Thursday was not a good day for generic drug companies. On that day, Bloomberg broke the news that the U.S. Department of Justice was investigating multiple generic pharmaceutical companies on charges of price collusion. These news are particularly problematic given how pharmaceutical companies have been under severe attack from the public for buying the rights to cheap generic drugs and massively jacking up the price in order to make a profit. Several companies such as Teva Pharma Industries Ltd (NYSE:TEVA), Impax Laboratories Inc (NASDAQ:IPXL), and Mylan (NASDAQ:MYL) Pharmaceuticals saw a massive single-day drop due to the news.
Investors should be naturally leery of investing in any of these companies, but Endo International PLC (NASDAQ:ENDP) is at particular risk. Endo took a massive hit alongside everyone else as it lost 19.5 percent of its value, and the company has issues even before it will have to deal with the inevitable storm of political outrage, fines, and additional regulations better than its competitors.
The company’s ongoing discussion to sell Paladin Labs to relieve its massive debt load is concerning, as is its stock performance over the past year and the intense competition it faces. Investors should look to sell their holdings in Endo and avoid the temptation to buy on the dip.
The Collusion Charge
The collusion charge is what caused Endo’s stock to collapse and is the biggest problem in the short to medium term. As the aforementioned Bloomberg report noted, the Justice Department’s investigation targets two dozen companies and drugs and has sent subpoenas to these companies. While some companies like Teva indicated their willingness to cooperate, Endo did not comment.
The fact that “high-level executives” could be charged and fined would be enough to give any company jitters under normal circumstances, and these are much worse than normal circumstances. The Democratic Party has made political hay for the past year by targeting pharmaceuticals who they argue unfairly jack up prices which hurt the ordinary consumer.
If Hillary Clinton is elected president as seems likely, she has vowed to regulate real estate, as well as pharmaceutical prices to prevent them from doing the sorts of actions which have attracted media attention. These regulations would likely limit the ability of smaller pharmaceutical firms like Endo to grow, and has investors concerned. Even if Trump prevails, his populist mindset means that he would need little persuading to go after corporations oppressing the white working-class that are the core of his support.
Regardless of political victors, Big Pharma will likely have few friends in Washington in the coming months.
Endo’s Problems
The collusion charge is problematic, but if that was Endo’s only problem, I would recommend buying and taking advantage of this price fall. But Endo has more concerns than angry politicians.
The first is Endo’s debt load. Reuters recently reported that Endo has discussed selling Paladin Labs Inc. to specialty pharmaceutical company Knight Therapeutics Inc (TO:GUD). The deal would be explicitly made so that Endo could “pay down some of its $8 billion in debt”, even though it would be selling Paladin at a significant loss compared to the price it originally paid.
This debt load happened because Endo went on a major acquisition spree before 2016, acquiring Paladin in addition to issuing $5 billion in debt as part of an $8 billion purchase of Par Pharmaceutical. Yet despite these acquisitions, Endo has not been able to increase its revenue enough to make these acquisitions worthwhile. In May, Endo had to slash its year-end estimates for revenue and earnings per share by 11 and 23 percent respectively. These changes caused the stock to fall by 40 percent, and Endo’s current value is only 25 percent of its peak back at the beginning of this year.
Too many problems
There is always a temptation to go against the grain and try to buy low when a stock falls like Endo’s has, but investors should be leery of the company and of the pharmaceutical industry in general. While pharmaceuticals will always be in high demand, they are also the target of politicians intent on further regulating the industry. The latest charges of collusion are a perfect opportunity for them, which will hurt the industry’s ability to innovate and grow. But even if there were no legal issues, Endo itself has concerns which should unnerve any investor. The company is facing tough competition, has failed to increase revenue enough to compensate for its high debt loads, and has watched its stock fall off a cliff as a result. Investors may be potentially interested if Endo’s value falls to $10 to $12, but the safer bet is to just stay away from the company and sell any holdings. Things are almost certainly going to go worse for Endo and pharmaceutics before they get better.