The Third Time Is Not the Charm for Endo Health Solutions


If there were ever any advice I'd wish to impart to the management at Endo Health Solutions' subsidiary Endo Pharmaceuticals, it would be that sometimes it's better to walk away than keep fighting a losing battle.

Following the close of the bell yesterday, Endo Pharmaceuticals announced that the Food and Drug Administration had yet again issued a complete response letter for Aveed, its once-every-10-weeks injectable low-testosterone treatment for a condition known as hypogonadism. This marks the third CRL for Aveed, with the most recent one coming last night. I guess it shouldn't have come as a complete surprise, with the FDA's panel splitting its vote 9-9 in favor of recommending approval in April. What stands out as truly disappointing is that all three CRLs have pointed to concerns about rare, but very serious, adverse events such as anaphylaxis and pulmonary oil microembolism, showing that even after roughly five years, the company and the FDA still aren't on the same page.

If there is one bright spot here, it's that Endo Pharmaceuticals will not have to run any additional costly trials and needs only to come up with a medications guide to ensure the drug is being dispensed and used safely.

Is this the End-o for Aveed?
Personally, I believe Aveed has been a lost cause for a while. As we saw with Affymax earlier this year with the voluntary recall of anemia drug Omontys, it doesn't take more than a few serious adverse events to recall a drug. In the case of Omontys, just 0.2% of all patients experienced a serious adverse event, but that, along with a fatal reaction in three patients, was enough to pull it off the market. The FDA's concerns are valid and could seriously hamper Aveed's sales even if it garners approval since the other marketed testosterone treatments have few side effects.

Also, the testosterone market is also glutted with competition and Aveed, even will likely have a hard time making any meaningful impact for Endo. AbbVie recently reformulated its AndroGel testosterone treatment into a more potent form at 1.62% and in 2011 received FDA approval after 82% of hypogonadal men achieved normal testosterone levels after 112 days. Also operating in the gel space is Auxilium Pharmaceuticals' drug Testim, which achieved $45.5 million in sales in the first quarter. That figure actually represents a 23% year-over-year decline because of difficulties in gaining insurance coverage for the gel, but it's yet another hurdle for Aveed to jump over if it were to reach market.

Forget Aveed and look right here!
My suggestion for Endo Health Solutions shareholders is to completely write off Aveed in their analysis and instead focus on Endo's remaining pipeline of branded and generic products, which includes drugs and medical devices. Sure, Endo has ongoing concerns like the introduction of generic competitors to its painkiller Opana ER, which are just around the corner, and the departure of its COO and CFO announced on Wednesday, but there are plenty of other catalysts in its portfolio that could stir the value pot.

In its most recent quarter, Endo reported a huge 152% spike in sales of Fortesta a (surprise, surprise!) low-testosterone treatment, as well as the return of Voltaren gel for joint osteoarthritis, which kicked in $36 million after providing no revenue last year because of a Novartis plant shutdown. While naturally a lower-margin business, Endo's generic division also delivered rapid growth of 23% to $178 million.

Another factor that can't be overlooked is that Endo hasn't been shy about putting the for-sale sign out in the front yard. In late January, Warner Chilcott and Valeant Pharmaceuticals were both rumored to be interested in acquiring Endo. Things have certainly changed since then, with Actavis (formerly Watson Pharmaceuticals) purchasing Warner Chilcott and Valeant currently arranging financing to purchase privately held eye products maker Bausch & Lomb for $8.7 billion. That shouldn't, however, discourage other suitors looking for hybrid growth in both branded and generic drugs from making a play for the very profitable Endo.

Finally, this is a diversified health-care operation. If one segment falters, there are others to pick up the slack. Barring an unforeseen recall or a global depression, Endo is primed to keep pumping out profits.

In short, it may be the End-o for Aveed, but it could be the start of something better for the remainder of Endo if you dig a bit deeper.

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