When investing in pharmaceutical companies, it's all about the future outlook. Investors can thus be forgiven if they glossed over Endo Pharmaceuticals'
Even with 11% growth in sales last year to $910 million, adjusted net income was down slightly to $221 million. Endo's SG&A expenses ballooned, thanks to a large increase in its sales force and marketing expenses. Gross margins were flat at 78%, and adjusted diluted earnings came in at $1.65 per share, versus $1.73 in 2005.
Its top product, the pain patch Lidoderm, continued on its torrid sales growth, up 35% last year and accounting for 62% of all product sales, even as Endo's generic drug business was in decline. Even better, a good chunk of these Lidoderm sales gains were driven by prescription growth rather than just price increases.
The good news is that Endo's salesforce buildup and the launch of pain drug Opana ER is expected to drive revenue growth of 13%-15% in 2007. This top-line growth would be even higher if Endo didn't have to stop marketing its generic version of Oxycodone this year. While 2007 will be another year of roughly flat earnings-per-share growth, the extra spending it is putting into the launch of Opana will pay dividends in the coming years, as Endo tries to counter its ever-growing reliance on Lidoderm.
Endo's cash pile was up 25% in 2006, to $628 million, or approximately $4.69 a share. Only vague references to pursuing "complementary acquisitions" were mentioned in its year-end press release. But with this growing cash hoard, it might make sense for Endo to buy one of its smaller partners like Durect
It's no secret that I like Endo's prospects in 2007. As revenue gains in sales of its branded products start to outpace its declining generic drug portfolio, it shouldn't take long for investors to realize that paying a less-than-20 P/E multiple for a drugmaker with such strong growth in its core products is cheap.