Back to Neutral on Endo Health


We are reverting to a Neutral recommendation on Endo Health Solutions (ENDP) as we believe that all the positives that led to our previous Outperform recommendation on the stock are reflected in the current price. Our target price is $70.00. The stock carries a Zacks Rank #3 (Hold) in the short run.

Why the Downgrade?

Endo reported higher-than-expected earnings in the third quarter of 2013 aided by lower costs. However, revenues declined on a year-over-year basis hurt primarily by lower sales of painkillers – Opana ER and Lidoderm. Actavis (ACT) launched its generic version of Lidoderm in Sep 2013. We believe revenues will remain under pressure due to genericization. However, cost-cutting efforts should help the company achieve its 2013 earnings guidance ($4.60-$4.75 per share).

In Jun 2013, the company announced that it will trim its work force by approximately 15%. The move is expected to result in annual savings of approximately $325 million. The company expects to realize $150 million savings by Dec 31, 2013. Endo further stated that the entire $325 million run rate is expected to be realized by mid-2014, when compared with full-year 2012.

We are impressed by Endo’s growth by acquisition strategy. The impending acquisition of generics company Boca Pharmacal is a smart move by Endo to strengthen its Qualitest (generics) portfolio and combat the generic threat over its key products. We are also positive on Endo’s decision to buy Canadian company Paladin Labs. Moreover, we are encouraged by Endo’s move to sell its struggling anatomical pathology business.

We believe all the above mentioned positive news is already reflected in the stock price, and hence downgrade the stock to Neutral from Outperform.

Other Stocks to Consider

Some better-ranked stocks include Jazz Pharmaceuticals (JAZZ) and Shire (SHPG). Both these stocks carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on ENDP
Read the Full Research Report on JAZZ
Read the Full Research Report on SHPG
Read the Full Research Report on ACT

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