Shares of Endo International (ENDP) jumped out of the gate after Morgan Stanley upgraded the stock this morning. Since then, its shares have given back those gains and turned negative.
Morgan Stanley’s Christopher Caponetti and David Risinger explain why they upgraded Endo to Overweight from Equal-Weight:
Mesh settlement removes what had been a potential multi-billion dollar liability in our bear case, and we now see a compelling risk-reward driven by M&A upside in our bull case…
Endo's current base business offers support, and we see limited downside in our bear case. We envision a bull case driven by dramatic value creation from M&A, and we est. Endo has $2-$3B of balance sheet flexibility (net of anticipated after-tax mesh cash outflows) to pursue M&A if mgmt. takes leverage from 3.0x to 4.0-4.25x (inc. mesh)…Mgmt's stated objective is to complete "at least 2-3 near-term accretive, valuecreating transactions" in the $250M-$500M range.
While noting that they have no information, Caponetti and Risinger explain that the “non-core assets of Major Pharma companies can move the needle for $10B market cap Endo.” And there are plenty of those up for sale, they note. Merck (MRK) is looking to sell a $15 billion drug portfolio, while Sanofi (SNY) is exploring a $7 billion sale, as well.
Shares of Endo were up 2.4% at the open but have fallen 0.1% to $66.27 as of 1:57 p.m. Merck has dropped 2.4% to $58.20 and Sanofi has declined 0.6% to $54.07.
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