ENDP Guides 2013 Below Street, Stock Cheap, Buy Weakness For A Bounce
Endo Pharmaceuticals (NASDAQ:ENDP) is hosting its analyst day today in NY, and despite guiding for lower 2013 revenues and EPS compared to Wall Street Consensus estimates, we believe the shares could bounce off of this morning’s modest weakness. Uncertainty related to the company losing its largest product to generic competition, Lidoderm for pain, was the major cause for ENDP falling from its near-$40 high this year. In late August, generic manufacturer, Watson Pharmaceuticals (NYSE:WPI) received final FDA approval for its generic Lidoderm, and based on a prior settlement with ENDP, WPI will launch the first generic Lidoderm in September 2013. Because WPI will have generic exclusivity for the product (only generic allowed to market for 6 months), pricing should remain relatively high for both ENDP’s brand and WPI’s generic. As a result, ENDP should be able to hold onto revenues from the product longer, and by removing the heavy sales and promotion expenses currently supporting its branded Lidoderm franchise, ENDP should be able to retain a good portion of the profits until more generics enter the market. Note that Lidoderm had sales of $1.2 billion for the 12 months ending in June, according to data from IMS Health. ENDP said today at its Analyst Day that it expects to retain 30% of the market with just the WPI generic competition, and given that WPI will pay ENDP 25% of its generic profits, the blow to the company should be softened.
ENDP re-affirmed its 2012 guidance, and offered new guidance for 2013; In 2013, revenues and EPS are anticipated to be in the ranges of $3.0B to $3.2B, and $5.20 to $5.40, respectively. This compares to 2013 Consensus estimates of $3.2B and $5.51, respectively. While this 2013 guidance constitutes a “miss”, with lower revenues and gross margins driving the disappointment, many investors that we spoke with expected conservative guidance by the company, and it is likely that management is setting itself up to beat estimates next year. ENDP has a history of delivering better-than-expected quarterly performance, so given the generic erosion of Lidoderm, one would expect the company to guide with plenty of wiggle room.
Going forward, the story is about growth of pain drug, Opana ER, the company’s Qualitest generic division, and the AMS division, which is Endo’s device and therapeutics business focused on Men and Women’s Health. Essentially, guidance this morning for these parts of the business was “in-line” with most expectations, hence, the company has a chance to deliver upside as the quarters roll in. In addition, the pipeline contains some interesting products such as BEMA Buprenorphine (pain treatment with expected approval in 2014) and ODM-201, a compound moving into Phase II for the treatment of prostate cancer. One analyst estimates that BEMA Buprenorphine could add $6.00 in value, if the product is approved and sells as well as Opana ER, and we note that the ODM-201 candidate recently showed impressive results in prostate cancer patients in a Phase I/II study.
ENDP is supported by a very low P/E multiple (~6x 2013 EPS vs. the pharma average of 11x), and management is confident that 2014 EPS will be comparable to 2013, and that 2015 will be a growth year. As a result, ENDP’s cheap price is likely to attract investors once the new guidance is absorbed. We think owning ENDP off of any weakness this morning is a good bet.