Endo's Potential as an Underappreciated Platform Company

Endo: An Underappreciated Platform
|Must Read Sep. 16, 2015 11:55 AM ET1 comment
by: Lester Goh
Summary
• 2015/16 Street EPS estimates seem to imply that Endo will achieve
revenue/EPS growth purely organically. This seems way too conservative
considering the potential for future bolt-ons.
• With a CEO that was ex-COO of Valeant - a widely-known platform company
- additional tuck-in acquisitions are very likely. If history is any guide, Endo
will continue this strategy.
• A compelling deal rationale, a CEO that is experienced in M&A, and the
sheer amount of potential acquisition candidates indicate that future bolt-ons
are likely to be highly accretive.
Endo: An Underappreciated Platform - Endo International plc (NASDAQ:ENDP) | See… Page 1 of 24
http://seekingalpha.com/article/3514286-endo-underappreciated-platform 1/8/2016

• Assuming Endo makes $10b in acquisitions over a 5-year period, EPS could
expand to ~$10. If EPS multiples remain unchanged, Endo appears
undervalued by 35% at current levels.
• With Valeant at ~20x 2015 Street EPS and Endo at ~16x, there is plenty of
potential for additional upside when the Street begins treating Endo as a
platform company.
Thesis
Wall Street appears to be underappreciating Endo's (NASDAQ:ENDP) potential to
become a platform company much like Valeant (NYSE:VRX) has become. With a
CEO that was ex-COO of Valeant, additional tuck-in acquisitions appear very likely.
This appears far more plausible if history is any guide.
Endo is equipped with a CEO that is experienced in the field of M&A. Couple that
with a compelling deal rationale and the sheer amount of potential acquisition
candidates, this indicates that future bolt-ons are likely to be highly accretive.
Assuming Endo makes $10b (my base case) in acquisitions throughout the
remainder of the decade, EPS could expand to $10.19 by 2020. Even if we
assume zero multiple expansion over the 5-year period (EPS multiple remains
at 16x), Endo appears undervalued by 35% at current levels. As Endo continues
participating in the consolidation of the pharmaceutical industry, I expect the Street
to eventually view Endo as a platform company (much like they have with Valeant).
With Valeant at ~20x 2015 Street EPS and Endo at ~16x, there is considerable
potential for further upside when the Street begins treating Endo as a platform
company. In essence, I believe that Valeant is being valued at a premium to comps
due to the market's awareness (courtesy of Pershing Square) of its platform value.
No doubt, Endo appears to be in the early stages of its transformation. However, I
believe that with continued successful execution of its M&A strategy, the market
would gradually appreciate said transformation and reward Endo with a higher
valuation multiple.

That being said, my long thesis is not predicated on multiple expansion. Even if
there is no re-rating of the stock, shares still see meaningful upside from current
levels.
A primer on platform companies
I realize that many readers may not be familiar with the concept of platform
companies. I invite the reader to view slides 3-16 of Bill Ackman's recent Ira Sohn
presentation, which I believe are highly instructive on the subject.
To be brief: platform companies differ from normal companies in that they have a
"base" or "platform" that is structural to the business. That base/platform can be
utilized to benefit potential acquirees and result in the creation of a great deal of
shareholder value.
In the case of Endo, their main platform attributes are their Irish domicile (low-tax)
and their established distribution channels/sales force. Bolt-on acquisitions can be
folded into the existing structure while realizing meaningful synergies (SG&A, tax,
etc). I detail these attributes at greater length below. Notable examples of platform
companies include Valeant, Jarden (NYSE:JAH), Liberty Media (NASDAQ:LMCA),
Danaher (NYSE:DHR), Transdigm (NYSE:TDG), etc.
Reasons for mispricing/margin of safety
The reasons for this mispricing/underappreciation seem fairly obvious. The market
has consistently undervalued platform companies (as illustrated by Bill Ackman in
his recent Ira Sohn presentation, - slides 3-16 are particularly instructive on this
phenomena. Notable examples of this persistent undervaluation include that of
Jarden and Platform Specialty Products (NYSE:PAH)).
In a nutshell, Wall Street commonly values companies by measuring the earnings
power of their existing asset base and applies a multiple to that earnings figure to
arrive at a price target. Such a valuation approach ignores the value that a company
can produce through highly accretive M&A. Anyone who has flipped through sell-
side research reports can attest to this.

Analyst price targets tend to converge on a certain point (usually not deviating far
from management guidance). Most sell-side research reports do not include a bolt-
on sensitivity analysis to account for potential M&A (most sensitivity analyses only
take into account different WACC values/terminal growth rates). Instead, analysts
take a "show-me" approach and account for acquisitions only when they are
announced (as seen in 2016 Street estimates for Endo detailed at length below).
Consequently, this results in meaningful price-value disparities.
Although Endo has neither net cash nor substantial tangible assets to provide
downside protection, there still exists a margin of safety, which will limit the
probability of permanent loss of capital from owning shares at current levels.
Specifically, like most of its peers, Endo possess legal monopolies over its products
over the life of their patents - these products are consistent revenue-generators,
which provide a high degree of operational visibility into the future. Additionally, the
company participates in an industry which enjoys secular growth trends (as an
example, the pain management market has experienced ~10% CAGR since 2010
per IMS Health data - other relevant trends are detailed at considerable length in
Endo's 10-K).
The Street is underappreciating Endo's potential for future bolt-ons
On average, Wall Street expects Endo to generate $2.96b and $4.81b in revenues
while earning $4.52 and $5.71 in EPS for the years 2015 and 2016 respectively
(non-GAAP EPS is used, which adds back the non-recurring charges primarily
related to past acquisitions).
If we compare this to the $2.87b in revenues and $4.31 in EPS that Endo
generated/earned in 2014, 2015, the Street estimates imply modest revenue (~3%)
and EPS growth (~5%). This is consistent with the results that Endo posted in recent
years and management's full-year guidance, which notably does not include the
potential for future acquisitions. Such modest expectations suggest that the Street is
not taking into account revenue/EPS growth derived from inorganic initiatives.
As for the Street's 2016 revenue/EPS estimate, it appears to incorporate Endo's
recently announced acquisition of Par. Per the investor presentation discussing the
acquisition, pro forma 2014 revenue amounts to ~$4.2b (slide 28 of Par
presentation).

Assuming ~$230m in incremental revenues (~$100m from Endo, consistent with
Street estimates/management guidance, and ~$130m from Par, which grew
revenues at a 12% CAGR from 2011-2014 per slide 12 of the Par presentation - I
assume a 10% growth rate) in 2015, pro forma revenues should be ~$4.43b in
2015. With analyst expectations of $4.81b in revenues for 2016, this implies an ~8%
growth rate - a moderate acceleration from 2015.
The Endo/Par pair has increased net revenues for generics (comprises of ~$2.5b of
pro forma 2014 revenues) at 18% CAGR over the 2011-2014 period (slide 24 of Par
presentation). Street 2016 expectations calls for a ~26% growth in EPS
([5.71-4.52]/4.52). Endo's management expects mid-teens and ~20% accretion to
EPS from the Par presentation in the years 2016 and 2017 respectively (slide 4 of
Q2 FY15 earnings presentation).
In sum, it seems that the Street's 2015/16 revenue/EPS estimates are
conservative and clearly do not include the potential for additional tuck-in
acquisitions beyond the Par deal. As a result, one can conclude that Wall Street
is underappreciating Endo's future inorganic growth endeavors.
Additional bolt-ons appear very likely
I believe that additional bolt-ons are very likely for the following reasons:
• Endo's CEO is very experienced in M&A and is highly aligned with shareholders.
• The deal rationale for future bolt-ons is very compelling.
• And there exists many potential acquisition candidates.
Endo's CEO is very experienced in M&A and is highly aligned with
shareholders: Rajiv De Silva who is currently CEO of Endo was the former COO of
Valeant for a meaningful period of Mike Pearson's tenure at the company.
Since joining Endo in March 2013, he has completed 2 (3 if you include the pending
Par acquisition) major deals which includes a redomicile to the low-tax jurisdiction of
Ireland, and numerous other smaller deals (Boca, Grupo Farmacéutico Somar,
Sumavel, etc.). Thus, Mr. De Silva undoubtedly has experience in the field of M&A.

Improved operational results posted by the company (namely strong revenue growth
and substantial EPS increases derived both organically/inorganically) following
these acquisitions indicate that Mr. De Silva is certainly successful with the strategy.
If one reviews all subsequent earnings calls since Mr. De Silva's installment as
CEO, there appears to be a common theme - the company is highly focused on
acquisitions, post-deal integration, as well as organic growth. As a result, additional
bolt-ons appear very likely in the future if history is any guide.
A majority (65% per the 2014 proxy) of Mr. De Silva's compensation is tied to long-
term incentives, which are awarded based on total shareholder return. Couple that
with the fact that he also owns common stock in ENDP worth ~$20m at current
market prices (while his base salary is <$1m) and directors/executive officers
collectively own ~$100m of the company, it is fairly obvious that the CEO/top
management is highly aligned with shareholders.
Compelling deal rationale: It is no secret that the industry allocates a great deal of
capital into the early-stage development of new drug candidates. The overwhelming
majority of these companies have no advantages or "edge" in basic research.
Consequently, the vast majority of these research efforts fail to achieve any
meaningful ROI, evident from the fact that a very small percentage of drug
candidates make it past FDA approval.
To complicate matters further, the traditional model relies on significant selling and
marketing costs. As a result, most companies in the industry only manage to
achieve 20%-30% profit margins despite ~80% gross margins. The culprit is of
course, sales & marketing spend.
In stark contrast, specialty pharma consolidators such as Valeant and Endo do not
waste time on low-ROI R&D and are of the opinion that the majority of these early-
stage developmental efforts should be left to the startups. If these efforts eventually
bear fruit, the consolidators can simply make a bid for the startup and fund the low-
risk/high-ROI late-stage development, significantly de-risking their R&D spending.
Moreover, they focus on highly-bankable niches within the industry that require
limited sales & marketing spend by acquiring drugs that can be "layered" onto their
existing sales & marketing structure, allowing them to eliminate significant amounts
of SG&A. Further cost synergies can be realized through the elimination of duplicate

departments/facility consolidation. To add the cherry on top, their low-tax domiciles
also further augments their return potential and attractiveness to a potential
acquiree.
Looking at Endo's expenses since the hiring of Mr. De Silva, it certainly appears
very possible for cost-cutting/synergies to be realized for future acquisitions: as a
percentage of sales, R&D and SG&A has decreased from 5% to 2.5% and 32% to
21% respectively while the company's tax rate has decreased from ~30% to ~14%
from 2013 to the most recent quarter (Q2 FY15). I note that this cost-cutting practice
has not resulted in an impairment of the overall business. Quite the contrary, the
company has managed to achieve consistent revenue and EPS growth following
these lean initiatives.
Many potential acquisition candidates: I believe it is fairly clear that the my thesis
hinges on Endo making acquisitions. It follows that one would be skeptical regarding
the availability of acquisition candidates. However, their fears would be largely
unfounded.
One need only review Endo/Valeant's management commentary and check out the
number of deals struck recently to know that there is a great deal of public and
private acquisition candidates. Much of this is due to the fact that the industry is
highly fragmented and is known for its inefficiencies. Below is commentary (bolding
is mine) from management on their past earnings calls regarding their acquisition
pipeline since the hiring of Mr. De Silva. Management has been very consistent
regarding deal opportunities throughout.

First, on business development, we remain confident that
we can execute the types and the number of transactions
we talked about before, which is -- and that I think we
have said, 2 to 3 transactions in the $250 million to $500
million range in the next 18 months. We remain on track.
We have a very active pipeline and transactions, and
I'm hopeful that we will be able to execute at least one
transaction in the near term."
Source: Q2 FY13 Earnings Call Transcript
Although the above commentary suggests that their targets are within the
$250m-$500m range over a period of 18 months, keep in mind that this was 2 years
ago. Their recent Par acquisition shows that they have upped their sights
substantially.
Below is an excerpt from the Q4 FY13 earnings call.

Sure, Liav, and let me have Suky talk about taxes and let
me talk about the deal flow and the deal pipeline. So our
deal pipeline is probably as robust as it has been
over the course of time. We continue to look at a
reasonable mix of transactions between US-branded, US
generics and within that a reasonable mix of private
companies or [after deals] as well as public market
transactions.
And obviously now with the Paladin transaction closing
today we also have a fairly robust set of international
opportunities that we are looking at as well, which
again fall into the same categories of deal type which is
private as well as public, though probably more private
than public. So in terms of the types of opportunities
we're looking at in the pipeline, it's actually pretty
robust.

So in terms of the private companies, it's actually, to
some extent, a combination of all of the reasons you
mentioned, right? So first of all, you don't kind of have
public company expectations when you're dealing with
private companies. Many of these are negotiated
transactions outside of formal processes. They can be
relationship-based. Many private company transactions,
the owners and sellers have more durations that go
beyond just price. And especially, in the current equity
markets, we prefer private transactions a great deal. Now
that being said, we are certainly open to public
transactions too. But we do have a pretty deep
pipeline of private transactions that we look at.
Endo: An Underappreciated Platform - Endo International plc (NASDAQ:ENDP) | Se… Page 10 of 24

We were disciplined on price for each of the deals we
executed, and remain confident that each of the deals will
meet or exceed our targeted returns. As I stated earlier,
deals are an important tenet of our growth, and the
pipeline of opportunities we are currently evaluating
remains robust. We will continue to be opportunistic in
our approach to M&A, and remain focused on small to
medium-sized deals, as we have announced so far this
year. That being said, we also remain open to larger,
more transformative opportunities that create value for
our shareholders.

Most importantly, in 2014, we have positioned Endo for
continued growth in 2015 and beyond. We have a strong
balance sheet, a lean operating model and a significant
number of value creating M&A opportunities ahead
of us. We also have a broad set of sustained organic
growth drivers and exciting near-term R&D pipeline
opportunities.
And finally, below is an excerpt from the most recent earnings call (Q2 FY15).

With respect to the business development question.
We've -- I continue to be optimistic about the deal
flow and the deals that we are looking at. Valuation
certainly if you look at public market assets, there are
certain assets that you could argue trading at higher than
-- higher values than they should be. But keep in mind
that in the end our view of value is we bring it back down
to our M&A criteria, right. So we have clear views on
what kind of internal rate of return we want to see, cash
payback period, accretion to our organic growth rates
and overall margin profile.
Now, I normally am not one to take management's word as gospel, I prefer to
independently verify their claims. In the case of Endo, the fact that the company
has been able to make many acquisitions over the period of the time during
which they state their deal pipeline is robust and expansive certainly
improves their credibility tremendously. In sum, I believe I have made it clear
that my thesis is not predicated on mere conjecture.
2020 Earnings Scenarios
Assumptions (rationale):
• Acquisition multiple of 5x sales (Endo acquired Grupo Farmacéutico Somar at
2.7x sales, Par at ~6x sales, Auxilium at ~6x sales as well),
• 35% EBIT margin (management 2015 guidance of 64%-65% gross margins and

23%-24% operating expense as a % of revenue implies 41% EBIT margins),
• D&A is 10% of revenue (2014 D&A was 11% of revenue),
• 5.5% interest on debt ($231m 2014 interest expense/$4.36b 2014 debt = ~5.2%
cost of debt),
• 20% tax rate (management 2015 guidance of 13%-14% tax rate per slide 19 of
Q2 FY15 earnings presentation),
• 10% organic growth (management reported base business growth of 8% YTD
for its US branded segment, 24% YTD for its US generic segment, and 12% for
its international segment per slides 8, 11, and 14 of Q2 FY15 earnings
presentation),
• 4x net debt-to-EBITDA throughout (management anticipates de-levering to 3-4x
EBITDA 12-18 months following the Par acquisition).

Source: Author's calculations, Endo Investor/Earnings Presentations

With conservative assumptions (above), we see that if Endo makes between
$10b-$20b in acquisitions by 2020, shares could see between 35%-65% upside.
Note that the EPS multiple that I have chosen is similar to Endo's current multiple as
implied by 2015 Street EPS estimates. If Endo trades in line with Valeant (i.e. 20x
EPS), shares would have 70%-105% upside from current levels. Considering that
Endo has made ~$14b in acquisitions (Boca, Paladin, Sumavel, Somar, Dava,
Auxilium, Aspen, and recently Par) since Aug 2013 (~2.5 years since), it is unlikely
that the size of my acquisition scenarios are aggressive. In fact, if the pace of
acquisitions continues as is ($14b in acquisitions over ~2.5 years), Endo could very
well make nearly $30b in acquisitions by 2020.
Risks faced by highly acquisitive companies
In general, companies whose business models rely a great deal on acquisitions face
several pertinent risks.
1. Integration is always a problem. The acquirer may not be able to efficiently
integrate acquisitions, thus the expected synergies may not be realized.
Further, integration tends to be time consuming (even more so for serial
acquirers), which may be a huge distraction to management, causing them
to take their eyes off the ball.
2. Access to sufficient funding is also a concern. Unless you're Berkshire
Hathaway (NYSE:BRK.A) (NYSE:BRK.B), chances are that most (if not all)
of your acquisitions would be funded with a sizable portion of debt/equity
issuance. The ability to access these sources of funding depends on the
health of the capital markets. Therefore, a recession could severely push
back the acquisition timeline.
3. Competition for M&A is one other factor. Most of the time, the company is
not the only one looking to make acquisitions. If there are several bidders for
an asset/acquiree, it is very likely that the company would have to offer the
highest price.
4. And finally, overpaying for acquisitions. This is usually a result of the
preceding point (competition for M&A). The higher the price paid, the lower
the ROI. Not only would ROI decrease substantially, if the overpriced
acquisitions are largely funded with debt, the combined company may face

difficulties paying down that liability if the acquisition does not work out,
stressing the balance sheet.
The above risks are discussed in the context of Endo in a later section.
Standalone Valuation
In order to get a feel for the amount of value that is likely to be created through
acquisitions, I think looking at the company's standalone valuation is a good starting
point.
Assumptions (rationale):
• 2016 revenue of $4.81b and EPS of $5.71 (Street estimates, estimates takes
into account the pending Par acquisition),
• 8% annual revenue growth rate from 2016-2020 (management expects double-
digit growth in the midterm per slide 5 of Par presentation) driving 8% annual
EPS growth (YTD 2015 results show ~1x EPS leverage)
• 5-year exit P/E multiple of 16x (in line with current multiple),
• 10% discount rate.

Source: Yahoo Finance Analyst Estimates, Author's calculations
Looking at the implied share price for Endo as a standalone company, we can see
that the market appears to be fully pricing in the company's ability to grow in the
future, assuming no other acquisitions besides the pending Par deal. Thus, one can
conclude that the majority of the "excess" value will be derived from future
acquisitions.
Although it is possible that the company could drive a far greater level of growth with
their pipeline (as an example, the Endo/Par pair possesses a combined 165
ANDAs, per slide 21 of the Par presentation), the exact value of said pipeline is hard
to determine. Hence, I went the conservative route and assumed no future
contribution from the company's pipeline and a slight haircut to management's
expected growth numbers.
Catalysts
1. Research coverage on Endo that includes sensitivity for bolt-ons - As
Valeant continued making acquisitions throughout Mike Pearson's tenure,
Wall Street slowly began giving credit to its platform value. Notably, analysts

from Goldman Sachs, JPMorgan, and Morgan Stanley recently started
ascribing meaningful value to bolt-ons, as seen in Bill Ackman's 2015 Ira
Sohn presentation (slide 24).
2. Continued execution of the model - As Endo acquires and integrates its
bolt-ons successfully, this should materialize in its operating results.
Eventually, the success of the model would be undeniable and the market
would have no choice but to value Endo higher (or else multiples would fall
drastically, further dislocating price/value). Endo continues to fund its
acquisitions with a meaningful amount of debt (a portion of the Par
acquisition consideration is financed with bonds), incentivizing sell-side
investment banks to continue coverage. The longer Endo receives coverage,
the higher the likelihood of the Street giving credit to its M&A strategy.
Notably, the Par acquisition received fully committed financing from Barclays
and Deutsche Bank.
Endo-specific risks
1. Integration risk - As with any highly acquisitive growth strategy the risk of
failed/inefficient integration is ever present.
Partial mitigants: Rajiv De Silva was the former COO of Valeant during a
meaningful portion of Mike Pearson's tenure. Mr. Pearson has been very
successful with integrating his acquisitions and thus it appears likely that Mr.
De Silva also shares that skill. The fact that Mr. De Silva's prior acquisitions
had done well (evident from growing organic revenues/EPS growth) further
supports this assertion.
2. Capital markets risk - Endo relies a lot on the capital markets for funding
for its acquisitions. If capital markets turn sour, Endo might not have the
ability to finance future bolt-ons.
Partial mitigants: With most of the global economy struggling (especially
China), it seems unlikely that the Fed would raise rates anytime soon for fear
that it would exacerbate the situation and result in a global recession. Rates
could very well remain at current lows for a meaningful period of time.

However, even if interest rates are hiked, the process is likely to be gradual.
Said another way, Endo's access to capital markets funding is unlikely to be
cut off abruptly.
3. Competition for acquisitions - Pharmaceuticals is an industry that is
currently undergoing a period of consolidation (largely driven by Valeant)
and thus Endo could face serious competition in M&A.
Partial mitigants: Endo is small ($15b in market cap) compared to serial
acquirers such as Valeant ($77b in market cap). Therefore, it is possible that
Valeant needs to make much larger acquisitions compared to Endo in order
to maintain the high expectations that the market has for the company. Thus,
although Endo will face competition for acquisitions, it seems likely that the
degree of competition would not be that intense. This assertion is supported
by management commentary (bolding is mine) shown below.

In terms of competition I wouldn't say that
competition has fundamentally changed. We've
seen the same level of competition for assets as we
have historically; and while you may say there's
more activity not every player is looking at the
same assets that we're looking at. And
obviously the larger you are, you look at a
different sort of asset. I think we're small
enough that we can still benefit from
transactions that are in the small- to medium-
sized. So in terms of deal flow and evaluations
we're not looking at a fundamentally different
picture.
Additionally, because Endo is currently smaller than most larger
pharmaceutical companies (Valeant, Allergan (NYSE:AGN), Teva
(NYSE:TEVA), Mylan (NASDAQ:MYL), etc), smaller drugs or companies will
move its needle significantly, while the same cannot be said for its larger
peers. In effect, this increases Endo's universe of acquisition opportunities.
4. Overpaying for acquisitions - In the field of M&A, an oft raised criticism is
that acquirers pay way too much for their acquisitions, ultimately driving
down ROI.

Partial mitigants: Endo recently competed with Valeant for the acquisition of
Salix. Endo submitted a topping bid for Salix and Valeant increased their
price by 10% in response, leading Endo to walk away on price. I believe that
this shows a stunning degree of price discipline and cements my belief that
Mr. De Silva is unlikely to overpay for acquisitions. Further, given that Street
expectations are currently tame (evident from their conservative 2015/16
revenue/EPS estimates), it seems improbable that Mr. De Silva would be
pressured into pursuing acquisitions at all costs.
Additionally, I believe that the company has a great deal of negotiating
leverage with respects to price. The company brings a lot to the table. Their
principal value-adds to potential acquirees is that of low taxes (Endo is
domiciled in Ireland) and an already established and highly effective (evident
from the rate of revenue growth) sales force. The same cannot be said for
most companies in the industry. There are only a few serial acquirers - chief
of them Valeant - that can offer the synergies associated with tax and SG&A.
Hence, I do not think it is a stretch to say that the company has a great deal
of bargaining power in the context of acquisitions. In effect, this negotiating
leverage over acquirees allows them to greatly tip the scale (price) in their
favor. This is fairly clear if one reviews the performance of their past
acquisitions.
5. Excessive leverage - Most acquisitions are funded with a significant
amount of debt, and the current low rate environment might tempt
management to lever up way too aggressively to finance inorganic growth
initiatives. In the event of a rate hike, floating rate debt would stress the
company's balance sheet.
Partial mitigants: Looking at Endo's past acquisitions, though the company
funds a majority of their acquisitions with debt, the cash/debt ratio does not
appear aggressive (the pending Par acquisition is funded with ~25% debt).
Additionally, management has repeatedly stressed that they aim for a 3-4x
net debt to EBITDA ratio (their rapid delevering following acquisitions is
proof that they are disciplined in this regard), a modest level of leverage.
Couple that with the highly recurring nature of the business, the risk of
excessive leverage should be sufficiently mitigated.
Conclusion

Endo appears to be an underappreciated platform company. This is evident from the
Street estimates, which do not take into account the possibility of the company
making future bolt-on acquisitions. With a highly disciplined CEO (see the Salix
deal), a compelling deal rationale, top management having meaningful skin in the
game, and many potential acquisition candidates, I believe that it is possible for
Endo to continue profitably executing their M&A strategy. Over time, I am optimistic
that Endo can follow in the footsteps of Valeant and receive a similar valuation
multiple.
Assuming Endo makes between $10b-$20b in acquisitions, it could reasonably
achieve EPS of $10.19 by 2020. Even with zero multiple expansion, shares see
35%-65% upside. The market appears to give considerable credit to known platform
companies: Valeant, which is consistently touted by Bill Ackman (a high-profile
hedge fund manager) as a highly successful platform company, trades at a premium
to comps (and deservedly so) at ~20x 2015 Street EPS. As the market begins to
realize Endo's potential as a platform company, a re-rating of multiples should
occur, leaving plenty of room for additional upside.
Although a highly-acquisitive growth strategy comes with risks (integration, capital
markets, competition, overpaying), I believe that these risks are sufficiently
mitigated. With a limited probability of permanent capital loss, Endo appears
compelling at current levels.
Disclosure: I am/we are long ENDP.
I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it (other than from Seeking Alpha). I have no business relationship
with any company whose stock is mentioned in this article.

Endo's Potential as an Underappreciated Platform Company

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