Endo coming out of the darkness into the light; contrarians, buy this name.

The News:

Endo International Plc (Dublin IRL) on Tuesday (August 8, 2017) lowered its full-year revenue forecast, saying it expected lower sales of branded drugs to add to the pricing pressure its generic drugs are facing, sending the company’s shares to their lowest level since 2003.

Generic drugmakers are being hurt by an acceleration in the decline of drug prices as US retail pharmacies wield more leverage during purchases at a time when regulators are pushing for faster approval of these copycat drugs, according to Reuters. Teva Pharmaceutical Industries Ltd, the world’s largest generic drugmaker, last week posted terrible 2Q results due to the accelerated price erosion in the US.

Endo’s revenue from its US generics unit in the second quarter was virtually unchanged from a year earlier as a sharp 34% decline in sales of its older generics drug was offset by strength in its sterile injectables as well as new launches and alternative dosages businesses.

Cowen & Co. analyst Ken Cacciatore said the pressure on Endo’s generics was unlikely to relent and any near-term stabilization could prove elusive.

“We have very little faith in the consistency of the operations from quarter to quarter,” Cacciatore said.

Endo said it continues to expect sales at its generics business to decline in the high single- to low double-digit percentage range this year. The company lowered its full-year total revenue forecast to $3.38 billion to $3.53 billion from $3.45 billion to $3.60 billion.

The lowered forecast reflects, in part, the voluntary withdrawal of Endo’s branded opioid painkiller Opana ER. Endo agreed to pull the drug in early July at the request of the US Food and Drug Administration, due to the escalating opioid epidemic.

Endo now expects full-year sales of its branded drugs to decline in the mid- to high-teens percentage range, compared with its previous forecast of a drop in the low- to mid-teens range. The company cut its forecast for adjusted profit from continuing operations to $3.35-$3.65 per share from $3.45-$3.75.

Endo’s second-quarter adjusted profit of 93 cents per share smashed analysts’ estimates by 20 cents. In fact, the bottom line was also 8% above the year-ago figure of 86 cents. Back in February, Endo took an eye-watering $3.5-billion write-down, but that wasn’t the end of the pain by a long shot.

Endo on Monday agreed to resolve long-standing claims over certain vaginal mesh products by increasing its liability reserve $775 million and making payments from the fourth quarter through 2019. The lawsuits stemmed from thousands of women who said they were injured after using the devices.

Endo shares closed Tuesday down 12% at $8.18 to start the week.

Steve’s Take:

In sum, it’s been a pricey, dicey year for Endo, which has struggled in the face of senior executive mayhem and industry-wide generics pricing pressure. And then there was the FDA’s June request that Endo withdraw long-acting opioid Opana–a $160 million hit to the top line but a move the company had little choice but to comply with, as the spotlight of the opioid addiction crisis shone smack on their product.

The company did manage to record a decent earnings beat, prevailing in the face of truly gloomy expectations. Notably, the “strength came on the back of a beat in generics,” which generated $563 million versus analyst forecasts of $525 million, RBC Capital Markets analyst Randall Stanicky pointed out in a note to clients.

Still, “the reality is cash flow generation toward continued paydown of debt/mesh will remain the primary focus in the stock over the near-term,” Stanicky said.

Meanwhile, opioids continue to draw scrutiny from all corners, with a US cost overseer weighing in Tuesday (August 8, 2017), according to FiercePharma. The Institute for Clinical and Economic Review (ICER) published its final report on the effectiveness and value of abuse-deterrent versions of the highly addictive medicines (pdf), determining that the safer products needed an average 41% discount to make them “cost-neutral” with their predecessors.

Let’s breakdown the 2Q numbers.

Not discussed much is that the lowlights, of which there admittedly were plenty, were offset by highlights not present with Teva’s much messier and foreboding results.

Firstly, Endo reports results through three segments–Branded Pharmaceuticals (US), Generic Pharmaceuticals (US) and International Pharmaceuticals.

US Branded Pharmaceuticals sales were down 15% to $245.2 million, reflecting generic entry for Voltaren Gel, Opana ER and Lidoderm, and divestiture of Stendra. Voltaren Gel sales were down 26% year over year to approximately $20.3 million. Sales of pain products Lidoderm and Opana ER were down 57% and 18%, respectively. However, Xiaflex sales increased 18% year over year reflecting strong volume growth of the product.

US Generic Pharmaceuticals recorded sales of $563.3 million in the quarter, marginally up 0.3% from the year-ago period as decline in the generics base business was significantly offset by launch of the generic version of neostigmine methylsulfate injection, along with the stout performance of sterile injectables.

The International Pharmaceuticals division generated sales of $67 million, up 3.1% sequentially, but was flat year over year.

Bottom Line:

What are the analysts saying?

On the ratings front, Endo has been the subject of a number of recent research reports, compiled by Smarteranalyst.com.

In a report issued on August 4, Mizuho analyst Irina Rivkind Koffler reiterated a Buy rating on the stock, with a price target of $19, which represents a potential upside of 104% from where the stock is currently trading. On July 26, BMO’s Gary Nachman reiterated a Hold rating on the stock and has a price target of $15.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Irina Rivkind Koffler and Gary Nachman have a yearly average return of 16.1% and 10.4% respectively. Koffler has a success rate of 50% and is ranked #198 out of 4628 analysts, while Nachman has a success rate of 59% and is ranked #695.

As far as the analysts-at-large are concerned, the Financial Times says as of Aug 04, 2017, the consensus forecast among 22 polled investment analysts covering Endo advises investors to Hold their position in the company. This has been the consensus forecast since the sentiment of investment analysts deteriorated on Jun 09, 2017. The previous consensus forecast advised that Endo would Outperform the market.

 

Recommendations

1yr ago Latest
Buy 5 2
Outperform 3 4
Hold 17 14
Underperform 0 0
Sell 1 1

Share price forecast

Current price $8.18 as of close 8/8/17

One-year change: -55.03%

The 17 analysts offering 12-month price targets for Endo have a median target of $15.00, with a high estimate of $19.00 and a low estimate of $10.00. The median estimate represents a 61.12% increase from the last price of $8.18 at close Tuesday, August 8, 2017.

Steve's Take: @ENDP has seen a beatdown that’s way overdone Click To Tweet

Any way I look at Endo, I see a beatdown that’s way overdone, largely, I believe, from the deserved slaughter of Teva with last week’s surprise list of horribles pertaining both to its earnings forecast but, more importantly, to its debt-service capacity. And top that off with a general fleeing by investors from the entire generic sub-category of Pharma, and you have a categorical route. It’s just that Endo doesn’t deserve to be lumped with Teva.

The write-downs and litigation set-asides have been faced, quantified and booked, and there are new products beginning to show positive signs of future growth potential. Trading at just north of $8 per share and analysts seeing a median price target of $15, it’s a no brainer, in my opinion, that this name is a Buy or Accumulate for the aggressive folder.

There’s plenty of uncertainty here, however, so this equity isn’t suited for the risk-averse portfolio.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. MondayMorning.com has a disclosure policy.