Opioids. Vaginal mesh. Testosterone. These have become some of the ugliest words in the pharmaceutical industry, telegraphing medical treatments gone awry, in some cases leaving behind disabled customers, epic legal battles, and vast capital destruction. Some of the industry’s largest companies have been mired in lawsuits and government probes over these issues. But no company has been haunted by the drug industry’s worst nightmares as mercilessly as Endo International Plc.
Just about everything that can go wrong in the world of pharma has gone wrong at Endo, which makes both branded and generic drugs. Through a dealmaking spree largely led by its former chief executive officer, the company amassed debt of more than $8 billion—five times its market capitalization. That might be tolerable for a high-growth company, but Endo faces cratering prices for generic medicines even as it must deal with a slew of litigation involving its products.
The new leadership says the Dublin, Ireland-based company can fix all this; it will just take time. “It’s very important to know that we’re not running or hiding from our challenges,” says CEO Paul Campanelli. “We’re well-equipped to handle these types of issues.”
That includes writing massive checks to get beyond some of Endo’s legal woes. As of November 2017 company officials have agreed to pay more than $3.5 billion in settlements in more than 46,000 suits over its vaginal mesh inserts alone. Endo may have to shell out more to resolve all the mesh cases, according to its U.S. Securities and Exchange Commission filings. Analysts say that should largely contain the problems over the vaginal device, but it will still drain much-needed cash.
“This is not a growth story,” Gabelli & Co. analyst Kevin Kedra says. “There’s significant pressures, mostly stemming from the debt load, and they’re probably not going to be able to make a significant dent in that until 2019.”
Campanelli has been slashing costs to help keep Endo’s finances in check. The company now operates with a staff of around 2,700, down from about 6,000 before he took the job in September 2016. It also stopped marketing its opioid pain drugs at the end of 2016.
Litigation related to Endo’s marketing of opioids remains the biggest wild card. The drugmaker faces at least 125 cases filed by U.S. state attorneys general, counties, and municipalities, alleging its salespeople downplayed the health risks of the extended-release version of its painkiller Opana while overstating its benefits, according to SEC filings. Other opioid makers, such as Johnson & Johnson and Purdue Pharma LP, face identical claims. The companies have denied the allegations.
The states and local governments have hired lawyers who helped negotiate the tobacco industry’s $246 billion master settlement in the late 1990s to handle the opioid suits. There’s no exact figure for the damages sought, and estimates of potential damages vary widely. Bloomberg Intelligence litigation analyst Holly Froum figures the total liability for all opioid makers, including Endo, could be as little as $5 billion or as high as $50 billion. “It’s obviously in a very early stage, and these things typically take years to resolve,” Campanelli says.
The company has shown it can be proactive when the need arises. Its extended version of Opana became the subject of controversy: The drug has been linked to outbreaks of viral infections like HIV as people abusing it spread diseases by sharing needles. U.S. regulators took the unprecedented step last June of asking the company to take the drug off the market. Endo could have appealed that decision, but Campanelli opted to comply—cutting off a drug that racked up around $533 million in sales in a three-year period starting in 2014.
Campanelli is busy putting out fires that were years in the making. In 2013 the drugmaker hired Rajiv De Silva, an ex-Valeant Pharmaceuticals International Inc. executive and former McKinsey & Co. consultant. At the time, Valeant was blazing a new trail for Big Pharma expansion: buying up other companies, cutting research, and jacking up drug prices. With De Silva as CEO, Endo became a prolific dealmaker, acquiring companies and drug rights—from acquisitions in the hundreds of millions of dollars to vying for assets in the $10 billion-plus range against Valeant. De Silva insisted at the time that Endo wasn’t another Valeant, which ran into massive financial and legal troubles, and said he was doing deals to build a company that didn’t need to rely on deals to grow. He declined to comment for this story.
De Silva’s biggest acquisition was the $8.05 billion purchase of Par Pharmaceutical in May 2015, which gave Endo a large foothold in the generics business. Endo, which assumed Par’s debt, financed the deal with borrowings and proceeds from a $2.3 billion equity offering. The Par buyout came at the height of the company’s run: Endo’s stock price peaked around $96 in April 2015. That was more than triple the level when De Silva took over. But concerns over litigation and debt, as well as post-Valeant angst over specialty drugmakers, conspired to drive the stock down over the following year. Ultimately, Campanelli replaced De Silva. “We said from Day One, we’re not fixing this in 12 months,” Campanelli says.
Another hangover from the De Silva era is Endo’s testosterone litigation. The company faces about 1,300 patient suits claiming its testosterone-boosting gels caused fatal heart attacks in some users. How those suits might fare remains uncertain. Two federal court juries in Chicago last year held AbbVie Inc. responsible for injuries suffered by men taking its AndroGel testosterone booster—a product similar to Endo’s—and awarded a total of $290 million in damages. But one of those verdicts was later thrown out by a judge. In November, Endo’s Auxilium unit won the first case to come to trial over its Testim testosterone gel.
Still, Endo’s problems could get worse. The company is likely to face many more Opana suits before any settlement is reached, says Richard Ausness, a University of Kentucky law professor, and Endo may be forced to take extreme measures to pay them out. It could adopt the playbook used by companies sued for selling asbestos-laced products in the 1980s and 1990s by setting up a bankruptcy trust to resolve opioid cases, according to Ausness. That would allow the company to hold down settlement amounts, he says.
“Their debt numbers look terrible. And when you factor in the thousands of opioid suits they may wind up facing, they may have no choice but to ask the bankruptcy courts to help them dispose of those cases,” he says.
Campanelli has heard the B-word before. “The use of the word ‘bankruptcy’—it’s not something that we’re contemplating at this point in time,” he says. “We’re looking to collaborate to deal with the opioid situation. If we ever got to that process, and I’m not saying that we’re thinking of it, it would be years and years before we would be addressing it.”
It’s also possible that any opioid manufacturer settlement could be structured in such a way that Endo doesn’t end up underwater. “There could be some giant master settlement—it would just make life that much more difficult for Endo, but I don’t think these state AGs are going to make Endo go out of business,” says Gabelli’s Kedra.
Despite the financial and legal clouds, Endo officials say they’re concentrating on expanding the business and working on new injectable drugs. The company is also developing one of its key products, Xiaflex, which is used to treat a hand deformity and curvature of the penis, for new uses such as improving the appearance of cellulite. Cosmetic drugs, such as Allergan Plc’s Botox, have turned into powerhouses for pharma companies, and Campanelli has been praising Xiaflex’s prospects. “It fits the model of the new Endo,” he says. Campanelli, however, still has plenty of problems from the old Endo to fix first.