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Earnings Beat at Endo, Shares Up on Improved Outlook

Zacks Equity Research

Endo International’s (ENDP) first quarter 2014 earnings (excluding special items) of 92 cents per share beat the Zacks Consensus Estimate by 8 cents but decreased 16% from the year-ago period. The year-over-year decline in earnings was due to lower revenues.

Revenues came in at $594.6 million in the first quarter of 2014, down 10%. Revenues were well short of the Zacks Consensus Estimate of $607 million.

Following the completion of the acquisition of Paladin Labs earlier in the year, the company has started reporting results through four segments – Branded Pharmaceuticals (U.S.), Generic Pharmaceuticals (U.S.), Devices and International pharmaceuticals from the first quarter of 2014.

The First Quarter in Details

Revenues were hurt by lower sales of Endo’s painkillers, Lidoderm (down 82%), Opana ER (down 17%) and Fortesta Gel (hypogonadism: down 24%). Reduced sales of the drugs were primarily responsible for a 35% decline in the quarterly branded pharmaceutical revenues to $234 million. Lidoderm sales were hurt by generic competition during the first quarter. Actavis (ACT) launched its generic version of the painkiller in Sep 2013.

In a bid to strengthen its portfolio of branded products in the field of pain and migraine management, Endo inked a deal last month to buy the global rights to Sumavel DosePro from Zogenix, Inc. (ZGNX) for $85 million in cash and milestone payments of up to $20 million.

Endo reported generic product net sales of $212 million in the quarter, up 19%. Increased demand for the generic drugs contributed to the increase. The addition of the products of the erstwhile Boca Pharmacal (acquisition completed in Feb 2014) also led to the expansion of the segmental sales.  Endo intends to launch an authorized generic version of Lidoderm shortly through its generic unit.

Revenues from the devices segment came in at $124 million in the reported quarter, up 1% at constant exchange rates. Segmental sales benefited from improved performance of the benign prostatic hyperplasia therapy (up 12%) sub-group.

The newly formed international pharmaceuticals division contributed $24.8 million to total revenues in the first quarter of 2014. In a bid to expand further, Endo announced a deal to acquire Mexico based private company Grupo Farmaceutico Somar last month. The company has entered into agreements to buyback about $240 million aggregate principal amount of its 1.75% convertible senior notes due 2015.

2014 Outlook Raised

Apart from announcing results for the first quarter of 2014, Endo upped its guidance for 2014. The company now expects adjusted earnings per share for 2014 in the range of $3.60–$3.85 per share (old guidance: $3.40–$3.65). The Zacks Consensus Estimate (pre earnings) stands at $3.51 per share. We expect it to be revised upwards following the management’s new outlook. The company now expects revenues in the range of $2.55 billion–$2.64 billion (old guidance: $2.50–$2.62 billion). The Zacks Consensus Estimate is $2.56 billion. The improved outlook issued by the company impacted the stock positively.

Endo carries a Zacks Rank #3 (Hold). An example of a better-ranked stock in the medical sector is WuXi PharmaTech (Cayman) Inc. (WX) with a Zacks Rank #1 (Strong Buy).

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