In a push to diversify, Endo Pharmaceuticals announced May 5 that it is buying HealthTronics, a urology device and services company, for $223 million in cash, or $4.85 a share, plus an assumption of $35 million in debt.

The same day, Endo also announced that it purchased exclusive rights to negotiate buying the Amsterdam-headquartered medical devices company Medical Enterprises Group, which is developing its Synergo device/drug combination product for prevention of bladder cancer recurrence. The combo product received a favorable FDA panel recommendation in 2008 (¹ Also see "FDA Panel Endorses Synergo Combo Product For Bladder Cancer" - Medtech Insight, 30 June, 2008.).

For now, Endo plans to focus its efforts on bringing HealthTronics' anatomical pathology and cryoablation equipment services to the urologists Endo's sales reps already call on. In doing so, Endo hopes to broaden its own bucket of treatment options for physicians. Execs did not offer insights into whether they considered any biopharma alternatives before deciding on buying a device company or why they thought a device company might be the ideal fit.

"The real opportunity for us is not so much in cross-selling each other's products, but in becoming the provider of multiple health care solutions and services that fill some critical gaps in patient care," Endo President and Chief Executive David Holveck told investors on a May 5 call announcing the deal.

But Jefferies & Company analysts pointed out that Endo's move to buy a device company is somewhat puzzling. "We've never seen a specialty pharma company attempt to get into the health care services business, so this acquisition is likely to meet with some hesitation among investors," they said in a May 6 note.

Endo expects the acquisition to add $80 million to its revenues in 2010. The deal is expected to close in the third quarter. As a result of the acquisition, Endo has raised the guidance it provided to Wall Street at the end of 2009. It now expects 2010 sales to range from $1.63 billion to $1.68 billion, with $0.05 accretion to its adjusted diluted earnings per share - up from $1.55 billion to $1.6 billion. The impact of a potential Medical Enterprises Group acquisition is not included in those revisions, and Endo did not disclose a price tag and closing date for that deal.

Endo acknowledged that it will need to do some work to grow HealthTronics' products, however. "We don't think that the transaction itself was really a cost synergy consideration. In fact, we think it would be appropriate for us to invest behind the HealthTronics franchise in order to accelerate the growth from that," Endo Chief Financial Officer Alan Levin said on the call. Endo also is retaining HealthTronics' management team to make the most of its expertise.

Levin also assured investors that it is "certainly fair" to assume synergies in 2011 would be greater than twice the 2010 accretion. "It's certainly our expectation, given the immediately accretive nature of this transaction, that we'll be able to leverage the accretive nature as '10 goes into '11," he added.

HealthTronics, based in Austin, Texas, claims it is the leading urology devices and services provider in the U.S. The company has relationships with a third of actively prescribing urologists in most states. Rather than a typical sales rep structure, the company has eight account managers who are responsible for what President and Chief Executive James Whittenburg called "very deep and intimate" sales relationships with physicians.

In explaining the role of these account managers, Chief Operating Officer Julie McHugh said "they are having a regular dialogue around innovations in the device space. They also are partners in ensuring that their physician partnerships have access to all the technologies that are relevant within the urology space." The managers also ensure that physicians have access to maintenance services for devices being used.

Endo believes HealthTronics' current sales structure will round out the message that its own sales team of 75 urology reps already is providing physicians. Execs did not explain how they plan to integrate the roles of the account managers and the sales reps.

Not Just A Pharmaceuticals Company Anymore

Last year, HealthTronics brought in revenue of $185 million, with 2010 revenue expected to range from $203 million to $208 million.

For Endo, HealthTronics offers devices that complement its current pharma products, execs told investors. Specifically, HealthTronics' lithotripsy services for kidney stones, laser procedures for benign prostatic hyperplasia, and offerings for cryosurgery - a procedure that uses lethal cold to kill tissue in cancerous tumors - complement Endo's drugs, Vantas and Valstar, for refractory bladder cancer and prostate cancer.

Endo has been under pressure to use its substantial cash assets to make more deals in order to address what analysts consider to be an over-dependence on revenues from a few key drugs, notably, its top seller the painkiller Lidoderm, and a lack of near-term growth drivers. At the end of 2009, Endo announced that it would seek out multiple deals in 2010 to do just that.

Lidoderm, which brought in $764 million last year, has a formulation patent that expires in October 2015, but it is responsible for at least 50% of the company's sales, so the pressure on Endo to diversify is intense. Moreover, it is the subject of a patent-infringement lawsuit Endo filed against generic drug maker Watson Pharmaceuticals in mid-February.

Even after the HealthTronics deal, Endo expects to have about $900 million in cash and marketable securities on hand to "pursue additional business development opportunities," execs told investors.

Health Reform Impact Minimal For HealthTronics

During Endo's first-quarter earnings call to investors on April 30, execs noted health reform legislation will adversely affect 2010 revenues by about $20 million. But HealthTronics does not expect reform legislation to significantly impact its products.

HealthTronics said its exposure to Medicare is minimal, since most of its services are contracted directly to hospitals, whereby the hospital is ultimately responsible for billing government or private payers.

"In terms of the percentage of the HealthTronics revenue that was Medicare-related ... it's very small," HealthTronics' Whittenburg said.

"The business where we do bill Medicare is in our lab business, and just to put [that] in context, our lab business accounted for less than 7%, or maybe even less than that, of our '09 revenues," he added.

- Carlene Olsen ( ² c.olsen@elsevier.com )

Endo Pharmaceuticals Buys HealthTronics, Bringing Devices Into Urology Biz

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