By Jake King
Chatter on the specialty pharma front is that Endo Health's (ENDP) newly hired CEO will be shaking hands with shareholders in a multi-city road show over the next two weeks. We expect clarity from the new helmsman on how he plans to create shareholder value at Endo, whose stock and business have struggled over the last year. As we wrote in our last article, Rajiv De Silva replaced David Holveck in late February as President and CEO of Endo, approximately a year-and-a-half ahead of Holveck's initial contract expiration as major shareholders clamored for new management to take the reigns and reposition the company. De Silva is a former Valeant (VRX) executive, which has led many, including ourselves, to speculate that De Silva is either: A) Acting as a trojan horse to facilitate a takeover by Valeant, which is known for its aggressive acquisition strategy, or B) that De Silva will begin his own aggressive divest-and-acquire strategy at Endo to pull the company out of a long-term rut. Our bet is that De Silva is a long-term player and has been interested in taking the helm for a while. While this takes some of the luster off of the acquisition chatter, there's potential for long-term value creation at Endo. We've heard that De Silva is hoping to act quickly at Endo, with major moves right out of the gate - perhaps an acquisition, divestiture, or both within six months. Either way, it's encouraging to see an experienced player coming into the weakened name. The market certainly noted De Silva's robust history in February; on announcing the hiring, shares rose 8% in a single trading session and have hovered just over $30 since, stability that ENDP hasn't seen in a long time.
What we liked about the story prior to De Silva's entrance was that negative analysts were still hung up on issues with the current business; they're missing that De Silva will likely give Endo a complete makeover, similar to what was done at Valeant over the past several years. One example is the acquisition of BioVail (which we called a double-reverse merger), which significantly lowered Valeant's tax rate and was a major driver of that story. These analysts will be forced to play catch up, as their mindsets are stuck in what's current, not what's coming.
Through early April as De Silva hits the road to speak with shareholders (beginning in New York), there are three key topics that investors should be paying attention to:
- The state of the existing business.
- De Silva's vision for the company.
- How he plans to minimize risk (details below), by either downsizing or eliminating them entirely.
The primary concerns for the business revolve around the long-acting opioid Opana ER, for which sales haven't materialized as fast as expected, and Endo's implantable vaginal mesh products. Opana ER faces a new generic entrant as of this year, and although Endo contests the tamper-proof comparability of the generic, analysts have been walking down expectations for sales accordingly. In addition, Endo and its subsidiary American Medical Systems (AMS) face lawsuits claiming complications with AMS' marketed transvaginal mesh products. The space has come under fire since 2008 (J&J (JNJ) faces similar issues) and divesting of the asset may make sense given the issues surrounding a core part of the business. Investors have been waiting to hear details from the new CEO, and clarity on these overhangs should relieve some pressure on the stock. Further, De Silva's vision for the company will be telling: Will he emulate the vigorous acquisition strategy that he helped cultivate at Valeant? Or will he pursue a sale of the company (many shareholders had been hopeful of a sale prior to De Silva coming in)? We expect further clarity on these issues as De Silva meets with investors country-wide, and we will update readers accordingly as we hear how the meetings are going. De Silva joining Endo is a breath of fresh air regardless, and with clarity in the near-term, now is the time to be involved. See why we believe he can turn ENDP around in our prior coverage.
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