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Endo Vaults Into Top 5 Among Generic-Drug Firms

Aspiring specialty-drug giant Endo International agreed to buy major generic-drug maker Par Pharmaceutical Holdings for $8.05 billion Monday, a deal that Endo says will make it one of the top five generic-drug makers in the world.

Investors were less than enthusiastic, however, as Endo's stock fell 5.4% to close at 80.77.

Endo (ENDP) agreed to shell out $6.5 million in cash and 18 million of its own shares to acquire Par from TPG Capital, the private-equity group that took Par private in September 2012. In March, Par filed to return to the stock market in an IPO, which revealed that it generated $1.3 billion in revenue last year from nearly 100 products.

"Our generics business, Qualitest, continues to be an extremely attractive and effective growth driver for Endo," CEO Rajiv De Silva said in a statement. "This transaction with Par builds upon our generics growth, adding a strong portfolio of high-barrier-to-entry and attractive gross margin products while also transforming Endo, creating a powerful corporate platform for future growth.

Acquisitions Key Strategy

The deal continues the highly acquisitive strategy that De Silva has adopted since taking the helm in March 2013, following the example of Valeant Pharmaceuticals (VRX), where De Silva used to be chief operating officer. Endo was then about to lose patent protection on its bestselling drug, painkiller Lidoderm, which led to a string of negative quarters last year. Profit growth has returned the last two quarters, however, through a series of buyouts that De Silva summarized on Monday's conference call with analysts to discuss the Par acquisition.

"With (the acquisitions of) Boca and DAVA, we expanded our generics platform," he said. "With Paladin, we established Endo's global presence and improved our corporate structure. With Auxilium, we rebuilt our branded platform and pipeline, and with our recently announced divestiture of AMS (American Medical Systems), we are sharpening our strategic focus on our core pharmaceuticals businesses.

"Now, with the acquisition of Par, we are strengthening and diversifying our generics business driving long-term double-digit growth and creating an expanded corporate M&A platform.

De Silva says that Par CEO Paul Campanelli will become head of Endo's generics business, which will come to make up about 65% of total revenue.

The companies expect to realize $175 million in operating and tax savings within the first 12 months of the merger.

Leerink analyst Jason Gerberry wrote in a research note that the cost savings "get us more comfortable with the deal valuation. Based on our prior coverage of Par, we believe the company is a high-quality business & we're glad to see Par's Paul Campanelli join ENDP.

Gerberry estimates that the deal will add 90 cents to annual EPS by 2017. But he says that he'd been hearing mixed reviews from investors, underscored by the stock selloff.

One issue is the leverage. The cash portion of the deal was financed by Deutsche Bank (DB) and Barclays (BCS), and Endo is also assuming the $2.4 billion in debt that TPG had left on Par. This will make it more difficult to do more big deals in the near future, Gerberry wrote.

Also, "prior expectation was for ENDP to acquire accretive brand assets — multiple rerating is less likely with Par," Gerberry added.

That investors would expect a branded target isn't surprising, given that Endo's last go at a big target was its $12.3 billion bid to snatch Salix Pharmaceuticals, a maker of proprietary gastrointestinal drugs, away from De Silva's former employer Valeant. Endo gave up its attempt after Valeant raised its own bid.

Morningstar analyst Michael Waterhouse took a more negative view than Gerberry of Par's quality as an asset.

"Par has gained more vertical integration and some complex manufacturing capabilities since 2012, but the company still remains largely exposed to the U.S. generics market with significant challenges facing lower-cost peers, in our view," he wrote in a research note Monday.

The friendly nature of the Endo-Par deal stands out among the recent round of hostile buyout attempts in the generics industry, with Teva Pharmaceutical (TEVA) chasing Mylan (MYL) and Mylan chasing Perrigo (PRGO), as the long run of consolidation in the industry has left only a few big companies who all want to be buyers rather than targets.

Mylan has remained adamant that Teva is the wrong company to buy it at any price. But on Monday, Perrigo CEO Joseph Papa told the UBS Global Healthcare Conference that there is a price at which Mylan could get it — the existing offer is just way below it.

"We're pretty far apart," Papa said, but declined to name a price at which he would sell, according to a report from Bloomberg. Perrigo's stock rose 2% on the news.