Generic Versions: The Next Big Thing for This Company


The recent downturn has led to a change in the consumer spending attitude. With every passing day, consumers are becoming increasingly price conscious. Generic drugs contain all the constituents of branded drugs but cost almost 60 to 70% lesser than the branded drug. The lower price tag makes them more attractive for the consumers and thus, the demand for generic drugs has been increasing by over 10% every year.

Realizing the switch in demand from branded drugs to generic drugs, many pharmaceutical companies are now focusing on launching the generic versions of drugs. Similarly, Endo Health Solutions has recently acquired a specialty generics company to keep abreast with the changing industry dynamics. Endo has also sold one of its business segments to focus on its new segments. The article focuses on analyzing the long-term effects of these key changes on Endo's financial health.

Strategic changes
As the company's press release says, it recently made some strategic changes including acquisition of Boca Pharmacal. The acquisition will accelerate growth of Endo's high-quality generic pharmaceuticals segment Qualitest. It will add unique generic products to the segment portfolio and build on its strength in controlled substances. As the demand for low cost generic drugs has increased than ever before, this will increase the demand for Baco's drugs, eventually contributing to the future revenues and earnings of Endo. Due to the lower manufacturing cost of generic drugs, the acquisition will improve the future profit margins of the company as well. According to Endo, the acquisition is expected to be immediately accretive to its diluted EPS and generate an EBITDA of around $50 million in full year 2013.

To focus on its other businesses, the company announced that it's selling its anatomical pathology business, HealthTronics Laboratory Solutions, enabling it to maintain and grow its position in the market.The divestiture will also help the company in paying off its debts.

Launch of a new system
Endoalsoannounced the launch of its MiniArc Pro single-incision sling system designed for the treatment of stress urinary incontinence. It is expected that the system will have a strong demand among SUI patients as the disease has continuously been increasing in the United States. According to the National Kidney and Urologic Diseases Information Clearinghouse, there are more than 13 million people suffering from this disease. The system is designed based on Endo's two previous systems with a success rate of 85% to 90%. The higher demand and reliability of the system will definitely lead to enhanced revenues for Endo.

Fundamental snapshot
According to the Annual Report 2012 , the revenues of the company have been increasing over the years. The year over year growth in Endo's Pharmaceuticals segment was 1.2%, in Qualitest 11.7%, and in Health Tronics 3.1%. The only segment that faced a decline in revenues was American Medical Systems. Its sales declined by 6.3%.

The overall sales in last five years increased at a compound annual growth rate of approximately 19%. The performance of the company has improved compared to last year. Although its revenues declined by 2%, reported net income increased by 270% in the second quarter of FY13 compared to the same quarter in FY12. Reported diluted EPS improved by 275% from $0.08 to $0.30. After adjusting for one-time earnings and expenses, net income for the second quarter was $166,348 million, higher by 8% compared to last year's second quarter net income of $154,153 million. Adjusted per share earnings was also up by 12% from $1.27 to $1.42.

The improvement in net income and per-share earnings despite lower revenues shows an improvement in Endo's operating and net margins compared to prior year.

Source: Company release.

Endo's debt-to-equity ratio is higher than the industry average and one of its competitors Teva Pharmaceutical .

Source: Morningstar.

During the second quarter of FY13, the company made payments of approximately $17 million to reduce the outstanding principal of term loan debt associated with the acquisition of its segment AMS. This brings the total repayments on the debt to approximately $769 million, bringing the debt profile to somewhat acceptable levels.

Competitor's position
Like Endo, Teva is also focusing on growing its generic drug business. As stated in a company press release, Teva in cooperation with Perriga has launched the generic version of Temodar. The drug is used to treat astrocytoma, a form of brain tumor, and melanoma, a form of skin cancer. According to the World Health Organization, melanoma skin cancers have been increasing over the decades. One in every five Americans will develop skin cancer in his or her lifetime. As reported at, astrocytoma rate is also high as approximately 4,000 tumors are diagnosed every year in children younger than 20. This high rate of both the diseases would lead to the higher demand of this new drug. An additional point that would further add to the sales of this drug is that people prefer generic drugs more than the branded drugs as discussed earlier.

Compared with Endo, Teva's performance has worsened over the years. Its revenues have declined by 1.4% year over year in the quarter ended June 2013. This resulted in a net loss of $456 million compared with a net income of $859 million in the same quarter, last year. Per-share loss in this quarter was $0.53.

Final take
Endo's stock provides an attractive opportunity for investors. Its fundamentals are getting stronger over the years. Net income, margins, and per-share earnings of the company have improved. The acquisition of Boca Pharmacal and the launch of MiniArc Pro-single incision system will further boost its revenues. Boca will improve its margins as well. Although Endo's poor debt-to-equity ratio is a problem but the payment of $17 million in the last quarter and the divestiture of anatomical pathology business will help it in making its debt profile better. Overall, the company's future prospects are positive.

More opportunity in the health care space
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