Activist Investor Attack at Endo

In another case of "when activist investors strike," Endo Pharmaceuticals (Nasdaq: ENDP) was the topic of an investor letter calling for changes at the company to improve shareholder value.

The Endo shareholder in question, D.E. Shaw Valence Portfolios, with its affiliates, holds nearly 10% of Endo shares outstanding and has peacefully agitated for change at Endo in the past. The most recent letter the group filed last week in conjunction with a 13-D SEC filing reiterated that it doesn't want Endo to do anything rash with its large amount of cash and investments on the balance sheet and that it is "concerned that [Endo] is overly focused on the need to complete a large acquisition or in-licensing deal."

Besides avoiding dangerous acquisitions, the group also wants Endo to "explore strategic alternatives," including a sale of the company, as drugmakers PDL BioPharma (Nasdaq: PDLI) and Enzon Pharmaceuticals (Nasdaq: ENZN) have been urged to do by investors wanting to unlock value in those companies. There's nothing wrong with the above sentiment. Many drugmakers have gotten themselves into trouble with expensive shareholder-destroying acquisitions, so these are valid concerns.

The next part of D.E. Shaw's proposals for Endo could be more troublesome. The investment group also wants Endo to do a recapitalization and leverage up its balance sheet by taking on debt and using the cash to buy back shares.

I previously liked D.E. Shaw's last call for a recapitalization at Endo, but I'm not sure Endo can easily do such a maneuver a now. As Endo revealed last week, a good portion of the investments on its balance sheet look to be tied up in the now illiquid auction-rate securities market, and another good portion of its cash might be needed to settle a Lidoderm marketing lawsuit initiated by the government last year. 

With its balance sheet looking less liquid, trying to buy back $1.5 billion worth of shares with its cash and new debt, like D.E. Shaw is calling for, doesn't sound prudent right now until at least the government lawsuit is cleared up, and Endo gets a better handle on its auction rate securities.