Wally Weitz, founder and chief investment officer of Weitz Investment Management, informed clients via a one-off note Thursday that his firm exited it entire position in pharmaceutical company Endo International, whose stock has dwindled to a quarter of its market value year to date.
Weitz’s statement regarding Endo in its entirety: “Typically, Weitz Funds discloses portfolio holdings and portfolio information on a quarterly basis (or, for the Government Money Market Fund, on a monthly basis as required by law). On May 25, 2016, Weitz Funds publically disclosed additional portfolio information by announcing that Endo International plc (ENDP, Financial) was sold entirely from Weitz Value Fund and Weitz Partners Value Fund after the most recent quarter end dated March 31, 2016.”
Weitz had just added shares of the company, a maker of branded and generic pharmaceuticals, last quarter when they looked relatively inexpensive, falling to new five-year lows. Instead of a temporary setback, though, the shares failed to recover and continued their 75% descent, closing at $15.31 Wednesday.
The market had reacted negatively to both the company’s fourth and first quarter operating results. May 5 Endo included a note in its first-quarter earnings release from CEO Rajiv De Silva warning of increasing competitive and pricing pressures. New competitor products, accelerated price erosion in generics and regulatory approval delays for some of its products in development caused the company to restate financial guidance for 2016.
Endo reduced anticipated revenues to a range of $3.87 billion to $4.03 billion from its previously expected $4.32 billion to $4.52 billion. It also dropped its adjusted diluted non-GAAP earnings per share range to $4.50 to $4.80 from a range of $5.85 to $6.20.
Endo has suffered primarily in its U.S. branded pharmaceuticals, where net revenues from each of its pain management drugs, including Percocet, saw year-over-year declines, offsetting growth in each of its specialty and generic U.S. pharmaceuticals. The results showed a sudden intensification of competition as at least two of its pain management drugs, Percocet and Voltarena Gel, saw double-digit year-over-year revenue growth in the prior quarter.
Total revenues increased 35% year over year to $964 million, including revenues from a new drug, Xiaflex, which it acquired in January 2015 and that grew 57% from the period in which it was acquired. Diluted loss per share totaled 60 cents, down from earnings per share of $1.08.
Endo’s efforts to buttress its business, including appointing two new directors with pharmaceutical industry backgrounds and speeding up R&D, pronounced in its earnings release, did little to hold the market’s faith.
Endo composed only 0.97% of Weitz’s portfolio of 63 positions. In October, he also withdrew from a position in another drug company, Valeant (VRX, Financial), before the worst of its price collapse precipitated by political scrutiny and accounting irregularities.
Weitz’s large-cap Value Fund has returned 10.2% annualized since inception in 1986, beating the S&P 500 return of 9.96%.
Though Weitz chose not to keep client capital in Endo with steep price declines, he said in his first quarter letter he thought it had "significant upside potential. Its price, P/B ratio of 0.58 and P/S ratio of 0.89 are all at 10-year lows Thursday. The stock’s P/E ratio is also 2.75, compared to an industry median of 13.9.
See Weitz's portfolio here.
