Measured Approach

ENDO PHARMACEUTICALS (NASDAQ: ENDP) Data as of: 02/26/2010

Industry: Biotechnology & Drugs

Current Data
Current Price $22.75 PEG 0.6X
Market Cap ($M) $2,667. EPS TTM ($) $2.26
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Shares Outstanding (M) 117.8 P/E TTM 10.1X
Institutional Holdings % 95.0% EPS Estimated 2010 ($) $3.16
Insider Holdings % 0.6% P/E Est. EPS 7.2X
Beta 0.49 Target Value ($) $32.00
Latest Quarter Reported 12/31/0 Dividend Yield % 0.0%
9

We first wrote about Endo Pharmaceuticals in a blog post on March 22,

2009. We recommend Endo then and we reiterate that
recommendation now.

“Endo Pharmaceuticals Holdings Inc., is a specialty pharmaceutical company in pain

management. The Company is engaged in the research, development, sales and
marketing of branded and generic pharmaceutical products primarily to treat and manage
pain. Its portfolio of branded products includes Lidoderm, Opana ER, Percocet, and Frova.
It concentrates on generics that have one or more barriers to market entry, such as
complex formulation, regulatory or legal challenges or difficulty in raw material sourcing.
During the year ended December 31, 2008, the branded products and non-branded
generic portfolio comprised approximately 93% and 7%, respectively, of the Company's
net sales. It markets its branded pharmaceutical products to prescribing physicians in pain
management, neurology, surgery, anesthesiology, oncology and primary care. In March
2009, Endo Pharmaceuticals Holdings Inc. completed the acquisition of Indevus
Pharmaceuticals, Inc.”

Recently, Endo released its most recent financial results and

announced its expectations for the coming year. Endo forecasted
2010 earnings of $2.40 to $2.45 share. Adjusted earnings should
come in between $3.15 and $3.20 a share, on revenue of $1.55
billion to $1.6 billion. A poll of analysts by Thomson Reuters
estimated earnings of $2.87 a share, on revenue of $1.53 billion.

“S&P REITERATES HOLD OPINION ON SHARES OF ENDO PHARMACEUTICALS

(Standard & Poor's)
Q4 adjusted EPS of $0.81, vs $0.74, is well ahead of our $0.67 estimate due to tax
benefits. ENDP challenges filing for generic version of Lidoderm, which we see protecting
franchise to mid-'12. We view ENDP's cost leverage to support EPS growth and
acquisitions favorably, but see limited pipeline visibility to drive long-term revenues as
legacy products near exposure to generics in coming years. On lower expense and tax
outlook, we raise our '10 adjusted EPS estimate by $0.36 to $3.20 and set '11's at $3.45,
but we keep our target price of $24 on pipeline uncertainties.”

The risks related to Endo are fairly obvious to discern. Some 52%
of sales revenue is derived from Lidoderm alone and 91% of
sales revenue are from branded products. There is litigation

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
involving a generic version of Lidoderm and the remaining
branded products are coming off patent protection within several
years. These factors place immediate pressure on Endo.
What does ENDO have in the pipeline? The Company generates
about 9% of net sales from generics. We believe there is
significant room to expand in this area where margins tend to be
higher. ENDO currently has 15 ANDA submissions on file with the
FDA; most of which have a product launch date in the
foreseeable future. In addition, the Company is building upon its
product line beyond the pain management market. It already has
product in the urology market. They are adding to their
endocrinology and oncology product lines.

Endo has a number of challenges which we believe are short

term in nature. This uncertainty provides us with an opportunity
to acquire ENDP at attractive prices.

By The Numbers

Quarterly EPS for the period ending December 31, 2009 were
$1.25 as compared to $0.42 in the prior quarter and $0.62 in the
year-ago quarter. EPS for FY 09 were $2.27 compared with FY
2008 EPS of $2.06. EPS grew at the rate of 10.2% y-o-y.
Historically, EPS grew at the rate 29.7%, 15.8%, and 33.5% on 3
year, five year and 7 year basis, respectively. Analyst forecasts
for FY 2010 EPS ranges from $2.85 to $3.20 with an average
forecast of $3.16. The consensus is up from $2.84.

Quarterly sales for the period ending December 31, 2009 were
$391.4 million as compared to $361.0 million in the prior quarter
and $347.3 million in the year-ago quarter. Net sales for the year
ending December 2009 were $1,460.8 million as compared to
$1,260.5 million in FY 2008. Sales grew at the rate of 15.9% in
2009 as compared to 2008. The 3 year, 5 year and 7 year sales
growth rates are 17.1%, 18.9% and 20.4%, respectively.

The Company has had positive free cash flow in each of the past
seven fiscal years. In FY 2009, free cash flow was $2.51 per
share, a 12.5% decline from the prior year.

Endo’s balance sheet is in good shape. Cash and short-term

investments represented 39.6% of assets. The current ratio is
3.1X and liabilities to assets are 42.4%. Long term debt to capital
is 24.8% and long term debt to equity is 33.0%.
The Company reports a respectable, and consistent, return on
equity of 22.0%.

Please visit http://measuredapproach.wordpress.com for important disclosures.

© Copyright 2009 Ronald Sommer. All Rights Reserved.
At recent prices, the P/E ratio at 10.1X is significantly less than
the five year average of 16.3X. The P/B ratio, at 2.0X, is down
from the five year average of 3.55X. Our price target of $32.00
represents a P/E of 11.25X on EPS of $2.85.

DISCLOSURE: Author is long ENDP.

Please visit http://measuredapproach.wordpress.com for important disclosures.

© Copyright 2009 Ronald Sommer. All Rights Reserved.