There is a war being fought over rising drug prices and Endo Pharmaceuticals (ENDP) is in the middle of it. I have closely following the debate over rising drug prices. I also chronicled lawmakers’ outing of Valeant (VRX), Turing Pharmaceuticals and Retrophin (RTRX) as some of the country’s most notorious price-gougers. Endo got lumped in with hedge fund hotels that acquired brands, raised prices and slashed R&D. I always wanted to learn more about Allergan (AGN), Teva (TEVA) and Endo, and parse through their stories. I finally got around to it in the second half of 2017.
I assumed Endo hit an inflection point in Q3 2017 after its underlying business slowed and the stock fell 60% Y/Y:
Within the generics segment revenue from U.S. generics fell 34%; generics are suffering from negotiated price cuts with big clients and an acceleration in generic drug approval by the FDA, which has increased competition. This was offset by strong sales of Sterile Injectables and recent launches of ezetimibe tablets (generic Zetia) and quetiapine ER tablets (generic Seroquel). The combination of new product launches and growth in Sterile Injectables helped stabilize generics this quarter, but will it be enough going forward?
The branded pharmaceuticals segment is a mixed bag. It consists of specialty products (45% of branded sales) and pain-related drugs (55% of branded sales) like Percocet and Opana. The company’s pain-related drugs experienced a revenue decline of 30% Y/Y, offset by growth in specialty products. In June 2017 the FDA [i] alerted Endo that risks of Opana outweighed its benefits and [ii] asked the company to remove the opioid from the market due to its public health consequences of abuse.
The company’s top-line continued to erode for both generics and pain-related drugs. I understood the demise of opioids given the government’s desire to tamp down opioid prescriptions. However, I assumed generics would be a moat, and it was not. The company successfully cut costs and rightsized its operations to help soften the blow of revenue declines. With debt at over 5x EBITDA I surmised it could be difficult to service debt from existing operations. Read more: