Endo Health Walks the Neutral Path


We are maintaining our Neutral stance on Endo Health Solutions (ENDP) with a target price of $33.00. Our long-term recommendation is in line with the Zacks #3 Rank carried by the stock in the short-run.

Endo Health Solutions, formerly known as Endo Pharmaceuticals, is a diversified health care company that operates in the US and focuses on the areas of pain management, urology, oncology and endocrinology. Endo Health reports results through four segments: Branded Pharmaceuticals, Generics, Devices and Services. The company is currently headquartered in Chadds Ford, Pennsylvania.

In May 2012, Endo Health announced disappointing first quarter 2012 numbers, missing both on revenues and earnings. Revenues were hurt by temporary supply issues at Novartis’ (NVS) manufacturing facility which affected sales of Opana ER and Voltaren Gel.

The earnings miss was attributable to higher-than-expected costs and lower-than-expected revenues. The supply issues have, however, been resolved. Following the resumption of normal supply of the key drugs, we expect Endo Health to achieve its revenue guidance of $3.15 billion - $3.30 billion. We also expect Endo Health to achieve the earnings per share guidance for 2012 ($5.00-$5.20) driven by its strong product portfolio.

Meanwhile, Endo Health is on an acquisition/deal signing spree to expand its business having completed four major acquisitions since 2010. We believe that these acquisitions are steps in the right direction and will help counter the generic threat that Endo Health is currently facing for many of its key products, including lead drug Lidoderm. Patent disputes and entry of generics have the potential to weaken Endo Health’s top-line substantially.

Even though Endo Health is looking to combat the generic threat by introducing new products, the company’s financials will be affected adversely if the new products perform below expectations.

Moreover, pipeline setbacks have the potential to limit the upside potential from current levels.

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