Endo International (ENDP) is a specialty pharmaceutical company that develops, manufactures and distributes branded and generic drugs. It is also a familiar name to the VIC community, as it has been written up several times. Simply put, Endo’s recently announced acquisition of Par Pharmaceuticals continues CEO De Silva’s execution of the Valeant play-book, whereby he’s created a tax-advantaged, opex-focused, serial acquisition platform that will beat synergy estimates, execute on accretive acquisitions and deliver significant shareholder returns over time as double-digit earnings growth continues for years.
The post-deal sell-off following the Par announcement will adjust, and to some extent already has, as the market recognizes the merits of the deal and the continuing Endo growth story. At $83 (today’s close), ENDP stand-alone trades at 16.1x 2016E EPS; but PF ENDP is trading at ~14x vs. larger peers at 15x or higher. Given its near-term path to earnings accretion, ENDP deserves to trade at least in-line with its spec pharma peers (at 18 – 19x current year earnings), which gives a 1-year price target of ~$110 based on 2016E PF Endo or 33% upside.
The Endo acquisition platform builds on a tax base created following a tax inversion with Paladin Labs in early 2014. Endo is an Irish tax entity and targets a mid-to-high teens tax rate (15 -17% in 2015). Like Valeant and, recently, Actavis, Endo uses this tax advantage plus a willingness to lever up, as it competes aggressively for acquisitions that meet its accretion threshold (typically low double digits or higher within 1st year). Since 2014, Endo has made a series of acquisitions, including large (e.g. $2.2bn for Auxilium last year), medium (e.g. $575mm for DAVA in June 2014) and small (e.g. $25mm for Natesto assets in December). Endo has also divested most of the assets of its under-performing medical device segment to Boston Scientific in a deal that will close later this year. The $8bn Par buy is Endo’s largest deal yet and promises to increase Endo’s scale in the mid-cap space, but given its current market cap of <$15bn, Endo still has room to grow while Valeant ($78bn) and Actavis ($117bn) have far fewer targets that will move the needle.
The Par deal brings significant scale and complementary products to Endo’s Generics segment (38% of 2014 revenue with a pro forma increase to 57% of revenue). PF Endo Generics will be led by Par CEO Paul Campanelli, who has focused on market leading, high value, high barrier to entry generics as a leader in the extended release space and injectables. Par has a diversified product platform and a significant # of filed ANDAs (Abbreviated New Drug Applications) which will more than triple PF Endo’s generic pipeline. Furthermore, the fact that private equity seller TPG is taking $1.5bn of the consideration in the form of ENDP equity provides another indication of rationale for the deal and the pro forma platform (TPG will become the #1 or #2 shareholder in Endo alongside Capital Group and Janus).
Par Deal Estimates
New shares to TPG(1)
New ENDP issuance(2)
(1) Endo issuing ~18mm shares to TPG as part of Par purchase consideration @ 10d VWAP.
(2) Endo guidance of new equity offering of $1.5 - $2.0bn at middle of range.
Approx. new ENDP shares (mm) =
<< inc. TPG shares and new offering
PF Capital Structure:
Net Debt (exc rest cash)
Legal Settlement Accrual
Share Price (current)
Net Leverage (2015E)
Incremental interest expense (@ 5.5%)
Approximate EBITDA Bridge:
2015E ENDP EBITDA
Loss of AMS EBITDA
Addition of Par 2015E EBITDA
PF 2015E EBITDA (pre-synergies)
Net Leverage at 12/31/15 assuming $500mm '15 FCF
Net Leverage at 12/31/15 inc. Legal Accrual
Bridge to 2016E PF EBITDA:
Core EBITDA growth of 10% YOY
Run-rate Par synergies
PF 2016E EBITDA
Net Leverage at 12/31/16 assuming $750mm '15 FCF
Net Leverage at 12/31/15 inc. Legal Accrual
Integration issues with past or future deals
·Failure to achieve synergy estimates or timeline takes longer than expected
·Par deal fails to close [unlikely]
·Interest rates increase significantly and/or credit markets cool to levered healthcare corps
·Treasury department / inversion regulations change again in unpredictable way
·FCF yield underwhelms – due to restructuring costs, legal settlement requirements
·Competition for deals
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
Par deal closes
Equity issuance to finance Par deal is smaller than market fears