Thursday, December 09, 2010

2010 M&A DOTY Nominee: Endo/HealthTronics

It's time for the IN VIVO Blog's Third Annual Deal of the Year! competition. This year we're presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (four or five in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

Endo Pharma CEO Dave Holveck has been emphatic about plans to diversify the company ever since taking the helm in 2008. But investors--and analysts--couldn't quite make the jump from pain to "pelvic health" defining the specialty pharma's May 2010 $258 million acquisition of HealthTronics, a provider of urological services and devices. Endo's share price barely budged after the deal was announced.

Still, this acquisition, which was the first of a 2010 Endo buying spree that eventually led to an uptick in the company's share price, illustrates how pharma needs to change given physician access grows tougher and differentiation may come by offering a continuum of products. It's for this reason Endo/Healthtronics merits a DOTY nod.

If investors failed to see the logic of HealthTronics, Endo's subsequent tie-ups, including a take-out of the generics firm Qualitest for $1.2 billion, were easier to parse, as was the August acquisition of drug deliver Penwest for $168 million. And Endo has been rewarded with a steadily rising share price: hovering in the low to mid-$20s for most of 2009 and the first half of 2010, the drug maker's stock was sitting pretty at $36-per-share by the close of business Dec. 8.

But there's also no denying the value HealthTronics has brought the spec pharma: about $185 million in annual revenues, and a new asset in a deal that is immediately accretive. Most importantly, it allows Endo to combine drugs, devices, and services in an area far less competitive than pain, providing the company new skill sets as health care reform and concerns about cost of treatment increasingly factor into strategic decision making.

This larger point eluded Wall Street, which tried to fit the acquisition in a framework solely related to advancing Endo's traditional drug business. Yes, the company has a drug for bladder cancer (Valstar), which its sales force details to urologists and a next generation drug, Urocidin, in Phase III. And yes, HealthTronics' strong ties to those physicians could result in a better understanding of this physician specialty's needs. But analysts saw the cross-selling opportunities for Endo's detail reps only as qualitative and indirect.

They failed to appreciate how HealthTronics provides a base that enables Endo to look for more acquisition opportunities that blend the various approaches to addressing urologists' needs. Specifically, Endo now has the option to get into the devices or auxiliary services if it believes these offerings represent the best proposition for patients, and therefore its business.

Down the road, this approach should enable Endo to provide a "care pathway" to physicians, which is an appealing concept for payors looking for “end-to-end” solutions and the ability to pay companies based on the best treatment outcomes for particular diseases. According to this strategy, a cancer patient ineligible for bladder removal could be given a generic drug infusion for chemotherapy followed by Valstar, and eventually Urocidin.

It's a concept other pharma companies are exploring – most rather timidly and as part of an effort to augment their flailing therapeutics sales, not as stand alone businesses. Sanofi’s forays in diabetes, especially its alliance with glucose monitoring company AgaMatrix, come to mind.

Endo’s need to change is particularly urgent. It is one of several well-capitalized small to mid-sized specialty pharma businesses that are ultimately fighting for their lives as they face an acute crisis: the drugs that underwrote their success are maturing and their model of in-licensing new drugs to augment their portfolio isn’t working as competition has increased for late-stage assets. Some companies in the space, such as Eurand and King, have been sold at less than optimal valuations.

But as Endo/HealthTronic shows there is a viable alternative, one that pushes specialty pharma out of its old comfort zone. Holveck, a former top executive at Johnson & Johnson, appears more comfortable than many pharma executives at mixing businesses, and some speculate he is modeling Endo for a sale to J&J. Whether Endo stays independent and grows, its valuation is on the rise.

Bright Idea courtesy of flickrer nhuisman, used with permission via a creative commons license.

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