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When A Winner Starts To Wane


The folks at Endo Pharmaceuticals Holdings Inc. have a dependency problem. Nearly two-thirds of the company's revenues and three-quarters of its profits come from a single product, Lidoderm, a skin patch widely prescribed to relieve aches and pains.

That's not exactly dragging the drugmaker down. Lidoderm's sales are projected to reach $540 million this year, up 29% from 2005, or an additional $10 million in revenue for each month. Thanks mostly to the pain patch, Endo is No. 35 on BusinessWeek's 2006 ranking of Hot Growth Companies, the only pharmaceutical company on the list.

But Endo may have to deal with its drug-dependency issue sooner than management had reckoned. Chief Executive Peter A. Lankau believes Lidoderm's patents will protect its monopoly through 2015. The Food & Drug Administration has signaled, however, that it may allow a patch that competes with Lidoderm to hit the market as early as 2009. "We are fully conscious of our need to diversify," Lankau says.

Compounding Endo's problems, Lidoderm's growth rate is slowing, and there's no new magic pill on the horizon. Lankau contends that the company's latest drug, Opana, an alternative to OxyContin, could be a hit. But the product is off to a disappointing start, and nothing else in Endo's drug development pipeline will be ready before 2008.

Investors have gone from boastful to anxious. Endo's stock, which traded for less than 10 a share in 2003, touched 34.75 this past October. But the company has been downgraded by three brokerages in recent months, and the stock has tumbled to under 27, down 10% from a year ago. Analyst Gary Nachman of Leerink Swann & Co., who rates Endo as "market perform," or neutral, has also trimmed his revenue and earnings forecasts for 2006 and 2007. "I don't see anything coming up to get people overly excited," he says.

HEALTHY BALANCE SHEET

Lankau, 53, says the company is already adding to its product list to lessen the impact of a Lidoderm knockoff. For instance, Endo agreed to pay up to $115 million in mid-October to purchase RxKinetix Inc., which is developing a drug for mouth sores that cancer patients often get while undergoing radiation or chemotherapy. Endo is also pressing the FDA to reconsider its timetable for a generic Lidoderm.

The mood at the company's Chadds Ford (Pa.) headquarters, near Philadelphia, is far from desperate. Endo is America's biggest pure play in pain medication today. It was spun off from DuPont in 1997 in a leveraged buyout led by the unit's president, Carol A. Ammon. She stayed on as CEO until May, 2005, when Lankau, a drug industry journeyman, took over. Endo went public in mid-2000 at 11.38 a share. Today, the company has a remarkable balance sheet for an early-stage drug company: $675 million in cash and no long-term debt.

While Endo sells a half-dozen branded pain drugs such as Percocet and Percodan, plus a generic version of OxyContin, it was the launch of Lidoderm in 1999 that transformed the company. The product, an adhesive patch laced with a numbing agent called lidocaine, was approved for pain caused by shingles, a viral infection that afflicts some 750,000 adults in the U.S. a year. Almost immediately, doctors began prescribing it for all sorts of other ailments, from lower back pain to tennis elbow and plain old sore muscles. More than half of Lidoderm prescriptions are now for non-FDA-approved treatments.

In some medical practices, the ratio is even more skewed. Dr. Louis D. Bojrab, a principal at Michigan Pain Specialists in Ann Arbor, figures that for every Lidoderm prescription he writes for shingles, he writes nine more for other conditions. Bojrab says he dispenses Lidoderm so liberally because it is safer than pain pills, since it doesn't enter the bloodstream. The patch also lasts up to 24 hours and can be used repeatedly without worries about abuse or addiction. "It's a unique product," he says. "We use it for a lot of purposes."

YOUR ACHING BACK

This wide-ranging usage appears to be perfectly legal. Drug vendors cannot urge doctors to prescribe products for anything but treatments authorized by the FDA. But sales reps can give doctors materials showing effectiveness in other studies. For Lidoderm, that includes trials showing the patch is effective on backaches and pain associated with diabetes and osteoarthritis.

Such details are at the core of Endo's campaign to "build the medical story," as Lankau puts it. And it's working. In 2004, Lidoderm accounted for 50% of Endo's $615 million in revenues. Next year the patch will make up 64% of the $980 million total even as Lidoderm's sales growth slows to 15%, Nachman predicts.

Opana, approved last June, was supposed to reduce Endo's exposure to the patch. To help promote the new drug this past fall, Lankau added 220 people to its sales force, a 60% increase. Yet through the third quarter, the company booked no sales for Opana, and it is no longer making any predictions about the drug's sales through the end of the year.

Despite Opana's slow start, analyst Megan Murphy of Lazard Capital Markets believes it will bring $130 million in sales next year. The company is also counting on help from Frova, a pill for menstrual migraines that is expected to get broader FDA approval in mid-2007. And in 2008, Endo may get the green light for Rapinyl, a fast-dissolving pain pill for cancer patients.

Clearly, demand for pain medication is rising, and companies that come up with effective remedies will be in a sweet spot. But since brand-name products are where the real money is, Endo needs to hold on to Lidoderm as long as it can.

By Michael Arndt


Reviving Keynes
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