Thursday, February 28, 2008

Shareholder Balks at Endo's Growing Pains

Endo Pharmaceuticals biggest institutional shareholder says it's time to change tack--in particular, to sell itself, and failing that, to make better use of its cash.

We aren't surprised at the complaint (neither, it seems, is the market). The pain specialist has been at a strategic crossroads for some time now. It admitted last year that it needed to move beyond pain into new therapeutic spaces and to take on additional development risk as competition for later stage assets increased. But while noting the increased competition themselves, Endo's management remained confident that at least in pain, the company remained the go-to partner.

Endo isn't the only spec pharma in a pickle. Last December MGI Pharma--unable to see an indepenent future for itself--sold out to Eisai. The problem for these groups is that they can't rely any longer on in-licensed, low risk assets to sustain the growth they need.

But some investors, it seems, don't like the new direction Endo's trying to move in. 9.8% holder DE Shaw Valence Partners claims the group is "overly focused on the need to complete a large acquisition or in-licensing deal," rather than focusing on strengthening its existing pain businesses. The investor goes on:

We are strongly opposed to the Company’s strategy of acquiring companies or in-licensing expensive assets, especially in new therapeutic segments outside of the Company’s core expertise in pain management. ENDP currently has no head of R&D, and recent development efforts have been marred by numerous setbacks and delays. Further, ENDP has a history of involving itself in value-destroying product licensing deals (including Synera, DepoDur, and Propofol IDD-D). This focus on business development as the source of future growth is even more confusing in light of management’s and the Board’s seemingly increased confidence in the duration of ENDP’s lead asset Lidoderm (as stated by your CFO, Charlie Rowland, on your year-end results conference call). ENDP also just reported high quality results for the fourth quarter and full year 2007, highlighting the strength and momentum of its underlying business and core assets.
With CEO Peter Lankau's resignation to take effect on Saturday, some loose ends recently tied up with regards to Endo's disappointing relationship with Vernalis, and according to some investors, an undervalued stock, certainly DE Shaw can't be faulted for its timing. The company breached $1 billion in revenues for the first time in 2007 and has about $663 million in cash.

And with a roughly $3.6 billion market cap Endo is certainly affordable for any of the Big Pharma looking for more of a specialist shine to their product portfolios and pipelines. Nor is it beyond the reach of the mid-sized European or Japanese pharma firms anxious for a foothold in the US market, a la Eisai's MGI buy. Astellas, for example "does not rule out an option to pursue a deal which could simultaneously bring both late-stage/marketed drugs and a U.S. presence," Masaki Doi, VP business development at the Japanese drug company told IN VIVO Blog recently.

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