Following the natural laws of economics

Endo Pharmaceuticals acquires generics giant Qualitest to be more responsive to changing healthcare environment

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HUNTSVILLE, Ala.—EndoPharmaceuticals announced in October t­hat it has laid out $1.2 billion in cashto purchase Qualitest Pharmaceuticals, the sixth-largest U.S. generics company.The combined company is a result of Endo's continued string of strategicacquisitions that underpin the company's new view of the healthcare industry.

Endo's strategy, which is cognizant of the changing face of healthcare deliveryin the face of new economic challenges, seeks to address three areas ofhealthcare product and service delivery: branded pharmaceuticals, generics anddevices and services.
Company officials say that its keytherapeutic areas include pain and urology.
Qualitest significantly adds toEndo's current generics business, further diversifies its business lines andproduct offerings and enhances Endo's portfolio of pain management products.Combining the companies' generics portfolios is expected to significantly boostEndo's revenue and earnings growth.

Currently, more than 90 percent of all pain prescriptions are filled by genericdrugs in the $15 billion U.S. pain market. Blaine Davis, vice president forcorporate affairs for Endo, says this played a major role in his company'sdecision to purchase Qualitest.
"Qualitest has a strong presenceand scale in the generics space," Davis says. "Combining their business withthe generics arm within our business made a lot of sense."
According to the companies, 40percent of Qualitest's revenues are derived from pain products, making theacquisition a natural extension of Endo's competitive position in pain andcontrolled substances.
Qualitest, the sixth-largest U.S.generics company measured by prescriptions filled, is focused on costcompetitive, high-quality manufactured products with high barriers to entry.Qualitest has cGMP facilities in the United States, including the ability tomanufacture controlled substances, which make up approximately 40 percent ofits product portfolio, and liquids, which are roughly 17 percent of itsportfolio. The company brings a broad range of generics to Endo encompassing175 product families.
"Endo's gone through atransformation over the past couple years," continues Davis. "Healthcare as anindustry has been changing. We felt that we needed to be able to be responsiveto those changes, many of which are economic. Expanding into the generics spacewith the acquisition of Qualitest makes sense."
The company has also made severalother strategic acquisitions since the beginning of 2009 to support this newstrategy, including the purchase of Healthtronics earlier this year. Davis saysEndo had been pursing a deal on Qualitest since mid-2010.
Thirty-two of Qualitest's productsare listed among the top 250 generics by total prescription volume. Inaddition, the combined company boasts an extensive pipeline of abbreviated newdrug applications (ANDAs) with 46 ANDAs under active U.S. Food and DrugAdministration review in multiple therapeutic areas, including pain, urology,CNS, as well as oncology and hypertension and an additional 24 ANDAs underdevelopment.
Davis says that not only wasQualitest's major presence in the U.S. generics space attractive, but the typesof medicines they produce was a factor in the decision.
"They have a strong presence inthe pain space and we're interested in growing our work there," he says.
David Holveck, president and CEOof Endo, said in a prepared statement that the acquisition follows Endo'sdiversification strategy and makes the company better able to respond to thechanging economics that drive the U.S. healthcare environment.

"We believe that this transaction will accelerate and diversify our revenuesand earnings streams, while also providing our partners in the industry with awider range of products and services at multiple value points," he adds."Together, we will be well-positioned to strengthen our relationships withphysicians and payment providers to deliver better outcomes for patients and tomeet the demands of the evolving health care system in the U.S."
Endo believes that a more nimble healthcare business will bethe model of the future, and that from a scientific standpoint, combining itstechnology platforms will make the growing company a powerful force. In addition, the combined leadership team will bring vastexperience in the generics space, including in product development, manufacturingand collaborative technical management.
Marvin Samson, chairman and CEO ofQualitest, added in a prepared statement, "this announcement brings togethertwo highly successful businesses that I believe are an excellent fit. I amconfident Qualitest's unique capabilities as a leading generics providerideally complement Endo's diversified businesses. I am convinced that thiscombination will enable our management team and employees to accelerate thegrowth of our business and continue the important work we do here atQualitest."
Samson, along with Julie McHugh,Endo's chief operating officer, will lead an integration team composed ofsenior leaders from both organizations focused on accelerating the growth ofthe combined business. 
Endo's Davis says that at present,his company intends to keep all of Qualitest's existing facilities andemployees, since the two businesses as currently configured have littleoverlap. In the coming months, he adds, further refinement of a combinedmanagement team may take place.
Qualitest operates facilities inHuntsville, Ala., Charlotte, N.C., and in Westbury, N.Y.
For fiscal year 2010, the combined companies estimate revenues of approximately$2 billion and employment of more than 3,000 employees.

Qualitest refused to comment further on the deal, and instead referredquestions to Endo.
The agreement contains customaryrepresentations, warranties, covenants, indemnities, conditions and terminationprovisions. The transaction is subject to regulatory review, includingclearance by the relevant antitrust authorities and is expected to close latein the fourth quarter of 2010 or early in the first quarter of 2011.
Endo is acquiring QualitestPharmaceuticals from funds advised by Apax Partners, a private equity investmentgroup.

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