Endo ($ENDP) and Mallinckrodt ($MNK) have a lot in common. Both companies have started transformations recently, using M&A to help them head down the specialty pharma path. Both call Ireland home, helping them boast lower tax rates than many of their peers--and giving them a leg up in the dealmaking arena. And both generate the vast majority of their revenue in the U.S.
But as Moody's points out, there are some important differences between them, too--and those will help determine their next M&A moves.
As the investor service wrote in a recent report, lower leverage and better cash flow will help keep Mallinckrodt's financial profile "considerably stronger" than its rivals' over the next 12-18 months. After its latest acquisition, a $2.3 billion deal for Ikaria, Moody's expects EBITDA growth to push the adjusted debt-to-earnings ratio below 4x over the next 12 months.
Endo's leverage, on the other hand, will depend more on its ability to squeeze costs out of its own recent acquisitions, such as the not-yet-closed Par Pharmaceutical buy. Moody's expects to see its ratio at about 5.4x once that transaction wraps.
But while Mallinckrodt may beat Endo on strength of finances, Endo takes the diversity crown. After swallowing Par, Endo's largest product will generate less than 5% of total revenue, Moody's guesses--a far cry from the 31% of revenue that its Lidoderm pain patch hauled in back in 2012. Overall, Endo's top 5 products will bring in less than 20% of revenue following the close, with Mallinckrodt's top 5 making up a shade more than 50%.
The companies will also grow differently, too, the report points out. Endo can look to M&A-related synergies to expand its profit margins, will Mallinckrodt will likely need to find its profit-margin gains in internal restructuring and shifts in its product mix.
So what does it all mean for the drugmakers' M&A ambitions? Both will need to keep buying--and they will, Moody's says, because their pipelines demand it.
"[W]ith limited internal pipelines in their branded businesses, both companies will likely continue to make acquisitions in order to drive long-term growth," the report says. Moody's expects Mallinckrodt to build up its hospital products business, purchasing companies with injectables or other drugs used in a hospital setting. Endo, on the other hand, has been more "therapeutically agnostic," and Moody's sees it going after "anything that it believes will generate shareholder value and boost growth."
And rest assured, some analysts have said--though the company may have lost out on GI drugmaker Salix in a bidding war with Valeant ($VRX) earlier this year, there are plenty of assets out there for Endo that will do just that.
"If you looked not just in North America but overseas, there are many private companies and many small companies that many in the broader investment community have never heard of," Piper Jaffray analyst David Amsellem told Bloomberg in March. "But you can rest assured that Endo has heard of them."
Special Report: Pharma's top 10 M&A deals of 2014 - Mallinckrodt/Questcor