On Tuesday, the FDA ruled that generic drug-makers are barred from selling copies of older, easily abused formulations of Purdue Pharma’s well-known pain killer OxyContin, which it originally reformulated to include abuse-deterrent qualities in 2010. Endo Pharmaceuticals (ENDP), meanwhile, markets its new tamper-resistant formulation (TRF) of Opana ER (oxymorphone) and faces a similar threat from generic challengers; but the read-through on Tuesday’s announcement is that Opana ER’s old abusable formulation will not have any new generic competition. This is good news for Endo, as analysts were worried about the escalating generic threat on Opana ER’s future. In fact, most analysts and investors see Opana ER’s contribution as being worth $5 per share; this good news could send the stock from the mid-$30 level up to the $40 level. Purdue pulled the original abusable OxyContin formulation from the market in 2010 for “reasons of safety or effectiveness,” and as such, the FDA said it would not approve generic forms of the old OxyContin version despite the expiration of a key patent on Tuesday. Importantly, FDA agreed that OxyContin was removed from the market for “safety” reasons, similar to the reasons given by Endo when it removed its original Opana ER formulation from the market last year. While ENDP Bears are saying there is a chance that the FDA may view the new OxyContin and Opana ER tamper-resistant formulations differently, we believe that what matters is that FDA sees older abusable formulations as a major risk, particularly when TRF products are available. We expect the FDA to treat potential generic Opana ER (oxymorphone) applications similarly, denying them market access. With risk of generic Opana ER formulations coming to the market mitigated, and the potential for the only generic of this drug (from Impax Labs (IPXL)) to be withdrawn, we expect ENDP to trade to the high-$30 or $40 range. From that point, investors must bet on new management driving value, and given the newly appointed CEO’s track record (see here), we believe there’s long-term upside in the name.
Opana ER stability is worth $5.00 a share to ENDP. As the market places a higher probability on the FDA ruling that no additional generics for the old formulation of Opana ER will be approved, ENDP should continue to work higher. Consensus among analysts and investors is that Opana ER is worth about $5 per share, and using a DCF model to value Opana ER sales (assuming no growth off of this year’s estimates) and net income from Opana ER at about $100M annually, $5/share is very reasonable (using a 10% discount rate). However, if FDA does move to pull the current generic Opana ER off the market (sold by Impax Labs (IPXL)), the Opana ER franchise’s growth opportunity improves significantly, therefore, the $5.00 per share inclusion should be much higher. As a result, ENDP trading to $40 on the current news makes sense, with upside if the FDA moves to pull the IPXL formulation of the older Opana ER generic off the market.
Execution by the new management team is the next step in the story. In short, ENDP has shown a tremendous recovery, from the mid-$20 range when the chips were down and the company was disappointing on earnings, to now, with a new energized CEO and management team, and a few things starting to go right. PropThink’s “Trouble is Opportunity” article demonstrates that sometimes a little contrarian thinking and reliance on strong cash flows and management can pay off. We believe ENDP is an entirely different story than it was in late 2012, in fact, turning around faster than we might have expected. There’s still work to be done, and it’s all about belief in the new management team, in our view, above the $40 level.