FDA Bars Old OxyContin Generics: Read-Through To Continue Boosting Endo

| About: Endo International (ENDP)

By Jake King

On Tuesday, the FDA ruled that generic drugmakers are barred from selling copies of older, easily abused formulations of Purdue Pharma's well-known pain killer OxyContin, which it originally reformulated to include abuse-deterrent qualities in 2010. Endo Pharmaceuticals (NASDAQ:ENDP), meanwhile, is marketing its new tamper-resistant formulation (TRF) of Opana ER (oxymorphone) and faces a similar threat from generic challengers. However, the read-through on Tuesday's announcement is that Opana ER's old abusable formulation will not have any new generic competition. This is good news for Endo, as analysts were worried about the escalating generic threat on Opana ER's future. In fact, most analysts and investors see Opana ER's contribution as being worth $5 per share; this good news could send the stock from the mid-$30 level up to the $40 level.

Purdue pulled the original abusable OxyContin formulation from the market in 2010 for "reasons of safety or effectiveness," and as such, the FDA said it would not approve generic forms of the old OxyContin version despite the expiration of a key patent on Tuesday. Importantly, the FDA agreed that OxyContin was removed from the market for "safety" reasons, similar to the reasons given by Endo when it removed its original Opana ER formulation from the market last year. While ENDP bears are saying there is a chance that the FDA may view the new OxyContin and Opana ER tamper-resistant formulations differently, we believe that what matters is that the FDA sees older abusable formulations as a major risk, particularly when TRF products are available. We expect the FDA to treat potential generic Opana ER (oxymorphone) applications similarly, denying them market access.

With the risk of generic Opana ER formulations coming to the market mitigated, and the potential for the only generic of this drug -- from Impax Labs (NASDAQ:IPXL) -- to be withdrawn, we expect ENDP to trade to the high $30 or $40 range. From that point, investors must bet on new management driving value. Given the newly appointed CEO's track record (see here), we believe there's long-term upside in the name.

Opana ER stability is worth $5.00 a share to ENDP. As the market places a higher probability on the FDA ruling that no additional generics for the old formulation of Opana ER will be approved, ENDP should continue to work higher. Consensus among analysts and investors is that Opana ER is worth about $5 per share. Using a DCF model to value Opana ER sales (assuming no growth off of this year's estimates) and net income from Opana ER at about $100 million annually, $5/share is very reasonable (using a 10% discount rate).

However, if the FDA does move to pull the current generic Opana ER off the market (sold by Impax Labs), the Opana ER franchise's growth opportunity improves significantly. Therefore, the $5.00 per share inclusion should be much higher. As a result, ENDP trading to $40 on the current news makes sense, with upside if the FDA moves to pull the IPXL formulation of the older Opana ER generic off the market.

Execution by the new management team is the next step in the story. In short, ENDP has shown a tremendous recovery -- from the mid-$20 range when the chips were down and the company was disappointing on earnings, to now with a new energized CEO and management team, and a few things starting to go right. PropThink's "Trouble Is Opportunity" article demonstrates that sometimes a little contrarian thinking and reliance on strong cash flows and management can pay off. We believe ENDP is an entirely different story than it was in late 2012, in fact turning around faster than we might have expected. There's still work to be done, and it's all about belief in the new management team, in our view, above the $40 level.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: PropThink is a team of editors, analysts, and writers. This article was written by Jake King. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein.You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relation ships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at www.propthink.com/disclaimer.