Sunday, August 29, 2010

$1 billion diversification – Endo moves beyond pain products into urology, oncology and endocrinology

At Stinson, we believe that part of brand innovation is meeting expectations of physicians, patients, and payers. But, in business reality, it also means meeting investor expectations. So we keep our eye on the business wires, too. We can learn a lot from the top companies in pharma as measured by relative performance.

Here’s what Investor Business Daily® had to say about Endo Pharmaceuticals on Friday.

Looking at all of its recent acquisitions, you might think Endo Pharmaceutical's business model echoes another firm's. One like Johnson & Johnson's.

That makes sense. Endo's chief executive since 2008, David Holveck, is a J&J alumnus.

He began climbing the J&J ladder in 1999, finally heading J&J's development corporation. An acquisition brought him to J&J. The diversified giant bought Centocor, where Holveck had been chief executive.

Since he took over at Endo in 2008, the company has done what J&J began to do decades ago under storied leader Robert Wood Johnson II: diversify.

Endo had no choice but to diversify, says Kevin Kedra, an analyst with Gabelli & Co. The patents for its main product, Lidoderm, expire in 2015. Kedra estimates Lidoderm will account for 47% of 2010 sales, or $787 million of $1.7 billion in revenue.

Lidoderm is a patch containing the painkiller lidocaine. It's for treatment of post-shingles nerve pain. Kedra says a generic Lidoderm will take away $360 million of Endo's annual revenue. And the Lidoderm patent could end sooner than 2015. The validity of Endo's patent is under legal challenge by Watson Pharmaceuticals, which applied in January to make a generic version. The courts will decide the matter unless Endo and Watson negotiate a deal.

"Endo had to find other growth opportunities and sources of revenue," Kedra said.

The company, based in Chadds Ford, Pa., had to take action, says Irina Rivkind, an analyst with Duncan-Williams. "They were under the gun because Lidoderm is at the patent cliff," she said.

The company, based in Chadds Ford, Pa., had to take action, says Irina Rivkind, an analyst with Duncan-Williams. "They were under the gun because Lidoderm is at the patent cliff," she said.

What made the diversification possible was a healthy balance sheet, Rivkind says. Endo has spent more than $1 billion in cash and earn-outs since Holveck took over.
  • On Aug. 9, the company agreed to buy Penwest Pharmaceuticals, a partner in a painkiller called Opana, for $144 million in cash.
  • On July 15, Endo wrapped up a deal to acquire HealthTronics for $223 million plus assumption of debt. Endo got a range of urology devices, products and service businesses, including imaging and pathology.
  • Back in March 2009, Endo completed its $370 million acquisition of Indevus Pharmaceuticals, which makes treatments for urinary incontinence, prostate cancer and premature puberty. Endos may pay another $267 million based on milestones.
And it still has about $550 million in cash. That means the company can do more deals, Kedra says.

To broaden its product base, Endo has also done some in-licensing.
  • In July, 2009, Endo acquired exclusive rights from Bioniche Life Sciences to develop and market phase-three drug Urocidin for bladder cancer in the U.S. with a global marketing option.
  • In 2008, Endo licensed from Novartis exclusive U.S. marketing rights for Voltaren Gel, a prescription ointment for arthritis pain.
The acquisition of HealthTronics was a huge step into diversification, Kedra says. From a company that focused on pain products until just two years ago, it's come a long way, he says.

"The company wants to cover the whole health care spectrum," Kedra said. "Not just drugs, but also devices and services."

Endo didn't respond to IBD's requests for comment. Holveck laid out his position in the firm's most recent conference call on July 30. "Our diversification beyond pain products into urology, oncology and endocrinology is enabling us to become a full-service provider of health care solutions," he said.

The company is looking for opportunities that are "unique and effective, and differentiated," Rivkind said.

While it has diversified beyond pain medications, those are still a big part of the business.

The most dramatic is the oral drug Opana, an opioid tablet for relief of moderate-to-severe acute pain, where an opioid prescription is appropriate. This is not a routine headache tablet. It's called an oxymorphone with both the helpful and the narcotic effects of morphine and OxyContin. Endo had been partnering with Penwest on Opana, including the extended-release version called Opana ER. On Aug. 9, the same day it unveiled the Penwest purchase, Endo announced that it had filed an application with the Food and Drug Administration for approval of a new version of Opana ER intended to prevent illegal abuse by people looking for a high. The new Opana ER is crush-resistant, the company says. That means it cannot easily be turned into a powder for inhalation or be mixed into a solution for injection. The FDA application caught watchers off guard, Kedra says.

Investors appear to approve of the company's diversification strategy. Endo ranks third in Composite Rating among the 50 stocks in IBD's Medical-Ethical Drugs Group. Shares are up 37% since the start of 2010.

1 comment:

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