We are reverting to a Neutral recommendation on
Endo Health Solutions
) from Underperform as we believe that the stock is fairly valued
at current levels. Our target price is $32.00. The stock carries
a Zacks Rank #3 (Hold) in the short run.
Why the Upgrade?
In Feb 2013, Endo Health reported higher- than- expected earnings
in the final quarter of 2012 on the back of reduced costs. Endo
Health's fourth quarter 2012 adjusted earnings of $1.62 per share
beat the Zacks Consensus Estimate of $1.56.
However, the company reported lower- than- expected revenues in
the final quarter of 2012, hurt by reduced sales of painkiller
Opana ER. Revenues came in at $801 million, flat year over year,
but well short of the Zacks Consensus Estimate of $808
Endo Health maintained the guidance for 2013, issued by it in
Jan 2013. The US-based diversified healthcare company continues
to expect adjusted earnings per share for 2013 in the range of
$4.40-$4.70 per share. Our 2013 earnings estimate is well within
the guidance range provided by the company. Endo Health continues
to expect to end 2013 with revenues in the range of $2.80-$2.95
billion. We expect the entry of a generic competitor,
), for Endo Health's lead drug Lidoderm in Sep, to hurt the
latter's 2013 sales.
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Moreover, Opana ER is already facing generic competition.
Moreover, generic threat looms over many other key drugs at Endo
Health. Patent disputes and entry of generics could weaken the
company's portfolio substantially.
We believe all the negative news is already reflected in the
stock price, and hence upgrade the stock to Neutral from
Other Stocks to Consider
Favorably placed stocks in the pharma sector include
Avanir Pharmaceuticals, Inc.
). Both companies carry a Zacks Rank #2 (Buy) and are worth