Endo Raises 2014 Guidance on Closing of DAVA Acquisition
After the close on Wednesday, Endo Health Solution announced the closing of its acquisition of DAVA Pharmaceuticals, a high-margin generics company. The deal was expected to be immediately accretive to Endo and adds approximately 20 ANDAs, bringing the company’s U.S. generics pipeline to 70 ANDAs. In line with prior acquisitions, the company offered revised guidance to reflect the DAVA integration. Management now expects between $2.78 billion and $2.86 billion in 2014revenue, up from $2.72 billion to $2.80 billion, and 2014 adjusted diluted EPS of $4.00 to $4.20, up from $3.80 to $4.00.
We adjusted our estimates to include the DAVA transaction as well and now estimate non-GAAP EPS of $4.18, up from our prior estimate of $4.02. We included our updated model at the end of this note. The closing of the DAVA deal is the latest in the company’s ongoing M&A strategy for growth. The company committed to deploy approximately $1 billion of capital in three significant transactions during the first half of 2014, including DAVA Pharmaceuticals, Boca Pharmaceutical, Grupo Farmaceutico Somar, and the Sumavel DosePro product from Zogenix (ZGNX $1.45; Outperform).
Management recently restated its focus on small to midsize deals, but it remains open to large transformative acquisitions and believes it has the capacity for at least $2 billion in additional deals. Further the key metrics guiding its acquisition strategy include near-term accretion, midteens return on capital, reasonable cash pay-back period, and from a portfolio perspective, accretive to organic growth in the medium term. We continue to rate shares Market Perform but note the steady improvement in earnings and guidance as a result of management’s new strategy for growth through immediately accretive acquisitions as the company navigates through the loss of Lidoderm exclusivity.
We derive a price target of $71, based on a 17-times multiple on our updated 2014 estimate of $4.18. We decreased our multiple from 18 times to 17 times due to comparables, which currently trade at 15.7 times 2014 EPS, excluding companies that are currently the target of acquisitions such as Shire (SHPG $236.90; Market Perform) and Allergan (AGN $157.10; Outperform). We also believe there is a risk for multiple compression similar to what we have observed recently as scrutiny arises around Irish tax inversions. However, we would look to upgrade shares as the company continues to execute through the generic Lidoderm drag on earnings during 2014.