Endo Pharmaceutical Holdings Inc.'s effort to diversify its specialty pharmaceutical portfolio is getting a significant bump with the acquisition of American Medical Systems Inc. The two companies announced an agreement April 11 in which Endo will acquire the urology device specialist for $2.9 billion in cash, or $30 per share, a move that furthers Endo's strategy to become a leader in the area of pelvic health services and products.

The offer represents a 34% premium over AMS' closing price April 8 - and is three times AMS 2010 sales of $538 million. The combined company would have sales of $2.68 billion.

Endo - once wildly dependent on Lidoderm (lidocaine 5% patch) for sales - has been in the midst of a makeover under CEO David Holveck, who joined in April 2008 ('The Shakeup At Endo,' IN VIVO, July 2010). The company has completed four acquisitions under his leadership, all aimed at positioning the company as a diversified healthcare solutions provider focused on urology and pain (the generics maker Qualitest Pharmaceuticals for $1.2 billion in September, Penwest Pharmaceuticals Co. for $168 million in August, the device company HealthTronics Inc. for $223 million in May, and the urology pharma company Indevus Pharmaceuticals Inc. for $370 million in 2009).

But the acquisition of AMS is Endo's largest yet, and it substantially alters the company's portfolio and reinforces its commitment to devices.

Including AMS, the device and services component of Endo's business would represent roughly 28% of sales versus 10% based on 2010 pro forma sales, Holveck said during a same-day conference call. The deal will give Endo scale in the urology space, with approximately $1 billion in urology-generated sales generated by a wider array of treatment options from implants for pelvic disorders like incontinence and erectile dysfunction to lasers for BPH and pharmaceuticals like Vantas (histrelin) for prostate cancer symptoms and Valstar (valrubicin) for bladder cancer, Chief Operating Officer Julie McHugh maintained.

Endo's dependence on Lidoderm, which is expected to face generic competition in 2015, would be further reduced, with the product accounting for about 30% of sales instead of 37%. That is a significant drop from 2008, when roughly 65% of sales came from Lidoderm.

AMS is itself a spinout from Pfizer, which Warburg Pincus, the private equity group, acquired for $100 million in 1999 to sell penile implants and sphincters for urinary incontinence. It has bought a number of smaller device companies, in the process transforming itself into a pelvic devices company (Also see "Device M&A: The New Acquirers" - In Vivo, 1 July, 2007.). Currently, the company has three business segments: men's health, women's health and benign prostatic hyperplasia therapy.

A Device M&A Trend?

Endo's move into devices is somewhat unusual in that few mid-sized pharmaceutical companies successfully market drugs and devices, and the synergies coming from such a combination are not clear cut. Big pharmas like Johnson & Johnson and Abbott Laboratories Inc. have walked the line successfully. Not surprisingly, Holveck came to Endo from one such company, J&J.

Nonetheless, more drug makers have been talking about moving into the device space as the pharmaceutical industry has come under increasing pressure. Devices generally have shorter, less expensive product development timelines and favorable pricing and reimbursement. Whether or not Endo's expansion into devices is the start of a broader industry trend remains to be seen, but for now it seems like a one-off scenario, fueled mainly by Endo's desire to buy a new revenue stream to fill the upcoming Lidoderm gap.

Morgan Stanley analyst David Lewis said the news isn't likely to signal a wave of pharmaceutical/device M&A. "This transaction appears very specific considering Endo's desire to diversify its business and exposure to urology markets through prior acquisitions," he said. "Although we see devices as a more sustainable cash flow business than pharmaceuticals, we did not see significant cross sector M&A during the significant pharmaceutical mega merger period and would not expect to see a strategic shift now."

Cowen & Co. analyst Ian Sanderson, in an interview, called the merger a "decent acquisition" for Endo in that it improves the firm's presence and offerings in urology and offers investors more visibility on earnings growth in 2012/2013. "HealthTronics was a real head-scratcher," he said of Endo's abrupt move into devices and provider services last year. "But AMS is somewhat complimentary and gives Endo a better urology presence and better fulfills the strategic intent than HealthTronics did." Still, Sanderson said Endo will need to deliver on earnings to keep investors on board with the strategy. The deal is expected to close in the third quarter, subject to approval by AMS' shareholders.

For now, Endo's investors are welcoming the changes. The stock is up more than 14% since the start of the year, closing April 11 at $41.06. Just a year ago, Endo was trading far lower, in the low-20s range. The stock was flat on the latest acquisition news.

Endo expects the combination will be dilutive to 2011 earnings by $0.61, dilutive to 2012 earnings by $0.05 and accretive to 2013 earnings by $0.25. The company expects $50 million in synergies stemming from the collaboration, coming from SG&A expenses, manufacturing efficiencies and procurement savings. Nonetheless, synergies aren't a significant driver of the acquisition.

Even after being pressed by analysts, Holveck declined to offer details on how the pharmaceutical and device units will be integrated or if they will operate as standalone units. The commercial organization will benefit from "crosstalk" and "customer facing," he said, though each group will still have its own specialty. Endo currently has 70 sales reps calling on urologists while AMS will add another 200 sales reps who target urologists with their device products.

"We see tremendous opportunity to ... cross-sell the entire urology portfolio," Holveck said. "We're going to be in the integration period over the next several months really mapping out carefully our urology customer audience and our product portfolio and looking for those opportunities to cross-sell where it makes sense."

[Editor's note: Keep up each with the health care industry's deal activity with Transactions Weekly, an update that highlights the latest information in Elsevier's Strategic Transactions database. Sign up at http://www.elsevierbi.com/tweekly.]

-Jessica Merrill (j.merrill@elsevier.com)

Endo Dives Deeper Into Devices With AMS Acquisition

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