Having realized that being overly reliant on a single product will only bring more pain, Endo Pharmaceuticals Holdings Inc. (ENDP), a market leader in pain management, will now be foraying into niche markets like urology, oncology and endocrinology, following the acquisition of Indevus Pharmaceuticals. Indevus, which ceased trading at market close on March 23, has now become a wholly owned subsidiary of Endo.

Endo's core business is developing branded and generic prescription pharmaceuticals used primarily to treat and manage pain. For the full year ended December 31, 2008 Endo derived 93% of its net sales from branded products while non-branded generic portfolio accounted for 7% of net sales.

The company's branded products include Lidoderm, Opana ER and Opana, Percocet, Frova and Voltaren Gel. Endo is highly reliant on Lidoderm, a topical patch prescribed for the relief of pain associated with post-herpetic neuralgia. (Post-herpetic neuralgia, or PHN, is a painful, chronic condition that can occur following shingles, a viral infection). Last year, Lidoderm made up 61% of the company's net sales.

According to Endo, its flagship product Lidoderm, which was launched in September 1999, is covered by five patents, with expiration dates from March 2009 to October 2015.

Lidoderm is also used for a number of off-label conditions, including low back pain, osteoarthritis, and diabetic neuropathy. A significant percentage of Lidoderm prescriptions are for off-label use, according to analysts. In January 2007, Endo received a subpoena from the Department of Health and Human Services requesting documents regarding the company's knowledge of off- label use of Lidoderm. The company is co-operating with the Government investigations.

It cannot be denied that Lidoderm's growth rate is slowing. Net sales of the patch were $765.1 million in 2008, $705.6 million in 2007 and $566.8 million in 2006. However, the company's pain drugs Opana ER and Opana appear positioned to reduce the impact of a Lidoderm knockoff.

Opana ER and Opana launched during the second half of 2006 and indicated for acute pain such as post-surgery pain, fetched sales of $180.4 million in 2008, $107.1 million in 2007 and $6.8 million in 2006. The drugs accounted for 14% of Endo's net sales in 2008.

However, the sales growth of other drugs -- Percocet indicated for the treatment of moderate-to-moderately severe pain and Frova approved for menstrual migraines have remained stagnant.

Seeking to diversify from pain management, Endo acquired Indevus Pharmaceuticals, a specialty pharmaceutical company engaged in developing products to treat conditions in urology and endocrinology, for $637 million. The acquisition was completed on Monday.

The acquisition added six FDA-approved products of Indevus to Endo's roster. Indevus' products include Sanctura and Sanctura XR for the treatment of overactive bladder; Supprelin LA for treating early onset of puberty in children; Vantas for the palliative treatment of advanced prostate cancer; Delatestryl indicated for treatment of male hypogonadism, a state of testosterone deficiency and Hydron Implant, a drug delivery device. As recently as last month, Valstar, a bladder cancer therapy was approved by the FDA for reintroduction into the U.S.

Valstar, which was approved by the FDA in 1998, as a treatment for bladder cancer patients who have failed BCG therapy and are not candidates for bladder removal, was withdrawn from the market in 2002 due to a manufacturing problem involving impurity issues in the original formulation and was placed on the FDA Drug Shortages List.

Now that the manufacturing issues related to Indevus' Valstar have been sorted out and the FDA has approved its reintroduction, Endo begins to commence marketing Valstar during the second half of 2009.

The most advanced compounds of Indevus, which are under development, include Nebido for hypogonadism, PRO 2000, a vaginal microbicide for HIV prevention and Octreotide Implant for Acromegaly and Carcinoid Syndrome.

Nebido, an intramuscular injection for the treatment of male hypogonadism, is currently under FDA review and the regulatory agency is expected to decide on the product by September 2009. The product is already approved in Europe and is marketed by BayerSchering.

A phase III Phase trial for Octreotide Implant to treat Acromegaly was initiated last October. Acromegaly is a hormonal disorder that causes enlargement of certain bones, cartilage, muscles, organs and other tissues, leading to serious illness and potential premature death.

While it is true that the acquisition is a big step for Endo to diversify into new therapeutic areas, beyond pain, analysts have mixed views on the deal's prospects.

Indevus has incurred substantial net losses over the past five fiscal years. The company's accumulated deficit as of December 31, 2008 was nearly $650 million.

According to Ian Sanderson, an analyst at Cowen & Co., Indevus' products have only modest sales potential of about $100 million each. In addition, Indevus' Nebido and Octreotide face substantial developmental risks and uncertainties besides pending regulatory reviews, as any pharmaceutical compound would face. In a research note to investors, the analyst noted that incremental investments will be required to generate meaningful sales, and operating synergies will be tough to realize.

Leerink Swann & Co analyst Gary Nachman, who has an optimistic view about the deal's prospects, believes that Indevus' products could help Endo reach a broader primary care audience and boost the company's sales.

Endo's fiscal year ends on December 31. The transaction is expected to be dilutive to Endo's earnings in 2009 and accretive in 2010.

Analysts who are bullish on Endo's prospects have raised their forecasts over the past 90 days, pushing the first-quarter consensus earnings estimate up 4 cents to $0.63 per share.

The company expects 2009 net sales to be between $1.39 billion and $1.44 billion, and adjusted earnings per share for the year to range between $2.59 and $2.67. Analysts polled by Thomson Reuters expect the company to earn $2.64 per share on revenue of $1.43 billion. In 2008, Endo posted net income of $261.7 million or $2.12 per share, and net sales of $1.26 billion.

Since its January high of $26.14, ENDP has retraced nearly 34%. So far, the stock has hit a 52-week low of $13.87 and 52-week high of $26.56. ENDP is currently trading at $17.39, up 0.69% on a volume of 427,601 shares.

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