January 19, 2009 - Endo Pharmaceuticals (ENDP-NASDAQ) engages in the research, development, sale, and marketing of branded and generic prescription pharmaceuticals for treating and managing pain. Products include Lidoderm, a topical patch to relieve the pain of postherpetic neuralgia; Percocet and Percodan tablets; Frova tablets for the short-term prevention of menstrual migraine; Synera, a topical local anesthetic patch to provide local dermal anesthesia in children and adults; and Opana and Opana ER for the relief of moderate-to-severe pain in patients.

The company markets its branded pharmaceutical products to physicians in pain management, neurology, surgery, anesthesiology, oncology, and primary care. It has strategic alliances with Hind Healthcare for the development of Lidoderm; Penwest Pharmaceuticals Co. for Opana ER; and Vernalis Development Limited for Frova. The company was founded in 1997 and is headquartered in Chadds Ford, Pennsylvania.

The stock wilted after touching its all-time high of $35.80, set in 2007. It's been all downhill since, hitting a low of $13.90 in 2008. Now it's bounced back to $22. Will it keep going?

As with all drug companies, it all depends on the pipeline and efficacy of new drugs as well as new applications for old drugs. And of course, acquisitions. Endo is currently in negotiations to buy Indevus Pharma, maker of urinary tract remedies, a new area for Endo. Management looks to provide therapeutics that leverage its expertise in pain and also save the healthcare system money.

One product currently accounts for about 60% of sales: Lidoderm. It's for postherpetic neuralgia. For the most recent quarter (ended in September) total sales were up to $316.8 million, well ahead of the $269.5 million in the same quarter last year. For the full year, analysts predict $1.25 billion, a marked improvement over $1.085 billion of 2007. Next year, the average for 16 analysts is for $1.41 billion.

Earnings show good comparisons as well. For the third quarter, they were 57 cents a share, compared to 44 cents in the same quarter last year. The average for the 19 analysts predicting fourth quarter results is 59 cents, above the 52 cents of last year's fourth. For the first quarter of 2009, only 4 analysts venture a guess. Their average is for 60 cents a share, better than the 49 cents in the first quarter of 2008. Over the last 5 years, earnings averaged 15.88% improvement a year. Over the next 5, analysts estimate annual average growth of 13.27%.

The company is helping earnings per share 2 ways: cutting costs in a meaningful way and buying back its own stock. Management raised estimates for full year 2008 recently for earnings while leaving revenue estimates unchanged. Lower R&D as well as SG&A (selling, general and adminstrative) expenses were part of the reason as well as stopping work on several drugs in the development stages.

Managemet is working to move the revenue stream from dependence on one drug (Lidoderm). Steps toward this goal include new drugs and acquisitions, such as Indevus, if approved by regulators. However, the new purchase is a question mark since its business is in an area different from Endo's expertise. It will also change the product mix for the sales force and as with most acquisitions take time and money to assimilate into Endo's way of doing things. It could hurt earnings in the short run.
Furthermore, with the elimination of three drugs that were in Phase III trials, the risks of investing in pharmaceutical companies are obvious.

More numbers: Total cash in the bank is $660 million. There are 134.2 million shares outstanding. Cash per share is $4.91. Market Cap is $2.98 billion. Forward P/E is 8.5. Price to Book is 2.52. Operating margin for the last 12 months was 29%. Profit margin was 19.5%. Current ratio is 2.8. Book Value per share is $8.85. There is no dividend. Beta for the last 12 months was .31.

Investing in Endo requires an investor willing to take more risk than normal. While management is delivering good earnings, much of it comes from one drug. Diversifying is a priority for the company, but that isn't easy, either from developing new drugs or buying other companies. On the other hand, when a new drug is successful, or a new firm has been fully incorporated into the acquirer, new sales and higher profits are almost always the results.

Company Web site: www.endo.com

- Ted Allrich