Investors in Endo International (ENDP -0.78%) have seen the stock decimated by persistent declines in demand for prescription painkillers and nationwide opioid litigation. The company's spending on research and development has been less than its competitors' for years, but results may be on the horizon at last. Will the company's new Biologic License Application to treat cellulite in a billion-dollar market be able to reverse its fortune?
So what's up?
On July 6, the U.S. Food and Drug Administration (FDA) will decide whether to expand Endo's Xiaflex label to target cellulite, a localized alteration of the skin affecting up to 85% to 98% of adult women in all ethnicities. Xiaflex is an injectable enzyme that strengthens the connective tissues between the skin, causing it to push out lipids responsible for the condition. If approved by the FDA, the drug will become the first pharmaceutical treatment for cellulite in a market estimated to be worth more than $1 billion.
The drug, however, produced mixed results in its phase 3 clinical trial. Between 5.6% and 7.6% of patients who took Xiaflex reported very significant improvement in their condition, compared with 0.5% to 1.9% of patients who took placebo. The results were statistically significant.
But let's think about this for a minute. These results mean that more than 90% of patients did not meet the primary endpoint of the trial. And out of all patient groups, approximately 40% to 60% witnessed satisfactory levels of improvement in secondary endpoints -- meaning that nearly half of patients saw low levels of improvement or none at all on these clinical scales.
I think the drug should have little problems gaining approval thanks to the high levels of statistical significance it achieved in attaining the endpoints. However, whether it can succeed commercially is another story. The clinical data here does not necessarily point to a sizable benefit, meaning dermatologists may be hesitant to prescribe the drug, instead choosing many of the other over-the-counter therapies available.
Is the stock a good long-term investment?
In short, no. Unfortunately, Endo's leverage is just too dangerous for any solid chance of a comeback. Currently, the company's debt stands at $8.49 billion, or almost 7 times adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Normally, a debt-to-EBITDA ratio of 4 or 5 times is sufficient to cause red flags among potential creditors.
Furthermore, the company will likely not have access to more than $1.4 billion in cash on its balance sheet because of settlements from the nationwide lawsuits regarding its role in the opioid crisis. As of now, Endo has more than $500 million in cash set aside for potential legal liabilities, but I think this number is far too conservative.
There are more than 2,600 lawsuits pending against opioid manufacturers in the U.S., and Endo's peers Mallinckrodt (MNK) and Teva Pharmaceutical Industries (TEVA -2.19%) have settled for $1.6 billion and proposed $23 billion in the form of naloxone donations, respectively. Others, such as Insys and Purdue, are in the process of bankruptcy.
Should Endo decide to settle for over 10 figures, it would likely file for bankruptcy as well. In such a scenario, shareholders should expect all of their holdings to be wiped out as part of a restructuring agreement.
Having one potential candidate to capture moderate sales in a billion-dollar market simply isn't enough, especially when facing the risk of a crippling settlement that could wipe out shareholder value. Healthcare investors should keep a safe distance from shares of Endo and instead look for other opportunities in similar companies.