If failures were black, and successes were white, Endo Pharmaceuticals (Nasdaq: ENDP) would be a perfect yin-yang. On Friday, the company sprinkled positive year-end financial results on top of a little bit of balance-sheet sourness.

In 2007, Endo was able to grow its sales 19% thanks to its top drug, pain patch Lidoderm. Adjusted earnings increased 16% to $1.92 per share, and because of better-than-expected fourth-quarter sales, it also upped its previously announced 2008 financial guidance, even with the recent introduction of a new pain patch competitor from Alpharma (NYSE: ALO).

Despite all the stumbles it has had with its pipeline, as well as the possibility for generic competition against its top two drugs in the coming years, I can't get away from how cheap Endo's shares look. It generated $366 million in operating cash flow last year, and its guidance is for adjusted earnings per share to hit $2.18 to $2.22 per share in 2008 (with an accompanying increase in cash flow, as well, I presume).

Not everything is rosy with Endo's future. Its pipeline needs to produce some successes beyond the inking of new development deals for niche drugs, like its recent deal with Alexza Pharmaceuticals' (Nasdaq: ALXA) inhaled fentanyl product for pain treatment. On its Friday conference call, Endo's interim leadership repeatedly discussed how its pipeline compounds were under "comprehensive" review (presumably with an eye toward axing some of them).

Also, Endo's balance sheet could be taking a hit sometime in the future if it decides to settle a lawsuit brought by the U.S. Department of Health over its marketing of top drug Lidoderm. If the lawsuit has merit and Endo does decide to settle, it could mean a payout in the hundreds of millions of dollars. Other drugmakers such as Cephalon (Nasdaq: CEPH) have paid similar amounts to settle lawsuits over their marketing practices.

Another bad sign for Endo's balance sheet: The company appears to have gotten caught up in the securitization market meltdown. Its fate is shared by fellow drugmaker Bristol-Myers Squibb (NYSE: BMY), as well as other companies outside pharma-land, such as Panera Bread (Nasdaq: PNRA). Endo hasn't yet written down any of the $283 million in auction-rate securities it owns, but it did reclassify them as long-term investments rather than short-term investments thanks to the liquidity problems in the auction-rate market.

All that being said, I still think there may be good times ahead for Endo if it can hold steady through its battles on the generics front. And I'm not the only one thinking the company looks undervalued. Some shareholders have been agitating for changes at the drugmaker since last year, hoping to bolster its share price. Now it looks like they may be getting their way, after Endo's CEO agreed to step down last month.

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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has an A+ disclosure policy.