No Pain, No Gain

11/18/2005 12:00 am EST

Focus:

Stephen Biggar

Director, Product Strategy, Argus Research Corporation

Endo Pharmaceutical was chosen as the latest "stock of the week" from Standard & Poor’s  The Outlook. Says Stephen Biggar, "This outfit has a brimming pipeline, locked-in market, and an undervalued stock. What’s not to like?" Here's his review.

"As the population ages, we expect an increase in demand for pain-management therapies for both chronic conditions and surgical procedures. We think Endo Pharmaceuticals Holdings (ENDP NASDAQ), a leading provider of pain-management drugs, will benefit from the growth we see in this market.

"In the near term, we expect continued strong results based primarily on sales of Lidoderm and oxycodone. Over time, we think Endo's pipeline drugs and additional research and development efforts will provide longer-term revenue and earnings growth. In our view, the cash generated from sales of oxycodone will enable the expansion of drug-development efforts and broaden the product portfolio.

"We forecast revenue growth of about 36% in 2005, with growth slowing to 7% in 2006. The addition of oxycodone sales in the second half of 2005, coupled with the expiration of 180-day exclusivity, distorts results somewhat, in our view. We believe that Endo will continue to effectively manage its expenses while building its sales force. EBITDA margins should widen in 2006 due to cost-containment strategies, coupled with lower SG&A expenses as a percentage of sales.

"Branded products accounted for 69% of sales in 2004, with generics accounting for the remainder. Endo's primary branded products include Lidoderm, Percocet, Frova, and DepoDur. The outfit's generic products are led by oxycodone, a generic version of Purdue Pharma's OxyContin. While several competitors also market generic OxyContin, we think Endo's niche focus on pain management and physician relationships will enable it to maintain a leading market share for oxycodone.

"While we expect the company's current product offerings to drive growth in the near term, we think Endo's pipeline portfolio of eight mid-to-late-stage products will contribute significantly to future growth. We forecast oxymorphone sales of $12 million in 2006. Endo is currently testing two existing products, Frova and Lidoderm, for additional indications. Frova is in Phase III testing for menstruation-related migraines, while Lidoderm is in Phase II testing for lower back pain. Overall, we expect the launch of six new products over the next four years.

"We believe that the overall pain-management market offers a large and attractive opportunity. Our 12-month target price of $35 implies over 30% potential upside from current levels, and is supported by our discounted cash flow model as well as our peer group analysis. Given our positive view of Endo's growth prospects, we have a 5 STARS (strong buy) recommendation on the shares."

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