, Boston Scientific has disclosed over 18,000 claims, and Johnson & Johnson has reported nearly 29K claims filed to date.

There are still 2,000 known claims against Endo outside of this settlement, though, and management has set aside $270 million in reserves to address them – those amounts certainly suggest a higher per-claim payout (which seems reasonable given the risks of the trial process), but I would also observe that more claims could still be filed.

A highly accretive generics deal
Just the other day Endo announced yet another generic drug acquisition that should prove highly accretive to the company. The company announced the acquisition of privately held DAVA for $575 million in upfront cash and $25 million in sales-related earnouts. Endo not only bought a generics company for six times trailing EBITDA (including the earnout), below the typical post-synergies multiple of 7x to 8x, but it bought a highly profitable company with a whopping adjusted EBITDA margin of 76%.

Generic methotrexate makes up more than 70% of DAVA's sales, where it holds 30% market share (versus 39% for Roxane, 17% for Mylan, and 12% for Teva according to IMS). Methotrexate has above-average challenges to manufacture, so this should be a solid profit generator. That said, Roxane, Mylan, and Teva have definitely had an impact upon DAVA in the past – DAVA's share spiked to 70% in in the second half of 2012 as Mylan's plunged, but all three of these rivals have seen taken back share from DAVA.

Outside of methotrexate, DAVA also sells amoxicillin and aprazolam among other drugs. The company is looking at five launches in 2015 and has a longer-term pipeline of more than 20 generic drugs. DAVA should add $0.30 to $0.50 a share in earnings for Endo in 2015, or about 7.5% to 12.5% accretion, with minimal integration or synergy risk (DAVA is already very lean, so further cost reductions aren't likely).

The bottom line
With Endo trading at a forward P/E of over 17 and a 2015 EV/EBTIDA of over 10x, this is a good value-adding deal for the company. More to the point, it highlights how management continues to remain on the hunt for low-risk opportunities to broaden the company's product portfolio and add to the earnings and cash flow streams.

A huge profit-making innovation opportunity
The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3007908, ~/Articles/ArticleHandler.aspx, 8/27/2015 3:33:23 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Stephen D.

I'm an ex-Wall Street sell-side and buy-side analyst who has spent most of the last 10 years writing on a wide range of industries and investment ideas.

Today's Market

updated Moments ago Sponsored by:
DOW 16,435.96 150.45 0.92%
S&P 500 1,959.21 18.70 0.96%
NASD 4,749.80 52.26 1.11%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 3:17 PM
BCR $194.56 Up +5.12 +2.70%
C.R. Bard, Inc. CAPS Rating: ****
BSX $16.70 Up +0.33 +2.02%
Boston Scientific… CAPS Rating: ***
ENDP $77.57 Up +1.19 +1.56%
Endo International CAPS Rating: ***
JNJ $94.77 Down -0.34 -0.36%
Johnson & Johnson CAPS Rating: ****