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By Jacob Wolinsky. Originally published at ValueWalk.
Endo International plc – Ordinary Shares (ENDP) shares are crashing and when I say crashing I do not mean one percent or two percent or five percent or ten percent but at the time of this writing 38 percent. The biotech company is having a Valeant style crash and like Valeant ENDP is a big hedge fund hotel stock and it is likely killing returns for many, unless there is a big rebound soon.
The pain, however, is especially acute for a lot of hedge funds, because as Goldman reminds us after the spectacular blow ups of Valeant and Allergan, and recently, the plunge in uber hedge fund hotel AAPL, Endo itself is one of the stocks that has the highest hedge fund concentration in the S&P.
Endo International plc – Ordinary Shares
Who are these hedge funds? Most of the usual suspects including Visium (which is also having other issues), Viking Global (more pain), Paulson (shocker), Brahman, MSD and of course countless bank prop desks as listed below.
So if we report next week that the "smart money outflows" have continued for a record 15th week, we will know who the weekly scapegoat is for the latest redemption deluge as panicking hedge funds are forced to liquidate other assets to cover for their massive P&L blow ups in ENDP this morning.
Endo International plc – Ordinary Shares
The sell side is hurrying to downgrade to play catch up, here is what they are saying (FWIW):
SIG
Guidance cut was widely expected as ENDP has faced a series of incremental setbacks in its brand and generics business this year. However, its 23% reduction to 2016 EPS was far beyond what we expected, owing mainly to a massive deterioration in its older generics. While management did an admirable job detailing changes in assumptions, it is difficult to reconcile past descriptions. Thus, while we come out near the high end of the revised range, the level of uncertainty remains high. More importantly, the results now lean even more heavily on a few key products, some of which could decline in the 2017-18 timeframe.
William Blair
On the call, management noted steps it is taking to return the company to a growth profile in the future. This involves continuing investment in U.S. branded growth drivers of Xiaflex and Belbuca, a restructuring of the generics product and R&D portfolio and manufacturing operations that will result in approximately $60 million net run-rate cost savings by 2017, with approximately $10 million recognized in 2016 (affecting about 740 employees). The company reiterated the goal of launching about 30 generics products from its combined pipeline, discontinuing 60 legacy products (which should affect revenues by $20 million in 2016 and $90 million in 2017) and filing approximately 25 to 30 ANDAs.
RBC
We think ENDP needs to look at strategic alternatives at this point – there are equity combinations that could make sense. The challenge that ENDP now faces is that current P&L headwinds will take time to get through and in the interim, leverage effectively moves higher towards 5x on lower EBITDA with few catalysts over the near-term. That leaves little financial flexibility and an equity value (ie. currency) that will be more depressed tomorrow. In other words, the greatest opportunity to realize value over the near term, in our view, would be to pursue an equity tie up with another company. By doing so, ENDP could strengthen the generics platform in a sector that we strongly think needs to consolidate.
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Very simply, the FDA is ramping up approval activity, and as more generic products come to market, we expect to see greater competition to existing base business revenue across the sector.
JPMorgan
Endo reported in-line 1Q results but more significantly revised 2016 guidance well below expectations due primarily to greater than expected pressures in its legacy generics business. We view this update as highly disappointing, particularly the rapid deterioration of Endo’s legacy generic portfolio, and believe it will take several quarters for the company to restore confidence in this revised outlook.
Stifel
As preannounced in March, ENDP reported revenues of $963.5bn in 1Q16 (Cons. $960.3mn) with Adjusted EPS of $1.08 (Cons. $1.05), with all segments slightly above expectations. However, while the Street was expecting a reduction in guidance, ENDP took a larger-than-expected reset with revenue guidance falling to $3.87-4.03bn (from $4.32-4.52bn), Gross margin of 59-60% (from 63-65%) and Adjusted EPS of $4.50-4.80 (from $5.85-6.15). This reflects several late-1Q16/early-2Q16 developments that meaningfully changed the outlook—namely earlier V-Gel generic entry, pricing pressure in Legacy Qualitest business from consortium buying power, aggressive competition, and delays in FDA actions on its 505(b)(2) products.
