Endo Re-enacts Valeant's Cliff Dive

It's the latest sign the M&A-driven business model is dead.

Endo International just keeps doing a great job impersonating Valeant, for better or worse.

The Irish-domiciled specialty pharma company has previously mimicked Valeant's business model and rapidly rising share price. Now it's re-enacting some of Valeant's less-desirable moments.

As Valeant did in March, Endo on Thursday slashed full-year revenue guidance it had only recently put out. The $500 million cut was much larger than anybody expected; the lowest Wall Street estimate tracked by Bloomberg put Endo's revenue at $4.12 billion, while the company now expects a range from $3.87 billion to $4.03 billion. Shares fell as much as 40 percent on Friday and are down 74 percent year-to-date.  

Look Out Below

Major guidance cuts and questions about their business model have sunk shares in specialty pharma peers Valeant and Endo. Percent appreciation.

Source: Bloomberg

Both Endo and Valeant have tended to buy competition-prone older drugs, used inversions to lower tax rates, and built up debt with a series of acquisitions. Endo is even run by Valeant's former COO, Rajiv De Silva.

As with Valeant, Endo is also under pressure to lower prices, especially for its pain products. Opioids make up a major part of that business, and concerns about addiction and abuse have led the Centers for Disease Control and others to try to limit their use.

But wait, there are still more Valeant parallels: Endo's problems have undercut management credibility. And its $8.2 billion in debt -- larger than its $3.5 billion market cap -- means it will have to shift from an M&A-driven business model to one focused on organic growth. The market seems to doubt the company can change.  

Bad crisis management and communications? Endo has those, too. Thursday's conference call turned into a rather intensely negative interrogation. JPMorgan analyst Christopher Schott said pungently that "it just seems like things have gone very bad, very quickly in a number of line items of your business over the last month-and-a-half or so." Analysts suggested mid-call that the company explore strategic options -- as in sell itself or break up. In a note, Mizuho's Irina Koffler wrote that the call was "as bad as it gets."

In another familiar development, formerly positive analysts are suddenly doubting Endo's business model and cutting ratings and price targets. In July 2015, at the height of Wall Street's optimism, Endo had 12 "buy" ratings, six "hold" ratings and an average price target of $100.64. Now we're at 9 buys, 11 holds, a sell, and a $42.56 price target.

Mind the Gap

Analysts have been high on Endo for some time, but are starting to seriously sour on the firm.

Source: Bloomberg

Endo said "unanticipated headwinds" caused the guidance cut. Those included unexpected new generic competition for one of its lead products, Voltaren Gel; problems with its own generics business, including an erosion in prices; and significant delays in expected FDA actions that might have helped Endo by kicking competing drugs off the market. 

The company hopes the erosion of its older generics business will moderate heading into 2017, that cost cuts in manufacturing and product discontinuations will help stabilize the business, and that its pipeline will help return it to growth. 

But there's no guarantee the things that went wrong recently won't get worse. The generics business could continue to erode more quickly than expected. There could be further regulatory delays. And if unexpected competition can happen to Voltaren Gel, then it can certainly happen to other drugs.

Beyond these particulars, the bigger lesson of Endo's troubles is that the acquisition-driven specialty pharma model, which looked so promising to many observers just a year ago, might finally be on its very last legs.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Max Nisen in New York at mnisen@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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