Endo Health Solutions Inc (ENDP)’s Endgame

I’m in trouble, and I’m on sale!

With all these headwinds threatening to push the company off course, Endo is now reportedly putting itself on sale. Initial reports claim that Warner Chilcott Plc (NASDAQ:WCRX) and Valeant Pharmaceuticals Intl Inc (NYSE:VRX) have expressed interest in acquiring the beleaguered drugmaker. Yet investors should wonder if a company being squeezed by the government and patent expirations can attract much of an acquisition premium. After all, the company has already warned that it does not expect to meet either top or bottom line growth expectations for fiscal 2013.


In the middle of all this news, Endo appointed a new CEO, Rajiv De Silva, a former executive of Novartis AG (ADR) (NYSE:NVS) and Valeant Pharmaceuticals – to replace retiring CEO Dave Holveck. De Silva can be considered an expert at acquiring and integrating companies in the biotech field – during his time at Novartis and Valeant, he oversaw 40 acquisitions.

While this bodes well for any future acquisitions, it is also puzzling for investors – does Endo really want to sell itself, or is it planning a contingency plan for the future?

The Foolish Fundamentals

Patent expirations and government probes aside, we should take a look at how Endo measures up to two larger industry peers – Abbott Laboratories (NYSE:ABT) and Pfizer Inc. (NYSE:PFE) – on a fundamental scale.

Forward P/E 5-Year PEG Price to Sales (ttm) Debt to Equity Price to Book Return on Equity(ttm) Profit Margin Fwd. Dividend Yield
Abbott 15.21 1.48 1.35 76.36 2.02 23.23% 14.95% 1.60%
Pfizer 11.39 4.49 3.35 47.36 2.42 11.56% 24.70% 3.50%
Endo Health Solutions 6.58 1.23 1.14 165.47 1.85 3.35% 0.41% N/A
Best Value Endo Endo Endo Pfizer Endo Abbott Pfizer Pfizer

Source: Yahoo Finance

Although Endo definitely looks the cheapest, it also has the highest debt ratio, the lowest return on equity and the slimmest margins. It also doesn’t offer a dividend – making it a weak choice, considering the only real reason to own this stock is to await a buyout offer.

Top and bottom line growth over the past five years also tell a similar story.

ENDP Revenue TTM data by YCharts

Endo’s top and bottom lines are the most chaotic, with revenue growth easily outpacing its peers, but with profit growth remaining the least impressive of the group.

The Bottom Line

By all measures, Endo Health Solutions is an unattractive investment. It currently faces a dreaded double whammy of government intervention and patent expirations – which have derailed thriving biotechs in the past.

However, Endo’s endgame is worth watching, since the results of the government probe could seriously impact Actavis’ generic Liboderm sales. Endo’s portfolio could also seriously boost Warner Chilcott and Valeant Pharmaceuticals’ market presence, which may attract other serious suitors to the table.

The article Endo’s Endgame originally appeared on Fool.com and is written by Leo Sun.

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