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Endo hires Valeant dealmaker as new CEO

by Jonathan Marino  |  Published February 27, 2013 at 12:35 PM
Endo Health Solutions Inc.'s investors got their wish on Monday as the company tapped a former executive from Valeant Pharmaceuticals International Inc. to lead the company through an operational turnaround.

The Chadds Ford, Pa.-based healthcare conglomerate has hired Rajiv De Silva as its new CEO. De Silva stepped down as the COO of Valeant's specialty pharmaceuticals business last year after a four-year stint as an executive at Novartis AG. He will start running Endo on March 18.

Investors cheered the decision Monday, sending Endo's stock up nearly 8% for a $30.26 per share finish after a Feb. 22 close of $28.04. The stock slumped to $29.93 per share in early Tuesday trading.

Endo hailed De Silva's role in Valeant's growth, as well as his experience managing both acquisitions and post-deal integrations. The Mississauga, Ontario-based specialty pharmaceutical company completed more than 40 acquisitions during De Silva's tenure and has expanded considerably, Endo chairman Roger H. Kimmel noted on a conference call late Monday afternoon.

De Silva takes over for former president and CEO David Holveck, who announced his retirement in December on the same day that the company withdrew its guidance for 2013.

Holveck championed a strategy of diversification for Endo, and during his tenure the company transformed itself from a company heavily dependent on one drug -- dermal patch Lidoderm, which is used for post-shingles pain relief -- into more of a conglomerate.

Between 2009 and 2011, Endo acquired Indevus Pharmaceuticals Inc. ($637 million deal price) for a developmental injectable testosterone therapy now known as Aveed, laying a foundation in urology; HealthTronics Inc. ($258 million), which expanded Endo beyond just drugmaking by giving it a line of urologic products and devices such as lithrotripters and surgical lasers; Penwest Pharmaceuticals Co. ($144 million), its development partner on chronic pain tablet Opana ER and the creator of an extended-release technology platform; Qualitest Pharmaceuticals Inc. ($1.2 billion), giving it a large generics arm; and finally, American Medical Systems Holdings Inc. ($2.9 billion), which built on the HealthTronics acquisition by expanding Endo's urology and medical device capabilities. Along the way, in March, Endo changed its name from Endo Pharmaceutical Holdings Inc. to Endo Health Solutions Inc.

As a result of all the moves, Lidoderm, which accounted for 65% of Endo's revenue in 2008, accounted for 30% ($825.18 million) of its $2.73 billion in revenue in 2011 while the divisions it created through acquisitions -- a medical devices segment and a services segment -- posted about $505.5 million, or close to 20% of its revenue.

Even so, however, diversification has come with a significant cost. The AMS acquisition hasn't panned out the way Endo has hoped as of yet. In addition, Endo levered up during its buying spree, and Actavis Inc. will launch a generic Lidoderm in September, eating into Endo's earnings. Endo also revealed in December that it no longer expects to hit its previous 2013 guidance numbers of $3 billion to $3.2 billion, and reports have even surfaced that certain shareholders have been pushing for the company to sell itself.

"I fully understand that this is a critical time for Endo," De Silva said on the call.

Those concerns appear to have been temporarily quelled with De Silva's hiring. Jefferies & Co. analyst Corey Davis called De Silva "an excellent fit" and "exactly the type of CEO that Endo needed" given his operational experience.

Davis doesn't expect De Silva to come in and begin hiving off divisions in the near term, "as some investors have been clamoring for the company to do."

But Davis does believe De Silva is the type of CEO that could help boost the value of those franchises to the point that they would be more attractive for a sale down the road.

"While the company is saddled with a fair amount of debt, it's far from cash constrained so we don't think that he will feel compelled to do anything quick/drastic with respect to asset sales," he wrote in a note to investors.

Davis added that he doesn't expect De Silva to "shun R&D investment" in the way that Valeant does, since the latter largely acquires products rather than develops them. Given Endo's thin late-stage pipeline, which only has one Phase 3 drug in a pain treatment called BEMA buprenorphine, Davis welcomes the company putting more focus on building its inventory of development-stage compounds.

De Silva didn't elaborate much on his plans. Asked on the conference call if Endo would pursue a Valeant-like strategy, he said the company's approach "will be tailored to our businesses and our products and our customers."

He elaborated later in the call, telling analysts listening, "And while the strategies may have some similarity to what other companies are doing, it will be uniquely tailored to what we want to accomplish here at Endo."

De Silva did assert that he believes diversification is "extraordinarily important" and that bolt-on acquisitions to spur growth aren't out of the question.

"I think what's been very encouraging in my discussions with the board leading up to this appointment is that there is an openness to looking at new ideas and opportunities, and I fully expect to make use of growth opportunities as they come," he said.

Tags: David Holveck | Endo Health Solutions Inc. | Rajiv De Silva | Roger H. Kimmel | Valeant Pharmaceuticals International Inc.

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