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Morningstar | Endo Possesses Few Positives on the Horizon

Despite its past executive leadership changes, Endo faces a number of significant challenges. The generics segment continues to see considerable competition and increased customer buying power. The branded segment has a number of products with declining sales with a limited pipeline to offer future growth opportunities. Moreover, the firm's ongoing mesh litigation payments, potential liabilities from government investigations into opiod abuse, and debt burden make bankruptcy a plausible scenario while preventing acquisition opportunities to expand the pipeline. With little internal research and development, we think Endo's mixed acquisition record creates future uncertainty. The merger with Paladin Labs mimics other tax inversions in the industry and allowed Endo to relocate to Ireland and drive its long-term tax rate below 20%, down from 30%. However, many of the quick value-creating actions, such as cost-cutting and the tax rate reduction, have already been implemented, and future value creation will depend on Endo's ability to identify and integrate attractive acquisitions. We have concerns about Endo's M&A strategy, however. We question the $2.6 billion acquisition of Auxilium following Endo's recent impairments of certain assets acquired from the deal. Additionally, we're skeptical of Endo's $8 billion acquisition of Par Pharmaceutical, which does not have meaningful competitive advantages in the generic drug industry, in our view.We also believe Endo's heavy reliance on the U.S. pain market puts it in a challenging position. Pain is slightly more attractive than other primary care indications, since it includes many topical, transdermal, or abuse-deterrent products that are more challenging to manufacture and prove bioequivalence, but it is still facing pricing pressure from payers and increased generic penetration as well as government initiatives to reduce opioid abuse. Lifecycle management products are facing increased scrutiny as payers are unwilling to pay branded prices for products with only slight efficacy or convenience benefits over generic options.