Endo Seen Boosted by Fidelity-Favored Sale: Real M&A
Endo Health Solutions Inc. (ENDP)’s best hope at regaining investor confidence after losing more than $1 billion in market value is to undo the acquisitions that built the company or find a buyer.
Chief Executive Officer David Holveck is retiring two years after bolting a medical-device business onto his pain-treatment operations. Instead of the “ideal strategic fit” he promised, the stock lost 27 percent since Holveck agreed to pay almost $3 billion for American Medical Systems Holdings Inc., leaving Endo with the lowest valuation in the U.S. specialty pharmaceuticals industry, according to data compiled by Bloomberg.
Fidelity Investments, Endo’s largest shareholder, is now pushing for a sale, people with knowledge of the matter said last week. On average, analysts see Endo getting at least a 26 percent premium in a deal. Teva Pharmaceutical Industries Ltd. (TEVA) or Covidien Plc (COV) could go after parts or all of Endo given its attractive generic-drug, pain-treatment and urology-device units, according to Stifel Financial Corp. Gabelli & Co. said Endo could break up or sell its pain drugs to Warner Chilcott Plc or Valeant Pharmaceuticals International Inc. (VRX)
“Endo needs to have some sort of value-creating event, and splitting up seems like the best path,” Kevin Kedra, an analyst at Gabelli in Rye, New York, said in a phone interview. “Individual pieces of the business would be attractive to buyers,” he said. “It was the right intention to diversify the business, but the execution wasn’t there.”
Blaine Davis, a spokesman for Chadds Ford, Pennsylvania-based Endo, said the $3.4 billion company doesn’t comment on speculation, when asked whether it’s considering a breakup or sale or if it’s been approached by suitors. Jeffrey Cathie, a Fidelity spokesman, declined to comment, saying that the firm doesn’t discuss individual holdings.
Endo said in December that Holveck would leave in May or as soon as a successor is found. A replacement hasn’t been named yet. Representatives of Boston-based Fidelity met with the board several times last year and pressed for his ouster, said one of the people, who asked not to be named because the talks were private. A month before the retirement was announced, Endo reported the first drop in quarterly sales since 2006.
The stock was valued at the end of last week at 8.6 times the past 12 months of earnings, the lowest among U.S. specialty pharmaceutical companies larger than $1 billion, which fetched a median multiple of 27, data compiled by Bloomberg show. Globally, only Dublin-based Warner Chilcott, a drugmaker specializing in women’s health and dermatology, is cheaper at 7.6 times earnings.
On average, analysts from Buckingham Research Group Inc., Cowen Group Inc., Gabelli and Stifel estimate Endo would get at least $37.50 a share in a sale. The stock ended at $29.75 last week, with its market value down $1.4 billion since the American Medical Systems deal was announced in April 2011.
“In 2012, Endo floundered a bit,” Annabel Samimy, a New York-based analyst for Stifel, said in a phone interview. “It looks cheap.”
Today, Endo advanced 0.7 percent, the third-biggest gain in the Standard & Poor’s MidCap 400 Health Care Index, to $29.95 at 10:10 a.m. New York time.
Endo’s businesses remain appealing, JPMorgan Chase & Co.’s Chris Schott said.
“A number of industry participants would be interested in Endo’s generic, pain and urology franchises,” Schott, a New York-based analyst at JPMorgan, wrote in a Jan. 30 report. “It would be prudent for Endo’s board to consider all strategic options while seeking new leadership.”
Endo isn’t running a sale process and has so far focused instead on replacing Holveck, said one of the people familiar with the matter.
Mallinckrodt Plc, the drug business that Covidien is spinning off, could bolster its position in pain medicines by adding Endo’s drugs and accompanying sales force, Stifel’s Samimy said. Endo’s top pain treatments are Lidoderm, a patch that faces generic competition beginning in September, and Opana. Covidien, the Dublin-based maker of surgical accessories and operating-room products, could benefit from Endo’s urology devices and services, she said.
“The urology business at Endo is a nice, neat package,” the analyst said. “If you want a franchise in an area of medicine that’s not particularly crowded and that’s got good relationships, it’s not a bad franchise to add.”
The pharmaceutical segment would be a “natural fit” for Petach Tikva, Israel-based Teva, the world’s largest maker of generic drugs, Samimy said.
Bruce Farmer, a spokesman for Covidien, said the company doesn’t comment on market speculation, when asked whether Covidien or Mallinckrodt are interested in Endo. Teva’s Denise Bradley also declined to comment.
Warner Chilcott and Valeant, Canada’s largest publicly traded drugmaker, may also be interested in Endo’s pharmaceutical business, Gabelli’s Kedra said.
“It would fit in very well,” he said. “I’m not sure how much the devices appeal to them, though, so a separation of Endo’s two businesses may have to be the first step before they can really find a buyer.”
Warner Chilcott, which sells contraceptives and colitis treatments, was among the companies that Fidelity contacted to gauge their interest in Endo, a person familiar with the matter said last week. Warner Chilcott is using Goldman Sachs Group Inc. to advise on the matter, said another person.
Valeant has done about 50 deals for companies or assets since Michael Pearson became CEO in 2008, Jared Levy, a spokesman for the Montreal-based company, said in September. Its most recently announced takeover was Medicis Pharmaceutical Corp. for $2.4 billion, completed in December.
Rochelle Fuhrmann, a spokeswoman for Warner Chilcott, didn’t respond to a request for comment. Valeant’s Laurie Little said the company doesn’t comment on speculation.
Endo also may appeal to private-equity firms, which could break the company up and boost profits at the drug business, Gabelli’s Kedra said.
Ken Cacciatore, a New York-based analyst at Cowen, says a deal is unlikely because almost all of Endo’s units are “under pressure.” Still, he says it should try to find a buyer.
“It would make sense for the board to pursue all strategic alternatives before they embark upon what could be a really long and potentially painful restructuring,” Cacciatore said in a phone interview. “They could stop and check this out before embarking on that.”
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