May 20, 2015 - 8:12am EST by
2015 2016
Price: 83.03 EPS 0 0
Shares Out. (in M): 179 P/E 0 0
Market Cap (in $M): 14,841 P/FCF 0 0
Net Debt (in $M): 5,165 EBIT 0 0
TEV ($): 20,000 TEV/EBIT 0 0

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  • Specialty Pharma
  • Pharmaceuticals
  • Inversion
  • Tax Inversion
  • Rollup


Investment Summary

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.      

Business Description

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).

Financial Highlights:

Par Deal Estimates              
Sources       Uses        
New shares to TPG(1) $1,543   Stock Consideration   $1,543  
New ENDP issuance(2) 1,750   Cash Consideration   6,500  
Debt issuance $4,850   Deal-related Fees   100  
Total   $8,143   Total     $8,143  
(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) =  39.1 << inc. TPG shares and new offering  


PF Capital Structure:


Endo  3/31/2015   AMS Sale   Par Deal   PF ENDP
Cash ($mm) $377.5   $1,600.0       $1,977.5
Restricted cash $534.2           $534.2
ST Debt $160.6           $160.6
LT Debt $5,386.5       $4,850.0   $10,236.5
Total Debt $5,547.2       $4,850.0   $10,397.2
Net Debt (exc rest cash) $5,169.7           $8,419.7
Legal Settlement Accrual $1,593.1           $1,593.1
Minority Int $0.1           $0.1
Shares  178.7       39.1   217.8
Share Price (current) $83.03           $83.03
Market Cap $14,841           $18,086
Enterprise Value $21,070           $27,565
Net Leverage (2015E) 3.87x           5.00x
Incremental interest expense (@ 5.5%)           $200
Approximate EBITDA Bridge:              
2015E ENDP EBITDA             $1,337
Loss of AMS EBITDA             -$130
Addition of Par 2015E EBITDA           $477
PF 2015E EBITDA (pre-synergies)           $1,685
Net Leverage at 12/31/15 assuming $500mm '15 FCF       4.70x
Net Leverage at 12/31/15 inc. Legal Accrual           5.33x
Bridge to 2016E PF EBITDA:              
Core EBITDA growth of 10% YOY           $168
Run-rate Par synergies             $175
PF 2016E EBITDA             $2,028
Net Leverage at 12/31/16 assuming $750mm '15 FCF       3.53x
Net Leverage at 12/31/15 inc. Legal Accrual           4.06x



  •            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
  • AUXL synergies beat estimates
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