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On Oct 16, we upgraded our recommendation on Endo Health Solutions (ENDP - Analyst Report) to Outperform from Neutral. We are impressed by the company’s strategy to cut costs and optimize resources in order to maximize long-term growth potential.

Why Outperform?

Endo Health reported higher-than-expected earnings in the second quarter of 2013 aided by lower costs. The company raised its earnings guidance for 2013 in the range of $4.25-$4.55 (old guidance: $4.10–$4.40 per share). Endo Health also reported revenues higher than the Zacks Consensus Estimate.

With a major part of its top line likely to be exposed to generic competition in the next few years, the company is looking towards cost-cutting initiatives to drive the bottom line. The company is seeking to lessen the impact of the genericization of key products by reducing its cost structure. In Jun 2013, Endo Health announced that it will trim its work force by approximately 15%. The move is expected to result in annual savings of approximately $325 million. The company expects to realize $150 million savings by Dec 31, 2013. We are also positive on Endo Health’s move to sell its struggling anatomical pathology business.

We are impressed by Endo Health’s growth-by-acquisition strategy.  In Aug 2013, Endo Health announced its intention to acquire privately-held generics company Boca Pharmacal for $225 million in cash. The decision to buy Boca Pharmacal is a smart move by Endo Health as it prepares to combat the decline in revenues due to genericization of its key painkillers. In Mar 2012, Endo Health joined hands with Mersana Therapeutics Inc. for the development of next-generation antibody-drug conjugates. Moreover, in Jan 2012, Endo Health inked a global license and development agreement with BioDelivery Sciences International regarding the latter’s pain candidate BEMA buprenorphine.

The company had made other major acquisitions over the past few years. We believe that these acquisitions/deals are steps in the right direction and would help counter the generic threat faced by Endo Health.

The earnings beat in the second quarter of 2013 was the fourth consecutive one at Endo Health. The third-quarter Earnings ESP for the company is +0.89%. This, along with its Zacks Rank #1 (Strong Buy), makes us confident of a positive earnings surprise in the third quarter of 2013. Moreover, the Zacks Consensus Estimate for 2013 advanced 57.6% to $4.59 per share over the last 90 days.

Other Stocks to Consider

Apart from Endo Health, other companies worth considering include Actelion Ltd. (ALIOF), Roche (RHHBY - Analyst Report) and Isis Pharmaceuticals, Inc. (ISIS - Analyst Report). All 3 companies, sporting a Zacks Rank #1, offer value and are worth buying now.

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