Endo Is Highly-Indebted
Endo cut costs amid the free fall in revenue. Q4 2017 SG&A and R&D were a combined $210 million, down from $259 million in the year earlier period. However, the decline in operating expenses did not match the decline in revenue. The company’s EBITDA margin was 30%, down from 38% in the year earlier period. That is problematic given Endo’s $8.2 billion debt load which is at 7.5x run-rate EBITDA. Endo’s deteriorating credit metrics could signal it could become difficult to service its debt down the road.
Amid its decline the company was able to collect on accounts receivable and pay down inventory. This was a boon to cash flow during the quarter. Cash flow from operations was $554 million. This could subside as the accounts receivable and inventory balances continue to fall. It currently has a cash hoard of $1.3 billion which could serve as a buffer against future operating losses. However, President Trump is considering suing opioid manufacturers for their role in the opioid crisis. The amount of liabilities is unknown; investors will have to wait for the details of pending lawsuits. This uncertainty over Whether Endo has enough capital to service its debt and cover potential opioid legal exposures remains to be seen.
Conclusion
Revenue from Endo’s core Generics business performed poorly last quarter and its other business segments were in disarray. ENDP trades at nearly 9x run-rate EBITDA, but it is uncertain whether legal exposures or the continued diminution in key business segments are priced in. ENDP remains a sell.
