Endo Pharma to Take Over AMMD - Analyst Blog

In a bid to diversify its business and bolster its urology portfolio, Endo Pharmaceuticals Holdings Inc. (ENDP), a US-based specialty healthcare solutions company which develops branded products and specialty generics, will purchase American Medical Systems (AMMD), a leading pelvic-health devices provider, for $2.9 billion or $30.00 per share in cash.

The offer price is 34% above the April 8, 2011, closing price of American Medical. The $2.9 billion consideration includes the assumption of a $312 million debt by Endo Pharma. The deal, expected to close in the third quarter of 2011, has been approved by the boards of both companies.

Endo Pharma anticipates the deal to be accretive to its adjusted earnings with immediate effect following closure. Moreover, the deal is expected to boost Endo Pharma's 2012 and 2013 adjusted earnings by $0.60 and $0.80 per share, respectively.

The merger is also expected to result in cost savings of at least $50 million by 2013. The synergies relate to procurement, manufacturing and selling, general and administrative costs. The merged entity is expected to end 2011 with revenues (on an adjusted basis) of approximately $3 billion. Following the closure of the deal, approximately 4,000 employees are expected to be employed in the combined company.

We note that the impending purchase of American Medical is the fourth major acquisition for Endo Pharma over the last one year. Endo Pharma completed three major acquisitions in 2010 to bolster its business. In December 2010, Endo acquired privately held generic company Qualitest Pharmaceuticals for $1.2 billion. During 2010, Endo Pharma also bought Penwest Pharmaceuticals Co. and HealthTronics Inc., a provider of urology products and services.

We believe that these acquisitions along with the impending purchase of American Medical are steps towards countering the loss of revenues due to the generic threat (especially to its lead drug Lidoderm) hanging over Endo Pharma.

2011 Outlook Backed

Endo Pharma, which has sufficient funds to finance the American Medical purchase, reiterated its 2011 revenue and adjusted earnings guidance (on a standalone basis). The company expects to earn in the range of $4.20-$4.30 per share on revenues of $2.35-$2.45 billion. We believe Endo Pharma, with its strong portfolio and continuous efforts to expand and diversify its business, will easily achieve the guidance. The Zacks Consensus Estimate for 2011 hints at earnings of $4.30 per share on revenues of $2.36 billion.

Our Recommendation

Currently, we have a Neutral stance on the stock in the long run, which is supported by the Zacks #3 Rank (short-term Hold recommendation) carried by the company.