ENDP - Endo Health Solutions Inc.

[giofranchi]

Endo Completes Acquisition of Specialty Generics Company Boca Pharmacal

 

MALVERN, Penn., Feb. 3, 2014 /PRNewswire/ --

•Unique Generics Product Portfolio, Attractive Pipeline, Builds On Qualitest's Strength In Controlled Substances

•Transaction Expected To Be Immediately Accretive To Endo's Adjusted Diluted EPS

 

Endo Health Solutions (Nasdaq: ENDP) today announced that its Qualitest subsidiary has completed the acquisition of privately held Boca Pharmacal, a specialty pharmaceutical company, for approximately $225 million in cash.  Boca Pharmacal is a specialty generics company that focuses on niche areas, commercializing and developing products in categories that include: controlled substances, semisolids, and solutions.  Boca Pharmacal's commercial footprint and R&D pipeline is expected to be a strong complement to Qualitest. The transaction will be financed with Endo's current cash on hand.

 

 

Gio

 

[giofranchi]

Endo Completes Divestiture Of HealthTronics

 

MALVERN, Pa., Feb. 3, 2014 /PRNewswire/ -- Endo Health Solutions (Nasdaq: ENDP) today announced that it has completed the previously announced divestiture of HealthTronics to Altaris Capital Partners, LLC for an upfront cash payment of $85 million, subject to cash and other working capital adjustments. In addition, Endo received rights to additional cash payments of up to $45 million based on the future operating performance of HealthTronics for a total consideration of up to $130 million.

 

The closing of this transaction and the earlier announced sales of HealthTronics' anatomical pathology business and IGRT business completes Endo's full divestiture of all HealthTronics businesses.

 

 

Gio

 

[giofranchi]

Endo Announces 2013 Non-Cash Charges

 

MALVERN, Pa., Feb. 19, 2014 /PRNewswire/ -- Endo Health Solutions (Nasdaq: ENDP) today announced that it has completed its annual goodwill and in-process research and development (IPR&D) impairment analysis for 2013 and plans to record in fiscal 2013, a pre-tax, non-cash asset impairment charge of approximately $495 million, primarily related to goodwill attributable to the company's acquisition of American Medical Systems. 

 

During the fourth quarter of 2013, the company also recorded a pre-tax, non-cash charge of approximately $316 million, to increase the company's product liability reserve to approximately $520 million for all known, pending and estimated future claims primarily related to vaginal mesh cases.  The change in the accrual for product liability claims is primarily associated with the company's ongoing evaluation of American Medical Systems' vaginal mesh litigation, including the inherent uncertainty of this litigation and potential settlement costs.

 

The non-cash charges will not affect the company's 2013 adjusted financial results; however, 2013 reported (GAAP) earnings per share are now expected to be materially below previously announced guidance of $0.95 to $1.10.

 

 

Gio

 

[PJM]

Gio,

 

i don't disagree. Have you invested in Endo at these prices - its not that cheap on a p/e basis, but if they are going to do a bunch of acquisitions at reasonable prices and tax savings, etc seems could be profitable. But its not like the story is not well understood by the market already.

 

No, I bought ENDP at $37 and never added more shares… Actually, I sold some. Of course, I am waiting for a correction, hoping there will be one in the near future…

 

Well, just the day before yesterday ENDP was up 6% in a single day… doesn’t really look like the market has understood the story behind the company very well, does it?!

 

It is the singer, not the song

--The Rolling Stones

 

Just like in music, in business too what really matters are the people. Henry Ford said: “As soon as I saw Mr. Rockefeller’s face, I knew what had made the Standard Oil Company”. Exactly. Don’t get me wrong: I know very well what Mr. Buffett says about the quality of a business and about the quality of management… But I am not talking about the quality of management, I am talking about the quality of owners… Those are two completely different things. My idea is simply that great business owners put themselves in the right businesses too. Precisely the same way Mr. Jagger chooses / writes the right song! :)

 

The problem with compounders is not that the market has not understood “their stories”. The problem is the market simply has not the patience nor the discipline to stay with them. And it will never have! It is only in a 10 – 15 years timeframe that they are almost sure of outperforming, but the market looks out only to the next year, or to the next two years at the maximum! That’s why compounders, I mean companies that will be able to grow their net worth at high rates for many years into the future, probably will always be the most fertile soil for irrational pricing and valuation mistakes.

And I think those with the patience and the discipline to stick with them will in time reap great rewards.

 

Time is on my side

--The Rolling Stones

 

Gio

 

When you say you are waiting for correction, what does that mean? ENDP is not a traditional value investing candidate but more of a bet on the management or say the compounders. In this case, what valuation metrics are you using to define the correct price point of entry or exit?

 

Your thoughts are much appreciated.

[giofranchi]

When you say you are waiting for correction, what does that mean? ENDP is not a traditional value investing candidate but more of a bet on the management or say the compounders. In this case, what valuation metrics are you using to define the correct price point of entry or exit?

 

Your thoughts are much appreciated.

 

I think it is very easy and straightforward: both for VRX and for ENDP I look at “Adjusted Diluted Cash Earnings Per Share”. And I feel quite comfortable to add to my holdings of both companies, when their share prices trade at around 12x ADCEPS.

In 2013 ENDP’s ADCEPS have been around $4.25. ENDP has increased Sales at a CAGR of 22% for the last 5 years. Assuming that 2014 ADCEPS will be 20% higher than in 2013, they will probably be around $5.1. Therefore, I will gladly add at a price of around $62. Yesterday ENDP’s share price closed at $75.29. When I talk about a correction, I mean I hope its share price might come down by ($75.29 - $62) / $75.29 = 17.65%, around 20%.

I don’t know if I ever will see ENDP’s share price come down by as much as 20% (though I think anything fluctuates and can come down significantly), but, if it ever does, I will be ready to act. :)

 

Gio

 

[giofranchi]

what valuation metrics are you using to define the correct price point of entry or exit?

 

Ah! By the way, I don’t have a clear exit price… I almost never sell…  ;)

 

Gio

 

[Liberty]

When you say you are waiting for correction, what does that mean? ENDP is not a traditional value investing candidate but more of a bet on the management or say the compounders. In this case, what valuation metrics are you using to define the correct price point of entry or exit?

 

Your thoughts are much appreciated.

 

I think it is very easy and straightforward: both for VRX and for ENDP I look at “Adjusted Diluted Cash Earnings Per Share”. And I feel quite comfortable to add to my holdings of both companies, when their share prices trade at around 12x ADCEPS.

In 2013 ENDP’s ADCEPS have been around $4.25. ENDP has increased Sales at a CAGR of 22% for the last 5 years. Assuming that 2014 ADCEPS will be 20% higher than in 2013, they will probably be around $5.1. Therefore, I will gladly add at a price of around $62. Yesterday ENDP’s share price closed at $75.29. When I talk about a correction, I mean I hope its share price might come down by ($75.29 - $62) / $75.29 = 17.65%, around 20%.

I don’t know if I ever will see ENDP’s share price come down by as much as 20% (though I think anything fluctuates and can come down significantly), but, if it ever does, I will be ready to act. :)

 

Gio

 

Hi Gio,

 

I have a question for you regarding valuation.

 

Does what you wrote above work in reverse? I mean, if you were able to get in at the price you want, and then the stock rose to become exactly valued like it is today based on the adjusted cash earnings at the time, would you sell? In other words, is the fact that you wouldn't buy today the same as you wouldn't hold at that valuation?

 

If you wouldn't sell, is that so different from buying at today's price? You have a lower margin of safety, of course, but if you have enough trust in the company's future growth to keep holding at that multiple, then maybe you can buy higher and just let time be your margin of safety (ie. even if you buy at a higher valuation, in a year or two it'll have grown into it nicely and years after that are the same as if you had bought at a lower valuation at that later time -- in other words, you sacrifice a certain amount of time in exchange for the certainty of buying shares in a business you find good enough to own).

 

Does this make any sense? Sorry if I'm being unclear, it's something I've been thinking about a lot when looking at these high-quality compounders that almost never become cheap enough... I don't want to be the guy who never bought Berkshire decades ago because he was waiting for the price to fall a lot. Sometimes you might be better to just bite the bullet and pay up for quality, but I'm always afraid that I could be fooling myself thinking like that.

[Liberty]

A better way to put it:

 

If I had bought a year ago, would I be selling today? If not, is that so different from buying and holding today?

[giofranchi]

A better way to put it:

 

If I had bought a year ago, would I be selling today? If not, is that so different from buying and holding today?

 

Hi Liberty!

I agree with what you say.

 

But let’s make this distinction: a business that you own in its entirety and a business you own through the stock market. In the first case, I would buy it. Period. And hold it for the very long term. Sure that in the end the entry price would not affect my returns much. The second case, instead, is a little bit different… because you also have to deal with the nature of the stock market. And by its very nature everything that is quoted on an exchange is also volatile. There might be listed companies the price of which did nothing but rise, but they surely are the exception to the rule!

 

Therefore, I have come up with this “solution”: I am always invested in businesses I like and I think will compound capital at high rates for many years to come, but I also leave room to average down.

 

For each of those companies there is in my mind what I call the “offer you cannot refuse” point, at which I would require no more room to average down, and I would hold a full position in those companies. Depending on how far or how close their prices get to those “offer you cannot refuse” points, I respectively increase or shrink the room I leave to average down.

 

That’s basically why I am not selling my investments in ENDP or VRX, even if I am not adding more today.

 

I hope this helps. :)

 

Gio

 

[Liberty]

Thanks, Gio. A couple more questions if I may...

 

So you already own some. Did you get in at the relatively low multiple that you are now looking for, or do you now ask a lower multiple than your entry point to average down?

 

One thing I'm always afraid is I'll find a company that I think is really high-quality on all fronts, with the ability to keep compounding for a long time (ie. transdigm), but if I wait for a certain valuation before buying, it might only happen in a number of years, and at the rate they're compounding, a 12-13x multiple in 3-5 years will be a higher price than a 18-20x multiple today. And then there's the possibility that even in high volatility periods, it wouldn't go down very low (say not below 15x FCF/share). So now I'm back to the problem of the guy waiting for Berkshire to become very cheap 30 years ago, watching it become a multi-bagger..

 

That's why I'm curious about if you're comfortable holding these types of businesses at higher multiples, why not buy some there? I can understand how if you already have a big position, you tighten the standard to average down on more. But would you use the same rule for the initial position? Thanks.

[rogermunibond]

Liberty, I've wrestled with the same issues you are discussing.  Looked at TDG, CFX, POST, etc.  Psychologically it's anchoring that keeps me from buying more.  I look at the price/valuation it traded out when I first made my decision and don't move on it.  With ENDP, I tried to do it differently.  I bought back in the $30s at an uncomfortable valuation based on th premise that what they were doing was going to work.  The plan was laid out but they hadn't started on it yet.

 

It's worked out but I still have nagging doubts about the sustainability of the business model.  Low debt costs, tax arbitrage etc., are not competititve advantages with lasting moats.  They can all go away.

[giofranchi]

Hi Liberty!

Maybe with an example this gets a bit easier:

 

Let’s say for me a full position in ENDP is 10% of my firm’s portfolio.

 

Now,

Case 1) It is selling for 18-20x ADCEPS: I establish a 5% position, leaving a lot of room to average down;

Case 2) It is selling for 15x ADCEPS: I establish a 7% position, decreasing the room I leave to average down;

Case 3) It is selling for 12x ADCEPS: I establish a 9% position, with almost no room to average down;

Case 4) It is selling for 10x ADCEPS: I establish a full position.

 

How do I manage Case 3) and Case 4)? Of course, it depends also on my other holdings: if Case 4) becomes Case 1), thanks to an appreciation in price that is faster than ADCEPS growth, while another holding of mine hits a bump in the road and goes from Case 1) or Case 2) to Case 4); well, then I shift some capital from the first holding to the second one. After all, they both are great businesses with what I believe are very good prospects for compounding capital many years into the future… Therefore, why shouldn’t I shift some capital from the one I consider to be more expensive to the other that I consider cheaper?

 

Gio

 

[giofranchi]

It's worked out but I still have nagging doubts about the sustainability of the business model.  Low debt costs, tax arbitrage etc., are not competititve advantages with lasting moats.  They can all go away.

 

Well, this is your judgment about the business. I don’t think Liberty was asking “what do you think about ENDP?”. Instead, I think he was asking “given the fact ENDP is a great compounding machine, how would you invest in it? Would you wait for the price to go down? And what if the price never goes down?”. At least, that’s what I have understood! ;)

 

Gio

 

[rogermunibond]

No that's my editorializing.  :)

 

But I'd be curious what you think of the business model.  Low interest rates won't last.

[Liberty]

It's worked out but I still have nagging doubts about the sustainability of the business model.  Low debt costs, tax arbitrage etc., are not competititve advantages with lasting moats.  They can all go away.

 

In some ways, I'm not as comfortable with ENDP as with VRX for the following reasons:

 

Even after the Ireland inversion, it looks like they expect their tax rate to be around 20% for the foreseeable future. Valeant has a cash tax rate of something like 5%, if I remember correctly, so M&A can create more value that way.

 

ENDP doesn't yet have the big presence with cash-pay products in higher growth international markets that VRX has. It's their strategy to go there over time, but they haven't done much yet (Paladin has a few things in latin america and south-africa, but they're relatively small).

 

But what makes it more attractive than VRX to me:

 

Small size, earlier in the story for the same playbook. CEO was insider at VRX so knows as well as anyone how to do it. They've moved fast so far on reducing the SG&A and making smart acquisitions (at least it seems so to me).

[Liberty]

Hi Liberty!

Maybe with an example this gets a bit easier:

 

Let’s say for me a full position in ENDP is 10% of my firm’s portfolio.

 

Now,

Case 1) It is selling for 18-20x ADCEPS: I establish a 5% position, leaving a lot of room to average down;

Case 2) It is selling for 15x ADCEPS: I establish a 7% position, decreasing the room I leave to average down;

Case 3) It is selling for 12x ADCEPS: I establish a 9% position, with almost no room to average down;

Case 4) It is selling for 10x ADCEPS: I establish a full position.

 

How do I manage Case 3) and Case 4)? Of course, it depends also on my other holdings: if Case 4) becomes Case 1), thanks to an appreciation in price that is faster than ADCEPS growth, while another holding of mine hits a bump in the road and goes from Case 1) or Case 2) to Case 4); well, then I shift some capital from the first holding to the second one. After all, they both are great businesses with what I believe are very good prospects for compounding capital many years into the future… Therefore, why shouldn’t I shift some capital from the one I consider to be more expensive to the other that I consider cheaper?

 

Gio

 

Thanks, Gio. That's what I wanted to know.

[Phaceliacapital]

Gio, very interesting remarks. Thanks.

[Cunninghamew]

Liberty - you did not ask me the question, but I thought I would chime in bc I deal with that same problem.

 

A long time ago I built a list of awesome companies I would buy if they ever became cheap (TDG was actually one of them). Unfortunately, these companies never actually make it into my portfolio, because they are rarely cheap "at face value."  I started pondering if they would ever be in my portfolio, because in the big sell-offs (when these companies get real cheap) there are sooo many other companies that look a lot cheaper.

 

My problem (or so I think) was my distaste (or inability) to discount cash flows out for more than a few years.

 

Realizing that I would be missing out - I honestly just closed my eyes and forced myself to buy TDG.

 

Now that some time has passed, I am starting to think this was the right decision. I think someone on this board posted a Munger quote that essentially said, over a long holding period your return would match the companies return on invested capital.  With a company like TDG, you can get pretty comfortable that it has secular growth tailwinds, pricing power, good capital allocator at the helm and most importantly a runway to generate returns in excess of its cost of capital for a long period of time.

 

I also find it helpful to keep stupid tables around... for example, a matrix with your discount rate on one axis and growth in FCF on the other. I just use a perpetual DCF to back out implied FCF yields. So if you have a 10% required rate of return and the company is not growing than you should be only willing to purchase that company at a 10% FCF yield or less.  If you think the company can easily grow FCF at say 5% over a reasonably long time horizon and your discount rate is 10% than you should be willing to purchase that company at a 5% free cash flow yield. I know this board is about ENDP, but I will go back to TDG one last time. The have compounded FCF at about 15% over the last ten years. If your required rate of return was 20% per annum you would have been fine purchasing this stock anytime it traded at a FCF yield of just 5%.  That is obviously said with the benefit of hindsight.  <<< This is a very simplistic way of thinking, but tables like this help remind me that great companies shouldn't trade at valuations that look cheap on first glance >>>

 

I also think these two readings gave me the courage to purchase some compounders

 

* Valuation by Koller, Goedhart, Wessels  (this is a textbook)

* What Does a Price-Earnings Multiple Mean by Mauboussin / Callahan  (this is a white-paper)

 

The second paper has a great table at the end that relates PE multiples back to earnings growth and ROIC... with an assumed 8% cost of capital

 

 

 

 

 

 

[Liberty]

Thanks, Cunninghamew!

 

That's an interesting quantitative approach. I think what I've had most problem getting over is the qualitative mental block required to properly value some of these 'outsiders' type businesses.

 

Most of these are asset-light, they make lots of acquisitions, and they usually have leverage and complex financial structures.

 

If you look at them with the same lens as other businesses, they'll look expensive and unpredictable a lot of the time. Even Buffett sold his Capital Cities shares before buying in again when they needed money for the ABC deal, and he considered that first sale a mistake.

 

The real challenge becomes making sure that you've truly identified a business model and management team that can keep compounding the way they have in the past and let them run with the ball. If you sell every time they become a bit expensive, chances are you won't capture much of the value creation because you'll be out quickly and won't have a chance to get back in for a long time (if ever, depending on how low you want to get in). But at the same time, this can't become a free pass for overvaluation because that can create too much risk even with a very good business, so how expensive is too expensive? I'm kind of used to what sane multiples are on a lot of businesses, but I find it harder with these types of businesses, especially since they often don't have really comps..

 

That's why I've been tempted to just do a lot of work beforehand to try to identify these rare combinations of management + business model that can reliably compound value over the long term and then hold them whatever comes except if there's a change in management or strategy that I think spoils the sauce.

 

In hindsight, that was the right strategy with early berkshire, teledyne, capital cities, leucadia, fairfax, etc.. The question is, can we reliably identify similar businesses at earlier stages of development today? Hard to say. My biggest investments are still in other types of business (BAC and AIG being the two biggest), but I've started thinking that a kind of basket approach to these makes sense as long-term core holdings. It's a bit similar to what Gio has been doing, except that I'm not comfortable with all the names he likes and there are some that I like that I haven't yet created threads about here (I'm planning to, just need to finish doing more work on them first).

 

Anyway, I think this style of investing fits well with my personality, so I've been trying to learn more about it over the past couple years. Take all this with a grain of salt.

[giofranchi]

No that's my editorializing.  :)

 

But I'd be curious what you think of the business model.  Low interest rates won't last.

 

Well, I like the pharmaceutical business. What I don’t like about it are often too high and wasted R&D costs. Both VRX and ENDP are precisely tackling that Achilles hill, aren’t they?

Furthermore, Mr. De Silva is a very good entrepreneur. As such, he is taking advantage of low interest rates… while they last. When low interest rates disappear, I am confident enough he will find other opportunities to make the abundant free cash flow from pharma operations work egregiously for the benefit of shareholders. After all, that’s what great entrepreneurs do.

 

Gio

 

[giofranchi]

I think someone on this board posted a Munger quote that essentially said, over a long holding period your return would match the companies return on invested capital. 

 

Yeah! Sure! That someone was me! :)

 

Gio

[wbr]

No that's my editorializing.  :)

 

But I'd be curious what you think of the business model.  Low interest rates won't last.

 

Well, I like the pharmaceutical business. What I don’t like about it are often too high and wasted R&D costs. Both VRX and ENDP are precisely tackling that Achilles hill, aren’t they?

Furthermore, Mr. De Silva is a very good entrepreneur. As such, he is taking advantage of low interest rates… while they last. When low interest rates disappear, I am confident enough he will find other opportunities to make the abundant free cash flow from pharma operations work egregiously for the benefit of shareholders. After all, that’s what great entrepreneurs do.

 

Gio

 

The interest environment has been far less attractive in the past, but Outsider companies have still done extremely well. So I think it is reasonable to be confident that these businesses will do well, even if rates go up.

[Phaceliacapital]

The real challenge becomes making sure that you've truly identified a business model and management team that can keep compounding the way they have in the past and let them run with the ball. If you sell every time they become a bit expensive, chances are you won't capture much of the value creation because you'll be out quickly and won't have a chance to get back in for a long time (if ever, depending on how low you want to get in). But at the same time, this can't become a free pass for overvaluation because that can create too much risk even with a very good business, so how expensive is too expensive? I'm kind of used to what sane multiples are on a lot of businesses, but I find it harder with these types of businesses, especially since they often don't have really comps..

 

That's why I've been tempted to just do a lot of work beforehand to try to identify these rare combinations of management + business model that can reliably compound value over the long term and then hold them whatever comes except if there's a change in management or strategy that I think spoils the sauce.

 

In hindsight, that was the right strategy with early berkshire, teledyne, capital cities, leucadia, fairfax, etc.. The question is, can we reliably identify similar businesses at earlier stages of development today? Hard to say. My biggest investments are still in other types of business (BAC and AIG being the two biggest), but I've started thinking that a kind of basket approach to these makes sense as long-term core holdings. It's a bit similar to what Gio has been doing, except that I'm not comfortable with all the names he likes and there are some that I like that I haven't yet created threads about here (I'm planning to, just need to finish doing more work on them first).

 

Anyway, I think this style of investing fits well with my personality, so I've been trying to learn more about it over the past couple years. Take all this with a grain of salt.

 

+1. Exactly how my way of thinking has changed in the last couple of months!

[magno111]

Someone might know something for the next earnings call

 

yesterday they bought HUGE number of CALL MAR'14@85, the volumen was like 8000 contracts, while the normal volume is around 200-300...

[Liberty]

Q4:

 

http://phx.corporate-ir.net/phoenix.zhtml?c=123046&p=irol-newsArticle_print&ID=1904734&highlight=

 

Company expects to close Paladin Labs transaction on February 28, 2014.

Full year 2013 adjusted diluted EPS exceeds previously issued guidance by $0.04.

Total quarterly revenues of $585 million, reported diluted (GAAP) loss per share of $6.74 and adjusted diluted EPS of $0.96.

Company expects 2014 revenues to be in the range from $2.50 billion to $2.62 billion.

Company expects 2014 reported diluted (GAAP) EPS to be in the range from$1.36 to $1.81 and 2014 adjusted diluted EPS to be in the range from $3.40 to $3.65.