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.

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