Endo International plc

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1 January 23, 2015 Endo International plc Current Recommendation Prior Recommendation Neutral Date of Last Change 01/23/2015 Current Price (01/22/15) $80.02 Target Price $96.00 SUMMARY DATA OUTPERFORM 52-Week High $ Week Low $56.28 One-Year Return (%) Beta 1.21 Average Daily Volume (sh) 1,823,500 Shares Outstanding (mil) 154 Market Capitalization ($mil) $12,323 Short Interest Ratio (days) Institutional Ownership (%) 99 Insider Ownership (%) 1 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 16.5 Earnings Per Share (%) 11.6 Dividend (%) N/A using TTM EPS 19.6 using 2015 Estimate 17.2 using 2016 Estimate 16.0 Zacks Rank *: Short Term 1 3 months outlook 1 - Strong Buy * Definition / Disclosure on last page SUMMARY Risk Level * (ENDP-NASDAQ) Endo s third-quarter 2014 earnings of $1.15 per share beat the Zacks Consensus Estimate of $0.99 but decreased 14% from the year-ago period. The year-over-year decline in earnings was primarily due to generic competition for branded Lidoderm. Strong generic revenues contributed to the top-line beat. We are impressed by Endo increasing its guidance further. We are also positive on the impending acquisition of Auxilium Pharmaceuticals. The deal is expected to boost the company s sales and earnings growth from We are pleased with the company s effort to advance its pipeline. Based on these factors, we upgrade our recommendation on the stock to Outperform with target price of $ Below Average Type of Stock Large-Growth Industry Med-Drugs Zacks Industry Rank * 77 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 767 A 715 A 585 A 2,617 A A 719 A 764 A 778 E 2,856 E E 739 E 726 E 925 E 3,155 E ,281 E Note: Qtrly nos may not add up to annual nos due to rounding off Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $1.09 A $1.42 A $1.34 A $0.96 A $4.79 A 2014 $0.92 A $1.06 A $1.15 A $1.11 E $4.24 E 2015 $1.24 E $1.24 E $1.15 E $1.01 E $4.64 E 2016 $4.99 E Note: Qtrly nos may not add up to annual nos due to rounding off Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Endo International plc, a global specialty healthcare company, came into existence following the acquisition of Paladin Labs by Endo. Endo International reports results through four segments Branded Pharmaceuticals (U.S.), Generic Pharmaceuticals (U.S.), Devices and International Pharmaceuticals from the first quarter of The company s key products are Lidoderm, Opana ER, Frova and Voltaren Gel. The portfolio has expanded following the acquisition of Paladin Labs. Major drugs in the Branded Pharmaceuticals (U.S.) segment include Lidoderm, Opana ER, Voltaren Gel, Frova, Supprelin LA and Fortesta Gel. The segment deals with high-value branded pharmaceuticals drugs that satisfy the unmet needs of patients. Generic Pharmaceuticals (U.S.): The division focuses on manufacturing and distributing generic and over-the-counter drugs (tablets, capsules, liquids, suspensions, creams and ointments). Endo expects generic products to grow at low double digits. The acquisition of Boca Pharmacal is expected to be a strategic growth driver. The Devices unit is a diversified supplier of medical devices and procedures for pelvic health. Endo expects to achieve accelerated growth in its Men s Health subgroup apart from increasing efficiency and managing the declining sales of its Women s Health products. International Pharmaceuticals: The newly formed division aims at providing quality products to patients across the globe in competitive and emerging markets. The segment recorded sales of $24.8 million in the first quarter of 2014 on the back of sales generated from the Paladin Labs business. Following the acquisition of Paladin Labs, Endo is aiming at strengthening its presence in Ireland. Currently, the company is in the process of recruiting senior staff in its Ireland-based business Endo Ventures. It is also investing in infrastructure to expand its capacity in the region. The impending acquisition of Mexican company, Grupo Farmaceutico Somar, will further strengthen the segment. Until Dec 31, 2013, the company reported results through three segments - Endo Pharmaceuticals (53.3% of total revenues in 2013), Qualitest (27.9% of 2013 revenues) and American Medical Systems (18.8% of total revenues in 2013). The company has completed several major acquisitions since In Feb 2014, Endo completed the acquisition of Boca Pharmacal and Paladin Labs. In Jun 2011, Endo purchased American Medical Systems. In Dec 2010, Endo purchased Qualitest Pharmaceuticals. In Nov 2010, Endo Pharma acquired Penwest Pharmaceuticals Co. and in Jul 2010 the company acquired HealthTronics Inc. The HealthTronics segment was subsequently divested in Feb In Jun 2014, Israel s Trendlines Group completed the purchase of intellectual property developed within the framework of the R&D deal inked with Endo in In Aug 2014, Endo acquired DAVA Pharmaceuticals to strengthen its generic unit. Endo has its global headquarters in Dublin and U.S. headquarters in Malvern, PA. Equity Research ENDP Page 2

3 REASONS TO BUY RISKS Acquisition to Drive Growth: We are impressed by Endo s growth-by-acquisition strategy. Endo is set to acquire Auxilium Pharma. The transaction is valued at approximately $2.6 billion, including the repayment and assumption of debt. The company expects the deal to close in the first quarter of The Auxilium Pharma acquisition will boost Endo s portfolio with products like Xiaflex (Dupuytren's contracture and Peyronie's disease), Testopel (testosterone replacement therapy) and Stendra (erectile dysfunction). The deal is expected to boost the company s sales and earnings growth from 2015 In Aug 2014, Endo acquired DAVA Pharmaceuticals to strengthen its generic unit. In Feb 2014, Endo acquired Paladin Labs for approximately $2.7 billion in a cash and stock deal. The move is in line with Endo s efforts to expand and counter declining revenues due to generic competition. The deal has strengthened Endo s portfolio substantially. In Feb 2014, Endo acquired privately held generics company, Boca Pharmacal, for $225 million in cash. In Mar 2012, Endo joined forces with Mersana Therapeutics Inc. for the development of next-generation antibody-drug conjugates. Moreover, in Jun 2011, Endo purchased American Medical Systems, a leading pelvic-health devices provider, for $2.9 billion in cash. Endo acquired companies like Qualitest Pharmaceuticals and Penwest Pharmaceuticals Co. We believe that these acquisitions and deals are steps in the right direction and would help counter the generic threat faced by Endo. Impressive Performance from Generic Pharmaceuticals Segment: The Generic Pharmaceuticals (U.S.) segment at Endo has been performing well due to new product approvals. Net sales of generic offerings jumped 74% year over year to $319.4 million in the third quarter of 2014 on the back of increased demand and launch of the authorized generic version of Lidoderm in May The addition of Boca Pharmacal also aided segmental sales during the quarter. The acquisition of DAVA Pharma has strengthened the segment further. It should benefit from high-valued branded drugs slated to go off patent in the next few years. Solid Earnings Beat Record: Endo reported higher-than-expected earnings in the third quarter of This is the 13 th consecutive earnings beat at Endo. Following the third-quarter results, the company upped its 2014 outlook for both revenues and earnings. With a major part of its top line likely to be exposed to generic competition in the next few years, Endo is looking toward cost-cutting initiatives to drive the bottom line. The company is seeking to lessen the impact of the genericization of key products by reducing costs. In Jun 2013, the company had announced that it will trim its work force by approximately 15%. The move is expected to result in annual savings of approximately $325 million. The company sold its struggling HealthTronics segment in Feb The move is aimed at increasing efficiencies. Moreover in Jun 2014, Endo sold its early-stage drug discovery portfolio to AsanaBioSciences as a part of its portfolio optimization process. Furthermore, Endo stands to benefit from lower tax rates thus aiding its long-term growth prospects. Underperforming Segments Concerning: Continued below-par performance of the Devices segment and Branded Pharmaceuticals division declined 34% year over year in the third quarter of 2014 mainly due to lower sales of painkillers Lidoderm (down 72%) and Opana ER (down 17%) resulting from generic competition could prompt us to revisit our recommendation. Pipeline Setbacks: Any pipeline setback related to its late-stage pipeline candidates (including pain candidate buprenorphine HCl buccal film) could cause us to revisit our recommendation. Equity Research ENDP Page 3

4 RECENT NEWS Endo/BioDelivery File Regulatory Application for Pain Drug Dec 23, 2014 Endo Pharmaceuticals Inc. along with its partner BioDelivery Sciences International, Inc. announced the submission of a new drug application to the FDA for buprenorphine HCl buccal film. The companies are looking to get buprenorphine HCL buccal film approved for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. Buprenorphine HCl buccal film is being developed using BioDelivery s patented BioErodible MucoAdhesive (BEMA) drug delivery technology and will be commercialized through a global license and development agreement between Endo and BioDelivery. Endo to Acquire Rights to Testosterone Nasal Gel Natesto Nov 24, 2014 Endo International announced that it has entered into an agreement to acquire the rights to Natesto (testosterone nasal gel) from Trimel BioPharma SRL, a wholly owned subsidiary of Trimel Pharmaceuticals Corp. Endo expects to complete the transaction in early The FDA has cleared Natesto in May 2014 for replacement therapy in males for conditions associated with a deficiency or absence of endogenous testosterone including primary hypogonadism (congenital or acquired) and hypogonadotropic hypogonadism (congenital or acquired). As per the terms of the agreement, Endo will acquire sole and exclusive commercial rights to Natesto in the U.S. and Mexico. Endo will collaborate on all regulatory and clinical development activities with Trimel. Under the terms of the agreement, Endo will make an upfront payment of $25 million to Trimel. Moreover, Trimel would be eligible to receive additional payments upon the achievement of certain regulatory and sales milestones. Trimel will undertake the responsibility of manufacturing and supplying Natesto, while Endo will pay a tiered supply price for the drug. Endo International Beats on Earnings and Sales, View Up Nov 5, 2014 Endo International s third-quarter 2014 earnings of $1.15 per share beat the Zacks Consensus Estimate of $0.99 but decreased 14% from the year-ago period. The year-over-year decline in earnings was primarily due to generic competition for branded Lidoderm. Revenues came in at $763.9 million in the third quarter of 2014, up 16%. Revenues were well ahead of the Zacks Consensus Estimate of $718 million. Following the completion of the Paladin Labs acquisition earlier this year, the company has started reporting results through four segments Branded Pharmaceuticals (U.S.), Generic Pharmaceuticals (U.S.), Devices and International Pharmaceuticals from the first quarter of The Third Quarter in Details Revenues were hurt by lower sales of Endo s painkillers, Lidoderm (down 72%) and Opana ER (down 17%). Reduced sales of the drugs were primarily responsible for a 34% decline in quarterly Branded Pharmaceutical revenues to $240.9 million. Lidoderm sales were hurt by generic competition. Equity Research ENDP Page 4

5 Endo reported generic product net sales of $319.4 million in the quarter, up 74%. The addition of the erstwhile Boca Pharmacal s (acquisition completed in Feb 2014) and DAVA Pharmaceuticals (acquisition completed in Aug 2014) products contributed to higher segmental sales. Endo launched an authorized generic version of Lidoderm in May 2014 through its generic unit. The move also led to higher segmental sales. Revenues from the Devices segment came in at $109.8 million in the reported quarter, down 1% year over year. While sales from the prostatic hyperplasia therapy sub-group increased 8%, the other two sub units women's health (down 10%) and men s health (down 2%) performed disappointingly. The newly formed International Pharmaceuticals division contributed $93.8 million to total revenues in the third quarter compared with $72 million in the preceding quarter. In a bid to expand further, Endo acquired Mexico-based private company Grupo Farmaceutico Somar in Jul Outlook Raised Following the release of better-than-expected third-quarter results, Endo increased its guidance for The company now expects earnings per share for 2014 in the range of $4.10 to $4.25 (old guidance: $4.00 $4.20). The company now expects revenues in the range of $2.80 billion to $2.88 billion (old guidance: $2.78 billion to $2.86 billion). VALUATION Endo s third-quarter 2014 earnings of $1.15 per share beat the Zacks Consensus Estimate of $0.99 but decreased 14% from the year-ago period. The year-over-year decline in earnings was primarily due to generic competition for branded Lidoderm. Strong generic revenues contributed to the top-line beat. We are impressed by Endo increasing its guidance further. We are also positive on the impending acquisition of Auxilium Pharmaceuticals. The deal is expected to boost the company s sales and earnings growth from We are pleased with the company s effort to advance its pipeline. Based on these factors, we upgrade our recommendation on the stock to Outperform with target price of $ Endo s current trailing 12-month multiple is 19.6 compared to 18.7 for S&P 500. Based on 2015 earnings estimates, the stock is trading at 17.2x. Our target price is $ It is based on 20.7x our 2015 earnings per share estimate. Equity Research ENDP Page 5

6 Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Endo International plc (ENDP) Industry Average S&P Grifols (GRFS) Zoetis Inc. (ZTS) Salix Pharmaceuticals Ltd. (SLXP) N/M Ono Pharmaceutical Co., Ltd. (OPHLF) N/M TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Endo International plc (ENDP) Industry Average S&P Equity Research ENDP Page 6

7 Earnings Surprise and Estimate Revision History Equity Research ENDP Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of ENDP. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform %, Neutral %, Underperform 5.6%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Lopamudra Bhattacharya QCA Arpita Dutt Editor Pushpanjali Banerjee Reason for update 4Q14 Equity Research ENDP Page 8