Endo Pharmaceuticals (NDAQ: ENDP) had an interesting week after it received a letter from a large shareholder and announced that it was exploring strategic alternatives in a most unusual way. The news comes after the company reported strong results and continued successes in its core businesses, but seems to be more and more focused on making a large acquisition or pursuing in-licensing deals that has many shareholders up in arms. So, is Endo Pharmaceuticals a stock that you should look at adding to your portfolio?

D.E. Shaw Valence Portfolio LLC, a 9.8 percent owner, demanded in a letter to the board that the company immediately hire an investment bank to explore strategic alternatives to increase shareholder value. The activist hedge fund said in its Schedule 13D/A filing with the SEC that it was concerned that the company is overly focused on the need to complete a large acquisition or in-licensing deal, rather than on optimizing the value of its existing business including lead assets Lindoderm and Opana and the profitable generic pain business. This focus on non-core development activities has shifted the company’s focus away from optimizing its increasingly cash rich balance sheet, which they believe is essential in order to unlock the intrinsic value of the company for the benefit of its shareholders.

D.E. Shaw also continues to believe there is strategic interest in the company on financial terms that a substantial majority of the company’s shareholders would, in their view, fully support. Moreover, the hedge fund believes that the company could leverage its free cash to fund a $1.5 billion share repurchase that could substantially improve its earnings per share. Meanwhile, the company’s most recent 10-K filing just reported high quality results for the fourth quarter for full year 2007, highlighting the strength and momentum of its underlying business and core assets. Clearly, this combination of an EPS increase and growth prospects (which leads to higher multiples) is a situation that makes this company ripe for activism.

Despite these arguments, hopes came crashing down when Corporate Communications Vice President Bill Newbould told a reporter from The Philadelphia Inquirer that the company wasn’t evaluating a possible sale following the letter from D.E. Shaw. However, the company then made a surprise announcement in an 8-K filing that it was in fact working with financial advisors and consultants in evaluating strategic alternatives. Apparently, Mr. Newbould was unaware of these developments and unauthorized to make a statement. As a result, he was removed from his position and shares rose 2.3 percent on the day.

In the end, we now know that Endo Pharmaceuticals is exploring a sale and has a good chance of finding a suitor with the help of activist hedge funds like D.E. Shaw. Moreover, the other actions suggested to leverage up the balance sheet and unlock value that way should also help improve shareholder value. Either way, shareholders stand nothing to lose and everything to gain from these recent announcements. Combined, these factors make ENDP a stock worth watching!

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