Health

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Everyone knows things are pretty bad at Endo International, the drug company considered Valeant Pharmaceuticals' mini-me. Its stock has tumbled 80 percent in one year, and the company's debt load is more than twice as big as its market value. But if you're the type of person who enjoys things like horror movies, let me show you one more frightful number that says a lot about Endo. 

Crescendo to Crash
Endo, the maker of pain drugs, has had a rough year.
Source: Bloomberg

Some investors keep an eye on price-to-book-value ratios to get a glimpse at potentially undervalued stocks. Book value, or net assets, is an estimation of what a business should be worth in a worst-case, fire-sale type of scenario -- a minimum value, so to speak. Excluding banks, the amount of S&P 500 index members that trade for less than their liquidation value can be counted on two hands. They technically include Endo, which  is priced at a 35 percent discount to its book value. But like any measure, this one can be impractical or totally misleading, which is the case here. It's a matter of tangible versus intangible assets.

Hold Up
Endo's low multiple is deceiving because the majority of its assets are intangibles such as goodwill.
Source: Bloomberg

Endo had $18.6 billion of total assets as of March 31. But $14.8 billion of them were intangible assets, things that are much tougher to value separately than, say, manufacturing lines and office equipment or often can't actually be sold. And in Endo's case, a huge chunk of its intangible assets is goodwill, racked up from making a slew of acquisitions. Goodwill is the amount paid in a deal above the target asset's value and comes back to bite buyers who overpay.

At $7.4 billion, Endo's goodwill is now almost double its market capitalization, a sign that more writedowns may be in its future. In the first quarter -- a painful one for Endo -- the company took a $130 million impairment charge related to the restructuring of its generic-pharma unit, which was built through deals. And in the final three months of 2015, Endo had a $140 million charge, a chunk of which was tied to its takeover of Paladin Labs (the deal that gave Endo its Irish tax domicile). 

Off Balance
The acquisitive drugmaker has very little cash, while goodwill makes up 40 percent of its total assets. And net debt is double its market value.
Source: Company filings, Bloomberg

Stripping out these intangible assets leaves Endo with negative common equity -- which can't really be comprehended but is a giant red flag that can be seen waving all the way from its Irish headquarters. Endo shareholders already know what a mess it's in, but this hits home the troubling point that debt has climbed quickly and earnings power is going the other direction. It's not like Endo pays a dividend that's depleting retained earnings. It simply doesn't make money -- yet owes so much of it. 

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

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net