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Here's Why Endo International Stock Dropped as Much as 13.8% Today

What happened

Shares of generic pharma leader Endo International (NASDAQ: ENDP) sank nearly 14% today after the company announced two of its subsidiaries had filed a lawsuit against the U.S. Food and Drug Administration (FDA) for breaking the law. Actually, more like ignoring the law. While that's technically true, it might not matter much.

The problem is that the law allegedly being ignored is one that new FDA Commissioner Scott Gottlieb has promised to overhaul -- and not in a way that would favor generic drug manufacturers such as Endo International. The very public spat between the company and one of the world's leading health institutions (not the first) is not what Wall Street wants to see, and adds yet another source of pressure on pharmaceutical companies in what has already been a tumultuous year in factors spanning political and public opinion.

As of 3:41pm EDT, the stock had settled to a 12% loss.

Image source: Getty Images.

So what

Endo International is accusing the FDA of ignoring the Drug Quality and Security Act of 2013, which established new guidelines governing a practice called bulk compounding. It came about after a deadly meningitis outbreak in 2012.

What the heck is bulk compounding? A pharmaceutical drug is essentially comprised of two components: the active pharmaceutical ingredient, or API (the ingredient that provides therapeutic benefit), and various other things collectively called excipients (inert ingredients that stabilize the API such as fillers, binders, flavors, fragrances, and the like). Mass-manufactured drug formulations work for the grand majority of patients. But some patients are allergic to specific excipients, or sometimes there are drug shortages from manufacturers. Therefore, pharmacies can take a recommended dose of a pure API and mix in only certain excipients, basically creating a custom-made drug formulation. That's bulk compounding.

It's a difficult practice to regulate, with much variability from one pharmacy to the next (see: 2012 meningitis outbreak). However, Gottlieb thinks expanding bulk compounding could be one way to attack high drug prices, since a pharmacy could take pure APIs, mix in excipients, and create a drug product without the extra markup that comes with a branded drug product -- even if a patient isn't allergic to any of the inert ingredients in the standard formulation, or without a drug shortage. That's obviously not going to sit well with companies such as Endo International.

Indeed, one of its most important drug products -- Vasostrict -- is also one of the most commonly compounded at pharmacies. Vasostrict accounted for $194.9 million in revenue in the first half of 2017, which represented 62% of total sterile injectable segment revenue and 15% of total revenue for U.S. generic drug sales. The lawsuit against the FDA asks for clarity about the law, and will force the institution to formally respond as to why it's not enforcing it.

Now what

Endo Pharmaceuticals is correct: The FDA is, in fact, ignoring the Drug Quality and Security Act of 2013 that heavily restricts the practice of bulk compounding. However, the current FDA is ignoring the law -- not enforcing it -- because it's about to rewrite it. That doesn't exactly make the FDA's willful ignorance right, but it may be difficult for the generic drug manufacturer to end up victorious. Wall Street certainly doesn't seem very optimistic.

That said, unless Endo International releases a bombshell in its third-quarter 2017 earnings report -- such as greatly reduced Vasostrict sales -- bulk compounding doesn't appear to be that big of a threat to its business. Then again, that's based on reading previous financial statements. Investors will need to wait for the next batch of data to be released to learn more.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.